Annex B - EARNED VALUE MANAGEMENT (EVM) TECHNIQUE
B-1 GENERAL
Earned value management (EVM) technique is used to track the progress and status of a project and forecast the likely future performance of the project. The EVM technique integrates the scope, schedule and cost of a project. It answers a lot of questions to the stakeholders in a project related to the performance of the project.
EVM technique can be used to evaluate past performance of the project, current performance of the project and predict the future performance of the project by use of statistical techniques. Good planning coupled with effective use of the EVM technique reduces a large amount of uncertainties arising out of schedule and cost overruns. There are following three
basic elements of EVM, which are taken into account on a regular basis:
a) Planned value (PV),
b) Actual cost (AC), and
c) Earned value (EV).
B-1.1 Planned Value (PV)
This is also referred to as budgeted cost of work scheduled (BCWS). Planned value (PV) or BCWS is the total cost of the work scheduled/planned as of a reporting date. It may be calculated as:
PV or BCWS = Hourly rate × Total hours planned or scheduled
NOTE — Hourly rate is the rate at which effort will be valued.
B-1.2 Actual Cost (AC)
This is also referred to as actual cost of work performed (ACWP). Actual cost (AC) or ACWP is the total cost taken to complete the work as of a reporting date. This may be calculated as:
AC or ACWP = Hourly rate × Total hours spent
B-1.3 Earned Value (EV)
This is also referred to as budgeted cost of work performed (BCWP). Earned value (EV) or BCWP is the total cost of the work completed/performed as of a reporting date. It may be calculated as follows:
EV or BCWP = Baseline cost × Percent complete of actual work B-1.4 All these three elements can be derived from work
breakdown structure by associating the costs to each of the tasks. For a big project it will be a tedious task to calculate these elements manually. Scheduling softwares are used to calculate these three elements.
B-1.5 Cost Variance (CV)
Cost variance (CV) is very important factor to measure project performance. Cost variance (CV) indicates how much over or under budget the project is. It may be calculated as follows:
CV = Earned value (EV) – Actual cost (AC)
or
CV = BCWP – ACWP
The formula mentioned above gives the variance in terms of cost which will indicate how less or more cost has been to complete the work as of date. Positive cost variance indicates the project is under budget and negative cost variance indicates the project is over budget (see Fig. 9). B-1.5.1 Cost Variance Percent (CV Percent) It indicates how much over or under budget the project is in terms of percentage. It may be calculated as follows:
CV percent =Cost variance (CV) / Earned value (EV)
or
CV percent =CV / BCWP
The above formula gives the variance in terms of percentage which will indicate how much less or more money has been used to complete the work as planned in terms of percentage. Positive variance percent indicates percent under budget and negative variance percent indicates percent over budget.
B-1.6 Cost Performance Indicator (CPI) Cost performance indicator is an index showing the efficiency of the utilization of the resources on the project. It may be calculated as follows:
CPI =Earned value (EV) / Actual cost (AC)
or
CPI =BCWP / ACWP
The formula mentioned above gives the efficiency of the utilization of the resources allocated to the project.
CPI value above 1 indicates efficiency in utilizing the resources allocated to the project is good and that below 1 indicates efficiency in utilizing the resources allocated to the project is not good (see Fig. 10). B-1.6.1 To Complete Cost Performance Indicator (TCPI)
It is an index showing the efficiency at which the resources on the project should be utilized for the rest of the project. This can be calculated as follows:
TCPI =(Total budget – EV)/(Total budget – AC)
or
TCPI =(Total budget – BCWP) / (Total budget – ACWP)
The formula mentioned above gives the efficiency at which the project team should be utilized for the rest of the project. TCPI value above 1 indicates utilization of the project team for the rest of the project can be lenient and that below 1 indicates utilization of the project team for the rest of the project should be stringent.