A Beginner’s Guide to Earned Value Management

Earned value is a technique used in project management to estimate where a project is versus the planned budget and schedule. We’ll consider its benefits and how to calculate it.

Updated May 11, 2020

Picture this: You’ve been working non-stop on a 30-day project for 15 days. Then, you get a call from the client asking how far along you are with it. He wants to know:

  • Will you be able to deliver the project on time?
  • How’s the actual cost looking like versus the budgeted cost?
  • Will the project be completed within the budget?

According to a Project Management Institute (PMI) report, 14% of IT projects fail. Another PMI study adds that “US$122 million [is] wasted for every US$1 billion invested due to poor project performance.”

That’s why constant progress monitoring is one project management basic that good project managers religiously adhere to throughout the project life cycle.

Real-time knowledge allows you to pivot as necessary and confidently generate reports that can quell the executive team’s apprehensions and help them make informed decisions.

Different measurement techniques and project management tools can give insight into potential cost and time problems that can cause a project to fail. Earned value, a notable project management best practice, is one such technique.

Overview: What is earned value management?

Budget-compliant projects going beyond the timeline and schedule-compliant ones resulting in overworked project teams are situations project managers see happening often. Even more frustrating, schedules often slip and costs increase without warning.

There has to be a better way for project managers to control the project’s performance

Earned value management (EVM) is one of several project management techniques you can use to estimate where you are currently in a project versus the project’s schedule and budget. EVM provides visibility into whether or not you’re on track to finish the project within the established cost and timeline baselines defined in the project plan.

It reveals project characteristics standard timeline and cost charts cannot track.

Benefits of earned value management

Earned value management is mostly used in government projects but can be applied in many projects. Benefits include:

1. One system for tracking a project’s progress

Project managers balance several elements to drive a project to successful completion. The most noteworthy: project scope, budget, and schedule — a trifecta known in project management as the triple constraint or project triangle, which are typically tracked separately.

This tracking system is well and good — until it’s not. A major downside is that disparate schedule and budget reports may not provide the overall project visibility required to enact real-time adjustments.

Earned value analysis, however, consolidates the project’s budget and schedule measurements, giving you a complete view of the project’s costs and timelines, including their implications on the project.

2. Understand schedule and budget variances

Factors causing cost and schedule deviations come in many forms: scope creep, changing client priorities or requirements, changes in the project’s scope of work, inclement weather, new regulations, unavailability of required materials, and the absence of a contingency or risk management plan, etc.

With EVM, you can calculate schedule and cost variances and apply the appropriate measures to minimize their impact on the project. More on that later.

3. Define actual, real success

Team satisfaction and motivation is a crucial ingredient for successful project and program management. Your team wants to know how well they’re moving their project to completion. Earned value measurement works with metrics or indicators that encapsulate their work and shows:

  • Whether the project is on schedule
  • Whether the project is on budget
  • The value of the completed work
  • How much of the work is left

How to calculate earned value in project management

To make use of the earned value management system for determining the status of the project’s budget and schedule, you need three types of data:

  • Planned value (PV)
  • Actual cost (AC)
  • Earned value (EV)

Step 1: Planned value (PV)

This refers to the budgeted amount for work scheduled for completion to date (or by a certain date). It’s also known as the budgeted cost of work scheduled (BCWS) and is calculated before any work is done. In this way, it serves as a baseline.

The project’s total planned value — a.k.a. budget at completion (BAC) — is calculated by adding the PV for each activity, task, or component of the work breakdown structure.

Implementation plan example

In this implementation plan example, the project’s budget is $4,000 (total planned value or budget at completion), while each month of work is expected to cost $1,000 (planned value). The project is scheduled for four months.

Planned value formula

To get the planned value, multiply the percentage of completed work (planned) by the project’s budget (BAC).

PV = % complete (planned) x BAC

Using the example above, let’s calculate the planned value.

1. After 2 months

*As you can see in the graphic, the project is scheduled for four months. Meaning, after two months, you should have completed 50% of the work.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 2 months
  • % complete (planned): 50%

PV = % complete (planned) x BAC

PV = 50% x $4,000

PV = $2,00

2. After 3 months

*Again, based on a four-month schedule, by the third month, you should have completed 75% of the work.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 3 months
  • % complete (planned): 75%

PV = % complete (planned) x BAC

PV = 75% x $4,000

PV = $3,000

Step 2: Actual cost (AC)

The actual cost is self-explanatory. It’s the value representing the actual costs incurred to complete a set amount of work by the scheduled date, usually today. In other words, it’s the amount of money already spent.

Actual cost formula

There’s no standardized formula for actual cost. You only need to get all project expenses to date. Expenses can include employee compensation, equipment, supplies, contractor fees, travel and related expenses, indirect costs, etc.

Let’s look at another example. Using the same sample graphic above, what’s the actual cost if you spent $750 after the first month even when you’ve only completed 20% of the project?

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 1 month
  • % complete (planned): 25%
  • % complete (actual): 20%
  • Actual cost: $750

AC = $750

Step 3: Earned value (EV)

Also called the budgeted cost of work performed (BCWP), earned value represents the value of the actual work completed to date (or by a certain date). So if your client asks you to stop all work on the project today, EV tells you the value the project has generated, considering work done to date.

Earned value formula

To get the earned value, multiply the percentage of completed work (actual) by the project’s budget (BAC).

EV = % complete (actual) x BAC

Let’s look at some examples:

1. You spent $750 after the first month and you only completed 20% of the project.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 1 month
  • Planned value: $1,000
  • Actual cost: $750
  • % complete (planned): 25%
  • % complete (actual): 20%

EV = % complete (actual) x BAC

EV = 20% x $4,000

EV = $800

*The value of the work done is $800 even when you only spent $750.

2. You spent $2,500 after three months. All tasks scheduled for completion up to this point have been completed.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 3 months
  • Planned value: $3,000
  • Actual cost: $2,500
  • % complete (planned): 75%
  • % complete (actual): 75%

EV = % complete (actual) x BAC

EV = 75% x $4,000

EV = $3,000

*The value of the completed work is $3,000 despite spending $2,500.

Step 4: Schedule variance (SV)

The schedule variance measures the difference between actual work done and the expected work to date (or by a certain date). It indicates whether the project is on schedule, behind, or early.

Schedule variance formula

To find the project’s SV, simply subtract the planned value from the earned value.

SV = EV - PV

If the schedule variance is:

  • Positive: Your project is ahead of schedule.
  • Negative: Your project is behind schedule.
  • Zero: Your project is on schedule.

Let’s use the same earned value examples used to find the schedule variances.

1. You spent $750 after the first month and you only completed 20% of the project.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 1 month
  • Planned value: $1,000
  • Actual cost: $750
  • % complete (planned): 25%
  • % complete (actual): 20%
  • Earned value = $800

SV = EV - PV

SV = $800 - $1,000

SV = -$200

*Because the schedule variance is negative, this project is behind schedule

2. You spent $2,500 after three months. All tasks scheduled for completion up to this point have been completed.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 3 months
  • Planned value: $3,000
  • Actual cost: $2,500
  • % complete (planned): 75%
  • % complete (actual): 75%
  • Earned value: $3,000

SV = EV - PV

SV = $3,000 - $3,000

SV = $0

*Because the schedule variance is zero, this project is on schedule.

Step 5: Cost variance (CV)

The cost variance measures the difference between the budgeted amount for work that should have been completed to date (or by a certain date) and the actual amount spent for the completed work. It shows whether your project is on budget or not.

Cost variance formula

Calculate the cost variance by subtracting the actual cost from the earned value.

CV = EV - AC

If the cost variance is:

  • Positive: Your project is under budget.
  • Negative: Your project is over budget.
  • Zero: Your project is on budget.

Let’s use the same examples we used to find the schedule variance.

1. You spent $750 after the first month and you only completed 20% of the project.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 1 month
  • Planned value: $1,000
  • Actual cost: $750
  • % complete (planned): 25%
  • % complete (actual): 20%
  • Earned value = $800

CV = EV - AC

CV = $800 - $750

CV = $50

*Because the cost variance is positive, this project is under budget.

2. You spent $2,500 after three months. All tasks scheduled for completion up to this point have been completed.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 3 months
  • Planned value: $3,000
  • Actual cost: $2,500
  • % complete (planned): 75%
  • % complete (actual): 75%
  • Earned value: $3,000

CV = EV - AC

SV = $3,000 - $2,500

SV = $500

*Because the cost variance is positive, this project is under budget.

Step 6: Schedule performance index (SPI)

The schedule performance index measures your project’s progress against the planned timeline.

Schedule performance index formula

To calculate, divide the earned value by the planned value.

SPI = EV/PV

If the schedule performance index is:

  • Greater than 1: You’ve done more work than planned. Your project is ahead of schedule.
  • Less than 1: You’ve completed less work than planned. Your project is behind schedule.
  • Equal to 1: You’ve completed the same amount of work as planned. Your project is on schedule.

Let’s use the same examples we used to calculate the schedule and cost variances.

1. You spent $750 after the first month and you only completed 20% of the project.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 1 month
  • Planned value: $1,000
  • Actual cost: $750
  • % complete (planned): 25%
  • % complete (actual): 20%
  • Earned value = $800

SPI = EV/PV

SPI = $800/$1,000

SPI = 0.8

*Because the SPI is less than 1, this project is behind schedule.

2. You spent $2,500 after three months. All tasks scheduled for completion up to this point have been completed.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 3 months
  • Planned value: $3,000
  • Actual cost: $2,500
  • % complete (planned): 75%
  • % complete (actual): 75%
  • Earned value: $3,000

SPI = EV/PV

SV = $3,000 - $3,000

SV = 1

*Because the SPI is equal to 1, this project is on schedule.

Step 7: Cost performance index (CPI)

The cost performance index indicates the cost efficiency of your project and measures the value of the completed work against the actual cost.

Cost performance index formula

To get the CPI, divide the earned value by the actual cost.

CPI = EV/AC

If the cost performance index is:

  • Greater than 1: The value of the completed work is more than the amount spent. Your project is under budget.
  • Less than 1: The value of the completed work is less than the amount spent. Your project is over budget.
  • Zero: The value of the completed work is equal to the amount spent. Your project is on budget.

Examples:

1. You spent $750 after the first month and you only completed 20% of the project.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 1 month
  • Planned value: $1,000
  • Actual cost: $750
  • % complete (planned): 25%
  • % complete (actual): 20%
  • Earned value = $800

CPI = EV/AC

CPI = $800/$750

CPI = 1.067

*Because the CPI is greater than 1, this project is under budget.

2. You spent $2,500 after three months. All tasks scheduled for completion up to this point have been completed.

Given:

  • Project duration: 4 months
  • Project budget (BAC): $4,000
  • Elapsed time: 3 months
  • Planned value: $3,000
  • Actual cost: $2,500
  • % complete (planned): 75%
  • % complete (actual): 75%
  • Earned value: $3,000

CPI = EV/AC

CPI = $3,000 - $2,500

CPI = 1.2

*Because the CPI is greater than 1, this project is under budget.

For more earned value calculation examples, here’s a YouTube video from Engineer4Free. Remember: ACWP is actual cost, BCWP is earned value, and BCWS is planned value.

Keeping your project on track with earned value management

Good project managers keep a close eye on every step a project takes to ensure it’s on budget and on schedule. With earned value management, you gain early visibility into problems affecting the budget and timeline. This allows you to enact the appropriate changes to put the project back on track.

But you don’t have to stop there. It’s also good practice to use a project management software system to centralize your reports, documents, communications, contact information, and updates. This way, you don’t have to rely on multiple standalone tools to keep your projects organized.

The Motley Fool has a Disclosure Policy. The Author and/or The Motley Fool may have an interest in companies mentioned.