Noel has taught college Accounting and a host of other related topics and has a dual Master's Degree in Accounting/Finance. She is currently working on her Doctoral Degree.
Earned Value Management
Earned value management (EVM) is a systematic process used to measure project performance at various times throughout a project life cycle. EVM helps project managers to determine whether a project is over or under budget, or if the project is on schedule. Project managers can also use EVM to compare the actual work performed to the work that was originally planned for the project at a specific period, and to forecast project performance.
Let's examine some of the primary elements of earned value management measurements and apply the EVM formulas in the example below.
Earned Value Management Scenario
Jane is a project manager for a company that produces two special widgets each year for suppliers around the world. Jane receives a project schedule of 10 months and a budget with estimates of what it will cost to produce both widgets (shown below). The project requires 200 widgets to be produced per month for Widget A, and 100 widgets to be produced per month for Widget B.
Jane has budgeted $50 per widget for Widget A ($100,000/$2000), and $100 per widget for Widget B ($100,000/$1000). At the end of June, Jane's project team is six months into the project. Let's take a look at the progress Jane and her team have made:
As the project manager, Jane must determine how well her project team has performed. Is she ahead of schedule or behind schedule, and is the project team over or under budget - and by how much?
Primary EVM Element Calculations
Let's follow the earned value management methodology and calculate the primary EVM elements first.
Jane must find the planned value (PV; the cost of the work that has been scheduled, according to the budget), earned value (EV; the cost of the work that has been performed, according to the budget), and actual cost (AC; the total cost of the work that has been completed so far) for Widgets A and B:
PV = $50 per widget x 200 widgets per month x 6 months = $60,000
EV = $50 per widget x 800 widgets = $40,000
AC = $45,000
PV = $100 per widget x 100 widgets per month x 4 months = $40,000
EV = $100 per widget x 400 widgets = $40,000
AC = $35,000
Schedule/Cost Variance and Performance Index Calculations
Jane can use the foundational calculations to determine schedule and cost variance, and the schedule and cost performance indexes.
SV = EV-PV
$40,000 - $60,000 = -$20,000
CV = EV - AC
$40,000 - $45,000 = -$5,000
SPI = EV/PV
$40,000/$60,000 = .67
CPI = EV/AC
$40,000/$45,000 = .89
SV = EV-PV
$40,000-$40,000 = 0
CV = EV-AC
$40,000-$35,000 = $5,000
SPI = EV/PV
$40,000/$40,000 = 1
CPI = EV/AC
$40,000/$35,000 = 1.14
Performance Index Details
The SPI (scheduled performance index) tells Jane how she is progressing compared to the planned progress. Is she on track to meet the project deadline? Has the team efficiently used the time that has been used on the project to date?
If an SPI is greater than 1, more work has been completed that what was originally planned and indicates the project team is ahead of schedule. If an SPI is less than 1, less work has been completed than what was originally planned, so the project team is behind schedule. If the SPI equals 1, all work has been completed as scheduled.
According to the figures above, the project team that produces Widget B is on schedule and all work is completed as scheduled. However, the project team that produces Widget A appears to be behind schedule because their SPI is less than 1.
The CPI (cost performance index) tells Jane how efficiently she is using her project dollars to perform the work completed to date. If the CPI is less than 1, Jane is over budget, which means she is earning less than what she spent. If the CPI is greater than 1, Jane is earning more than she spent, and is under budget. If the CPI is equal to 1, Jane and her project team are spending money as originally planned.
According to the figures above, the project team that produces widget B is under budget because they are earning more than they spend as indicated by the CPI of 1.14. However, the project team that produces widget A is over budget as indicated by the CPI of .89.
We know the project team producing Widget A is over budget and behind schedule, and the project team producing Widget B is under budget and exactly on schedule. How much is the Widget A team over budget, and how far behind on schedule? How much is the Widget B team under budget?
Schedule and Cost Variance Details
Jane can use the schedule variance (SV) and cost variance (CV) formulas to determine how much the project teams are over or under budget, and how far ahead or behind schedule.
According to Jane's calculations, the project team for Widget A determined each widget cost 1.12 (1/CPI = 1/.89 = 1.12) times the amount the team originally planned to spend, and only produced 67% of the widgets as planned.
The project team for Widget B is 12.5% under budget (1/CPI or 1/1.14 = .875; 100-87.5 =12.5) and is on schedule.
Assuming the remaining work is produced at the planned budget for each widget, Jane can now calculate the estimate at completion for each project team.
Estimate at Completion (EAC) Examples
EAC = BAC+AC-EV
$100,000+$45,000-$40,000 = $105,000
EAC = BAC+AC-EV
$100,000+$35,000-$40,000 = $95,000
Jane was able to effectively manage the project team that produced Widget B because the team was under budget and exactly on schedule. Jane needs to determine why the team spent less than what was planned despite being under budget, because this may be an indicator that lower quality products were used to assemble Widget B.
Jane was not able to effectively manage the project team producing widget A because the team was over budget and behind schedule. This could have been the result of staffing issues or an increase in the cost of supplies used to produce widget A.
Earned value management is a systematic approach used to determine the project performance of a project at a point in time within the project lifecycle. It consists of a series of measurements used to determine differences in costs and schedule. EVM measurements help project managers predict whether a project will finish on time and within the project budget.
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