Earned Value Management (EVM) is a project management system that combines schedule, costs, and value to measure project performance. The size or difficulty of the project are no match for it. However, the usage of earned value management (EVM) can change depending on the circumstances encountered, such as weather issues. It measures the stages of work on the project that you have completed and done within a given time and budget. Basically, it monitors whether you are behind schedule and if you have surpassed you pre-fixed budget. So, how do you calculate earned value management (EVM), and why do you need it?
The use of and understanding of earned value management for projects performances
Of course, if you are reading this Appvizer article, there is always a tool to simplify your tasks, plan your schedule and improve the performance of your work on project completion. In this case, it is the earned value management (EVM). Any person who manages projects plans can benefit from project management software. No matter how small the project plan may be, a management software can still be useful.
Many companies that don’t run legit projects use software to organize, plan, track, and bring their work to life, so which is why, if your project is big, I suggest using earned value management (EVM).
It centralizes all your tasks in one place. Projects managers and project teams no longer come face to face with confusion, they are blessed with accuracy and actual tracking of their tasks and projects.
These tools come in many ways, just like tasks projects themselves. For example, some of your plans may be simple project processes that only require you and one other person, but, others can be arduous, needing more workers. Here are three kinds of tools that can help manage tasks and teamwork.
Here is how:
Choosing the right one for you and your team is essential as there are many types of project management software out there, that provide earned value management.
Here are some questions to keep in mind when assessing project management software options:
- Will your team use it?
- Will it be useful for every department? As EVM gives access to all the information pertaining to the project, to the project team and other departments.
- Is it transparent enough and does it have clear communication? In order for everyone to understand the task at hand, to quickly achieve it.
- Can custom reports be generated from this?
- Does it have complete cooperation with your other tools?
And, here are the complete actual ways it works. First, you need to start by completely sorting out your work, budget and schedule.
Those complete steps that you can take are below.
The first step is, as previously mentioned but more in-depth, is to completely sort out the work. What type of project it will be, define the different type of activities you will be doing and need to accomplish in the project.
It is usually done with the help of WBS, a work break-down structure in project management that, as its name says, structures your activities in a ranked way. Its method used for projects is known as the top-down approach, which means taking your goal and estimated results and breaking them down into pieces.
In the second step, it is to set a complete cost value to your project’s activities and question them. This step is called planned value, known as (PV) of the project. It can completely measure the project in currency (total of cost/ budget) or schedule (work hours).
The third is earned value. The cost & value, each activity, will have you earn. The quicker you move, the more you earn in valued time and cost, but if you move too slow, well what can I say? You lose more of that valuable time and money (cost) for your project. And who wants that? Not you nor I. So, I would say use the good old earned value management (EVM) method, not to end up with this problem.
And finally, the fourth and last complete step is to take the project from paper to action. This is where you find out if everything in your project (cost/ budget & time) that you have planned using the earned value project (EVM) worked or not. It is actually the physical part of the project.
How to calculate earned value management (EVM)?
So basically, earned value management (EVM) is to actually help calculate the variance between a set budget/ cost and the limit (schedule) in which work (tasks) have to be performed and completed in the actual project. Meaning quick time equals actual planned budget (less spending).
Estimate at completion: is calculated to see how the cost of the project is going to change from the cost of the actual budget. If what you've spent reflects how the plan of the project will behave later, during the “put into action” phase, then the cost performance index (CPI) can be used to calculate EAC.
The formula: EAC (estimate at completion)= AC (actual cost) + BAC (budget at completion) - EV (earned value)/ CPI (completion performance index)
Budget at Completion: BAC or budget at completion cost is the total of all budgets established for the work you will perform on the project. It indicates how much was initially planned for the project to cost. There isn’t a unique formula for it. BAC concerns looking at the actual total budget cost of the project and what value was gained or lost.
Planned Value: It is the complete work value of the project that you have previously planned out according to your time and budget (cost) that should be completed in due time. Your work activities should respect your project plan. This method is calculated before you attack any project’s activity. This is what is used in the budget that you have completely measured, and nothing else. Nothing out of budget and cost comes in to play yet.
So here is how to calculate it:
You take the planned percentage of the work you completed in the project and multiply it by the project budget (cost), and you will get your Planned Value.
Its formula: Planned Value = (Planned Percent (%) Complete) X (BAC)
Actual Cost: It is the actual cost, total amount of money you have spent since each member of the team has started and performed their activities in the project. It concerns the actual cost from the beginning of each activity performed on the project during a set period of time (a specified date).
There is no specific way to calculate Actual Cost. It is the complete amount that you have spent until now on the project.
Earned Value: Take the confirmed percentage of the completed work on the project and multiply it by the project budget, and you will get the Earned Value.
Earned Value = percentage (%) of completed work on the project X BAC (Budget at Completion).
Here is an example of the calculation:
You have an actual project to complete in 14 months. You set a budget of $100,000 for the project. Suddenly, six months have gone by, and you used $60,000 out of that budget. Upon inspection, you realize that you have completed only 40% of the work.
So how would the Earned Value (EV) of the project be calculated?
Your Earned Value is 40% of the value of your total project work
You’ve completed a 40% value of BAC known as Budget at completion
Therefore, you will calculate
= 40% of 100,000
= 0.4 X 100,000
= 40,000 USD
In the end, your project’s complete Earned Value (EV) is $40,000. And this all thanks to EVM, which gave you an overview of your schedule, costs, and value to completely measure your project performance.
Cost Variance: It is the difference between what was expected to be spent from the budget and what was actually spent on the project. It is calculated as the difference between earned value and the actual cost.
The formula: CV (cost variance) = EV (earned value) - AC (actual cost)
Schedule Variance (SV): It is the difference between where you planned to be in the schedule when accomplishing your activities versus where you actually are in the schedule of the project. It is calculated as a difference between the earned value and the planned value. Basically, it explains whether you should move faster or remain at that pace in order to complete the project.
The formula is: SV (schedule variance) = EV (earned value) - PV (planned value)
Cost Performance Index (CPI)
Cost Performance Index is the speed at which the project performance is meeting cost expectations during a given period of time. It is a relation between the earned value to the actual cost.
The formula is: CPI (cost performance index) = EV (earned value)/ AC (actual cost)
Schedule Performance Index (SPI)
Schedule Performance Index: It is a calculation of the earned value to planned value. Basically how far you are performing and completing those activities compared to the schedule.
The formula: SPI (schedule performance index) = EV (earned value) / PV (planned value)
Estimate at Completion (EAC)
Estimate at completion is the expected total cost of total work completion. It lets you know if you have surpassed the original cost and budget of the project.
EAC (estimate at completion) = BAC (budget at completion) / CPI (cost performance index) – If the CPI (cost performance index) is expected to be the same for the remainder of the project, the EAC (estimate at completion) can be calculated using this formula.
Estimate To Complete (ETC)
The estimate to complete is the remaining cost to complete all the of the work left for the project. It estimates how much more will be spent on the project, if you are behind schedule.
The formula: ETC (estimate to complete) = EAC (Estimate at Completion) - AC (actual cost) – If the work on the project is moving according to what was planned, the cost of completing the remaining planned work can be calculated using the formula, shown above.
Variance at Completion (VAC)
Variance at completion is comparing the original budget BAC of the project and the one used during the work, if the BAC was not respected. It is calculated as the difference between budget at completion and the estimate at completion.
The formula: VAC (Variance at Completion) = BAC (budget at completion) - EAC (estimate at completion)
So after all, you should note that earned value management (EVM) is very important when it comes to managing and completing a project. It saves you great time, money and value thanks to the organizational system of EVM.