# Earned Value Management (EVM)

July 4, 2008 | Author: PM Hut | Filed under: Cost Estimating, Cost Management, Economic Evaluation, Project Management Definitions

Earned Value Management (EVM)
By Mohamed Elashri

The earned value Management involves developing these key values for each schedule activity, work package, or control account:

Planned value (PV). PV is the budgeted cost for the work scheduled to be completed on an activity or WBS component up to a given point in time.

Earned value (EV). EV is the budgeted amount for the work actually completed on the schedule activity or WBS component during a given time period.

Actual cost (AC). AC is the total cost incurred in accomplishing work on the schedule activity or WBS component during a given time period. This AC must correspond in definition and coverage to whatever was budgeted for the PV and the EV (e.g., direct hours only, direct costs only, or all costs including indirect costs).

Cost variance (CV). CV equals earned value (EV) minus actual cost (AC). The cost variance at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent. Formula: CV= EV - AC

Schedule variance (SV). SV equals earned value (EV) minus planned value (PV). Schedule variance will ultimately equal zero when the project is completed because all of the planned values will have been earned. Formula: SV = EV - PV

These two values, the CV and SV, can be converted to efficiency indicators to reflect the cost and schedule performance of any project.

Cost performance index (CPI). A CPI value less than 1.0 indicates a cost overrun of the estimates. A CPI value greater than 1.0 indicates a cost underrun of the estimates. CPI equals the ratio of the EV to the AC. The CPI is the most commonly used cost-efficiency indicator. Formula: CPI = EV/AC

Schedule performance index (SPI). The SPI is used, in addition to the schedule status to predict the completion date and is sometimes used in conjunction with the CPI to forecast the project completion estimates. SPI equals the ratio of the EV to the PV. Formula: SPI = EV/PV

### Forecasting

Forecasting includes making estimates or predictions of conditions in the projectâ€™s future based on information and knowledge available at the time of the forecast. Forecasts are generated, updated, and reissued based on work performance information provided as the project is executed and progressed.

BAC is equal to the total PV at completion for a schedule activity, work package, control account, or other WBS component. Formula: BAC = total cumulative PV at completion.

ETC is the estimate for completing the remaining work for a schedule activity, work package, or control account.

ETC based on new estimate. ETC equals the revised estimate for the work remaining, as determined by the performing organization. This more accurate and comprehensive completion estimate is an independent, non-calculated estimate to complete for all the work remaining, and considers the performance or production of the resource(s) to date.

Alternatively, to calculate ETC using earned value data, one of two formulas is typically used:

• ETC based on atypical variances. This approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. ETC equals the BAC minus the cumulative earned value to date (EVC). Formula: ETC = (BAC - EVC)
• ETC based on typical variances. This approach is most often used when current variances are seen as typical of future variances. ETC equals the BAC minus the cumulative EVC (the remaining PV) divided by the cumulative cost performance index (CPIC). Formula: ETC = (BAC - EVC) / CPIC

EAC is the projected or anticipated total final value for a schedule activity, WBS component, or project when the defined work of the project is completed. One EAC forecasting technique is based upon the performing organization providing an estimate at completion:

EAC using a new estimate. EAC equals the actual costs to date (ACC) plus a new ETC that is provided by the performing organization. This approach is most often used when past performance shows that the original estimating assumptions were fundamentally flawed or that they are no longer relevant due to a change in conditions. Formula: EAC = ACC + ETC

The two most common forecasting techniques for calculating EAC using earned value data are some variation of:

• EAC using remaining budget. EAC equals ACC plus the budget required to complete the remaining work, which is the budget at completion (BAC) minus the earned value (EV). This approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. Formula: EAC = ACC + BAC - EV
• EAC using CPIC. EAC equals actual costs to date (ACC) plus the budget required to complete the remaining project work, which is the BAC minus the EV, modified by a performance factor (often the CPIC). This approach is most often used when current variances are seen as typical of future variances. Formula: EAC = ACC + ((BAC - EV) / CPIC)

Mohamed Elashri is a software project manager with over 7 years in IT Field and has a wide experience in software Project Planning, Project Monitoring and control, Risk Management, Software Estimation, Measurement And Analysis, Software development and system analysis and design, Object oriented solutions analysis, and design and implementation. Mohamed has a wide experience in RUP Model implementation and tailoring , as well as a wide experience in e-business & e-commerce business, Process Improvement and CMMI Model and Six Sigma. He has been certified as Certified Six Sigma Green Belt form Quality America Inc Since 2006. He also has been certified as PMP since 2007.

Mohamed attended many courses in software architecture, Software analysis and design, project management and Process Improvement in many respectable Institutes Like SEI , QAI India, AUC, Nile University, PMI and Quality America Inc. Mohamed runs Mohamed Elashri Weblog, his professional blog.

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