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Earned Value Management System
In any given project, there are three variables that control the project from its conception to finish. These three variables are the Scope, Cost and Time factors. The Scope outlines the reason for the project being carried out and remains constant throughout the project life cycle, while Cost and Time may be adjusted according to the need and the phase.
Ideally, while managing a project, cost estimates and time estimates are separately taken into consideration. The main concern of all stakeholders during each phase would be, “How much time will it take, and how much is it going to cost in the end?" Separate time and cost reports can be tedious to interpret as they many not necessarily be along the same plane.
Earned Value is a technique that calculates the cost and time factors to deduce a monetary value for the project. It follows the Earned Value Management System to arrive at a value known as the EAC or Estimate at Completion. The EAC gives an approximate estimation of what the project is likely to cost based on the project’s performance at any given time. It gives a fairly accurate estimate of the project’s progress based on Planned Values and Actual Values at the end of the project. In the following sections we will understand how to calculate earned value based on a few 'work' values.
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1. Planned Value (PV)
Planned value is also known as the Budgeted Cost of Work Scheduled (BCWS). It is the physical work as per time schedule alongside an authorized budget for the work. This is a value that may be assigned at the beginning of the project, based on the different ‘work’ phases in a project. A combination of different works in the WBS (Work Breakdown Structure) gives rise to the Budget at Completion (BAC).
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2. Actual Cost / Actual Value (AC)
The Actual Cost was once known as Actual Cost of Work Performed (ACWP). As the term implies, it is the cost for the actual physical work accomplished.
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3. Earned Value (EV)
Every project manager has to develop the knack on how to calculate earned value with ease. It is simple to understand once the above mentioned terms are familiarized with and calculated.
Earned Value is the percentage of work covered by the PV, or planned value.
For example, if the PV is $1,000 and the project is 20% complete, the EV would be calculated as,
EV = PV x % = 1,000 x 20/100 = $200
When the Earned Value is used in conjunction with Actual Cost Values, it results in a performance ratio of the project.
For example, in addition to the values stated in the previous example, if the Actual Costs on project completion for that phase is 20%, or $800, then the performance ratio would be:
(800 / 1000) x 100 = 80%
If the Performance Ratio is more than 100%, it means the project exceeds the budget (negative expenditure), and if it is equal to 100%, it means that it is alongside the planned budget. In this case, it is well below 100%, at 80% and gives room for positive expenditure.