Earned Value Management System Explained in Easy Language

Do you find Earned Value Management System a difficult concept?

I generally ask the above question in my class before I start explaining what is Earned Value Management System. Usually I find most of the students have not even heard about Earned Value Management System, let alone gauge its difficulty.

Earned Value Management System

On the other hand, a small proportion of students know about Earned Value Management System. They think that the concept is difficult, profound and impractical. However, I believe, the difficulty level of Earned Value Management is grossly overrated. This is one of the simpler concept of Project Management.

Then why do most of the students find Earned Value Management System problematic?

The reason is not difficult to fathom. The subject is not treated well in many Project Management books; especially the books for PMP exam preparation. Most of the books treat Earned Value Management System as a Mathematical concept with lots of Formulas. Let us be truthful to ourselves, Mathematics is not a forte for many. In fact, it may be a bugbear for many of us.

In my opinion Earned Value Management System is more about Common Sense than anything else. Mathematical Formulas can be easily derived if we understand the basics of Earned Value Management System.

In some of my other posts I have explained Earned Value Management using small examples. In this post I have explained Earned Value Management terms in simple and easy language. You should read these posts together to get a complete understanding of Earned Value Management System.

I have also compiled a PMP® Formulas Pocket Guide. You can download it free. It is a comprehensive guide to all PMP® Exam formulas.

Earned Value Management System (EVMS)

EVMS is a methodology to assess project performance by combining Scope, Time and Cost. In simple terms EVMS is a Project’s performance management system.

In EVMS, Work is considered as the basic unit for performance measurement and evaluation. There could be many different definitions of Work. The definition can vary from one organization to the other (or from one project to the other). However, ideally it is the Work as defined in Work Breakdown Structure (WBS). E.g. Work could be a small Work Package or it could be an Entire Project or anything in-between.

In EVMS, project’s performance is evaluated on a given date (often called the Control Date). There are 3 basic ingredients of EVMS which are essential for ascertaining the project’s performance. These ingredients are 3 different monetary values of Work.

  1. Work that was Planned to be Completed by the Control Date. Refer to Planned Value below.
  2. Work that was Actually Completed by the Control Date. Refer to Earned Value below.
  3. The Cost (Expenditure) of work that was Actually Completed by the Control Date. Refer to Actual Cost below.

In EVMS, all 3 values are usually enumerated and reported as Monetary Values. Sometimes these values are reported as a monetary equivalent like Effort.

Budget At Completion (BAC)

It is the Estimated (or Planned or Budgeted) Cost required to complete the Entire Work. Usually the Entire Work means Total Project Work (as defined in WBS). But it can also mean the Work defined for a Milestone(s).

Planned Value (PV)

It is also called Budgeted Cost of Work Scheduled (BCWS). It is the Monetary Value of the Work that was Planned (Estimated) to be Completed by the Control Date.

Earned Value (EV)

It is also called Budgeted Cost of Work Performed (BCWP). It is the Monetary Value of the Work that was Actually Completed by the Control Date. It is NOT the Cost of Work completed. Rather it is the value of the Work completed as per the original Budget. e.g. if X% of the Work is completed then EV would be X% of BAC.

Actual Cost (AC)

It is also called Actual Cost of Work Performed (ACWP). It is the Cost of of Work that was Actually Completed by the Control Date. Or simply, it is the Actual or Booked Expenditure.

Schedule Variance (SV)

It is the difference between the monetary value of Work that was Actually Completed and the monetary value of Work that was Planned to be Completed. In EVMS terminology it is the difference between EV and PV. It provides a status check on Project Schedule.

Cost Variance (CV)

It is the difference between the monetary value of Work that was Actually Completed and the Cost of Work that was Actually Completed. In EVMS terminology it is the difference between EV and AC. It provides a status check on Project Cost.

Schedule Performance Index (SPI)

It is the ratio of the monetary value of Work that was Actually Completed and the monetary value of Work that was Planned to be Completed. In EVMS terminology it is the ratio of EV and PV. It is the measure of Schedule Efficiency of the project.

Cost Performance Index (CPI)

It is the ratio of the monetary value of Work that was Actually Completed and the Cost of Work that was Actually Completed. In EVMS terminology it is the ratio of EV and AC. It is the measure of Cost Efficiency of the project.

Estimate To Complete (ETC)

It is the Estimated Cost of the Remaining Work (Work that is remaining on the Control Date). Or simply, it is the money required to complete the Remaining Work.

Estimate At Completion (EAC)

It is the Revised Estimated Budget for the Entire Work. The Original Budget was estimated as BAC. But on the Control Date Project may have a Cost Variance (CV). Due to the Cost Variance, Original Budget (BAC) may no longer be valid. The original budget may need to be adjusted. EAC is the Adjusted (or Proposed or Revised) Budget.

Variance At Completion (VAC)

It is the difference between the Original Budget and the Revised Budget. In EVM terminology it is the difference between BAC and EAC.

To Complete Performance Index (TCPI)

It is the Projected Future Cost Efficiency to complete the project within Approved Budget. CPI is the Actual Efficiency of the project till the Control Date whereas TCPI is the Projected Future Efficiency to complete the remaining work.

You should also look at some of my other articles that explain Earned Value Management System with the help of a small example.
You can also look at EVM – Is it Useful? to understand practical utility of Earned Value Management System.
You can refer to Max Wideman Glossary to read some standard definitions on Earned Value Management System.
Do you still find Earned Value Management System confusing? Please leave a comment.

 

Praveen Malik, PMP is a certified Project Management Professional (PMP®) with a rich 20+ years of experience. He is a leading Project Management Instructor and Consultant. He regularly conducts Project Management workshops in India & abroad.

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