Earned Value Management, which gives projects adequate control over their schedule and budget, is a vital technique for project managers to master today. It serves as a warning system for projects that are running behind budget and schedule and aids in project managers changing their course to avoid losses and delays.
The general budget versus actual costs incurred model is different from earned value management in that it calls for the quantification of the cost of work-in-progress. The project manager can use earned value management to compare the amount of work completed to the amount they anticipated to have finished at a particular point in time.
Earned Value Management gives project managers a methodical way to gauge performance and forecast future results. With the help of earned value management, they can report progress with more assurance and quickly identify any overruns. The management team is then able to make decisions regarding cost and time allocation more quickly than they otherwise could because of this confidence.
What is Earned Value Management? EVM in a nutshell
How to calculate earned value
Here are the steps to calculate earned value:
1. Quantify work completed
You must first quantify the amount of work you have on hand in order to determine the earned value. This is what separates it from a normal budget projection. You must analyze your project to ascertain the amount of work that has been completed.
Consider the project’s ultimate objectives before determining how many of the necessary steps have been completed. Your projected earned value will be more accurate the closer you can get to this percentage.
2. Obtain your project budget
The project budget is a further element of earned value. This is the initial budget set aside for the project.
3. Use the earned value formula
The formula for earned value looks like this:
Earned value is calculated as earned value (EV) x Budget at Completion (BAC).
BAC = Total project budget
What is the earned value of a project?
Earned value (EV) is a measure of project performance. As a project manager, you’ll keep an eye on earned value to assess whether your project is progressing as planned. Earned value is used to inform project managers of potential future costs and whether there will be delays in the project. The value that a project would produce if it were to end today is another way to think of earned value.
EV can be applied to projects of any size and aids managers in making choices that will keep projects on track and within their budgets.
Earned value formula
Earned value can be calculated like this:
Earned value is calculated as Earned Value (EV) x Budget at Completion (BAC).
If you are unsure of the BAC, another option is to use the overall project budget.
Example of earned value
An illustration of how a business could use earned value to benefit their project is as follows:
The goal of Dynamic Industries is to launch a new software product in 18 months, and the project’s total budget is $200,000. Additionally, they decided that after nine months, the project should be halfway finished and half of the budget should have been used.
Planned value = planned percentage of project completed x BAC
PV = .50 x $200,000
PV = $100,000
The project manager finds that they have spent half of their approved budget, or $100,000, by the time the six-month deadline rolls around. This would suggest that they are on schedule.
However, only 45% of the project is complete. They determine their earned value to be $90,000 using the earned value formula. This demonstrates that the project’s value is $10,000 lower than what has already been spent on it. This indicates that they are likely to exceed their allotted budget.
Earned value = percentage of project completion x BAC
EV = .45 x $200,000
EV = $90,000
The project manager makes some adjustments, and after a year, the final cost, $132,000, is in line with their initial estimates, indicating that they have not increased their spending rate. However, their completion rate is now at 70%. This gives them an earned value of $140,000.
Earned value = percentage of project completion x BAC
EV = .70 x $200,000
EV = $140,000
The project is currently worth more than the sum the business invested in it. This suggests that they will complete their project for less money than they originally budgeted.
Earned value management
Earned value is one method of measuring a project’s performance and a part of earned value management (EVM). The other two components are planned value and actual cost. Each has different applications and provides different information.
Planned value (PV)
The value of work that should have been finished in accordance with the previously established schedule is known as planned value. This calculation is performed before work starts so there is a baseline to compare project progress against. This is distinct from earned value, which is determined as the project advances. The formula for planned value is:
Planned value = Planned percentage of project completed x BAC
The planned value would be (40% x $50,000) = $20,000 if your project budget is $50,000 and you should have 40% of it finished after two months.
Actual cost (AC)
The amount of money already spent on a project represents its actual cost. There is no formula other than adding up all of the project’s expenses to determine the actual cost. The actual cost of your project is $30,000 if you have already spent $30,000 on it.
Actual cost (AC) = Actual costs to date
Depending on what you are trying to measure or predict, you will use a different EVM element. You can view your progress objectively by utilizing all three in your project.
When to use earned value
During the project, earned value and actual cost are both used. Earned value is perhaps the most important of the three components because it illustrates how much value you have obtained from the money you have already spent. Before you start any work, you should calculate the planned value to use as a benchmark as you proceed.
EVM can also be used to aid other calculations. For instance, you can assess the Schedule Performance Index, which indicates how close a project is to completion in relation to its schedule, after determining planned value. The Cost Performance Index, which gauges project efficiency, can be found with the actual cost.
What is earned value and why is it important in a project?
- You need some contextual narrative in addition to the numbers because they don’t tell the whole story.
- Data must be accurate to avoid making assumptions and predictions based on unreliable information.
What is the best explanation of what is earned value?
A project management technique called earned value analysis measures a project’s performance in relation to its budget and schedule. It assists in determining a rough estimate of the resources required to finish the project.