Leveraging earned value management for a competitive edge
Tempo Team
While organizations have used earned value management (EVM) project tracking concepts for over a century, the structure formally took root in the U.S. Department of Defense in the 1960s. Initially, managers of large-scale defense projects were the leading adopters, but the method quickly expanded to the private sector and became commonplace among various industries.
Many government agencies, such as NASA and the U.S. Department of Energy, still use EVM practices to track project performance — but you don’t need to be a rocket scientist or defense specialist to benefit from the system.
Learn how leveraging earned value in management gives a competitive edge to businesses across a range of sectors and functions.
What’s earned value management?
EVM involves calculating data to objectively evaluate a project’s performance. With metrics for comparing the work you outlined in the original plan with the actual work occurring, EVM reveals the likelihood of unexpected results and helps managers determine the project’s priorities.
Using EVM, managers can track project efficiency and work quality while proactively identifying risks. They use this information to ensure schedules, costs, and resources align with the organization’s value proposition and high-level strategic goals.
Earned value management core concepts
Three core concepts are critical to the many calculations required for effectively implementing EVM into an organization. Once you understand these fundamental pillars, you can use them in multiple straightforward equations to monitor the many facets of your project tracking.
1. Planned value (PV) or budgeted cost of the work scheduled (BCWS)
PV refers to the estimated total value of the work you plan to complete by a specific date. This metric represents the cumulative budget — typically monetary — at any point during a project.
PV = hours scheduled x hourly rate
PV is essential in evaluating the project’s progress at any given point and helps forecast performance.
2. Actual cost (AC) or actual cost of work performed (ACWP)
The AC, or ACWP, is the total cost incurred and recorded in accomplishing the work for a particular task or work breakdown structure component.
AC = total cost incurred for the work performed
This includes all direct costs (such as labor and materials) and indirect costs (such as office supplies and utilities) associated with the project.
3. Earned value (EV) or budgeted cost of the work performed (BCWP)
The EV, or BCWP, is the value of the work you’ve completed to date, represented as a percentage of the budget at completion (BAC). It indicates not what you’ve spent but the value of work you’ve achieved so far.
EV = % of completed work x BAC
EV provides a realistic view of project progress. If the EV is less than the PV, it suggests that the project fell behind schedule or exceeded budget.
An earned value management example
This straightforward scenario illustrates how the three primary EVM concepts relate to each other.
A marketing team estimated that a digital ad campaign would cost $100,000 over 10 months. By the fifth month, they’ve spent $60,000 but only reached 40% of their target conversions. Using EVM, the marketing manager could discover the areas where the cost exceeded budget while the schedule fell behind. This information guides corrective actions to get the campaign back on track by the end of the period.
PV: The PV would be 50% of $100,000, or $50,000. This is the expected budget by month five, halfway through the original timeline.
AC: The AC — total amount the team has spent by this point — is $60,000. This shows the campaign is $10,00 over budget.
EV: The EV would be 40% of $100,000, which is $40,000. This represents the budgeted cost of the actual progress made.
Essential earned value formulas
Several formulas are essential to calculate a project’s EV. Using these makes it easy to assess performance at any point during the lifecycle.
Budget at completion
The budget at completion (BAC) is the total cost allocated to the project, covering the sum of all budgets established for the work and any budget changes.
BAC = sum of all budgeted values for project work
This metric is your baseline against which you measure AC and EV. You can predict future project performance based on the data you gather through calculating your BAC.
Cost variance (CV)
Cost variance (CV) is the difference between the EV and AC — it’s the amount you’ve overspent or underspent relative to the work actually done.
CV = EV – AC
The CV is a crucial tool for project managers, as it enables immediate identification of any cost-efficiency issues.
Schedule variance (SV)
SV evaluates the project’s progress by comparing the actual work to the planned work. To calculate it, you subtract the PV from the EV.
SV = EV – PV
A positive SV indicates you’re ahead of schedule, while a negative SV suggests the project is running behind.
Schedule performance index (SPI)
The SPI is the ratio of the EV to PV and assesses efficiency and time use. To find it, you divide the EV by the PV.
SPI = EV / PV
An SPI of 1 indicates the project is on schedule, while a number below or above tells you it’s running behind or ahead.
Cost performance index (CPI)
CPI is the ratio of EV to AC, measuring the project’s cost efficiency. Dividing the EV by the AC gives you this metric.
CPI = EV / AC
Similar to SPI, a CPI of 1 means the project is on budget, less than 1 signifies the project is over budget, and greater than 1 means the project is under budget.
Estimate at completion (EAC)
Estimate at completion (EAC) forecasts the project’s total cost at completion. It’s calculated based on the project’s actual performance and the remaining work. To find it, you divide the BAC by the CPI.
EAC = BAC / CPI
The EAC gives project managers insights into the final project cost, allowing them to manage budgets more effectively and adjust as needed.
Estimate to complete
Estimate to complete (ETC) represents the expected cost to finish all remaining work. You calculate it by subtracting the AC from the EAC.
ETC = EAC – AC
The ETC offers project managers an estimation of additional resources they’ll require to complete the project.
What questions does EVM answer?
EVM helps project managers understand questions critical to their role, like:
Where have we been?
What did we plan to spend? (PV)
What have we actually spent? (AC)
Where are we now?
What work value have we actually completed? (EV)
Are we ahead or behind schedule? (SV)
Are we under or over budget (CV)
Where are we going?
How efficiently are we using project time? (SPI)
How efficiently are we using resources? (CPI)
What’s the new estimate for completion based on current performance? (EAC)
How much more will it cost to complete the project? (ETC)
EVM disadvantages
EVM offers many benefits, such as an objective mindset and team motivation, but it isn’t without its drawbacks. Here are a few disadvantages to recognize when considering an earned value management system:
Time-consumption: EVM requires you to meticulously track your budget and activities, which can be time-intensive and potentially detract from other important tasks.
Accuracy issues: If initial project estimates are inaccurate, the value given by EVM will also be faulty.
Complexity: For smaller projects, the effort of implementing EVM might outweigh the benefits.
Inflexibility: EVM structures tend to be rigid. The system assumes a project’s path is set from the beginning, which is unrealistic.
Overemphasis on cost: While EVM is great at tracking cost efficiency, it doesn’t monitor other vital critical success factors like quality, customer satisfaction, and impact.
Drive more informed EVM decisions with Strategic Roadmaps by Tempo
Don’t let the fear of accuracy issues, complexity, or inflexibility hinder your project’s success. Incorporate Strategic Roadmaps by Tempo and Tempo’s Planner into your project management strategy for seamless EVM implementation and successful project outcomes. Using intuitive templates, you can easily collaborate with your team, track project progress, and make data-driven decisions based on EVM data.
Sign up today and see how Tempo’s tools can streamline your EVM process.
