PMP Study: Earned Valued Management Systems (BAC,EV, etc...)

Earned Value Management Systems allow the project manager to answer the following three questions, as they relate to the project:

Where have we been?

Where are we now?

Where are we going?

In Earned Value Management, unlike in traditional management, there are three data sources:

– the budget (or planned) value of work scheduled

– the actual value of work completed

– the “earned value” of the physical work completed

Earned Value takes these three data sources; compares the budgeted value of work scheduled & “earned value of physical work completed” & the actual value of work completed.

Planned Value describes how far along project work is supposed to be at any given point in the project schedule and cost estimate.

PV, also known as Budget Cost of Work Scheduled (BCWS), can be defined as:

• Define Scope: What you are tasked to do (Scope Statement)
• Assign Scope: Breakdown scope into manageable parts (WBS)
• Schedule Scope: Time-phased, logic driven with critical path (Project Schedule)
• Budget Scope: develop cost (budget) for all approved scope (Performance Measurement Baseline)
• Baseline: Snap-shot in time, frozen. What performance measurement will be based upon.

Actual Cost (AC), also called actual expenditures, is the cost incurred for executing work on a project. This figure tells you what you have spent and, as with Planned Value, can be looked at in terms of cumulative and current.

• Cumulative AC is the sum of the actual cost for activities performed to date.
• Current AC is the actual costs of activities performed during a given period. This period could represent days, weeks, months, etc. AC is also called Actual Cost of Work Performed (ACWP).

To report the accomplishments of the project, you must apply Earned Value (EV) to the figures and calculations in the project. EV is the quantification of the “worth” of the work done to date.

In other words, EV tells you, in physical terms, what the project has accomplished. As with PV and AC, EV can be presented in a Cumulative and Current fashion.

• Cumulative EV is the sum of the budget for the activities accomplished to date.
• Current EV is the sum of the budget for the activities accomplished in a given period. Earned Value is also called Budgeted Cost of Work Performed (BCWP).

The PM will be provided with financial information from accounting that will expressed the actual cost incurred on the project's work is performed, then the PM will seek information from the team that will state the budgeted cost of work performed on the project, or earned value.

After those three values are established, a variance analysis can be performed.

There are two basic expressions of variance, schedule variance and cost variance.

Schedule Variance status does indicate the dollar value difference between work that is ahead or behind the plan and reflects a given measurement method.

Schedule Variance status does not address impact of work sequence.

The formula utilized to express schedule variance is project earned value minus the project planned value as of the date of examination.

*VERY IMPORTANT*

(SV = EV – PV) If the variance is equal to 0, the project is on schedule.

If a negative variance is determined, the project is behind schedule and if the variance is positive the project is ahead of schedule.

The cost variance is defined as the “difference between earned value and actual costs. (CV = EV – AC)” (PMI, 2004, p. 357)

Sometimes this formula is expressed as the difference between budgeted cost of work performed and actual cost work performed.

*VERY IMPORTANT*

If the variance is equal to 0, the project is on budget.

If a negative variance is determined, the project is over budget and if the variance is positive the project is under budget.

Another analysis that can be done by using EVMS is that of Performance or establishing the project’s burn rate.

Two examination of performance are available to the project manager, Schedule Performance Index (SPI) and Cost Performance Index (CPI).

The SPI is defined by PMI’s PMBOK® Guide as “a measure of schedule efficiency on a project.

It is the ratio of earned value (EV) to planned value (PV). The SPI is equal to earned value divided by planned value, SPI = EV/PV.

An SPI equal to or greater than one indicates a favorable condition and a value of less than one indicates an unfavorable condition.

Assuming your SPI efficiency remains through out the reminder of work; your project will finish ahead of schedule.

The CPI is defined by PMI’s PMBOK® Guide as a measure of cost efficiency on a project.

It is the ratio of earned value (EV) to actual costs (AC). The CPI is equal to the earned value divided by the actual costs, CPI = EV – AC.

Assuming your CPI efficiency remains the same throughout the reminder of work; your project will be over budget.

Potential Causes of Favorable Cost Performance:

• Efficiencies being realized
• Work less complex than anticipated
• Fewer revisions and rework
• Favorable Market Fluctuations in the Cost of Labor or Material
• Overhead Rate Decreases

Potential Causes of Unfavorable Cost Performance

• Work more complex than anticipated
• Design review comments extensive
• Rework
• Unclear Requirements
• Scope Creep
• Unfavorable Market Fluctuations in the Cost Labor or Material
• Overhead Rate Increases

Anticipating future progress requires determining when the project will be completed and how much it will cost to complete it.

The Estimate at Completion (EAC) is the actual cost to date plus an objective estimate of costs for remaining authorized work.

The objective in preparing an EAC is to provide an accurate projection of cost at the completion of the project.

The Budget at Completion (BAC) is the sum of all budgets allocated to a project scope.

The Project BAC must always equal the Project Total PV. If they are not equal, your earned value calculations and analysis will be inaccurate.

• Planned Value (PV) - How much work should be done?
• Earned Value (EV) - How much work was done?
• Actual Cost (AC) - How much did the work cost?
• Budget at Completion (BAC) - What is the total job budgeted to cost?
• Estimate at Completion (EAC) - What do we expect the total job to cost?

The EAC is the best estimate of the total cost at the completion of the project. The EAC is a periodic evaluation of the project status, usually on a monthly basis or when a significant change happens to the project. 

1. Organize the project team & the scope of work, using a work breakdown structure. Each task should have a single WBS number and organizational code.
2. Schedule the tasks in a logical manner so that lower level schedule elements & the top level milestones.
3. Allocate the total budget resources to time-phased control accounts.
4. Establish objective means for measuring work accomplishment. Budget should be earned equal to planning.
5. Control the project by analyzing cost and performance variances, assessing final costs, developing corrective actions, and controlling changes to the integrated baseline.

Project Management Institute. (2004) A Guide to the Project Management Body of Knowledge (PMBOK® Guide). (Third ed.) Newtown Square, PA: Project Management Institute

Project Management Institute. (2005) Practice standard for earned value management (PMI Global Standard) (2005 ed.) Newtown Square, PA: Project Management Institute

Government Electronics and Information Association. (2002) Earned value management systems Approved: May 19, 1998. Reaffirmed: August 28, 2002. ANSI/EIA-748-A-1998

United States Department of Energy (2005) Earned value management application guide, version 1.6. 1-1-2005.