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EduPristine>Blog>Earned Value Management

Earned Value Management

September 19, 2015

How do you decide the status of your project? Is it progressing well? Are the costs and efforts in control? Will you reach the targeted profitability?

Lord Kelvin, the famous mathematical physicist and engineer said, “To measure is to know.” It is imperative to measure progress in business else you would never know performance levels. Managing and measuring project performance is important as it helps to know how the team is performing, profitability that will be achieved and whether delivery will be as per planned schedule, cost and efforts. Earned Value Management (EVM) is an effective tool to measure project performance. It can be used to measure past project performance, current project performance and in predicting future performance. EVM is a crucial aspect of software project management and therefore a key component of the PMP exam.

Let us understand EVM thoroughly. Earned Value Management (EVM) basically tracks the effort and cost that has been spent on the project and compares them with the value that has been delivered.

There are certain concepts to understand before calculating the EVM for a project –

understanding Earned Value Management

Once these concepts are clear, we can evaluate the project performance using the following indicators –

project performance indicators

Now we will use an example to understand these concepts better. Here is an example that will help us to understand how to calculate earned value for a software project –

You are the project manager of a project which has an estimated cost of $35000 and an estimated duration of 10 months. You and your team have been working on the project for 4 months now. The PMO office says that you have spent $8000 till date. How do you know how the project progress has been. What status will you report to the senior management regarding cost and efforts spent and the project spending forecast?

We will use concepts of EVM to report project progress –

reporting project progress

As per the EVM analysis, the CPI is over 1 which indicates that the project has earned more than the spending on it till the end of 4th month. The project is therefore under budget. The SPI is under 1 which indicates that the project is behind schedule.

The project stakeholders would also be interested to know how the project will perform in the future. EVM helps in forecasting performance too. Estimate at Completion (EAC) is used to find out the expected total cost of work in the project.

EAC can be calculated in three ways. We will use the same example to find out EAC –

  1. Assume similar cost variance will occur till the completion of project
    calculating EAC
  2. Cost Variance will not occur in the future.
    calculating EAC
  3. Current cost and schedule variance will continue in the future
    calculating EAC

There are two more measures that are useful to give the status of the project –

  1. Variance at completion will tell how much deviation from budget will there be at the completion of the project. It is calculated as –
    calculating EAC
  2. To Complete Performance Index gives the future CPI that must be followed if the project has to be completed within the budgeted cost.
    If the project is under budget, TCPI is calculated as –
    calculating TCIP

If the project is over budget, TCPI is calculated as –

calculating TCIP

EVM is an important component of PMP certification. PMP aspirants should understand the concepts thoroughly and prepare well in this subject area.

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Trusted by Fortune 500 Companies and 10,000 Students from 40+ countries across the globe, it is one of the leading International Training providers for Finance Certifications like FRM®, CFA®, PRM®, Business Analytics, HR Analytics, Financial Modeling, and Operational Risk Modeling. EduPristine has conducted more than 500,000 man-hours of quality training in finance.

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