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Introduction to Earned Value Project Performance Formulae
Earned Value is a part of the Project Cost Management knowledge area. This is the last in the series of articles on Earned Value computations. The other articles in this series are:
- Compute the Earned Value (EV) of a Project
- Examples of Cost Variance (CV) and Schedule Variance (SV) in a Project
- How to Compute Cost Performance Index (CPI) and Schedule Performance Index (SPI) in Projects
To gauge project performance by using Earned Value Analysis formulae, use the following:
- Estimate at Completion (EAC): Computes project performance by looking at the total cost of the project when it is completed based on the current rate of progress.
- Estimate to Complete (ETC): Calculates project performance by looking at the amount of money required to complete the project based on the current rate of progress.
- Variance at Completion (VAC): Computes project performance by looking at the variance of the total project cost at completion when compared with the project budget.
- To-Complete Performance Index (TCPI) based on BAC: Represents the level of project performance that future project work needs to be implemented to meet the budget.
- TCPI based on EAC: Represents the level of project performance that future project work needs to be implemented to meet the project’s cost based on past project performance.
Next, let's look at a couple of examples to compute project performance.
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Example 1
Suppose you have a budgeted cost of a project at $900,000. The project is to be completed in 9 months. After a month, you have completed 10 percent of the project at a total expense of $100,000. The planned completion should have been 15 percent. Now, let’s see the project performance.
From the scenario, you can extract the following project performance parameters:
- BAC = $900,000
- AC = $100,000
The project performance in terms of Planned Value and Earned Value can then be computed as follows:
- Planned Value = Planned Completion (%) * BAC = 15% * $900,000 = $135,000
- Earned Value = Actual Completion (%) * BAC = 10% * $900,000 = $90,000
- Cost Performance Index = EV / AC = $90,000 / $100,000 = 0.90
The Earned Value Project Performance formulae are as follows:
- Estimate at Completion (EAC) = BAC / CPI = $900,000 / 0.9 = $1,000,000. At the current rate, the project performance in terms of cost is: Project completion in $1,000,000 as opposed to a planned budget of $900,000.
- Estimate to Complete (ETC) = EAC – AC = $1,000,000 - $100,000 = $900,000. If the project performance continues at this rate, the project requires $ 900,000 to be completed.
- Variance at Completion (VAC) = BAC – EAC = $900,000 - $1,000,000 = - $100,000. The project will be $100,000 over-budget at completion. The project will run $100,000 over-budget at completion.
- To-Complete Performance Index (TCPI) based on BAC = (BAC – EV) / (BAC – AC) = ($900,000 - $90,000) / ($900,000 - $100,000) = $810,000 / $800,000 = 1.01
- TCPI based on EAC = (BAC – EV) / (EAC – AC) = ($900,000 - $90,000) / ($1,000,000 - $100,000) = $810,000 / $900,000 = 0.9
Note: Read the Protect Your Project Against Cost Overruns article to understand how to use buffers.
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Example 2
Suppose you are managing a software development project. The project is expected to be completed in 8 months at a cost of $10,000 per month. After 2 months, you realize that the project is 30 percent completed at a cost of $40,000. You need to determine whether the project is on-time and on-budget after 2 months. Let's see the project performance.
Step 1: Calculate the Planned Value (PV) and Earned Value (EV)
From the scenario, you can extract the following project performance parameters:
- Budget at Completion (BAC) = $10,000 * 8 = $80,000
- Actual Cost (AC) = $40,000
- Planned Completion = 2/8 = 25%
- Actual Completion = 30%
Therefore, the project performance in terms of Planned Value, Earned Value, and Cost Performance Index is:
- Planned Value = Planned Completion (%) * BAC = 25% * $80,000 = $20,000
- Earned Value = Actual Completion (%) * BAC = 30 % * $80,000 = $24,000
- Cost Performance Index = EV / AC = $24,000 / $40,000 = 0.6
The Earned Value Project Performance formulae are as follows:
- Estimate at Completion (EAC) = BAC / CPI = $80,000 / 0.6 = $133,333. At the current rate, the project performance will be such that it will be completed with $133,333 as opposed to a planned budget of $80,000.
- Estimate to Complete (ETC) = EAC – AC = $133,333 - $40,000 = $93,333. Project performance at this rate means that the project requires $93,333 to be completed.
- Variance at Completion (VAC) = BAC – EAC = $80,000 - $133,333 = -$53,333. The project performance in terms of budget will be: $53,333 over-budget at completion.
- To-Complete Performance Index (TCPI) based on BAC = (BAC – EV) / (BAC – AC) = ($80,000 - $24,000) / ($80,000 - $40,000) = $56,000 / $40,000 = 1.4
- TCPI based on EAC = (BAC – EV) / (EAC – AC) = = ($80,000 - $24,000) / ($133,333 - $40,000) = $56,000 / $93,333 = 0.6
Following the golden rules for managing risk and scope creep will get the project back on-track.