Earned Value vs Revenue: What You Should Know
Sometimes we’re asked about earned value vs revenue: what are the differences and how they are used in project management. In this article, you’ll learn about earned value vs revenue and what they mean for your project.
First, earned value. This is a topic that we’ve written about many times before, and we provide specialist earned value management system support to a range of large firms.
Earned value is a measure of the value created by the work performed during a particular time period on the project. In other words, it is a way of combining time, budget and progress to calculate the value of the work delivered.
Revenue is your organization’s income. It reflects when the money was earned, and not necessarily when it was received, so it is different to cash flow. Revenue recognition is a formal accounting practice and subject to regulation, so your Finance team will have specific processes and governance relating to it. We would recommend talking to your local experts so you can understand how, if at all, the process of revenue recognition affects your project.
EV reporting requires some financial information. Project cost control and the costs recognized by the finance department might provide slightly different numbers. That’s because the Finance team are probably using recognized revenue. As a project manager, you may prefer to (or need to) track performance using different numbers to recognized revenue, especially if the dates between milestone payments are large.
We don’t know any project managers who would be happy to wait until the next quarterly invoice is due to get a view of how the project cost control is looking! Therefore, it’s important that the project manager and the Finance team work together to understand how project cost control and performance management will work and what methods will be used to measure and account for spending.
The link between EV and revenue
For some projects, earned value (EV) and the revenue stream are going to be similar, if not identical. Let’s say you run a web design company. You’re building a new website for a client. They pay for the work in stages, based on milestones laid out in the contract. As you deliver the work according to the timeline, you can issue invoices along the way in line with the contractual agreement. Therefore the project progress tightly relates to revenue.
In this case, EV reflects the amount of income earned as the website projects gets closer to the final delivery date. However, you can only bill the client at the point that you have earned your way to the next payment milestone.
The way you track earned value metrics may also be related to revenue. For example, if you charge your resources out per day, you can earn revenue for each day worked. Chargeable days may be the metric you use to calculate project progress in the earned value management system (EVMS).
As you can see, on some projects, EV might be equal to revenue. However, project teams tend to use EV instead of revenue as some projects are not revenue-driving. For example, you may be doing an internal project where the goal is not revenue creation but reducing customer complaints or closing an office. Perhaps you are not charging for resource time on your project so the metric of billable hours doesn’t make sense for tracking and control.
Some projects may have expenses like travel and accommodation or equipment hire that are charged back to the client and they may not necessarily reflect project progress.
The benefits of EV over revenue tracking
EV provides the opportunity to recognize progress in financial terms during a long project, regardless of how the underlying budget is phased or what contractual milestones are in place for generating invoices. Even if you have one payment due from the client at the point that our fictional website project is completed, you could use EV reporting to track progress along the way.
The benefit for project teams of using EV over revenue is that you can use one metric to measure project progress on all types of projects, even those that are not directly tied to revenue generation. The project team can track progress based on the original budget and timeline for the project, comparing actual performance against that baseline. That information offers the opportunity to both review past performance and also forecast future performance.
Earned value has the advantage of being independent from actual revenue earned, the invoice process or cash flow accounting. It enables the project team to track progress against the planned budget without having to worry about the accounting principles that sit behind each of the client payments – if you are invoicing a client at all.
If you are setting up an earned value management system, it is important to understand the data going into the system and how it is intended to be used going forward. The way revenue is earned may influence the metrics used or how work is recorded, measured or tracked. Or it might be totally separate. If in doubt, get some advice about how best to set up your system so the analytics and reports are a transparent and joined up view of project financials and performance. That will avoid any conflicts between project accounting and Finance or Operations teams.