When you work in project management, you should be prepared to carry out every task, from planning to reporting. In addition, while managing your project performance, you must compare the plan to the actual result to easily predict the time overspent on a specific task. Simply put, the earned value method eliminates guesswork by delivering accurate and empirical data to achieve optimal results.
Project management offers various tools and techniques for managing a successful project. Earned Value Management (EVM) is a better method that compares what you have received or produced to what you have spent on the project. Acquiring a Project Management Certificate online as a project manager will help you identify problems in the project early and enable you to be more proactive through earned value calculations.
What is Earned Value Project Management (EVPM)?
In project management, the earned value method is one of the most prominent tools to measure the performance and progress of the project. The EVM calculations are studied by all managers seeking PMP Certification courses.
Among all the PMP exam formulas calculations, this earned value project management certification is considered one of the best practice aspects for monitoring the project performance from the triangle perspective of scope, cost, and schedule.
Earned Value Analysis
Earned Value Analysis, or Earned Value Method, is a methodology that allows the project manager to measure the amount of work performed on a specific project beyond the basic review of cost and scheduled reports. EV in Project Management provides information on the progression of the project, corresponding to its original planning and predicting how its development in the future will be.
Benefits of Earned Value Project Management
EVM Project Management provides insights and dearly visibility into a project's cost and time-related problems, respective to all levels of management. It delivers accurately defined data and gives proactive managers a greater scope for decision-making in various verticals.
EVM in Project Management:
- Provides a reliable central data source for faster reporting cycles with more time for earned value analysis.
- Integrates all authorized work using a product-oriented work breakdown structure. It will help coordinate each team's contributions, ensuring the work, schedule, and cost are aligned perfectly.
- Predicts the issues early, allowing the management to focus on the other core areas. This clearly depicted process will lower the risk of other prospects that have been overlooked.
- Monitors budget, schedule, m scope by accurately measuring and predicting the future of the performance.
- Detects high costs and schedule variances once the project completes by 10%.
- Reports the data in real-time insights to warn the managers and stakeholders early if the process goes off-track.
- Follows a time-phased approach to check and calculate the work process periodically, ultimately to attain a successful outcome from the project.
EVM Core Concepts
Earned Value Analysis helps you identify trends so you can predict problems, decide on solutions and manage the project's performance more effectively. However, to understand the applications of EV in project management, you have to learn the core concepts.
- EVM: Earned Value Method to analyze the budget and schedule of the project to quantify and optimize the performance.
- EVA: Earned Value Analysis to determine the likely outcome of the project in the future by comparing the schedule and budget with the fixed.
- EVMS: Earned Value Management System indicates all the techniques, templates, and processes that have to be provided for the EVM.
5 Fundamentals of Earned Value Project Management
The Earned Value Method is all about measuring and benchmarking a well-prepared plan. Hence, you can only perform the process in companies with a set of key elements in place. Below we have described the fundamentals of Earned value management in detail for proper implementation.
1. Scope of Project and Organization
It should be started by identifying the specific element along with requirements collection and scope definitions. This principle should have three important documents-
- WBS: Initiate with work breakdown structure to translate large deliverables into smaller modules.
- OBS: Develop an Organization Breakdown structure to clarify the stakeholders and participants.
- RAM: Build a Responsibility assignment matrix to clarify the role of the individual in every task.
2. Planning, Scheduling, And Budgeting
It defines the major and minor milestones of the project, assigning deadlines for each. Get an ideal percentage of the budget for each small module, reflecting the estimated labor and material costs.
3. Detecting Actual Costs
Build a system to track the expenses and integrate them with the relevant module. With this tracking system in place, you can analyze the costs at the work package level, emphasizing accurate accounting.
4. Analyzing and Reporting Project Performance
Make an accurate plan to report on PV, EV, and AC to the team, senior leaders, and customers to increase the visibility of the progression of the project.
5. Revisions and Data Optimization
Prepare guidelines for when and how to adjust the baseline of the project. For instance, you can revise the plan only if the stakeholders authorize a change due to the scope rather than whenever the project encounters a delay.
Earned Value Formulas
No matter what, EVM can be an intimidating concept for some project managers due to the various terminologies associated with the process. You need to break down the bigger title into smaller concepts to gain more confidence and expertise in the domain.
Here we have listed out the earned value management formulas where each concept has a key role in improving the project performance.
1. Budget at Completion (BAC)
This is the total anticipated and budgeted costs for a project. In simple terms, it is the estimated project cost planned before the actual work begins.
BAC = Sum of all budgeted costs of a project
2. Planned Value (PV), or Budgeted Cost of the Work Scheduled (BCWS)
The planned value depicts the activities of a project should be at a determined point in the project schedule and in the cost estimation.
PV = Total Project Cost x % of planned work
3. Earned Value (EV), or Budgeted Cost of the Work Performed (BCWP)
Earned Value is the approved budget cost of the work that is completed within the specified date.
EV = Total Project Cost x % of actual work
4. Actual Cost (AC), or Actual Cost of Work Performed (ACWP)
This value indicates the costs of the total project to date or the actual cost of the performed work at any standpoint in the project.
AC = Total Costs Incurred
5. Cost Variance (CV)
This number refers to how far the project has strayed from the initial planned budget. A positive result means that you are under the budget, while a negative means you are over it.
CV = EV - AC
6. Schedule Variance (SV)
The SV calculation shows whether you're lagging behind or ahead of the planned schedule. If it's positive, you are ahead and behind if it is negative.
SV = EV - PV
7. Cost Performance Index (CPI)
CPI shows the project performance from a budgetary standpoint. If the value is more than one, it is below the budget. If it's less than one, it has gone overboard.
CPI = EV/AC
8. Schedule Performance Index (SPI)
This value indicates the project performance from the perspective of time. If the SPI is more than one, then the project is ahead of the planned schedule. If it is less than one, it is lagging.
SPI = EV/PV
9. Estimate at Completion (EAC)
This EAC calculation aids in determining the expected cost of completing the remaining project based on the present performance.
EAC = BAC/CPI
10. Estimate to Complete (ETC)
ETC value is the estimation of the amount required to complete the remaining work of the project.
ETC = EAC - AC
11. Variance at Completion (VAC)
VAC calculation indicates the amount of expected budget overrun if the value is negative or underrun if it's positive at the end of the project.
VAC = BAC - EAC
12. To Complete Performance Index (TCPI)
TCPI is used to calculate the future cost of the performance of the project to achieve a specified result.
To achieve the original budget – TCPI = (BAC-EV)/(BAC – AC)
To achieve Estimate at Completion – TCPI = (BAC-EV)/(EAC – AC)-
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Earned Value Metrics
The earned value metrics are Planned value (PV), Earned Value (EV), and Actual Cost (AC), which project managers and organizations use to determine the earned value of ongoing projects. It will give a more comprehensive overview of the project's health to make better decisions and control the projects.
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How Do You Calculate Earned Value Management With Example?
Earned Value in Project management is a way to measure and monitor the amount of work completed against the plan. In a nutshell, it is a prompt way to indicate whether you are behind schedule or over your fixed budget.
Here we have explained the Earned Value Analysis example for better understanding. If you have fixed a budget for a project as Rs. 20000 for six months. Now that you have completed 25% of the work in three months, then the EV would be Rs. 5000.
EV = Total Project Cost (20000) x % (25%) actual work
Projects are a vital yet fundamental part of every business organization, where earned value techniques are defined in a standard manner, and data will be available to be reported periodically across the project. EVM in project management seamlessly integrated data throughout the project with a single system to improve the scope and analysis of the overall performance.
Join the Knowledgehut’s Project Management certificate online, designed with expert educators and extensive coursework to build and assemble a knowledge base for the Earned Value management system. With the course, you can predict the future performance and past history of the project clearly, ensuring to alleviate any risks and satisfying the stakeholders and the management.
Frequently Asked Questions (FAQs)
1. How to Calculate Earned Value in Project Management?
The earned value analysis formula that should be used in project management is.
Earned Value (EV) = total project budget multiplied by the % of the project completed. Certain tools, such as Microsoft projects, can perform earned value analysis in project management automatically.
2. How does a project manager manage projects with earned value management?
Performing EVM in project management requires the project scope, schedule, and budget to integrate into the time-phased performance measurement baseline (PMB). Project managers can use such earned value management example aids in tracking the performance of the projects against project baselines.
3. What are the earned value indicators?
Earned Value Indicators are used in the standard method of measuring the progress of the projects at any point in time, as well as forecasting its completion date and final budget cost. The indicators also compared the planned amount of work with what has been completed by analyzing the schedule variances as the project proceeds.
4. What are the key components of earned value management?
EV in Project Management has three important components: Organization and scope of the project, Planning, scheduling, and budgeting, as well as Accounting for Actual costs.
5. What are the top three 3 EVM performance measures?
EVM in Project Management is built on three key metrics measures, including Planned Value (PV), Earned Value (EV), and Actual Cost (AC).