In my previous article “How to Explain Earned Value to Dummies” I touched upon the subject of Earned Value and how to explain it in a simple way. The post since went viral on LinkedIn generating several thousand hits. One of my followers expressed her desire to see someone (i.e. yours truly) describe the entire domain of EVM in a similar fashion. So, here you go!
- You have to dig a trench by extracting 1,000 cubic meters of sand.
- The duration of the project is 10 days (assume no initiation, planning or close-out stages, only execution)
- Your budget is $5,000
- You therefore believe that you should be digging 100m3/day and spending $500/day in order to finish this project on-time and on-budget.
As a result of these assumptions, you do the following (see Table 1):
- Populate the “Scheduled Work” row with ten “100 m3/day figures
- Populate the “Cumulative Work” row with incrementally increasing corresponding numbers (i.e. 100 m3/day, 200 m3/day, 300 m3/day, etc.)
- Populate the “Budget” row with $500/day figures
- Populate the “Cumulative Budget” row with incrementally increasing corresponding numbers (i.e. $500/day, $1,000/day, $1,500/day, etc.)
- Finally, the “Planned Progress” numbers are equal to the “Cumulative Work” for that particular day divided by total work planned (i.e. 1,000 m3).
Now imagine that we are at the end of Day 5. Let us pretend that you extracted 10, 50, 70, 120 and 150 m3 on days 1-5 respectively, instead of a planned pace of 100m3/day (see “Actual Work Done” and “Cumulative Work Done” rows)
Imagine also that you also spent $500, $750, $520, $800 and $900 days 1-5 respectively, instead of a planned pace of 500$/day (see “Actual Spent” and “Cumulative Spent” rows).
Finally, the “Actual Progress” row is calculated as Cumulative Work Done/Total Work
Now, your common sense should tell you that you are somewhat behind the schedule (you started disastrously slow, but sped up by day 4 and 5) and massively over budget.
Let us generate some EVM values and see if our instincts are correct:
- BAC (Budget At Completion) is just your total budget (i.e. $5,000)
- PV (Planned Value) is the Cumulative Budget value for that day
- AC (Actual Cost) is the Cumulative Spent value for that day
- EV (Earned Value) is total budget (aka BAC) multiplied by Actual Progress for that day
Schedule Variance (SV) determines whether you are on schedule:
- SV = $0 means we are on plan in terms of spending (neutral)
- SV > $0 means we are ahead of plan in terms of spending (good)
- SV < $0 means we are behind plan in terms of spending (bad)
Cost Variance (CV) measures whether you are on budget
- CV = $0 means we spent the same amount as the value of the work we produced (neutral)
- CV > $0 means we spent a lesser amount than the value of the work we produced (good)
- CV < $0 means we spent a greater amount than the value of the work we produced (bad)
Examination of the SV values (-$450, -$700, -$850, -$750 and -$500) confirms that we started really slow but were able to catch up (not fully though) by Day 5.
Inspection of the CV figures on the other hand (-$450, -$950, -$1,120, -$1,320 and-$1,470) fully confirms our suspicion that we are way over budget and the situation is deteriorating.
Let us examine the more complicated notions of the EVM:
- Estimate at Completion (EAC) is basically an attempt to predict the future real cost of the project.
- EAC1 = BAC/CPI method – here you are basically assuming that the rest of the project work will proceed at the same pace as before. In our case, for example, you realized that the estimate has been too optimistic, or the labor force is not skilled enough or the equipment you are using is inadequate.
- EAC2 = AC + (BAC-EV) method – use this formula if you think that the past performance is not a reliable indicator of the future execution (e.g. torrential rains have prevented you from delivering on-plan in Days 1-3)
- EAC3 = AC + [(BAC-EV)/(SPI*CPI)] method – use it if you want to combine both the schedule and cost performance into your forecast.
We can see from our table that EAC1 and EAC2 were better predictors of the final project cost as they started at a very high level ($50,000 and $495,500 respectively) when our performance was really bad and dropped down when our performance had improved.
And finally, the Variance at Completion and Estimate to Completion:
Variance at Completion (VAC) is an attempt to predict by how much will your final cost be over or under the initial budget estimate (BAC)
- VAC < 0 Over budget
- VAC = 0 On budget
- VAC > 0 Under budget
Estimate to Completion (ETC) – you are trying to predict how much additional money you need to spend to finish this project.
You are welcome! Check out my online Advanced Project Management course for more info on project initiation, planning, execution, monitoring and control!
About the Author
Jamal Moustafaev, MBA, PMP – president and founder of Thinktank Consulting is an internationally acclaimed expert and speaker in the areas of project/portfolio management, scope definition, process improvement and corporate training. Jamal Moustafaev has done work for private-sector companies and government organizations in Canada, US, Asia, Europe and Middle East. Read Jamal’s Blog @ www.thinktankconsulting.ca
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- Project Scope Management: A Practical Guide to Requirements for Engineering, Product, Construction, IT and Enterprise Projects
- Project Portfolio Management in Theory and Practice: Thirty Case Studies from around the World