The Earned Value Technique’s Role in Project Management

In this PMP® Course video, you will learn about the Earned Value Technique, which is very important.

The Earned Value Technique is an excellent method for tracking Project Progress in relation to the Project Plan. It is a method of measuring project performance objectively against the Project baseline. The result of an Earned Value analysis indicates the Project’s deviation from the cost and schedule baselines.

Let me quickly explain what a baseline is. I’ve already explained this, but just to refresh your memory, baseline refers to the first approved value. As a result, schedule baseline refers to ‘The First Approved Project Schedule.’

Earned Value Techniques employ a number of terms. This slide contains a list of all of these terms. Please go through the same procedure. They are self-explanatory. For instance, PV, or Planned Value, is the Estimated Value of the Work to be done. This value is expressed in terms of currency, such as the dollar. So, if the planned value is $340, it was anticipated that $340 worth of work would be completed.

But how does Earned Value get calculated? It’s very simple. Simply add the budget allotted to each of the completed activities at that point in time. Earned Value at that point in time is the resulting value.

All of the other parameters listed on this slide are also measured solely in terms of currency.

Formulas for Earned Value

Now that you’ve gone over the Earned Value Terms, let’s take a look at the formulas used to calculate the Earned Value.

Again, all of the formulas are listed in the slide, along with explanations. Remember that a negative cost variance indicates that the project is over budget, whereas a positive cost variance indicates that the project is under budget.

Negative schedule variance indicates that the project is behind schedule, whereas positive schedule variance indicates that the project is ahead of schedule.

The next two parameters, Cost Performance Index (CPI) and Schedule Performance Index (SPI), are also crucial. Their value ranges from 0 to 1.

So, if the CPI is, say, 0.8, we are getting 80 cents out of every dollar spent on the project.

If the SPI is 0.9, it means that the project is moving at only 90% of the speed that was originally planned.

The following parameter is the Estimate At Completion. So, if it is necessary to know how much the project will actually cost by the time it is completed at any point during the project execution, simply divide the Budget At Completion by the Cost Performance Index.

What is the budget at the end? It is simply the total project budget.

The following parameter is Estimate to Complete, which indicates how much more the project will cost from this point forward. This is easily calculated by subtracting the Actual Cost from the Estimate at Completion.

Variance at Completion can also be calculated by deducting the Estimate At Completion from the Budget At Completion.

Using the earned value technique, compare your project’s performance to the baseline and track deviations immediately.

Example of an Earned Value Problem

Consider the case of a software development project. The project is divided into four phases, as shown on the slide. Each phase has a budget of $10,000. Each phase is expected to take one month. The project will last four months in total. The phases are sequential, which means they happen one after the other.

Today is the third month’s end; compute the CPI and SPI for this project!

As shown in the slide, the Project’s status at the end of the third month is:

The project’s first phase, i.e. requirement definition, is completed on time and within budget.

The second phase of architecture and design was supposed to be completed by the end of the second month, but it wasn’t until the third month. It ended up costing $12,000 instead of $10,000 to complete.

The third phase, i.e., development and unit testing, is only half completed, despite the fact that it was supposed to be completed by the end of the third month. It ended up costing $9,000 instead of $5,000 to complete.

Work on the fourth phase, System Testing and Go Live, has yet to begin and was not even planned to begin.

The solution to the Earned Value Problem

To calculate the Planned Value, PV, simply adds the amount of work that was supposed to be completed by the third month. The project’s three phases were supposed to be completed by the end of the third month. Each of the three phases costs $10,000 to complete.

As a result, the planned value, PV, is $10,000+$10,000+$10,000= $30,000

However, by the third month, two of the project phases have been completed and the third phase is only halfway completed, so the Earned Value, EV is $10,000+$10,000+$5,000=$25,000.

The actual cost of completing the work, AC, is $10,000+$12,000+$9,000= $31,000.

Now that we know how to calculate CPI and SPI using PV, EV, and AC, we can move on to the next step. Simply plug these into the formulas you learned earlier.

Use this as a practice exercise!

The Project Management Institute, Inc. owns the trademark PMP.

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