PMP Earned Value Management (EVM) And Formulas

PMP Earned Value Management (EVM) And Formulas

Last updated on 14th Oct 2020, Artciles, Blog

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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.

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

  • Read the question carefully
  • Select the correct formula to apply
  • Calculate the answer (this is often the easiest part! You can get most answers without the use of calculators)

PMP® 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:

  • ahead of / on / behind schedule
  • under / on / 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.

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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$1000 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$4000

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$3000

Actual Cost (AC) — The total expenditure for the work so far at a specific date

Example:

by end of week 4, US$4000 was spend, the AC is US$4000

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$3000 – US$4000 = -US$1000 (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$3000/US$4000 = 0.75 (behind schedule)

Cost Variance (CV) — difference between EV 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$3000 – US$4000 = -US$1000 (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$3000/US$4000 = 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.

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$1000 x 10 = US$10000

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. labour with less skilled than expected)

Example:

the EAC for the housing project = US$10000 / 0.75 = US$13333

  • 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$4000 + (US$10000 – $3000) = US$11000

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  • 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$4000 + [(US$10000 – $3000)/(0.75*0.75)] = US$16444

  • 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$10000 – US$13333 (just take the 1st EAC as an example only) = -US$3333

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 above equation if the project is required to finish within BAC

Example:

the TCPI for the housing project at end of week 4 = (US$10000 – US$3000) / (US$10000 – US$4000) = 1.167

  • TCPI = (BAC-EV)/(EAC-AC)

Use this above 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$13333 = (US$10000 – US$3000) / (US$13333 – US$4000) = 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$1000 expected to be completed in 10 weeks in proportion, earned value of 3 house built is US$3000

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

Example:

building 10 houses each has a value of US$1000 expected to be completed in 10 weeks in proportion, earned value of 30% complete is US$3000

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
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Conclusion

Every project needs to manage schedule, cost or scope requirements and restrictions. Earned Value Management is a comprehensive yet not over-sophisticated methodology that allows project managers to measure and monitor the performance of a project.

Thereby, the Earned Value Analysis focuses on the measurement of cost and value. The Variance Analysis assesses the differences between the project baseline(s) and the actual performance.  Forecasting is used to estimate the future performance of a project and identify the areas of improvement. Trend analysis, on the other hand, refers mainly to the development of variances over different periods.

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