What are the earned value management formulas you need to know? In this article we’ll look at 8 calculations for earned value that will help you understand project performance.
Before we dive into those, let’s look at a couple of terms that make understanding the calculations easier, even though they don’t have formulas themselves.
Terms that don’t have formulas
Actual Cost (AC)
Actual Cost (AC) is the amount of money the project has spent so far. You’ll find this in your project management budgeting tool or on your latest budget report.
Budget at Completion (BAC)
Budget at Completion (BAC) is the amount of money that has been budgeted for the work. This might be in your forecast reports of the project’s business case.
Earned Value Management formulas
Now those terms are clear, we can look at the earned value management formulas.
Earned Value (EV)
Earned value is the main calculation: this is what everyone wants to know! It’s also known as Budgeted Cost of Work Performed (BCWP).
What it is: A description of what the work completed so far is worth.
Calculate by: Multiplying percent complete for the work package or project as a whole by the budget for the task.
Formula: EV = BAC x % complete
Output: You’ll get a monetary amount as the earned value, in the currency of your project budget.
Planned Value (PV)
Planned Value is also known as Budgeted Cost of Work Scheduled (BCWS). The PV for the whole project is the same as the BAC, so normally PV is used to represent a portion of the work.
What is it: A statement of how much the planned work is going to cost.
Calculate by: Before a work package begins, you can use the budget amount for the work. Once the task has started, multiply percent complete by the budget for activity.
Formula: PV = task budget x percent complete
Output: You’ll get a financial value.
Cost Variance (CV)
Cost Variance is probably something you are using already on your project budget reports. It’s a simple, useful calculation that lets you compare actual project costs against what was planned.
What is it: A financial amount that tells you the variance from your original budget, whether that is overspending or underspending against your forecast.
Calculate by: Start with the EV figure and take away the Actual Cost spent so far. If the result is a positive number, you are coming in under budget. In an ideal world, the EV and the AC would be identical.
Formula: CV = EV-AC
Output: A financial value.
Schedule Variance
If you’ve grasped CV, Schedule Variance will be an easy concept to understand!
What is it: A financial amount that represents whether the project is on schedule, behind schedule or ahead of schedule. If the result is zero, you’re exactly on track. A negative answer shows that you are behind schedule and a positive answer shows you are ahead of schedule.
Calculate by: Start with the EV and then take away the Planned Value figure.
Formula: SV = EV – PV
Output: A monetary amount.
Cost Performance Index (CPI)
If you have already calculated CV, it might seem unnecessary to calculate CPI as well. However, it is useful because the CPI formula gives you the ability to compare results over time and track trends.
What is it: A ratio that shows the relative relationship between EV and cost.
Calculate by: Divide EV by the Actual Cost. If the project is on budget, the answer will be 1. An answer higher than 1 shows more value has been achieved than planned to be spent and the project is under budget. An answer less than 1 shows the project is over budget as it has delivered less than expected for the money spent.
Formula: CPI = EV/AC
Output: A single number or fraction of a number.
Schedule Performance Index (SPI)
SPI is another useful index that adds more insight than SV alone. Like CPI, it lets you track trends and compare project performance over time.
What is it: A ratio that shows the relative relationship between EV and schedule.
Calculate by: Divide EV by the Planned Value. If the project is on track, the answer will be 1. An answer higher than 1 shows more has been delivered than planned and the project is ahead of schedule. An answer less than 1 shows the project is behind schedule and hasn’t delivered everything that was planned.
Formula: SPI = EV/PV
Output: A single number or fraction of a number.
Estimate at Completion (EAC)
Estimate at Completion (EAC) is a way of talking about the forecasted total cost of the project, taking into account anything that has changed since the project began.
What is it: A calculation that gives you a total project budget figure based on the data available at the time of doing the calculation. As you get more information through the project, particularly around how quickly work is being completed and how much it is costing, your EAC will need to be updated.
Calculate by: There are various different ways to calculate EAC depending on what you think might happen with the project as it moves forward. This is where you really need to use your professional judgement, and software that runs your earned value reporting comes into its own!
Formula: The simplest formula is EAC = AC + new budget estimate for remaining work
Output: A financial amount.
Variance at Completion (VAC)
Variance at Completion (VAC) is simply another variance calculation.
What is it: A way of calculating the difference between the original project budget and the new, updated budget as represented by EAC.
Calculate by: Start with BAC and subtract the EAC figure. If the EAC is smaller than the BAC, your end result will be a positive figure and that tells you the project will come in under the original budget. The reverse is true for a negative answer.
Formula: VAC = BAC – EAC
Output: A financial amount.
These are the basic earned value management formulas you should know. Understanding the math is important – especially if you are taking a project management certification exam – but today we have advanced software tools that can do a lot of the calculations for you so you don’t have to do the calculations by hand. Trust us, using project management tools that support earned value makes the whole thing a lot easier!