Earned Value Management (EVM)

Summary:  In PMP® Exam questions, the Earned Value Management (EVM) questions are usually considered the most important ones as candidates will need to solve quite a few of them in the real PMP® Exam — I got around 7 EVM questions on my PMP® Exam paper and I am quite confident that I could get them all correct.

EVM is not a PMI Method; it was introduced by the military to manage large scale military projects.  It is applicable to many other industries and projects.

When should it be used?  Never for Firm Fixed price contracts, costs are known by the buyer and they are fixed, it will only give schedule information. EVM is expensive, so there is no need to add the additional cost. Cost Plus and Time and Materials type contracts that meet cost thresholds are where EVM become useful.

However, many project managers may not have done any EVM in their projects and many of them consider the EVM questions a bit scary. 

This post aims to help PMP® aspirants to understand easily the EVM concepts and how to tackle the EVM questions.

Introduction

As project managers come from different backgrounds, there is no consensus for the level of difficulty of EVM questions. But if you can understand the concepts of EVM firmly, you too will find that EVM questions for the PMP® Exam is indeed NOT difficult at all. After all, the PMP® Exam is not an exam decided for Maths students, the PMP® Exam tests your understanding of project management as a whole.

To arrive at the correct answers for EVM questions, all you need to do in the PMP® Exam is to:

1.     Read the question carefully and understand correctly

2.     Choose the correct formula to apply

3.     Calculate the answer  

EVM Concepts Explained With Examples

Earned value management (EVM) is used to assess the schedule and cost performance of a project — with EVM, the project manager will know exactly whether the project is with respect to schedule and budget

Schedule -

§  ahead of schedule

§  on Schedule  

§  behind the schedule

Budget

§  under budget

§  on Budget  

§  over budget

Earned value management (EVM) bases on the concept that i) work completed will deliver value and ii) the value delivered equals the budget put into the work. The value gained can be assessed along the progression of the project. In reality, earned value management is very complicated as value usually cannot simply be assessed based on the percentage of completion.

 PMI has simplified PMP® EVM calculation to very “ideal” situations! You will just need to know the following to get your PMP® EVM questions correct.

Basic EVM Formulas

To speak more clearly how the value is to be managed, a number of terms are defined in EVM (explained with the example of building 10 houses each has a value of US$500 expected to be completed in 10 weeks in proportion):

§  Planned Value (PV) — The budgeted value of the work completed so far at a specific date
example: at end of week 4, altogether 4 houses should be completed, the PV is US$2000

§  Earned Value (EV) — The actual value of the work completed so far at a specific date (refer to the “Notes on Earned Value Measurement” section below)
example: by end of week 4, only 3 houses are completed, the EV is US$1500

§  Actual Cost (AC) — The total expenditure for the work so far at a specific date
example: by end of week 4, US$2000 was spend, the AC is US$2000

EVM is based on monitoring these three aspects along the project in order to reveal the health of the project with the following indices:

§  Schedule Variance (SV) — difference between PV and EV, to tell whether the project work is ahead of / on / behind schedule

§  SV = EV – PV
If the project is behind schedule the SV will be negative (i.e. achieved less than what planned)
If the project is on schedule the SV = 0
If the project is ahead of schedule the SV will be positive (i.e. achieved more than what planned)

example: by end of week 4, the SV = EV – PV = US$1500 – US$2000 = -US$500 (behind schedule)

§  Schedule Performance Index (SPI) — ratio between EV and PV, to reflect whether the project work is ahead of / on / behind schedule in relative terms

§  SPI = EV/PV
If the project is behind schedule the SPI < 1 (i.e. achieved less than what planned)
If the project is on schedule the SPI = 1
If the project is ahead of schedule the SPI > 1 (i.e. achieved more than what planned)

§  example: by end of week 4, the SPI = EV/PV = US$1500/US$2000 = 0.75 (behind schedule)

§  Cost Variance (CV) — difference between PV and AC, to tell whether the project work is under / on / over budget

§  CV = EV – AC
If the project is over budget the CV will be negative (i.e. achieved less than spent)
If the project is on budget the CV = 0
If the project is under budget the CV will be positive (i.e. achieved more than spent)

§  example: by end of week 4, the CV = EV – AC = US$1500 – US$2000 = -US$500 (over budget)

§  Cost Performance Index (CPI) — ratio between EV and AC, to reflect whether the project work is under / on / over budget in relative terms

§  CPI = EV/AC
If the project is over budget the CPI < 1 (i.e. achieved less than spent)
If the project is on budget the CPI = 1
If the project is under budget the CPI > 1 (i.e. achieved more than spent)

§  example: by end of week 4, the CPI = EV/AC = US$1500/US$2000 = 0.75 (over budget)

Note both SV and SPI / CV and CPI give similar information on schedule / budget but the indices will give more insights into the actual performance with a meaning comparison.

From my experience, the most difficult process of solving EVM problems for PMP® Exams is to identify the PV, EV and AC from the wordy calculation questions. Then you will just have to recall the correct formula to substitute the values into to get the answer — the question will usually ask you directly about the actual indices to get.

Advanced EVM Formulas

§  Budget at Completion (BAC) — also known as the project/work budget, that is the total amount of money originally planned to spend on the project/work

§  example: the BAC for the housing project = US$500 x 10 = US$5000

§  Estimate at completion (EAC) — as the project goes on, there may be variations into the actual final cost from the planned final cost, EAC is a way to project/estimate the planned cost at project finish based on the currently available data

§  The following formulas can be used to calculate EAC based on which information and conditions given in the question:

§  EAC = BAC/CPI
If we believe the project will continue to spend at the same rate up to now

§  The delay is caused by reasons which is likely to continue (e.g. labor with less skilled than expected)

§  example: the EAC for the housing project = US$5000 / 0.75 = US$6666.66

§  EAC = AC + (BAC-EV)
If we believe that future expenditures will occur at the original forecasted amount (no more delays of the same kind in future)

§  The delay might be caused by some unforeseen reasons (e.g. typhoon) which is not likely to happen again

§  example: the EAC for the housing project = US$2000 + (US$5000 – $1500) = US$5500

§  EAC = AC + [(BAC-EV)/(SPI*CPI)]
If we believe that both current cost and current schedule performance will impact future cost performance

§  The performance of the project will continue with sub-prime standards (over budget and behind schedule)

§  This formula is less likely to be used for the PMP® Exam

§  example: the EAC for the housing project = US$2000 + [(US$5000 – $1500)/(0.75*0.75)] = US$8222

§  EAC = AC + New Estimate
If we believe the original conditions and assumptions are wrong

§  Will not be tested as there is nothing to calculate

§  Variance at Completion (VAC) — the variance at completion, i.e. the difference between the new estimate at completion and original planned value

§  VAC = BAC – EAC
If we forecast the project will be over budget, VAC will be negative
If we forecast the project will be under budget, VAC will be positive

§  example: the VAC for the housing project = US$5000 – US$6666 (just take the 1st EAC as an example only) = -US$1666

§  To Complete Performance Index (TCPI) — the efficiency needed to finish the project on budget, it is the ratio between budgeted cost of work remaining and money remaining

§  TCPI = (BAC-EV)/(BAC-AC)
Use this equation if the project is required to finish within BAC

§  example: the TCPI for the housing project at end of week 4 = (US$5000 – US$1500) / (US$5000 – US$2000) = 1.16

§  TCPI = (BAC-EV)/(EAC-AC)
Use this equation if the project is required to finish within new EAC

§  example: the TCPI for the housing project at end of week 4 with new EAC US$6666 = (US$5000 – US$1500) / (US$6666 – US$2000) = 0.75

Notes on Earned Value Measurement

The following will discuss how earned value is measured for project and work, from simple physical measurements, percentage complete to weighted milestones. Since the PMP® EVM questions cannot describe a lot of information, the part on earned value measurements will normally be based on simplified situations like physical measurements or percentage complete.

It is likely that you will not be tested on the more difficult ways of measuring earned values. These are included here for your reference only.

§  Physical Measurement — directly transform the physical measurement of the amount of work completed into EV

§  example: building 10 houses each has a value of US$500 expected to be completed in 10 weeks in proportion, earned value of 3 house built is US$1500

§  Percentage Complete — directly transform the percentage of the amount of work completed into EV

§  example: building 10 houses each has a value of US$500 expected to be completed in 10 weeks in proportion, earned value of 30% complete is US$1500

§  Weighted Milestone — a EV is assigned to the 100% completion of each milestone of the work packages with prior agreement with stakeholders

§  Fixed Formula — a specific percentage of the overall PV is assigned to the start of a work package and the remaining assigned upon completion; these must be agreed upon in the project management plan

§  0/100 rule: 0% EV at the activity begins; 100% EV upon completion

§  20/80 rule: 20% EV at the activity begins; 80% EV upon completion.

§  50/50 rule: 50% EV at the activity begins; 50% EV upon completion

EVM Charts

In common practices, EVM will also involve plotting the values on a graph in order to help stakeholders concerned to visualize the progress and the health of the project. More often than not you will find the EV, AC and PV plotted on a graph and you will be asked on the interpretation of the graph.

Insights to be gained from the chart:

§  If EV line is below PV, the project is behind schedule; if EV is above PV, the project is ahead of schedule.

§  If AC line is below EV, the project is within budget; if AC is above EV, the project is over budget.

Below is an example of the EVM charts you would be likely to encounter in your PMP® Exam — solid lines represent actual figures while dotted lines represent forecasted figures:

Judging from the chart above, we can infer that the project is currently over budget and behind schedule.

PMP® Earned Value Management (EVM) Formulas in PMBOK® Guide At a Glance

Name (Abbreviation)	Formula	Interpretation
Schedule Performance Index (SPI)	SPI = EV/PV EV = Earned Value PV = Planned Value	< 1    behind schedule = 1    on schedule > 1    ahead of schedule
Cost Performance Index (CPI)	CPI = EV/AC EV = Earned Value AC = Actual Cost	< 1    Over budget = 1    On budget > 1    Under budget sometimes the term ‘cumulative CPI’ would be shown, which actually is the CPI up to that moment
Schedule Variance (SV)	SV = EV – PV EV = Earned Value PV = Planned Value	< 0    Behind schedule = 0    On schedule > 0    Ahead of schedule
Cost Variance (CV)	CV = EV – AC EV = Earned Value AC = Actual Cost	< 0    Over budget = 0    On budget > 0    Within budget
Estimate at Completion (EAC) if original is flawed	EAC = AC + New ETC AC = Actual Cost New ETC = New Estimate to Completion	if the original estimate is based on wrong data/assumptions or circumstances have changed
Estimate at Completion (EAC) if BAC remains the same	EAC = AC + BAC – EV AC = Actual Cost BAC = Budget at completion EV = Earned Value	the variance is caused by a one-time event and is not likely to happen again
Estimate at Completion (EAC) if CPI remains the same	EAC = BAC/CPI BAC = Budget at completion CPI = Cost performance index	if the CPI would remain the same till end of project, i.e. the original estimation is not accurate
Estimate at Completion (EAC) if substandard performance continues	EAC = AC + [(BAC -EV)/(CPI*SPI)] AC = Actual Cost BAC = Budget at completion EV = Earned Value CPI = Cost Performance Index SPI = Schedule Performance Index	use when the question gives all the values (AC, BAC, EV, CPI and SPI), otherwise, this formula is not likely to be used
To-Complete Performance Index (TCPI)	TCPI = (BAC – EV)/ (BAC – AC) BAC = Budget at completion EV = Earned value AC = Actual Cost TCPI = Remaining Work /Remaining Funds BAC = Budget at completion EV = Earned value CPI = Cost performance index	< 1    Under budget = 1    On budget > 1    Over budget
Estimate to Completion	ETC = EAC -AC EAC = Estimate at Completion AC = Actual Cost
Variance at Completion	VAC = BAC – EAC BAC = Budget at completion EAC = Estimate at Completion	< 0    Over budget = 0    On budget > 0    Under budget
12 PMP® EVM Formulas

Hint - Make sure you understand about CV, SV, CPI and SPI, 

EV Comes first in each of these formulas. Remembering this would help you to clear at least half of the earned value questions right.  

References – PMBOK® , RMC,  Internet Content