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Apr 1st, 2024

What is Earned Value and How to Calculate in Project Management?

Naveen Kumar Singh
Naveen Kumar Singh

Naveen is a professional agile coach and has been working independently for a long time in the Asia... Read more

About 37% of projects run into trouble because project managers forget to monitor how things are going. It's like driving a car without checking the gas gauge – you might run out of fuel! Keeping track of a project is super important.

It helps project managers make intelligent decisions and see how well the project is doing. One essential part of tracking is "earned value" (EV). It's like checking if you're getting your money's worth. 

Not tracking earned value is like driving with your eyes closed – project managers need to keep an eye on it to know if they're using resources wisely and not spending too much.

Sometimes, lacking information can lead to problems like going over budget, missing issues until it's too late, and not finishing on time. So, keeping an eye on project progress is like having a map to avoid getting lost!

This blog will discuss earned value (EV) and how to calculate it. 

What is Earned Value (EV) in Project Management?

Let's keep it simple. Earned Value is like having a scorecard for your project. It helps you figure out how well your project is doing. You do this by looking at three important things: what you planned to do, what you've actually done, and how much you spent.

Calculating Earned Value:

Now, don't get intimidated by numbers. The earned value calculation is like putting together a puzzle. We break it down into three pieces:

  1. Planned Value (PV): This is what you plan to spend on the work you schedule.

  2. Actual Cost (AC): This is the real deal – how much money you've spent on the work so far.

  3. Earned value (EV): Then, we calculate the EV by multiplying the percentage of actual completion with the PV. It’s as simple as that!

Let's Crunch the Numbers:

Example: You're planning a party with a budget of $500. After a week of planning, you've done tasks worth $200. But you spent $150. Let's calculate!

  • PV (Planned Value): $500 (your initial budget)

  • EV (Earned Value): $200 (the value of what you've done)

  • AC (Actual Cost): $150 (the real money spent)

1. Earned Value (EV):

  • Formula: EV = % of Completed Work * Planned Value
  • Example: If a task is 50% complete, and the planned value for the task is $500, then EV = 0.5 * $500 = $250.

2. Schedule Variance (SV):

  • Formula: SV = EV - PV
  • Example: SV = $200 - $500 = -$300 (Negative means you're behind schedule)

3. Cost Variance (CV):

  • Formula: CV = EV - AC
  • Example: CV = $200 - $150 = $50 (Positive means you're saving money)

4. Schedule Performance Index (SPI):

  • Formula: SPI = EV / PV
  • Example: SPI = $200 / $500 = 0.4 (Less than 1 means you're behind schedule)

5. Cost Performance Index (CPI):

  • Formula: CPI = EV / AC
  • Example: CPI = $200 / $150 = 1.33 (More than 1 means you're spending efficiently)

Understanding Earned Value and these superhero metrics helps you steer your project ship. If SV and CV are positive, you're on a good course. If SPI and CPI are close to 1, you're cruising smoothly. It's like having a compass and a treasure map for your project adventure!

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Benefits of Using Earned Value in Project Management

  • 1Risk Anticipation and Early Intervention: One of the key advantages of EV is that it allows project managers to anticipate risks and intervene early. This prevents potential issues from escalating. For instance, if the Cost Performance Index (CPI) calculated using EV is less than 1, it indicates a cost overrun risk. Early identification of this risk allows for timely intervention.
  • 2Efficiency and ROI: Earned value (EV) helps project managers spot discrepancies and rectify them. This improves project efficiency and Return on Investment (ROI). For example, if the EV of a project is significantly higher than the AC, it indicates high efficiency and a positive ROI. In conclusion, EV is crucial in enhancing project management efficiency and effectiveness. A clear, quantifiable measure of project performance enables project managers to make informed decisions and keep their projects on track.
  • 3Realistic Project Planning: Earned value analysis (EVA) helps project managers plan realistically. It lets them set a reasonable budget and timeframe. For example, if a project is planned to cost $100,000 and take six months, EV can help track whether the project is adhering to these parameters. If, after three months, the EV is only $40,000, it indicates that the project is behind schedule.
  • 4Performance Measurement: EV provides an objective framework for tracking and measuring the progress of different projects. It helps assess work progress against a baseline plan, relating technical, time, and cost performance. For instance, if a project’s Schedule Performance Index (SPI) is less than 1, it is behind schedule.
  • 5Schedule and Budget Accuracies: EV helps measure schedule and budget accuracies, offering a clear picture of the project’s progress. For example, if the Actual Cost (AC) of a project is higher than its EV, it indicates a cost overrun. This insight can help project managers take corrective actions to bring the project back on track.

Conclusion

So, we’ve learned about Earned Value (EV) in project management. It’s like a superhero metric that helps us keep our project on track. It tells us how much work we’ve done and how much money we’ve spent. And the best part? It’s not that hard to calculate!

By using EV, we can see if we’re on track with our project. If we’re spending more than we planned or if we’re behind schedule, EV will tell us. It’s like having a project GPS!

In conclusion, Earned Value is a super helpful metric in project management. It helps us plan better, track our progress, and make sure we’re getting the most out of our project. So, let’s start using it and make our projects a success!

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Frequently
Asked
Questions

Earned value shows how much of the work is done in a project. It represents the value or worth of what the project has achieved. This helps you compare the completed work with the planned costs of your project. By doing this calculation, you can measure the success of your project clearly and measurably.

Earned value (EV) is like a key performance indicator (KPI) that shows how much work has been done on a project at a certain date. It's an important way to measure project progress.

The other name of earned value is the budgeted cost of work performed (BCWP).

Earned value is commonly used by project managers, project teams, and stakeholders in various industries.

Naveen Kumar Singh

Naveen is a professional agile coach and has been working independently for a long time in the Asia Pacific. He works with the software development team and product team to develop awesome products based on empirical processes.

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