Let's say your sponsor asks you the typical question about how far along you are on your project. You may say that you are 25% complete or 50% complete or 75% complete. But do you really know that? How do you know if you're 50% complete—or 48% or 56%? The truth is that you don't know for sure with any degree of precision. You have some general notion of where you are, but you can't say with certainty.
Earned Value Management (EVM) is a technique that allows you to determine more precisely where your project stands in terms of your baseline schedule and budget. The general idea behind earned value is to compare where you actually are against where you planned to be. EVM allows you to quantify all of the work that has been accomplished so far on the project. It also allows you to quantify all of the work that should have been done on the project so far. Then, you can compare those numbers to determine if you're on schedule, ahead of schedule, or behind schedule.
Likewise, EVM calculations allow you to determine the total cost of the work done so far, as well as the total cost of all the work you expected to have completed by now. Comparing these two numbers gives you a sense for whether you are trending over budget, under budget, or on budget.
There are three metrics that form the building blocks for earned value—Earned Value, Actual Cost, and Planned Value.
- Earned Value (EV) is calculated by adding up the budgeted cost of every activity that has been completed. EV is the basic measure of how much value the project has achieved so far. By itself, it doesn't tell you too much. So you use it in combination with other calculations to determine your status.
- Actual Cost (AC) is calculated by adding up the actual cost for all the work that has been completed so far on the project.
- Planned Value (PV) is calculated by adding all the budgeted estimates for all the work that was scheduled to be completed by today.
These three numbers can be combined to give you the following four pieces of critical information.
- Schedule Variance (SV) tells you whether you're ahead of schedule or behind schedule, and is calculated as EV - PV. If the Schedule Variance is positive, it would mean that you have actually completed more work (EV) than you planned to complete (PV) at this time. If the SV is negative, it would mean that you are behind schedule.
- Cost Variance (CV) gives you a sense for how you're doing against the budget, and is calculated as EV - AC. If the Cost Variance is positive, it means that the budgeted cost to perform the work was more than what was actually spent for the same amount of work. This means that you are fine from a budget perspective. If the CV is negative, you may be over budget at this point.
Performance Index (
SPI) is a ratio calculated by taking the EV / PV. This shows the relationship between the budgeted cost of the work that was actually performed and the cost of the work that was scheduled to be completed at this same time. It gives the run rate for the project. If the calculation is greater that 1.0, it would mean that you are getting more work done (SV) than you had planned (PV).
Performance Index (
CPI) is the ratio of taking the EV / AC. This shows the relationship between the budgeted cost of the work performed and the actual cost of the work performed. It gives the burn rate for the project. If the calculation is greater than 1.0, it would mean that the project is getting more work done for each dollar spent than initially estimated.
There's much more to EVM and it's much more sophisticated than what has been described so far. However, the entire EVM model is based on these simple calculations described above. The calculations can help you determine where you stand against budget and schedule today, as well as how the project is trending against schedule and budget in the future.