In Part 1 of this blog, I explained what Earned Value Management (EVM) is, what the benefits are and reviewed the primary elements of EVM. You remember: Planned Value, Earned Value and Actual Cost. To recap, EVM is used to answer questions that are critical to the success of every project:
- When will the project finish?
- How much work remains? Are we delivering more or less work than planned?
- Are we on track to meet our planned budget?
- What is the remaining work likely to cost? The total project?
EVM informs the process for estimating project outcomes based on 1) past performance and 2) current project conditions. Once you’ve calculated Planned Value, Earned Value and Actual Cost, you can derive the other EVM metrics to analyze variances (in both schedule and cost) and estimated costs at project completion.
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Now let’s dive deeper into what the other EVM components are and how to use them to gauge your project’s current progress as well as predict future success.
Project Profess Metrics
Variance Analysis (VA)
When you need to demonstrate that your project was successfully completed on time and within budget, you use EVM Variance Analysis which allows you to monitor how your project is performing and enables you to course correct when needed. It lets you know that you are moving in the right direction!
Schedule Variance (SV)
Schedule Variance represents how far ahead of behind schedule your project is at a given point in time. It is calculated as the difference between the earned value and the planned value. This enables you to compare the difference between the work you’ve actually completed by a given date to the work you’ve planned to be completed by that same date. Obviously, you want to ensure that your project remains on schedule so you don’t go over budget. .
SV = EV – PV (positive = ahead of schedule, negative = behind schedule)
Cost Variance (CV)
Cost Variance is equally important as it provides the cost performance of the project and helps you determine whether the project is proceeding as planned. CV tells you whether your project is running over or under budget at any given point in time. It’s the difference between the value of work completed by a given date and the actual costs to the same point in time.
CV = EV – AC (positive = under budget, negative = over budget)
Schedule Performance Index (SPI)
The Schedule Performance Index (SPI) tells you how efficiently your project is actually progressing when compared to the original plan. An SPI of 1.0 indicates that, to this point in the project, the work is exactly on schedule.
SPI = EV/PV (>1 = ahead of schedule, <1 = behind schedule)
Cost Performance Index (CPI)
The Cost Performance Index measures the value of the work completed compared to the actual cost spent on the project. It helps you analyze the cost efficiency of the project by measuring how much you are earning for each dollar spent. A CPI of 1.0 means the project is exactly on budget and that the work completed to date is exactly the same as the cost to date.
CPI = EV/AC (>1 = under budget, <1 = over budget)
Importance of Calculating Variance and Index
Whether you are looking at schedule or cost, the difference between the variance and the index is that the variance simply tells you the difference between amounts, while the index provides you with the ratio between them. Calculating both indexes enables you to compare the health of your projects across the organization.
Project Forecasting Metrics
Do your projects all go exactly as you had planned? (Crickets chirping.) Right, I thought so. To give your projects a fighting chance, use forecasting metrics. Forecasting gives you a glimpse into your project’s future progress and can provide an early indication when things are off track. When applying EVM concepts in project management, forecasting is based on objective evidence.
Budget at Completion (BAC)
As the name indicates, Budget at Completion (BAC) represents your total budget for the project and is a summation of the total planned value for it.
Estimate at Completion (EAC)
Estimate at Completion (EAC) represents what you expect your total budget for the project will be upon completion – or what it will cost you to complete all the planned work in addition to the actual costs incurred so far. There are multiple ways to calculate EAC, based on assumptions about how your project is progressing.
- If the CPI is expected to stay the same for the remainder of the project (i.e., you assume that the project will continue to perform as it is currently performing): EAC = BAC/CPI
- If future work will get done at your original planned rate (i.e., perhaps you started out off track but you’ve course corrected and are back on track): EAC = AC + (BAC – EV)
- If your original plan/budget estimates are no longer valid (i.e., your baseline project assumptions and estimates were flawed): EAC = AC + Bottom-up ETC. Note: To calculate your bottom-up ETC, you will go to the task level, find the cost to complete each task and sum them up to get the total cost of the remaining work.
- If you believe that both your CPI and SPI will continue as they are currently calculated and influence the pace of completing all remaining work (i.e., you are over budget and behind schedule and you are unable to get things back on track): EAC = AC + [(BAC – EV) / (CPI x SPI)]
Estimate to Complete (ETC)
The Estimate to Complete (ETC) is the expected cost needed to complete all the remaining work for your project. ETC helps project managers predict what the final cost of the project will be upon completion.
ETC = EAC – AC
EAC vs ETC
Estimate at Completion represents the total cost of the project upon completion, and Estimate to Complete is the amount of money needed to complete all remaining work from a particular point. At the beginning of your project EAC is equal to ETC. As your project progresses, the ETC will decrease until you’re completed the project and your ETC = 0.
Variance at Completion (VAC)
The Variance at Completion (VAC) forecasts the difference between the Budget at Completion and the expected total costs to be accrued over the life of the project based on current trends.
VAC = BAC - EAC
To Complete Performance Index (TCPI)
TCPI represents an estimate of the cost performance needed by the project to meet the project’s budget goal. In basic terms, the To Complete Performance Index tells you how fast you have to move to achieve your target and it estimates the future cost performance that you must achieve to complete the project within your planned budget.
This can be calculated based on your Budget at Completion (BAC) or your current EAC. Either way, a value of >1 represents ‘harder to complete’ and <1 means this will be easier to achieve.
To calculate your TCPI based on your BAC:
TCPI = (BAC– EV)/(BAC – AC)
To calculate your TCPI based on your EAC:
TCPI = (BAC – EV)/(EAC – AC)
How to Apply EVM to your Projects
To implement EVM, you must first develop a detailed project plan including both the time and budget required to complete the work. As your project progresses, check in and measure the primary elements of Planned Value, Earned Value and Actual Cost for your project to-date. These three assessments form the basis for all earned value analysis techniques. The last step is to use this data to forecast project trends and course correct when needed. Using all of these values, you can track and evaluate your project’s health.