Advanced Terminology
How to Calculate Earned Value in Project Management
Earned value management (EVM) is a method used in project management to assess project performance. It provides valuable insights into the project’s health by measuring the planned work against actual work completed as well as the associated costs.
By calculating the earned value of a project, project managers can monitor progress, identify deviations from the plan, and make necessary adjustments to get the project back on track.
In this article, we will delve into the fundamentals of EVM and guide you through the step-by-step process of how to calculate earned value in project management. Before we begin, you can unlock a free trial with Wrike now to streamline your projects in one platform.
What is earned value?
Earned value (EV) is a way to measure and monitor the level of work completed on a project against the plan. Simply put, it’s a quick way to tell if you’re behind schedule or over budget on your project.
You can calculate the EV of a project by multiplying the percentage complete by the total project budget. For example, let’s say you’re 60% done, and your project budget is $100,000 — your earned value is then $60,000. However, to properly use earned value, a few additional calculations must be considered. The largest benefits of earned value result from completing both cost and schedule variance analyses.
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Earned value calculations in project management
1. Schedule Variance (SV): Schedule variance is the difference between your planned progress and your actual progress to date. The SV calculation is EV (earned value) - PV (planned value). Let’s assume you have a four-month-long project, and you’re two months in, but the project is only 25% complete. In this case, your EV = 1 months (25% of four months), and your PV = 2 months. Therefore your SV is 1 - 2 = -1. Since the number is negative, it indicates you’re behind schedule.
2. Cost Variance (CV): Similar to SV, cost variance is the difference between how much you planned on spending thus far and your actual costs to date. The CV calculation is: CV = EV - AC (actual cost). Let’s use the earlier example. Your project budget is $100,000 and you’re 60% done, which means your EV is $60,000. If you’ve spent $70,000 so far to get to this point in the project, your CV is -$10,000. You can tell you’re over budget because the number is negative, which may indicate a problem with the project or that the project could go over budget or run out of money.
3. Schedule Performance Index (SPI): This measure is similar to SV but is often preferred as it translates the numbers into a value that is easily compared across tasks or projects. The SPI calculation is: SPI = EV/PV. When SPI is above 1.00, you’re ahead of schedule. If it’s below 1.00, you’re behind. To take the example from above, SPI would be 1/2 = 0.5. Using SPI is different than simply comparing your progress against your baseline. Comparing your actual schedule against your plan may indicate you’re behind on two tasks. So, you know where your immediate problem is, but not necessarily how it impacts the overall project or your expected completion date. Using earned value, you can calculate your SPI both by task and for the project as a whole. When you take the SPI for each task and look at the bigger picture, you can see that your project is ahead of schedule, even with two late tasks. This helps you better understand the overall impact of the late tasks on the project.
4. Cost Performance Index (CPI): As with SPI, CPI allows you to simplify the answer for better analysis. The CPI calculation is: CPI = EV/AC. When CPI is over 1.00, you’re under budget, and when it’s under 1.00, you’re overspending. In the scenario above, CPI = 60,000/ 70,000 = 0.86, indicating an overspend. CPI can be used to forecast your project’s completion. For example, you can divide your total project budget by your current CPI to get the expected total cost at completion. The formula is Estimate at Completion (EAC) = Budget/ CPI. In the above example, this would be $100,000/ 0.86 = $116,279.07. Meaning, that at this point in the project, based on current trends, you will likely end up overspending your budget by $16,279.07. Knowing this early allows you the time to either find ways to cut costs or secure more funding.
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In conclusion, EVM is a useful technique in project management that enables project managers to accurately assess a project’s performance. The process of calculating EV may seem complex at first but, as we’ve seen, this can easily be overcome with the right tools and techniques.
As monitoring your project is key to delivering a successful outcome, using a robust work management platform can make all the difference. With Wrike, you can easily track, control, and adjust the details of your project, from EV data to schedules.
Further reading
- Project Management Basics: 6 Steps to a Foolproof Project Plan
- Why Managers Have Unrealistic Expectations About Their Team’s Capabilities
- 80+ Awesome Online Resources for Project Managers
- How to Create a Monthly Budget Spreadsheet Template for Your Small Business
Advanced Terminology
5 questions
What Is Change Management in Project Management? What Is Cost-Benefit Analysis in Project Management? What is Cost Control in Project Management? What is Cost Management in Project Management? What is Cost Variance in Project Management?
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