The PMP Exam - Important terms and formulas in Earned Value Management

The PMP Exam - Important terms and formulas in Earned Value Management
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Sabyasachi

Last updated March 14, 2017


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“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®exam. There are several terms and formulas in earned value management that an aspirant must memorize and understand for the exam. 

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In this article, we will take a look these important terms and formulas that are useful for earned value calculations.
 
While preparing for the exam, aspirants could create a tabular column of these terms and formulas which will help them in memorize, understand, and apply them to relevant problems in earned value management .


What is Earned Value?


If you are struggling with the concept of earned value , you could 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 , in that if you are spending  a dollar on labor for your project , you are ' earning ' a dollars value back into your project . Therefore whenever you write code or documentation in your project , those activities earn value back into your project .
 
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Let us now take a look at the key terms and their formulas that are used for Earned Value Calculations.

 

Formulas and Abbreviations

Budget at Completion
Abbreviation : BAC
Description : 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  .
Formulas : No single formula exists . BAC is derived by looking at the total budgeted cost of the project.

Planned Value (Also known as Budgeted cost of the Work Scheduled)
Abbreviation : PV (or BCWS)
Description : 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 (Also known as budgeted cost of Work Performed)
Abbreviation : EV (or BCWP)
Decription : It 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 (Also known as Actual Cost of Work Performed)
Abbreviation : AC ( or ACWP )
Description : It is the realized cost incurred for the work performed on an activity during a specific time period . It indicates the money spend during a given period of time .
Formula : Sum of the costs for the given period of time.

Cost Variance
Abbreviation : CV
Description : It 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
Abbreviation : SV
Description :  It 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
Abbreviation : CPI
Description : It 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
Abbreviation : SPI
Description : It 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
Abbreviation : EAC
Description : It 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 .
Formula :
EAC = BAC / CPI If the CPI is expected to be the same for the remainder of the project then the EAC could be calculated using the above formula .
EAC = AC + BAC - EV If the future work will be accomplished at a planned rate then the EAC could be calculated using the above formula .
EAC = AC + Bottom up ETC If the initial plan is no longer valid , then the EAC could be calculated using the above formula
EAC = AC + (BAC - EV ) / (CPI * SPI ) If both the CPI and SPI influences the remaining work , then the EAC could be calculated using the above formula

Estimate To Complete
Abbreviation : ETC
Description : It 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 .
 
ETC = Reestimate
 
Reestimate the remaining work from the bottom up .

Variance at Completion
Abbreviation : VAC
Decription : It 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
Abbreviation : TCPI
Description : It is 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 .
Formula : TCPI = BAC - EV / BAC - AC The efficiency that must be maintained in order to complete to plan . TCPI = BAC-EV / EAC - AC The efficiency that must be maintained in order to complete the current EAC.
 

Conclusion

Earned value management is an important topic to be covered for the PMP® certification exam . There are several important terms and formulas that an aspirant must understand and memorize for the exam . Similar to the one described in this article , PMP® aspirants could create their own chart of formulas . This will help them memorize and understand the formulas better and prepare well for the exam .

 

PMP is a registered trademark of the Project Management Institute, Inc. 

About the Author

Sabyasachi has over a decade’s experience in leading IT and non IT projects in the Healthcare, Oil and Energy, eCommerce, Public Sector Undertaking , and Services industry . He is a PMI certified Project Management Professional , PMP, and a volunteer in the Project management community with a focus on best practice and mentoring other project management professionals . His writings are regularly published in several blogs , forums and online project management communities .


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