According to the Project Management Institute (PMI), 28% of projects fail because of inaccurate cost estimates. Many project management methodologies have sought to get rid of this problem, and earned value management continues to find success across industries.

This guide will explore the basics of earned value management and explain the benefits of implementing this measurement.

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What is earned value management (EVM)?

Earned value management is a technique that adds progress measurement to the standard project management tools of costs and scope. It is also referred to as earned value project management or earned value performance management.

To calculate EVM, a project leader uses the project budget, timeline, scope, and risks to forecast actual project performance and cost at completion.

Earned value management follows the EIA-748 standard, a set of guidelines adopted by organizations like the U.S. government to standardize its use for all partners and subcontractors.

A similar standard published by the PMI follows ANSI guidelines and can apply more broadly across various industries.

Organizations implement EVM using an earned value management system (EVMS), which describes the people, processes, and tools needed to take this approach.

To keep the project on track, EVM requires a few additional PM roles. If your team is understaffed, you may need to make some hiring changes.

Most bring on a dedicated project owner, master scheduler, and earned value analyst. The analyst role is in charge of the regular earned value analysis (EVA), which measures project progress compared to budgeted and actual costs.

Earned value analyst using earned value management to evaluate a project's progress

Five benefits of using earned value management

Earned value management has gained popularity as a project management tool for a few key reasons:

1. More precise budget management 

Most importantly, EVM keeps a project’s total budget and resource planning on schedule. For example, a DoD study, later confirmed by the PMI, found that EVM techniques could accurately forecast the budget at completion even when a project was just 20% complete.

2. A better measure of project progress

What project milestones matter? EVM’s focus on “critical path” creates a more reliable estimate of progress within the project schedule, allowing for early action and better risk management.

3. Improved ability to stay within project scope

The same critical path emphasis also ensures that no unneeded steps will make the timeline longer or increase total costs. It gives a baseline to which everyone in the project can refer as needed.

4. A better measure of the bandwidth

Most project management techniques begin with a set amount of work scheduled. But that work is based on an estimate that evolves as the project evolves.

Through EVM, project owners can get a more accurate measure of deliverables and work required from the beginning, setting a more precise project plan from initial kickoff to completion.

5. Improved possibilities of stakeholder management

In addition to its internal benefits, EVM also helps within the larger accountability structure of project management.

These advantages have made earned value management one of the industry’s most important PM techniques. The benefits explain why even some of the world’s largest organizations, like the U.S. Department of Energy, use the technique to improve their project management success and accountability.

Earned value management core dimensions

Earned value management systems, at their core, rely on three basic dimensions around which the system operates: planned value, actual costs, and earned value. Around these dimensions, various calculations can help make sense of variances and success.

Group assessing a project through earned value management

1. Planned value (PV)

Also known as the budgeted cost of work scheduled (BCWS), planned value describes how much approved budget the project should need throughout its timeline.

It’s plotted alongside a time graph, allowing project managers to estimate expected spend as a type of project baseline.

For example, a project’s anticipated total costs might be $100,000, with $20,000 spent within the first month, $10,000 for each of the next three months, and $5,000 for each following month until project completion.

A PV graph would show total cumulative costs between $0 and $100,000 on the y-axis. On the x-axis, monthly markers show $20,000 at month 1, $30,000 at month 2, $40,000 at month 3, $50,000 at month 4, $55,000 at month 5, until the project’s completion date at 14 months.

2. Actual costs (AC)

Also known as the actual cost of work performed (ACWP), this dimension is a simple summary of the real-time project cost. It’s tracked along the same axes as PV, showing the differences between estimated and actual expenses.

In the same example, the first month may have required a $25,000 initial investment followed by just $5,000 in the second month, but $15,000 in the third month. After three months, the AC would be $45,000 compared to the PV of $40,000.

3. Earned value (EV)

Earned value in project management, also known as the budgeted cost of work performed (BCWP), is the percentage of work towards project completion accomplished to date. It’s a KPI that requires classifying each work task, or work package, as one of three types:

  • Discrete
  • Apportioned effort
  • Level of effort

Because the latter two types are challenging to quantify, it’s the job of the control account manager (CAM) to ensure that as few tasks as possible fall within these categories. For each discrete work package, meanwhile, the CAM selects an earned value technique from the following:

  • 0/100, which assumes there is no value before the task has started and 100% value when it’s complete
  • 50/50, which assumes that 50% of the value exists before the task begins, and its completion adds the other 50%
  • Units completed, used for tasks with many small wins that all have identical budget needs (like mass-producing a small assembly line component)
  • Percent complete, in which the percentage of completion on the task equals the value it has earned

Managers can give tasks an earned value relative to the overall project budget depending on the earned value chosen. The team looks at the value of completed or in-progress tasks, which helps them calculate the EV at any point in the project.

Performing an earned value analysis with variances and indexes

Use the three dimensions of PV, AV, and EV to create a baseline that takes account of project variances in both cost and schedule. For the project manager, these calculations can estimate how far off a project may be in either of these variables:

Schedule variance (SV)

Earned value - planned value (EV - PV) = schedule variance (SV)

Calculated as earned value minus planned value (EV – PV), schedule variance shows how much of the project is running ahead or behind. A negative number means work is running behind, while a positive number indicates projects are ahead of schedule.

For example, if the planned value three months into the project was $50,000, but EV calculations have shown a $40,000 earned value to date, the SV = -$10,000, and the project is behind schedule.

Cost variance (CV)

Earned value - actual cost (EV - AC) = cost variance

Calculated as earned value minus actual cost (EV – AC), cost variance shows whether a project aligns with its target budget. A positive CV shows that less spent money to date than anticipated. Conversely, a negative CV shows that the project has overspent its target.

Suppose the earned value three months into the project is $50,000, but the actual cost is $45,000. CV = $5,000, and so the project has achieved more value to date than its estimated cost.

Calculating performance indexes

Schedule and cost variations can also be expressed in less absolute numbers. This allows for better comparisons between projects with varying budgets and better comparisons over time to allow for more targeted corrective actions.

Performance indexes, especially the schedule performance index (SPI) and the cost performance index (CPI), can provide a more detailed picture.

Schedule performance index (SPI)

Earned value/planned value (Ev/pv) = schedule performance index (SPI)

The schedule performance index, calculated as EV divided PV, measures actual progress versus the anticipated progress at a given point. A value lower than 1.0 indicates that the project is late, while a value higher than 1.0 shows the project is ahead of schedule.

Cost performance index (CPI)

Earned value/actual cost (EV/AC) = Cost performance index (CPI)

Calculated as EV divided by AC, the cost performance index measures how the monetary value of completed work compares to the project costs to date. A number lower than 1.0 indicates that the actual costs were higher than planned. A CPI higher than 1.0 shows lower costs than anticipated.

Basic principles of EVM implementation

Implementing an earned value management system is complex, especially for organizations unfamiliar with its processes and nuances. However, some basic principles can help maximize its usefulness and streamline its application.

Define project scope with a work breakdown structure (WBS)

The work breakdown structure is a defined, hierarchical list of tasks employees must complete to finish the project.

The goal of this structure is to break down the project into specific sections. This then allows for more efficient program management by assigning particular responsibilities and determining task dependencies early on. It also enables project managers to create work packages that group multiple similar tasks for more streamlined execution.

Set project budget based on anticipated costs of each work package

A detailed WBS allows you to set PV estimates for all aspects of the project. This then leads to an estimate of the project’s total budget at completion (BAC).

Project managers should assign the earned value technique to each project so that they can calculate EV and other metrics.

More complex projects may also require a management reserve. This flexible budget is set aside for “known unknowns” that may appear during execution.

Create project milestones based on work packages and budgets

Beyond a basic project timeline, milestones enable account and project managers to set predefined times when evaluations through variances and indexes come into play. Combining WBS and budget streams into the project can help define them.

For example, a $30,000 infusion needed five months into the project may be best preceded by an estimate of project health and progress.

Account for actual cost accumulation and spending

The EIA-748 EVM standard points out a few basic guidelines to make sure that costs are recorded accurately as the project moves forward:

  • Capture actual costs in a way consistent with the way work is planned
  • Select the most appropriate times possible to schedule a vital project resource
  • Accrue costs for tasks and materials in the same month as the budgeted cost for work scheduled, if possible, to avoid “booking lag”

The overarching takeaway is to be as timely as possible with the actual costs. Only then can you avoid any misleading calculations at any point in the project.

Track project progress through regular reporting

As the project executes, the CAM should regularly calculate SV, CV, SPI, and CPI during and ahead of important milestones. More visible reporting ensures that all project stakeholders can see the progress and work together on potential revisions to the budget, schedule, or project scope.

An updated EAC (Estimate at Completion) calculation is a crucial benchmark metric. This KPI takes the total cost accumulated to date and adds the planned value or BCWS that has not been spent on the project. You’re left with an accurate, point-in-time estimate of the total project cost once complete.

Weekly and monthly reports can ensure that even if a project is running behind schedule, everyone involved knows the situation and can take action as needed.

Optimize your earned value management processes

Earned value management has been popular for decades, even with massive organizations like NASA, for a reason. Its inherent accountability and ability to track progress at any point, along with a more natural risk and budget management, can keep every stakeholder and team member on the same page from planning to completion.

Implementing the right earned value management system can be complex but tends to be well worth the effort. Thanks to this streamlined system, everyone can stay on the same page as they work together towards long-term, sustainable success.Looking for ways to get more value and keep teams on track? Hubstaff Tasks is a great way to manage projects, keep an eye on budgets, and meet goals on time. Try it now for free.