Earned Value Management Formulas Every Project Manager Should Know
Finding ways to eliminate extra costs and boost visibility in your project is challenging. Yet, that does not negate the need for better accountability in your organization. Understanding more about the status of your ongoing projects through earned value management (EVM) can help your organization achieve a higher level of visibility.
Successful project managers understand the role of earned value management in maintaining and upholding a project’s accountability and visibility. But, project managers who take the time needed to understand how to calculate EVM manually can exceed in visibility goals beyond traditional software packages. So, you need to learn what common terms exist among EVM formulas, how to apply basic and advanced formulas, and what they mean for improving visibility in your company.
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Basic Earned Value Management Terms Defined
Before a project manager can calculate earned value management, he or she needs to understand the variables used in EVM basic and advanced formulas, which includes planned value (PV), earned value (EV), and actual cost (AC).
PV refers to the budgeted value for work completed to date. EV reflects the actual value of the work completed to date. And AC describes the total costs for the work completed to date. Depending on a project’s current status, affected by the variables mentioned in this ebook, these values can vary widely.
For example, today’s PV might be $1,000. But, unforeseen weather issues damage construction quality, resulting in an additional purchase of $100 worth of lumber. Thus, the EV is $1,100. However, replacing damaged studs will still require eight hours of labor, billed at $15 per hour, to repair. That’s another $120. So, after repairs have been completed, the AC is $1,220.
These formulas provide specific pathways to gain visibility into the costs and status of your project.
It’s also important to note at least two of these terms are used in all EVM formulas.
Simple & Basic Earned Value Management Formulas
Simple EVM formulas only involve the basic terms mentioned previously. They can be calculated on a standard, simple calculator.
Schedule Variance (SV)
SV gives project managers a specific degree by which the project is ahead of or behind a project, a critical concern for project visibility. It is calculated as follows:
SV = EV – PV.
Both the EV and PV reflect monetary values. So, the result of the formula shows how much behind the project is in financial terms if the result is less than zero. If the result is more than zero, it shows the financial advancement of the project for its current state. Also, a value of zero indicates the project is on track with the schedule’s expected costs.
Cost Variance (CV)
CV is like SV. But it calculates the AC’s financial status behind or ahead the PV. It is calculated with this formula:
CV = EV – AC.
As with calculated SV, the result of this formula shows the dollar amount a project is ahead of or behind budget. A value above zero indicates the project is over budget. A value of less than zero indicates being under budget. Also, a value of zero shows the project is on track with the budget.
Schedule Performance Index (SPI)
SPI is used to determine or measure the project’s current completed activities against the planned activities for the project to date with respect to general status.
SPI = EV / PV.
If the result is a positive number, it indicates the project has achieved more than what was planned. A negative number indicates less was achieved than what was planned. A result of one indicates a project is on schedule.
Cost Performance Index (CPI)
The CPI measures if the completed work aligns to the PV of the project with this formula:
CPI = EV / AC.
If the result is zero, the project is within budget. A value of less than one indicates the project’s completed work is worth less than what was spent. Yet, a value of greater than or equal to one indicates your project’s completed work is worth more than what was spent.
Advanced Earned Value Management Formulas
Unlike simple formulas, EVM formulas will require multiple calculations to derive a result. Thus, most project managers may prefer to use a scientific or higher-level calculator to make completing these formulas easier.
Budget at Completion (BAC)
The BAC is the total costs incurred upon completion of a project, including labor, materials, and operational expenses. If a project has a management reserve (MR), “wiggle room for the budget,” most BAC tallies do not include it.
Estimate at Completion (EAC)
Depending on a project’s status, EAC can be calculated several ways. For example, project managers can derive EAC from adding the AC with bottom-up estimate to complete (the costs still expected). Taking a bottom-up approach benefits visibility by assessing costs expected in the future, nearest the completion of a project.
Formula 1: EAC = AC + New Estimate.
But, it does not provide any direction for calculating remaining expenses. So, consider this formula:
Formula 2: EAC = BAC / CPI.
This formula is best if spending patterns are expected to continue through the end of the project, such as continued bad weather or poor laborer skills.
If future expenses are likely to reflect the original BAC, assuming nothing major happens in the future, such as a natural disaster, the following formula is appropriate:
Formula 3: EAC = AC + (BAC – EV).
Another formula uses SPI and CPI to define an EAC if unfavorable standards are continuing to occur. For example, projects that are consistently over budget and behind schedule should use this formula:
Formula 4: EAC = AC + [(BAC – EV) / (SPI * CPI)].
Variance at Completion (VAC)
Since the BAC and EAC represent two different values for the cost to complete a project, project managers can determine the difference between the two by subtracting the Estimate at Completion from the Budget at Completion. This results in the Variance at Completion (VAC).
VAC = BAD – EAC.
To-Complete Performance Index (TCPI)
A previous blog post explained how the to-complete performance index (TCPI) could be used to calculate performance needed to meet an original BAC for a total PV for a project with the following formula:
TCPIBAC = (Budget at Completion - EV) / (Estimate at Completion – AC).
The result of this equation reveals whether the project is under budget (if less than one), on budget (one) or over budget (greater than one).
However, the TCPI can be applied to the EAC to define the performance required to meet a new, revised budget through the following formula:
TCPIEAC = (Budget at Completion- EV) / (Estimate at Completion – AC).
Notice the difference between the two formulas exists within the latter half of the equation, replacing (BAC – AC) with (EAC – AC). The resulting decimal of this equation indicates the efficiency needed to complete a project.
For example, a result of 1.1 means that for every unit of work completed from the current point to the completion of the project, an additional 10 percent of work will be needed without adding to the cost. A result of less than one, such as 0.75, indicates the project is under budget.
In other words, both TCPI equations give a project manager the ability to calculate the additional number of hours or raw materials needed to complete a project with a calculated BAC or EAC.
Use EVM Formulas to See Where Your Project Stands Today
Earned value management formulas provide insight into a project’s adherence to budget, schedule, and unforeseen changes in scope or activities. This gives the project office a chance to mitigate risk and damages. Unfortunately, there is not a standard definition of what is and is not a successful EVM application. The key to using EVM formulas correctly lies in knowing how they are calculated and applied.
To further enhance the visibility of your project, download this ebook now. And join the conversation below with your thoughts on manual versus automated EVM calculations. Although most systems offer around-the-clock support, knowing how to calculate them in the event of downtime is key to optimizing your workflows at any time, even when you lack internet access.
About Jeff Collins
Hi there, thanks for reading! As the President of IMS, I’ve just about seen it all in the project management industry. I’m happy to share my experiences to help managers and organizations improve their project performance. Please reach out to our team if you’re struggling to achieve your goals. We’d love to work with you to discover the PM solutions you need for success.