Earned value is a concept that allows a project's progress to be precisely defined. While the information provided through the calculations can be very valuable, the effort requires the adoption of a rigor and reporting discipline not seen in many organizations. Nevertheless, earned value metrics are a valuable tool for tracking your project along a timeline. These calculations can also give you an early warning when your project begins to skid off track.
Part 1 of the series
The first part of this series covered the background and history of earned value calculations.
In this article, we'll look at the fundamental mathematical building blocks of earned value. In the next article in this series, we'll start to combine these fundamental metrics in a way that gives you the true informational value.
Here are some of the basic concepts behind earned value. Depending on which book you read, there are dozens (maybe hundreds) of earned value calculations. However, most of them involve combining a few basic earned value metrics into various permutations.
The three metrics that form the building blocks for earned value include:
- Budgeted cost of work performed.
- Actual cost of work performed.
- Budgeted cost of work scheduled.
Budgeted cost of work performed
The budgeted cost of work performed (BCWP) is also referred to generically as the earned value. The BCWP 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. See Figure A.)
Let’s say that we have completed activities A, B, C, and D. Can you guess the simple formula for finding the BCWP? You got it. It’s (20 + 10 + 15 + 5), which happens to be the convenient round number of 50.
You might ask how you calculate an activity if it is in progress. Actually, you have some discretion to set the rules up front. One option is to consider the activity as being zero percent completed until it is totally completed, and then give yourself 100 percent of the credit. In other words, when activity B starts, the BCWP is zero. When activity B ends, the BCWP is 10.
Another option is to give partial credit. For example, when activity B starts, the BCWP is zero. When the activity is in progress, you can give 50 percent credit, or a BCWP of 5. When the activity ends, you give it the full BCWP of 10.
Likewise, you can get more discreet (say, giving credit in 10-percent increments), but each level of discretion results in more work for marginally more accuracy.
BCWP is the basic measure of how much value the project has achieved so far. By itself, it does not tell you too much. So, we use it in combination with other calculations to determine your status.
Actual cost of work performed
To calculate the actual cost of work performed (ACWP), add up the actual cost for all the work that has been completed so far on the project. This could include the internal and external labor costs, as well as invoices paid (or perhaps purchase orders approved). This task is less difficult if you have an automated financial system that will crank out these numbers. If you cannot capture all of the costs automatically, it could be very time-consuming. If your project consists only of labor, then the cost and the effort will track along the same lines. If you have a lot of nonlabor costs in your budget, then the project costs don’t directly tie to the labor used.
In Figure A, the ACWP for activities A through D is (20 + 5 + 20 + 10) or 55. You can see that the actual cost for the work performed is greater than the budgeted cost for the work performed. This could be a problem.
Again, if an activity is in progress, you could use the same options as we discussed in the BCWP to determine whether to include the actual cost or some percentage allocation (0 percent through 100 percent).
Budgeted cost of work scheduled
The budgeted cost of work scheduled (BCWS) is the sum of all the budgeted estimates for the work scheduled to be completed by today (or by any specific date).
Now we have a little more information. Since today's date is March 31, the BCWS is A+B+C (20 + 10 + 15) or 45. We do not count activity D, since D was not scheduled to be completed by March 31.
The building blocks of earned value
In this article, we covered the basic building blocks of earned value—the budgeted cost of work performed, the actual cost of work performed, and the budgeted cost of work scheduled. In the next column, we will start to put these numbers together in ways that will show us the progress we are making on a project today, the projected end date and end cost, and the trend line that shows whether we are getting closer to, or farther away from, our targets.