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Author: Elyse, PMP, CPHIMS
December 8, 2006


Earned Value Management is a way to measure a project's performance against the project baseline. An earned value analysis can clue the project manager into trending deviations from the project's cost and schedule plans. Earned Value Management integrates cost, time, and scope completed. It is very useful in forecasting future performance.

The Terminology

Acronym Term Description
PV Planned Value PV is the authorized budget assigned to the scheduled work to be accomplished for a scheduled activity or work breakdown structure component.
EV Earned Value EV is the value of completed work expressed in terms of the approved budget assigned to that work for a scheduled activity or work breakdown structure component. The cumulative EV is the sum of the approved budgets for activities completed during a given period.
AC Actual Cost AC is the total costs incurred and recorded in accomplishing work performed during a given time period for a scheduled activity or work breakdown structure component. Actual cost can sometimes be direct labor hours alone; direct costs alone; or all costs, including indirect costs
BAC Budget at Completion BAC is the total amount of funds to be spent at the completion of the task.
EAC Estimate at Completion EAC is used by project managers to give their best estimate of the total costs of projects based on actual costs to date. The most frequently used formula for EAC is AC plus ETC; this formula is typically used when previous assumptions regarding costs are wrong.
ETC Estimate to Complete ETC is the expected cost needed to complete all the remaining work for a scheduled activity, a group of activities, or the project. ETC helps project managers predict what the final cost of the project will be upon completion.
VAC Variance at Completion VAC forecasts the difference between the Budget-at-Completion and the expected total costs to be accrued over the life of the project based on current trends.

The Formulas

Acronym Term Formula Description
CV Cost Variance CV = EV - AC CV provides the cost performance of the project to help determine whether the project is proceeding as planned. Subtracting AC from EV calculates the cost variance.
SV Schedule Variance SV = EV - PV SV indicates the project's schedule performance. This value can indicate whether the project work is proceeding as planned. Calculate the SV by subtracting the PV from the EV.
CPI Cost Performance Index CPI = EV / AC For the CPI of individual budgets, divide EV by AC. For a cumulative CPI, divide the sum of all EV budgets by the sum of all ACs. A CPI of less than one indicates that the project is over budget, and a CPI of over one indicates that the project is coming in under the estimated budget.
SPI Schedule Performance Index SPI = EV / PV Project managers can use the SPI to help predict when their projects will be completed. To calculate the SPI, divide EV by PV. An SPI of one indicates the project is on schedule; greater than one indicates it is ahead of schedule; and less than one indicates it is behind schedule.
EAC Estimate at Completion

EAC = BAC / CPI

EAC = AC + ETC

EAC = AC + (BAC - EV)

EAC is used by project managers to give their best estimate of the total costs of projects based on actual costs to date. The most frequently used formula for EAC is AC plus ETC; this formula is typically used when previous assumptions regarding costs are wrong.
ETC Estimate to Complete ETC = EAC - AC ETC is the expected cost needed to complete all the remaining work for a scheduled activity, a group of activities, or the project. ETC helps project managers predict what the final cost of the project will be upon completion.
VAC Variance at Completion VAC = BAC - EAC VAC forecasts the difference between the Budget-at-Completion and the expected total costs to be accrued over the life of the project based on current trends.
CPIc Cumulative Cost Performance Index CPIc = Σ EV / Σ AC Cumulative CPI Method forecasts the total amount to be spent by adding costs incurred to date to the remaining work to be earned, which has been weighted against the current CPI performance value. Starts from the 20 percent completion point.

Futher Readings:

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7 Comments to “PMI Earned Value Management Terms and Formulas”

Thanks so much for posting this. It's Thursday at 7:34pm and I'm taking the PMI CAPM Saturday morning. Needless to say I'm in a studying frenzy! Your descriptions are a great help for me in solidifying my understanding of these terms. Right on time - thanks again!

Cheers!
Melissa

Just doing the PMI course, great help to me.

I'm not to sure about the formula for EAC. The first assumes the only change is CPI - what about SPI. THe second formula is circular EAC = AC +ETC and ETC = EAC - AC and therefore can never be solved. THe third EAC = AC +(BAC - EV) assumes any (in)efficiences encountered so far will not be repeated. PERhaps the formula should be EAC = AC + (BAC –EV)*CPI/SPI. However thi swill only hold true if the type of resources both human and physical are exactly the same as those used previously.
We might better off goingback to our monte carlo analysis and recalculating the budget with known values to reflect change sin CPI and SPI for sepcific inputs and contingencies.
Looking forward to your reply
Patrick

Thank you for giving us the formula and its explanation. it really helps us in doing our PSM, and also for the examination.

Hi Patrick,

Great Questions, I think this one needs to be clarified for all. Plan on seeing the answer this Friday on our Q and A entry.

Thanks for sharing!
E

Hi Patrick,

In looking into this for a bit, perhaps you can expand on it a bit more.

Let me review your assumptions, the formula

EAC = BAC / CPI does not include scheduling information. However, schedule variance is based upon planned value. Planned value is defined as the authorized budget assigned to the schedule work to be accomplished. Budget at Completion is defined as the total amount of funds to be spent.

So looking at the ending of a project (after all work is completed) your Budget At Completion is your total cumulative Planned Value at completion.

Therefore if in the middle of a project your budget at completion has increased, you should have a scope change for the planned value to increase. Otherwise you can forecast that your planned value will increase. EAC is a forecasting technique of what it will cost to complete the project.

The next item of insolvable, isn’t really true. It just algebraically 0 = 0 , which is true.

The assumption would hold true within the PMI constructs.

I can say this, I have found the Earned Value Project Management Book by Fleming and Koppelman extremely valuable when understanding the intent and purpose of this formulas.

I’d welcome hearing your thoughts and suggestions,
Elyse

Hi Elyse,
very good, helpful overview, thanks for that!
Patrick was partly right though as the third formula for EAC is not quite correct. One term is missing.
The correct formula should be: EAC = AC + (BAC - EV)/CPI.

Mathematical derivation:
Based on the definition EAC = AC + ETC, the assumption that must hold true is ETC = (BAC - EV)/CPI. With CPI = EV / AC you get ETC = BAC/CPI - EV x AC/EV. BAC/CPI is by definition EAC. Thus ETC = EAC - AC which is the definition of ETC. q.e.d.

See also the wikipedia article: http://en.wikipedia.org/wiki/Earned_value_management

Regards,
Peter


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