Demystify Earn Value Management

Manish Purwar, iZenBridge

Understanding Earned Value Management Calculating To-Complete Performance Index (TCPI) Budget forecasting Budget variance analysis

Agenda

Understanding of Earn Value Management concepts Will help in managing projects better in real life Will help in solving ~10 questions in PMP exam

Expected Benefits From This Session

Earned Value Management (EVM) is a project management system that combines schedule performance and cost performance to answer the question,

“What did we get for the money we spent?” It measures project performance against the project

baselines. It results from an earned value analysis indicating potential deviation of the project from the cost and/or schedule baseline.

Earn Value Management

It is used to figure out how well project needs to perform in the future in order to stay on budget.

To-Complete Performance Index (TCPI)

Use the information you have about the project right now to predict how close it will come to its goals if it keeps going the way it has been.

Forecasting

Throughout your project, you are looking at how you are doing as compared to your plan. The variance between planned and actual performance needs to be carefully analyzed to figure out budget or schedule related issues.

Variance Analysis

Planned Value : The percentage of total budget that you are supposed to have earned so far.

BAC (Budget At Completion)◦ It is total budget you have for your project.

Planned Value◦ Budget you planned on using so far◦ PV = BAC x Planned % CompleteIf BAC is $100,000 and planned % complete is 30%,

then Planned Value is : $100,000 x 30% = $30,000

Planned Value (PV)

Earn Value tells you how much your project actually earned.

EV = BAC x Actual % complete If BAC is $100,000 and actual % complete is 25%,

then Earned Value is : $100,000 x 25% = $25,000

Earn Value (EV)

Schedule Performance Index (SPI) = EV / PV If SPI > 1 means Earned Value is greater than Planned value so project

is ahead of schedule If SPI < 1 means Earned Value is less than Planned Value so project is

behind of schedule Schedule Variance (SV) = EV – PV

If SV is positive means EV > PV and it tells you how many dollars you are ahead of schedule.

If SV is negative means EV < PV and it tells you how many dollars you are behind schedule.

Total budget of project is $10,000 and you are halfway through schedule. It seems you have only gotten 40% of actual work done.

What is PV, EV, SPI and SV? Is project ahead or behind of schedule?

Recap : PV = BAC x Planned % Complete, EV = BAC x Actual % complete

Is project behind or ahead of schedule?

Actual Cost (AC) is the amount of money spent so far on the project.

Cost Performance Index (CPI) = EV / AC If CPI > 1 means Earned Value is greater than Actual Cost so project is under

budget If CPI < 1 means Earned Value is less than Actual Cost so project is over budget

Cost Variance (CV) = EV – AC If CV is positive means EV > AC and it tells you how many dollars you are

under budget. If CV is negative means EV < AC and it tells you how many dollars you are over

budget.

Total budget of project is $10,000 and you are halfway through schedule. It seems you have only gotten 40% of actual work done. You have spend $6000 so far.

What is PV, EV, CPI and CV? Is project over or under budget?

Recap : PV = BAC x Planned % Complete, EV = BAC x Actual % complete

Are you over or under budget?

Interpretation of EVM

Forecasting is predicting what your project will look like when it’s at completion.

Estimate At Completion (EAC) is Predicting total cost when project is complete.

EAC = BAC / CPI◦ If CPI < 1 mean project is over budget and will give EAC

> current budget.◦ If CPI > 1 mean project is under budget and will give EAC

< current budget.

If CPI is 0.8 and total budget is $10,000, then what will be Estimate At Completion (EAC)?

Forecasting your project budget

Estimate To Complete (ETC) is how much more money will be spend on project completion.◦ ETC = EAC – AC

Variance At Completion (VAC) predicts what your budget variance will be when the project is complete.◦ VAC = BAC – EAC◦ If you will spend more than your budget, variance will be

negative.

What will be variance at completion?

PV

AC

BAC

EACETC

TCPI represents a target that your CPI would have to hit to meet forecasted completion cost.◦ TCPI when you are trying to get your project within your original

budget, TCPI = (BAC – EV) / (BAC – AC) i.e. left Budgeted work / left

budgeted money◦ TCPI when you are trying to get your project done within Estimate

At Completion (EAC), TCPI = (BAC – EV) / (EAC – AC) i.e. left budgeted work / left

estimated money

Higher TCPI means left budgeted work > left budgeted (or estimated) money so it’s time to take strict cost management approach.

Lower TCPI means left budgeted work < left budgeted (or estimated) money so you are well with in your budget.

To Complete Performance Index (TCPI)

Actual value at any given time of the project minus all of the costs associated with it.

Managers calculate this number to see if it’s worth doing a project. Managers select project with greatest NPV.

If Project A will take 3 years to complete and has an NPV of $50,000. Project B will take 6 years to complete and has an NPV of $90,000. Which one would you prefer?

Net Present Value (NPV)

IRR is interest rate at which project inflows (revenues) and project outflows (costs) are equal.

If company has more than one project to select, project with highest IRR are selected for implementation.

Internal Rate of Return (IRR)

The number of time periods it takes to recover your investment in the project before you start accumulating profit.

You have two projects to choose from, Project A with a payback period of six months or Project B with a payback period of 18 months. Which one would you prefer?

Payback Period

It is ratio of Benefit (i.e. revenue in this case) to Cost.

BCR > 1 means benefits are greater than cost.

Project with highest BCR is selected for implementation.

Benefit Cost Ratio (BCR)

Opportunity given up by selecting one project over another.

You have two projects to choose from; Project A with an NPV of $50,000 or Project B with an NPV of $90,000. What is the opportunity cost of selecting project B?

Opportunity Cost

Net Present Value Internal Rate of Return Payback period Benefit Cost Ratio

Project Selection Method

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Presentation by – Manish Purwar

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