In any project, the value to be gained is based on completing the work. From a customer perspective, the business value is achieved when the project is completed. If a project gets canceled 90% through completion, the business value might be zero.
However, earned value looks at this differently. With earned value, you are earning the value of the project on an incremental scale as the project is executing. When 50% of the work is completed, you could say that 50% of the value of the project has been realized as well.
Likewise, given where you are today, earned value calculations allow you to determine the total cost of the work done so far, as well as the total cost of all the work you expected to have completed by now. Comparing these two numbers gives you a sense for whether you are trending over budget, under budget or on budget.
Utilizing both the schedule and cost metrics gives you more information as well. You may well be spending your budget faster than you anticipated, but what if the reason is because you are ahead of schedule as well? That is, you may be spending more because your team may be getting more work done than planned. That may be fine. Likewise, if your project is behind schedule, but you are also behind in your spending, that may be fine as well. Perhaps you were not able to get the team members allocated as fast as you planned. So, your project is behind schedule, as is your spending rate. If you have a critical end-date, this may be a problem. If your end-date is flexible, you may be fine as long as you don’t overspend your budget.
Earned value gives you the information you need to make the right decisions.
There are three metrics that form the building blocks for earned value – Earned Value, Actual Cost and Planned Value. Let’s look at each of these in more detail.
Earned Value (EV)
The earned value is calculated by adding up the budgeted cost of every activity that has been completed. (Remember, this is not the actual cost of the work activities; this is the budgeted cost.) Look at the following example:
Today’s Date: March 31
| Completed Activity |
A |
B |
C |
D |
| Target Date | March 10 | March 15 | March 31 | April 5 |
| Budgeted Cost | 20 | 10 | 15 | 5 |
| Actual Cost | 20 | 5 | 20 | 10 |
Let’s say that you have completed activities A, B, C and D. Can you guess the simple formula for finding the earned value? You got it. It’s (20 + 10 + 15 + 5), which happens to be the convenient round number of 50.
EV is the basic measure of how much value the project has achieved so far. By itself, it does not tell you too much. So, you use it in combination with other calculations to determine your status.
Actual Cost (AC)
To calculate this number, add up the actual cost for all the work that has been completed so far on the project. If your project only consists of labor, then the cost and the effort will track along the same lines. If you have a lot of non-labor costs in your budget, then the project costs don’t directly tie to the labor used.
Let’s look at our example again.
Today’s Date: March 31
| Completed Activity | A | B | C | D |
| Target Date | March 10 | March 15 | March 31 | April 5 |
| Budgeted Cost | 20 | 10 | 15 | 5 |
| Actual Cost | 20 | 5 | 20 | 10 |
The actual cost for activities A through D is (20 + 5 + 20 + 10) or 55. You can see that the actual costs for the work performed are greater than the budgeted costs of the work performed. This could be a problem.
Planned Value (PV)
This is the sum of the budgeted estimates for all the work that was scheduled to be completed by today (or by any specific date).
Today’s Date: March 31
| Completed Activity | A | B | C | D |
| Target Date | March 10 | March 15 | March 31 | April 5 |
| Budgeted Cost | 20 | 10 | 15 | 5 |
| Actual Cost | 20 | 5 | 20 | 10 |
Now you have a little more information. Since today’s date is March 31, the planned value is A + B + C (20 + 10 + 15) or 45. You do not count activity D, since it was not scheduled to be completed by March 31.
Now let’s put these fundamental metrics together.
Schedule Variance (SV)
The Schedule Variance (SV) tells you whether you are ahead of schedule or behind schedule, and is calculated as EV – PV. In our example above, the EV is 50 (20 + 10 + 15 + 5) and the PV is 45 (20 + 10 + 15). Note that the difference is activity D. Since work has been completed on this activity, it is included in the EV. However, since it was not scheduled to be completed by March 31, it is not included in the PV.
The Schedule Variance is 5 (50 – 45). If the result is positive, it means that you have performed more work than what was initially scheduled at this point. You are probably ahead of schedule. Likewise, if the SV is negative, the project is probably behind schedule.
Cost Variance (CV)
The Cost Variance gives you a sense for how you are doing against the budget, and is calculated as EV – AC. If the Cost Variance is positive, it means that the budgeted cost to perform the work was more than what was actually spent for the same amount of work. This means that you are fine from a budget perspective. If the CV is negative, you may be overbudget at this point. In our example above, the EV is 50. The AC is 55. Therefore, the Cost Variance is -5 (50 – 55), which implies you are overbudget.
Schedule Performance Index (SPI)
This is a ratio calculated by taking the EV / PV. This shows the relationship between the budgeted cost of the work that was actually performed and the cost of the work that was scheduled to be completed at this same time. It gives the run rate for the project. If the calculation is greater that 1.0, the project is ahead of schedule. In the example above, the SPI is equal to (50 / 45) or 1.11. This implies that your team has completed approximately 11% more work than what was scheduled. If that trend continues, you will end up taking 11% less time to complete the project than what was scheduled.
Cost Performance Index (CPI)
This is the ratio of taking the EV / AC. This shows the relationship between the Earned Value and the actual cost of the work that was performed. It gives the burn rate for the project. If the calculation is less than 1.0, the project is overbudget. In our example, the CPI is (50 / 55) or .91. A CPI of .91 means that for every $91 of budgeted expenses, your project is spending $100 to get the same work done. If that trend continues, you will end up overbudget when the project is completed.
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