Earned Value Management Explained on a Simple Example (video+template)

Earned Value Management rises an alarm and dread in you? I get it. It is a common problem. Plotting project plan, tracking costs and progress of a project on one chart. It looks overcomplicated.

Why would anyone needs EVM if there are Scrum’s burndown chart? They are so much simpler.

Wait!

Isn’t it just the same thing? Only inverted a bit.

If you are still reading this, let me explain the core benefit of the Earned Value Management.

Earned Value Management Definition

EVM helps you to measure your project across three main baselines (scope, cost, schedule) on one chart.

You might be already one step ahead of others by measuring planned values against actual ones. However, if you limit it to one of two baselines, there is always a chance that you are falling behind on other aspects.

For example, you are measuring your schedule progress missing the fact that you are overspending.

EVM gives an opportunity to look at scope, cost and schedule performance in one unit of measurement – dollars. Well, in any currency.

Prerequisites for Earned Value Management

As this in-depth article on EVM states:

“In order for the Earned Value Analysis to be accurate, a good solid project plan must be created.”

To measure across three baselines, you need to have those baselines clearly defined. Learn how to do it in these articles:

1. How to Manage Project Scope In a Structured Way
2. How to Create a Realistic Project Schedule
3. How to Make Project Estimates

How does EVM Works?

Earned Value Management charts plots time on one axis and monetary value on the other. There are three series on the chart:

1. Planned Value shows how we plan to spend money on a timeline to created deliverables within given timeframe.
2. Actual Costs shows how much we really spend. These are based on actual invoices.
3. Earned Value shows how much of the planned value we delivered as of today.

Rather than trying to explain it all in written words, let me show you an example of a mini project.

Earned Value Management Example

In this video, I use Merlin Project by Project Wizards.

Here you can find an example of Earned Value Management for non-cost values:

EVM for Testing Project

You can use it as a template from similar activities.

Earned Value Management Formulas

Cost Variance

Cost Variance (CV) = Earned Value (EV) – Actual Costs (AC)

It shows your deviation from the planned budget as of now. Negative means you are overspending. Positive shows that you are under your budget.

Schedule Variance

Schedule Variance (SV) = Earned Value (EV) – Planned Value (PV)

This one shows your deviation from schedule. Negative means behind schedule. Positive shows that you are ahead of schedule.

Do you understand how it happens? Project costs are directly associated with all tasks you have on the schedule. The costs occur immediately, prorated or at the end of the task on a planned date.

Cost Performance Index

Cost Performance Index (CPI) = Earned Value (EV)/Actual Costs (AC)

CPI states how much we spend to earn 1 dollar of value. Greater than 1 means we earn 1 dollar of value for less than a dollar of actual costs.

For example, I need to analyze available hosting options. Planned value is $100. However, at some point, I got a discount card and got the analysis done for $90.

CPI = 100/90 = 1.11. So, for every real dollar I spend I get 1.11 dollars of value.

Schedule Performance Index

Schedule Performance Index (SPI) = Earned Value (EV)/Planned Value (PV)

SPI shows you at what percent you progress compared to planned performance.

For example, as of today, you planned to get $100 of value. However, you only finished 3 of 4 subtasks and got $75.

SPI = 75/100 = 0.75 (75%). So, you are progressing at 75% of your planned speed.

Other EVM Formulas

There are several other formulas. But I want to keep this guide simple. So, I’ll name them here and will explain them in a separate article.

Considerations for Accurate EVM

At first, the Earned value management looks quite simple. However, there are several important consideration you need to keep in mind.

1. Planning Ahead and Estimating Uncertainties

For EVM to work you need a complete plan with all three baselines.

But what should you do, if you don’t have a full picture of your project? For example, you have a plan for the next six months, but beyond that – nothing is specified.

You need to do Rolling Wave Planning.

You need to make assumptions about the scope of work. You need to make high-level estimates of time and costs. And you do need risk management here.

Your whole project should be planned. Though some parts may be roughly specified.

2. When value earning happens

Also, sometimes it is not clear when you actually earn value. Final deliverables may get approval weeks or months after you create them.

So, you need to be clear on the definitions of done.

There might be cases when you prepay resources or materials that you will use later. Or you will use one part now and the rest later. So, a portion will stay in stock for a while giving no value.

It depends on your industry. There will be cases when you have to take a stand and decide how to track it.

3. How to Calculate Actual Costs

The same goes for Actual Costs. Some costs contribute to earning value on different deliverables and throughout time. So, it might be a challenge to redistribute them correctly.

Also, you might have a case when you procure a lot of expensive materials upfront. The costs of further work are relatively small. In the end, EVM might no seem reasonable.

Accuracy and timing of your tracking system impact accuracy and period of earned value analysis. You might be limited to a weekly or monthly periods.

It is Not Only About Money

Quite often on smaller projects, PMs doesn’t control budget directly. They manage allocated resources only. Does EVM useless then?

There is a catch.

Costs and planned values in dollars (or any other currency) can be converted into different units of measurement.

Most commonly, you can use man-days as your currency. You can also use EVM to control the progress of activities that have daily norms. For example, test cases executed, pieces created, actions made. Almost anything that has a correlation with money you spend.