Earned Value Analysis: An Explanation That Finally Makes Sense

If you find Earned Value Analysis confusing this is not your fault.

Most material on EVA/EVM is either vague or doesn’t answer the deeper questions.

So I decided to write this article for you to explain EVA in every detail.

At the end you will understand Earned Value Analysis and how to practically apply it in your projects. If you’re studying for an exam you’ll be able to calculate the EVA metrics without getting stuck.

To get you mentally warmed up, let’s start with an analogy.

A Flight Analogy

Imagine you are piloting an airliner from Los Angeles to Hawaii.

flight map

Little wiggle room for mishaps.

And you got 2’500 miles to fly.

25% of the distance (= 675 miles) into the trip, you want to know whether you are burning fuel efficiently and if you are going to make it to Daniel K. Inouye International Airport.

Just hoping that things are going to be alright is not a good strategy.

You want certainty for you and your crew.

So you grab a piece of paper to make a few calculations. The result:

You’ve flown 28% of the total distance, but you have used only 25% of the fuel.

This means you are well on your way! (assuming that for every mile flown, you are consuming about the same amount of fuel)

Had you used already 30% of the fuel supply, you’d have burnt too much and things might have gotten a bit dicey towards the landing.

Now that you know you are safe, you lean back in your seat and start dreaming about the waves in Waikiki Beach.

This story gives you an idea of the type of problem that Earned Value Analysis is used for.

EVA helps you assess whether you are on track in terms of budget and time.

Let’s transfer the example to the world of project management.

How’s Your Project Doing? The Question That Earned Value Analysis is Trying to Answer

Imagine you are managing a complex 3-year project with hundreds of deliverables.

Suddenly the CEO walks in and wants to know from you: ‘How’s the project doing? Are we staying within budget?’

You have no way to tell confidently whether your project is doing okay or not.

You’ve gotten the latest status of activities and spending, and the overall picture is mixed: Some tasks that should have been done by now are still in progress. Some tasks are finished. One task was started earlier, because a predecessor was already finished.

According to your budget report, you’ve spent $462,000 so far.

Is this good or bad?

This is not easy to answer:

If you are below budget, this could mean two things:

  • Completed work was carried out at a lower cost
  • Some tasks are delayed and the corresponding costs haven’t hit your budget yet (learn how to avoid project delays)

If you are above budget, this could either mean:

  • Some of the work has been more expensive to do, or
  • Some tasks were started before their scheduled time, and the corresponding costs hit the budget earlier

How do you know which one is true?

Earned Value Analysis can answer this question for you.

What is Earned Value Analysis?

Earned Value Analysis (or EVA) is a calculation method that helps you see if your project is within budget and schedule given where you are right now in your project.

It takes into consideration the work that has been accomplished so far and costs incurred until now, and puts that into perspective to the original budget and schedule (also known as baseline).

Earned Value Analysis works in such a way that you enter a couple of project metrics into formulae and it spills out a couple of key figures (or metrics) that tell you different interesting things about your project’s status.

We’ll get to the metrics later, but important to remember for now is that among other values, EVA (or EVM) gives you two important key figures:

  • The expected cost difference at the end of the project: How much more or less the project is going to cost at the end (also called Variance at Completion or VAC)
  • The estimated schedule variance: how far ahead or behind the project is on the timeline
 

The Benefits of Earned Value Analysis

For you as the project manager, Earned Value Analysis has the following advantages:

  • Earned Value Analysis gives you a realistic picture of the project status
  • Earned Value Analysis helps you predict any budget gaps and schedule issues

The method gives you a number of metrics, each of which tells you something specific about your project.

Let’s look at the metrics. 

Earned Value Metrics Explained

If you’ve never heard about EVA/EVM before, this section might be a bit challenging to understand.

But don’t worry. Once we get to the actual example where we calculate the metrics, things will become clear for you.

Planned vs. Actual

To understand EVA, you need to understand the concept of planned versus actual numbers with respect to cost and schedule.

You always start with a planned budget. This is the budget how it was approved. The planned budget isn’t just estimated as one large figure, but it’s calculated by estimating the effort and cost for every deliverable and activity in the project, and then summing up the values.


You also have a planned schedule: That’s your agreed project schedule. It states the sequence of activities and contains deadlines for every task and deliverable.


Your actual cost is the sum of funds you have incurred so far. Your actual cost is determined by two factors: First, how much you pay for an activity / deliverable, for example you pay an external engineer $120 per hour. Second, your actual cost are dependent on your schedule and progress. If you change the sequence of tasks, this has an influence on your actual cost.


Your actual schedule — in practice — may vary from the planned schedule. Some tasks may get delayed. Or you might deliberately postpone an activity, swap or skip activities or you might start working on some task before its originally scheduled start date.

Earned Value Metrics

Planning values

BAC (Budget at Completion): The total approved budget

PV (Planned Value): The total cost that should have incurred till now, looking at the tasks that should have been completed by today, and valued at the original budget. You would say: “According to the project schedule, we should have completed THESE tasks. The value of these tasks in original valuation amounts to $X in planned value”.

Here’s the official definition from the PMBOK Guide:

“Planned Value (PV) is the authorized budget assigned to work to be accomplished for an activity or WBS component.”

 

Current values - Your project's status at the time of measurement

Actual Cost (AC): The amount of costs effectively incurred up until now.

Earned Value (EV): Earned Value (EV) is the value of the work that has been effectively completed so far, using your initial cost estimations as valuation factor and not the actual cost. In simple terms: EV is the money you should have spent for the work that was actually done.

Example: Imagine a project consisting of 3 activities. You have completed activities 1 and 2 so far. The planned cost for activity 1 is $2,500 and $1,000 for activity 2. You have spent $3,700 up to now. Then the Earned Value for the project at the current point in time is $2,500 + $1,000 = $3,500

SV (Schedule Variance): How far ahead or behind is the project? The SV is calculated as the difference between Earned Value and Planned Value, meaning SV = EV – PV.

SPI (Schedule Performance Index): How far ahead or behind schedule is the project, expressed as a ratio of the overall project duration. Formula: SPI = EV / PV.

An SPI of less than 1 indicates your project is behind schedule, whereas a value > 1 means you are ahead of schedule.

CPI (Cost Performance Index): How far above or below schedule the project is in comparison with the total approved project budget. CPI = EV / AC

CV (Cost Variance): Looking at the project right now, how far under or over budget is it? The Cost Variance is calculated as CV = EV – AC.

Projected (Future) Values

ETC (Estimate to Complete): The amount of money necessary to complete the project, not considering money spent until now. In other words: How much money the entire project is going to cost in the end.

EAC (Estimate at Completion): The amount of money necessary to complete the project, factoring in money you have spent till now. In other words: How much money is required to complete the project.

Variance at Completion (VAC): The predicted final cost variance (CV), assuming the project continues with the same pace and quality it has shown so far.

TCPI (To-Complete Performance Index): The Cost Performance Index (CPI) describes the level of performance that must be achieved for the remainder of the project duration so the project will complete on budget.

Click to download Earned Value Management Summary SheetGet my Earned Value Cheat Sheet! A PDF with all the definitions and formulas one sheet! Click there.

Click to download Earned Value Management Summary SheetAre you looking for exercises to practice EVM formulas? Check out my new Earned Value Exercise Pack!

We can visualize the metrics in a graph. This is what it looks like:

Graph showing the Earned Value Analysis metrics

Earned Value Analysis Example

This example will make the concept of earned value clear for you. Together we’ll calculate the EVA metrics for a sample project.

Watch me calculate EVA metrics for you

Our Sample Project

We are going to build a machine for our client — in just 14 days!

Here’s our project schedule:

Here’s our list of activities and the planned budget:

Activity Effort (days) Cost per day Total cost
1. Gather requirements
3
800
2,400
2. Create design
2
600
1,200
3. Build machine
4
900
3,600
4. Test and refine
4
700
2,800
5. Rollout
3
500
1,500

We are at the end of day 8 and we got the latest status and cost information.

Actual values at the end of day 8:

Activity Incurred Cost Actual % Complete
1. Gather requirements
2,400
100%
2. Create design
1,500
100%
3. Build machine
2,700
50%
4. Test and refine
700
25%
5. Rollout
0%

The incurred cost is the money we have spent for each task until now. The Actual % Complete tells us how much of the work has been completed so far.

EVA metrics for this example

Now let’s calculate the EVA metrics (go back to the explanation of the metrics if you are not clear about their meaning):

Activity AC EV PV CPI CV SPI SV
1. Gather requirements
2.400
2,400
2,400
 
 
 
 
2. Create design
1,500
1,200
1,200
 
 
 
 
3. Build machine
2,700
1,800
2,700
 
 
 
 
4. Test and refine
700
700
700
 
 
 
 
5. Rollout
 
 
 
 

TOTAL

7,300

6,100

7,000

0.84

-1,200

0.87

-900

How the values are calculated:

  • The AC (Actual Cost) is the money we’ve spent so far. You simply take the values from column incurred cost. Summing up all values we get a total AC of 7,300 for the entire project.
  • The EV (Earned Value) is calculated by multiplying the Actual % Complete with the planned cost. If we take task 3 as an example, we multiply 50% by 3,600 which gives us 1,800 in Earned Value for this task.
  • The PV (Planned Value) is calculated by multiplying the planned level of completion by the planned cost. The planned level of completion (or planned progress) is simply how far we should have gotten on a task according to our schedule. You get this information by looking into the schedule (I didn’t put it in any table). The planned cost you can see in the planned values table.
  • The Cost Performance Index (CPI) we only calculate for the entire project and not for each single task. We simply divide Earned Value by Actual Cost (EV / AC) and get 6,100 / 7,300 ≈ 0.84. Because the CPI for this project is < 1, it means we are over budget. A value greater than 1 would mean we are below budget.
  • The Cost Variance (CV) is simply EV – AC, which is 6,100 – 7,300 = -1,200. The negative value indicates we are over budget. The value is the estimated amount that we are over budget.
  • The Schedule Performance Indicator (SPI) is calculated from EV/PV = 6,100 / 7,000 ≈ 0.87. It tells you how far off schedule you are, and as for the CPI, a value of less than 1 means the project is behind schedule.
  • The Schedule Variance (SV) is we get from taking SV = EV – PV = 6,100 – 7,000 = -900. The negative value indicates a delay.

Going through the calculations yourself will give you a good understanding of the maths the Earned Value Method is based upon.

Want To Use The Earned Value Method? Consider These Requirements

Now that you understand the Earned Value Method (EVM), you might want to use it in your own projects. This not so easy. The EVM works only when certain requirements are met, and these requirements are quite high.

Unless your entire environment — including your planning and budgeting systems as well as your tracking process — is designed with the intention of conducting earned value analysis, you have no chance of harvesting the benefits of EVM.

These are the key requirements:

  • Solid schedule and budget estimate: The EVM tells you how your project is performing with respect to your original project plan and budget. For the method to return useful insights, you need both your schedule and budget to be based on realistic assumptions (not a project plan that was designed to impress managers).
  • Availability of actual cost data: This is obvious. You need a systematic process for tracking project expenses and effort data. The data must be available within a reasonable timeframe so that your EVM metrics show the current picture and not past performance.
  • Cost planning on a highly granular level: This requirement is the hardest to meet. The EVM only gives you reliable and useful feedback if your cost planning is done on a very detailed level. Ideally, you have a WBS which is broken down on several levels. Consequently, also your deliverables should be broken down into smaller work packages.

    Example: Instead of having one deliverable called build software, break it down into these more granular deliverables: requirements analysis, prototyping, implementation, testing, documentation, rollout.

  • Cost and effort tracking on a highly granular level: Just like you need to have your budget broken down on a detailed level, you also must track the ongoing project expenses and your team’s effort on specific deliverables. Your accounting systems have to support a detailed tracking.
This takes us to the final question.

Should You Use Earned Value Analysis?

The Earned Value Method is a useful tool for gauging the performance of your project, but it is difficult to implement.

EVM requires detailed-level planning and precise cost tracking: Every invoice, every cost item and every hour spent must be assigned to the right cost object.

Otherwise EVM won’t provide any value, and without such a rigorous implementation, Earned Value Analysis won’t give you any benefits.

If you have good systems in place that allow for detailed planning and cost tracking, you might give the method a try.

Popular project management tools like MS Project have built-in functionality for EVA, so I recommend you take advantage of that.

But be aware that pulling together the numbers and conducting the analysis takes time. Time that you could also spend on managing the project and handling communication.

Click to download Earned Value Management Summary SheetAre you looking for exercises to practice EVM formulas? Check out my new Earned Value Exercise Pack!

Author

  • Adrian Neumeyer

    Hi! I'm Adrian, former Senior IT Project Manager and founder of Tactical Project Manager. I created the site to help you become an excellent project leader and manage intense projects with success!

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