Earned Value Management Terms and Formulas: PMP Study
“You cannot manage what you cannot measure…and what gets measured gets done.”— Bill Hewlett, Hewlett Packard
Earned value management is an essential part of the Project Cost Management knowledge area and an important topic for the PMP® certification exam. There are several terms and formulas in earned value management that those in PMP certification training must understand and memorize for the exam.
In this article, we will take a look these important terms and formulas that are useful for earned value calculations.
What is Earned Value?
To understand the concept of earned value, think about the concept of debits and credits. In a double entry accounting system, for every debit to one account there is a corresponding credit to another account.
Earned value is similar to this concept. When you spend a dollar on labor for your project, you are “earning” a dollar’s value back into your project. Therefore, all project tasks—including code development, documentation, and other functions—earn value back into your project.
Earned Value Formulas and Abbreviations
Budget at Completion (BAC)
- BAC is the sum of all budgets established for the work to be performed. It indicates how much was originally planned for the project to cost.
- No single formula exists. BAC is derived by looking at the total budgeted cost of the project.
Planned Value (PV), or Budgeted Cost of the Work Scheduled (BCWS)
- Planned value is the authorized budget assigned to the scheduled work and does not include management reserve. It indicates how much work should have been completed at a point in time based on a plan. It is derived by measuring planned work completed at a point in time.
- Formula: PV = Planned % complete * BAC
Earned Value (EV), or Budgeted Cost of the Work Performed (BCWP)
- Earned value indicates how much work was actually completed during a given period of time. It is the budget associated with the authorized work that has been completed. It is derived by measuring actual work completed at a point in the schedule.
- Formula: Actual % complete * BAC
Actual Cost (AC), or Actual Cost of Work Performed (ACWP)
- Actual cost is the realized cost incurred for the work performed on an activity during a specific time period. It indicates the money spent during a given period of time.
- Formula: Sum of the costs for the given period of time.
Cost Variance (CV)
- Cost variance is the difference between what we expected to spend and what was actually spend. It is expressed as a difference between earned value and the actual cost.
- Formula: CV=EV-AC
Schedule Variance (SV)
- Schedule variance indicates the difference between where we planned to be in the schedule and where we are in the schedule. It is expressed as a difference between the earned value and the planned value.
- Formula: SV = EV - PV
Cost Performance Index (CPI)
- Cost Performance Index is the rate at which the project performance is meeting cost expectations during a given period of time. It is expressed as a ratio of the earned value to the actual cost.
- Formula: CPI = EV / AC
Schedule Performance Index (SPI)
- Schedule Performance Index is the rate at which the project performance is meeting schedule expectations up to a point in time. It is expressed as a ratio of earned value to planned value.
- Formula: SPI = EV / PV
Estimate at Completion (EAC)
- Estimate at completion is the expected total cost of completing all work. It projects the total cost at completion based on project performance up to a point in time.
o EAC = BAC / CPI – If the CPI is expected to be the same for the remainder of the project, the EAC can be calculated using this formula.
o EAC = AC + BAC - EV – If the future work will be accomplished at a planned rate, the EAC can be calculated using this formula.
o EAC = AC + Bottom Up ETC – If the initial plan is no longer valid, the EAC can be calculated using this formula.
o EAC = AC + (BAC - EV ) / (CPI * SPI ) – If both the CPI and SPI influences the remaining work, the EAC can be calculated using this formula.
Estimate To Complete (ETC)
- Estimate to complete is the expected cost to finish all the remaining work. It projects how much more will be spend on the project , based on past performance.
- Formula: ETC = EAC - AC Assuming that the work is proceeding to plan , the cost of completing the remaining authorized work can be calculated using this formula.
Variance at Completion (VAC)
- Variance at completion is the projection of the amount of budget deficit or surplus. It is expressed as a difference between budget at completion and the estimate at completion.
- Formula: VAC = BAC - EAC
To Complete Performance Index (TCPI)
- To complete performance index describes the performance that must be achieved in order to meet the financial or schedule goals. It is expressed as a ratio of the cost to finish the outstanding work to the budget available.
o TCPI = BAC - EV / BAC - AC The efficiency that must be maintained in order to complete to plan.
o TCPI = BAC - EV / EAC - AC The efficiency that must be maintained in order to complete the current EAC.
As you have learned, earned value management is an important topic to learn if you’re working on your project management certification. If you’re looking for a PMP course online, Simplilearn has more than a dozen project management courses, including PMP certification training that is designed to help you pass the PMP exam on your first try. You’ll get project management training online by faculty with at least 10 years of industry experience.
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