# The Sure Fire Formula To Learn Earned Value Analysis

**Earned Value Analysis** or **Earned Value Management** is considered to be one of the more difficult concepts of Project Management. Many practicing professionals find the earned value terms and definitions confounding. They dread the formulas and calculations.

I believe, Earned Value Analysis concept is lot simpler than it is made out to be. After reading this article, you too will find it easy. I will explain **earned value terms, definitions, formulas, and calculations using a small example**.

## Earned Value Analysis and PMP

Do you know why most professionals find Earned Value confusing?

I believe PMP prep books and training programs should be blamed for the state of confusion. They have just over-complicated an easy concept. They stress more on formulas and calculations without explaining the basic concepts.

Let me be honest here. My first experience with Earned Value Analysis was on similar lines. I did not find the concept intuitive during the initial days of my PMP exam prep.

Even though my first experience was not pleasant, I persevered. I re-read the concepts and understood with the help of examples. After, I understood the topic, Earned Value Management seemed like a walk in the park.

## Earned Value Definition

Do you understand the language of money?

Well! Who doesn’t?

The basic principle of Earned Value (EV) is based on the fact that everyone understands the language of money.

In simple words we can say that, Earned Value is the monetary value of the completed work.

For example, if I have made 5 widgets and each widget is worth $10 then I can say that my earned value is $50 (5 X $10).

In Earned Value Analysis (EVA) everything is measured and reported as money or monetary equivalent. The project team determines an equivalence between Scope, Schedule, Cost to do this. EVA provides a singular view of Scope, Schedule and Cost.

Let us understand equivalence by the following example.

## Earned Value Analysis Example

In this article, I have explained EVA by using a small example. In another post, I have provided its explanation in simple and easy language. You should read both these articles to understand the concept completely.

Let us look at the example. Let us consider that we have to complete a small project. We need to build wooden tables.

### Project Plan

The project team needs to build 80 wooden tables in 5 days. It is estimated that each table will cost 1000 units of money.

The following figure provides initial plan for the project. It also provides equivalence between Project Scope, Schedule, and Cost.

Project Scope |
Build 80 tables |

Project Schedule Estimate |
5 Days |

Cost Estimate per Table |
1000 units of money |

Project Cost Estimate |
80000 units of money |

The following figure provides detailed Schedule and Cost estimates at the start of the project.

Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | |
---|---|---|---|---|---|

Tables Planned to be Built |
10 | 13 | 17 | 20 | 20 |

Estimated Cost for the Day |
10000 | 13000 | 17000 | 20000 | 20000 |

Estimated Cumulative Cost |
10000 | 23000 | 40000 | 60000 | 80000 |

### Project Tracking

Let us assume that, the project was started 3 days ago and we are evaluating the performance at the end of Day 3.

The following figure provides status at the end of Day 3. There are two new rows that depict the progress of the project. These are shown in light orange background.

Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | |
---|---|---|---|---|---|

Tables Planned to be Built |
10 | 13 | 17 | 20 | 20 |

Estimated Cost for the Day |
10000 | 13000 | 17000 | 20000 | 20000 |

Estimated Cumulative Cost |
10000 | 23000 | 40000 | 60000 | 80000 |

Actual Cost for the Day |
8000 | 12000 | 16000 | ||

Actual Cumulative Cost |
8000 | 20000 | 36000 |

Cumulative Work Scheduled at the end of Day 3 = 40 Tables

EVA considers monetary value of the work. So, we can re-write the above statement as

Cumulative Work Scheduled at the end of Day 3 = 40 Tables worth 40000 units of money

Cumulative Actual Cost at the end of Day 3 = 36000 units of money

Is the Project Team making good progress?

Some of you might say that project has saved cost. The team has spent 36000 units of money against an estimate of 40000 units.

Some others might say that project is behind. The team has build only 36 tables instead of planned 40.

Both are incorrect interpretation of the given data. The data, itself, is incomplete.

Do you know how much work has been completed? How many tables were built at the end of Day 3?

No.

We need another parameter to determine the progress of the project. Let us introduce some more data in the above figure.

### Introducing Earned Value

Day 1 | Day 2 | Day 3 | Day 4 | Day 5 | |
---|---|---|---|---|---|

Tables Planned to be Built |
10 | 13 | 17 | 20 | 20 |

Estimated Cost for the Day |
10000 | 13000 | 17000 | 20000 | 20000 |

Estimated Cumulative Cost |
10000 | 23000 | 40000 | 60000 | 80000 |

Tables Actually Built |
8 | 12 | 15 | ||

Value of Tables Actually Built |
8000 | 12000 | 15000 | ||

Cumulative Value of Tables Actually Built |
8000 | 20000 | 35000 | ||

Actual Cost for the Day |
8000 | 12000 | 16000 | ||

Actual Cumulative Cost |
8000 | 20000 | 36000 |

You would have noticed that only 35 tables were built at the end of the day 3.

Cumulative Work Scheduled at the end of Day 3 = 40 Tables worth 40000 units of money

Cumulative Actual Cost at the end of Day 3 = 36000 units of money

Cumulative Work Performed at the end of Day 3 = 35 tables worth 35000 units of money at the Budgeted Cost

Let us re-write these terms again

Budgeted Cost of Work Scheduled (BCWS) = 40000

Budgeted Cost of Work Performed (BCWP) = 35000

Actual Cost of Work Performed (ACWP) = 36000

These are the 3 basic terms/values of EVA. The modern names for these terms are Planned Value (PV), Earned Value (EV) and Actual Cost (AC) respectively.

## Earned Value Analysis Formulas

We can interpret a few things by analyzing the above data.

1. The project is **behind schedule**.

- The Project Team had planned to build 40 tables at the end of Day 3.
- They could only build 35 tables.
- In EVA parlance we can say that Project Team planned to complete the work that was worth 40000 units of money.
- They completed the work that was worth 35000 units of money.

2. The project is **Over Budget**.

- The Project Team build 35 tables at the end of Day 3.
- In EVA parlance we can say that they completed the work that was worth 35000 units of money.
- The Project Team spent 36000 units of money to build 35 tables.
- In EVA parlance we can say that 36000 units of money was spent for doing the work that was worth 35000 units of money.

Let us write initial formulas based on above interpretations.

### Variance Formulas

Schedule Variance (SV) = EV – PV

Cost Variance (SV) = EV – AC

### Efficiency Formulas

Schedule Performance Index (SPI) = EV/PV

Cost Performance Index (CPI) = EV/AC

### Calculations

SV = 35000 – 40000 = -5000

CV = 35000 – 36000 = -1000

SPI = 35000 / 40000 = 0.875

CPI = 35000 / 36000 = 0.97

You can refer to my other article for a complete list of EVM formulas.

### Final Thoughts

- EV is the first term in all the formulas.
- Negative variance means Project is behind.
- Positive variance means Project is ahead.
- Efficiency less than 1 means Project is behind.
- Efficiency of greater than 1 means Project is ahead.

### Over To You

Do you still have any confusion about earned value analysis? Can you apply formulas and do earned value calculations at the end of Day 2?

Please leave a comment.

EVM Formulas And Their Explanations

Simple Definitions And Explantions Of EVM

### PMP Exam Formulas

I have also compiled a PMP Formulas Cheat Sheet. It contains 45 formulas and 57 abbrviations. It will help you in your exam prep. You can freely download the PMP Formulas Sheet for your studies. It is the best and most comprehensive cheat sheet based on the PMBOK Guide 6th edition.

If you are looking beyond a cheat sheet, then I would suggest you to buy detailed PMP Exam Formula Study Guide by Cornelius Fichtner. It contains detailed explanations of all the formulas along with examples and 105 practice questions.

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