Applying Earned Value Management

Terms and Definitions

Authorization For Expenditure (AFE)

For earned value management to be successful, a request for authorization for expenditure should include a proposed plan with definitions of scope, cost, and schedule, plus a change control process for managing the same. The accuracy and level of detail in the proposed plan should seek to minimize the risk of ambiguity in the event that changes are requested. In other words, the definitions and level of detail should make clear whether a requested change is truly a deviation from the authorized plan. An authorization to proceed with the proposed plan is known as the Authorization for Expenditure (AFE).

Baseline

The plan associated with the AFE includes, at a minimum, a budget and a timeline. The plan associated with the AFE is the initial baseline.

As you will see in the next section below, titled "Change Requests", a project can have one or more baseline schedules subsequent to the initial baseline schedule.

When changes are authorized subsequent to AFE, a new Baseline should be calculated and a revision number should be attached.

At the end of the project, a comparison between the initial Baseline and the last Baseline can be studied to generate ideas for improving future plans.

Date Line

The Date Line is a vertical line on an Earned Value Management diagram that intersects the x-axis at a point that represents the date up to which progress is being measured, calculated, and reported.

The Date Line can be earlier than the current date or the same as the current date but it cannot be later than the current date.

Change Requests

Changes to the Baseline Schedule should be subject to the terms and conditions of the change control process as specified in and authorized by the AFE. Changes can be categorized in many ways but in this article, we are concerned with those changes categorized as having an effect on the scope, cost, and/or schedule of the project.

Authorized changes in scope, cost, and/or schedule provide a rationale for creating a new version of the Baseline. In other words, The Baseline can change over time in accordance with authorized project changes.

Maintaining traceability between the Baseline and authorized changes is critical for maintaining traceability.

Key Elements of Earned Value Management

There are three key Earned Value Management terms that you need to memorize so that you can interpret Earned Value Management diagrams and easily perform other Earned Value Management calculations. Below, the three terms are color-coded to match the curves in the Earned Value Management diagram below. (See figure 1.)

Planned Value (PV)

PV is also known as the Budgeted Cost of Work Scheduled (BCWS) and is represented by the red curve in the diagram below. In simpler terms, PV is the budgeted cost of performing the scope of work scheduled, over time, through the end of the project timeline.

Actual Cost (AC)

AC is also known as the Actual Cost of Work Performed (ACWP) and is represented by the green curve in the diagram below. In simpler terms, AC is the actual cost of performing all work, over time, up to the Date Line.

Earned Value (EV)

EV is also known as the Budgeted Cost of Work Performed (BCWP) and is represented by the purple curve in the diagram below. In simpler terms, EV is the budgeted cost of work performed, over time, up to the Date Line.

Figure 1

Calculating EVM Formulas

Calculating earned value management formulas requires knowledge of the key elements of earned value management, skillful management of the project change control process, maintenance of the forecast, and some simple math calculations.

Two Key Variances

There are two key variances in EVM; they are Schedule Variance and Cost Variance. Calculating these two key variances is dependent on skillful updates of PV, inclusive of all authorized changes, and on updates of the actual work performed up to and including work performed on the date of the Date Line.

Schedule Variance, SV

As project time elapses, the time available to complete budgeted work is consumed. Work may be completed faster or slower than originally scheduled, so EV may be greater than or less than PV.

The formula for calculating SV is as follows.

SV = EV - PV

When EV is greater than PV, SV is a positive number and the project is ahead of schedule. When EV is less than PV, SV is a negative number and the project is behind schedule.

A project can be ahead of schedule at some points along the timeline and behind schedule at other points along the timeline. At points along the timeline where the EV curve is above the PV curve, the project is ahead of schedule by that cost amount; and, at point along the timeline where the EV curve is below the PV curve, the project is behind schedule by that cost amount.

Cost Variance, CV

As work is performed, the project accumulates actual costs, and AC may be greater than or less than EV.

The formula for calculating CV is as follows.

CV = EV - AC

When EV is greater than AC, CV is positive and project spending is under budget. When EV is less than AC, CV is negative and project spending is over budget.

A project can be under budget at some points along the timeline and over budget at other points along the timeline. At points along the timeline where the EV curve is above the AC curve, the project spending is under budget; and, at points along the timeline where the EV curve is below the AC curve, the project is over budget by that cost amount.

Two Key Performance Indices

Completing calculations of the two indices is dependent on the values of the three key elements of Earned Value Management: PV, AC, and EV.

Schedule Performance Index, SPI

The Schedule Performance Index is a number that indicates the project's conformance to the baseline spending schedule. Project spending can outpace the baseline spending schedule, or it can fall short of the baseline spending schedule.

The formula for calculating SPI is as follows.

SPI = EV/PV

When SPI is greater than 1, the cost of work performed is greater than the baseline cost of work scheduled, and the project is said to be earning more than it is costing; this is good. When SPI is less than 1, the cost of work performed is less than the baseline cost of work scheduled, and the project is said to be earning less than it is costing; this is bad.

Cost Performance Index, CPI

The Cost Performance Index is a number that indicates the conformance to the cost budget. The actual project cost can be greater than the budgeted or less than the budgeted cost up to, and including, the Date Line.

The formula for calculating CPI is as follows.

CPI = EV/AC

When CPI is greater than 1, project spending is under budget; this is usually a good thing. When CPI is less than 1, project spending is over budget; this is usually a bad thing.

Two Key Estimates

The next calculations require a skillful estimate of the remaining work.

Estimate To Complete, ETC

ETC is the estimated cost to perform all remaining work; it does not include any cost of work that has already been performed.

The formula for calculating ETC is as follows.

ETC = EAC - AC

When a change to the baseline cost and/or time is authorized, ETC must be updated to account for the change.

Estimate At Completion

EAC is the sum of all actual costs to date, plus the estimated cost to perform all remaining work.

The formula for calculating EAC is as follows.

EAC = AC + ETC

When a change to the baseline cost and/or time is authorized, EAC must be updated to account for the change.

Two Final Calculations

Variance At Completion

VAC is a projection of the budget surplus after all project work has been performed.

The formula for calculating VAC is as follows.

VAC = BAC - EAC

When a change to the baseline cost and/or time is authorized, VAC must be updated to account for the change.

Schedule Slippage

Schedule Slippage is a measure, in units of time, that the schedule slipped beyond, or finished before, the baseline schedule.

The formula for calculating schedule slippage is as follows.

Schedule Slippage = Planned Finish Date - Target Date