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HOW TO CALCULATE EARNED VALUE IN PROJECT MANAGEMENT

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HOW TO CALCULATE EARNED VALUE IN PROJECT MANAGEMENT

Gustavo De Felice
Jan 25, 2024
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HOW TO CALCULATE EARNED VALUE IN PROJECT MANAGEMENT

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Earned Value Management (EVM) is a project management technique for objectively
measuring project performance and progress, it can combine measurements of
scope, schedule, and cost in a single integrated system.

Implementing Earned Value Management (EVM) in your projects can bring several
benefits, it offers clarity, control, and enhanced communication capabilities,
all of which are critical for successful project delivery in the ever-evolving,
but mainly it responds the most important questions to your Sponsor and
Stakeholder.








WHAT IS EARNED VALUE?


Earned Value assesses and tracks the progress of work done in a project relative
to the planned schedule and budget. It provides a straightforward method to
determine whether your project is lagging in terms of time or exceeding its
financial constraints.

EVM provides a clear and quantifiable measure of project performance by
integrating cost, time, and scope, the comprehensive view helps identify
problems early, allowing for timely corrective actions.


IMPROVED COST MANAGEMENT


You can more effectively manage your project's budget by tracking and
calculating the Budgeted Cost of Work Performed (BCWP) against the Actual Cost
of Work Performed (ACWP).

> EVM allows you to identify cost variances early in the project lifecycle,
> reducing the risk of budget overruns.


WHAT IS THE EFFECTIVE SCHEDULE MANAGEMENT


EVM offers insights into schedule performance by comparing the work planned with
the work accomplished assisting in predicting project delays and providing an
opportunity to take corrective measures to stay on track.


HOW TO OBJECTIVE PROGRESS ASSESSMENT


The methodology offers an objective method to measure and report project
progress, which is particularly useful in complex IT projects where subjective
measures of progress can be misleading.


ENHANCED FORECASTING AND DECISION MAKING


With EVM, you can forecast future performance based on current trends. The
predictive capability enables more informed decision-making, allowing for
proactive management of potential risks and issues.


IMPROVING STAKEHOLDER COMMUNICATION


The clear, quantified data provided by EVM can improve communication with
stakeholders. Presenting tangible evidence of project status can build
stakeholder confidence and make it easier to justify decisions or the need for
changes.

EVM promotes accountability as team members understand that their performance
directly impacts the project's cost and schedule metrics, it fosters a more
responsible approach to work.


STANDARDIZATION AND CONSISTENCY


EVM provides a standardized method for project performance measurement.
Consistency is beneficial when managing multiple projects or comparing
performance across projects within your organization.

> Many government contracts and industries require EVM as a standard practice.
> It use can ensure compliance with these requirements and enhance your
> organization’s credibility.

--------------------------------------------------------------------------------


EARNED VALUE CALCULATION


Before calculating EV, you need to have a detailed project plan.
The plan should include a Work Breakdown Structure (WBS), which breaks down the
project into smaller, manageable components.


1. CALCULATE SCHEDULE VARIANCE (SV)


It measures the difference between the work that was planned to be completed by
a certain date and the work that has been completed by that date, in detail:

Definition of Schedule Variance (SV):

- SV is a quantitative indicator of how much ahead or behind schedule a project
is at any given time.

- It is calculated as the difference between Earned Value (EV) and Planned Value
(PV).

Calculation of Schedule Variance

the formula is: SV = EV - PV

.EV (Earned Value) is the budget assigned to the work actually completed up to
the reporting date.

.PV (Planned Value) is the budget assigned to the work that was scheduled to be
completed up to the reporting date.

INTERPRETING SCHEDULE VARIANCE


> - A positive SV indicates that the project is ahead of schedule.
> 
> - A negative SV suggests that the project is behind schedule.
> 
> - An SV of zero means the project is exactly on schedule.


2. CALCULATE COST VARIANCE (CV)


Cost Variance (CV) is a fundamental metric in Earned Value Management (EVM), a
project management technique. It is used to assess the financial performance of
a project by comparing the budgeted cost of work performed with the actual cost
incurred for that work. Here's a closer look at Cost Variance:

DEFINITION OF COST VARIANCE (CV)


- CV is an indicator of how much over or under budget a project is at a specific
point in time.

- It measures the financial efficiency of the project's progress.

CALCULATION OF COST VARIANCE


- CV = EV - AC

- Where:

- EV (Earned Value) is the value of the work actually completed up to the
reporting date, measured in terms of the budget.

- AC (Actual Cost) is the total cost incurred for the work completed up to the
reporting date.

INTERPRETING COST VARIANCE


> - A positive CV indicates that the project is under budget.
> 
> - A negative CV suggests that the project is over budget.
> 
> - A CV of zero means the project is exactly on budget.


3. SCHEDULE PERFORMANCE INDEX (SPI)


The Schedule Performance Index (SPI) provides a ratio of the work performed to
the work planned, it indicates how closely the project is adhering to its
planned schedule.

CALCULATION OF SCHEDULE PERFORMANCE INDEX


- SPI = EV / PV

Where:

- EV (Earned Value) represents the budgeted value of the work actually completed
up to a certain date.

- PV (Planned Value) is the budgeted value of the work that was supposed to be
completed by that date.

INTERPRETING SCHEDULE PERFORMANCE INDEX


> - An SPI value of 1 indicates that the project is on schedule.
> 
> - An SPI greater than 1 suggests that the project is ahead of schedule.
> 
> - An SPI less than 1 means the project is behind schedule.

--------------------------------------------------------------------------------

Schedule Performance Index (SPI) is especially beneficial in complex
environments where multiple tasks and variables intersect, by calculating SPI
for individual tasks, you gain a granular view of which specific areas are
lagging.

The level of detail is crucial for pinpointing problems and implementing
targeted corrective actions, for example, if two tasks are behind schedule,
their SPIs (less than 1) will clearly show this delay.

> When you aggregate the SPI values across all tasks, you get a comprehensive
> view of the overall project's schedule performance.
> 
> The broader perspective can reveal that, despite delays in certain areas,
> other parts of the project may be progressing well enough to keep the overall
> project ahead of schedule.

UNDERSTANDING THE OVERALL IMPACT


The contrast between task-level and project-level SPI allows you to understand
the relative impact of each task's delay, in a scenario, although two tasks are
behind, their delay might not be critical enough to derail the overall project
timeline, as indicated by an overall SPI greater than 1.

> The dual-level analysis informs more strategic decision-making, understanding
> that the overall project is ahead of schedule despite delays in certain tasks
> can influence how you allocate resources and prioritize work.
> 
> It allows for a more balanced approach to managing delays, focusing on
> critical path tasks that might have a greater impact on the completion date.


COMMUNICATING WITH STAKEHOLDERS


The analysis provides a solid foundation for communicating with stakeholders
explaining that while certain tasks are behind, the overall project is still on
track, managing expectations and maintaining confidence among project
stakeholders.


4. COST PERFORMANCE INDEX (CPI)


CPI is a vital tool in Earned Value Management (EVM) for assessing the cost
efficiency of a project's progress. Let's elaborate for example:

- CPI = EV / AC, where EV is the Earned Value and AC is the Actual Cost.

It measures the value of work completed against the actual cost incurred for
that work.

> A CPI over 1.00 signifies that the project is under budget, while a CPI under
> 1.00 indicates overspending.
> 
> CPI = 50,000 / 70,000 = 0.86, it clearly indicates that the project is
> currently overspending.

FORECASTING USING CPI


- The formula for Estimate at Completion (EAC) is EAC = Budget / CPI.

- In your example, with a total project budget of $150,000 and a current CPI of
0.90, the EAC would be $150,000 / 0.90 = $166.666.


> The forecast suggests that, based on current spending trends, the project is
> likely to exceed the budget by $16,666.

STRATEGIC ACTIONS BASED ON CPI ANALYSIS


Knowing this information early in the project lifecycle is crucial allowing
proactive measures to either reduce costs or seek additional funding also helps
in adjusting project strategies, renegotiating contracts, or re-evaluating
project scope to align with budget constraints.

COMMUNICATING FINANCIAL STATUS


CPI provides a clear, quantitative measure to communicate the financial status
of the project to stakeholders, the transparency is vital for maintaining trust
and managing expectations.

--------------------------------------------------------------------------------

Integrating CPI into your project monitoring processes allows for a more nuanced
understanding of the project's financial health. It aids in making informed
decisions about cost control and resource allocation, ensuring that projects
remain financially viable and aligned with organizational goals. Knowing the
potential financial outcome in advance equips you to steer the project more
effectively towards its successful completion within the financial constraints.



Gustavo’s The Business Automator is a reader-supported publication. To receive
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