Posted by: Linda Russell | 8 May, 2008

Earned Value

What is Earned Value?
Traditionally, project managers have tended to compare actual costs with planned expenditure, and actual hours with the estimate.

This leads to actual values being confused with actual progress. Actual costs/hours are not necessarily a good measure of how the project is performing.

Earned Value Management (EVM) provides an objective reference point indicating the status of the project, i.e. the value of the work completed to date in comparison with the desired end result. This value can be compared with both planned and actual costs and hours, to determine the performance to date and to give early indications of problems.

Cost forecasting can be enhanced with the use of EVM, as it can indicate the likely “outturn” result, based on continuing performance at the same rate as previously. Used with time estimates, it can help to predict that tasks will run late or even that they may finish early.

If payments against contract are required, EVM can form the basis of this. It can also be used in the management of risk.

How is Earned Value Calculated?
You need to be able to record:

  • planned hours or costs – known as the Budgeted Cost of Work Scheduled (BCWS)
  • actual hours or costs – known as the Actual Cost of Work Performed (ACWP)
  • task progress (percentage complete)

Calculating costs is better than working with just hours. Even if the hours are on track (or ahead of schedule), you may have had to use more expensive resources than planned, and working out the earned cost value and other cost indicators can highlight when a project is likely to go over budget.

To calculate Earned Value, multiply the BCWS by the Percentage Complete.

Other Useful Indicators

When you have calculated the Earned Value, you can calculate a Performance Ratio: if it’s less than 1, the task is underachieving; a performance value above 1 indicates you’re ahead of schedule.

It’s also possible to calculate a Predicted Forecast, which is the total outcome (in hours or cost) of the task, assuming that progress continues at the current rate (as indicated by the Performance Ratio).

Examples Using Costs

The total cost of Task A was estimated at £600. So far, the ACWP (the cost of the work done on it) is £200, but it’s only 20% complete.

  • The Earned Cost is £600 x 20% = £120
  • The Performance Ratio is 120/200 = 0.6

Using these values, the Predicted Forecast = £400 [remaining cost]/0.6 + £200 = £866.67 which is worse than planned and will mean the task is over budget.

Task B was estimated to cost £800. The ACWP is £400 and the task is 70% complete.

  • The Earned Hours are £800 x 70% = £560 hours
  • The Performance Ratio is 560/400 = 1.4
  • The Predicted Forecast is £400/1.4 + £400 = £685.71 which is less than the estimate.

So you might think that Task B is doing really well. But that’s not the whole story.

What about Time?

Performance isn’t just measured in cost terms: you need to take into account the earned Hours and the time performance.

You may have used a more experienced (and hence more expensive!) resource in order to reduce the amount of effort needed to complete the task, which may be ahead of schedule.

On the other hand, if the task is under budget, lower value resources may have been allocated, and they may be underperforming.

So it’s important to review both measures, and to reschedule the project regularly, to keep track of time progress.

How Software Can Help

It will come as no surprise to realise that software can take the legwork out of these calculations, and can also help you produce reports and graphs to help you review task and project progress.

Here’s an example of a graph (sometimes called an S-Curve) showing earned, planned, actual and forecast cumulative Costs:

Cost Variance Graph (S-Curve)

Cost Variance Graph (S-Curve)

Want to know more?

Dennis Lock’s Project Management (7th Ed) has a section on earned value (pp 564-583). The latest (9th ) edition is published by Gower and is available on Amazon.

The excellent Max’s Project Management Wisdom website has set of slides on Earned Value.

You could also try Wikipedia.

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Responses

  1. […] If you can compare planned hours and costs with actuals, this gives you the ability to calculate Earned Value, which can give you a measure of performance. This can be useful when comparing one project with […]


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