Earned value for beginners…Let’s try to make it simple

Quite often, when talking to clients or other project managers, I get the impression that Earned Value is still considered a very technical and complex metric.

This was true in the past (say 10-15 yrs ago), when people’s choice, when using EV, was only between painfully building (and keeping updated!) formulas in Excel or buying expensive Project Management tools. But with the advent of complete, easy-to-use and (much) less expensive PM tools, today we can’t “hide” anymore from such powerful technique (in particular when we put together our reporting pack!).

Today many PM solutions, by managing pretty much all project financial and progress data in the background, make the monitoring of Earned Value a very simple task, allowing even small projects (say below 1.5 MUSD - typically those for which a PM would not really want to get “into the weeds” of EV) to benefit from such structured approach to project progress monitoring.

Let’s start from the basics…What is Earned Value?

Earned value analysis is a technique that was developed ca. 100 years ago to somehow quantify cost and efficiency of industrial production. It was first introduced into the Project Management world in the 1960s by the US Department of Defence to measure the budget and progress status of their projects.

Earned Value is calculated as: Total budgeted cost x %Completed Actual, and it tells you how much you planned to spend to carry out the work you actually have done so far.

The Earned Value analysis umbrella includes a number of metrics. A few of them, I must admit, still sometime “scare” me. The most famous ones are:

• BCWP (or EV) - Budgeted Cost of Work Performed
• BCWS (or PV) - Budgeted Cost of Work Scheduling
• ACWP (or AC) - Actual Cost of Work Performed
• CV – Cost Variance
• SV – Schedule Variance
• CPI - Cost Performance Index
• SPI - Schedule Performance Index

Other often used ones are:

• CSI – Cost Schedule Index
• EAC – Estimate at completion
• ETC – Estimate to complete
• IEAC – Independent estimate at completion
• TSPI – To Complete Schedule Performance Index
• TCPI – To Complete Cost Performance Index

So…which ones are the REALLY important metrics?

Now, unless you are preparing for a Project Management certification, it would be very easy to get overwhelmed by the list of metrics above and throw away all your good intentions. But…here’s my advice: if you are in your early stage as EV user, why not forgetting about the majority of them and focus on those few that can give a clear picture of your project status without too much trouble?

Check these out:

1) CPI: Cost Performance Index (EV/AC) – This tells you whether your project is spending more than planned:

CPI below 1= you are above budget, above 1= you are utilizing your resources efficiently.

2) SPI: Schedule Performance Index (EV/PV) - This tells you whether your project is ahead or behind the planned schedule.

SPI below 1= you are late, above 1= you are being efficient in utilizing the time allocated to the project

Honestly, these are still now, after years of use, the key figures I check when monitoring my projects (and 90% of the time I stop here…)

Good…what shall I do with SPI and CPI, then?

Reporting! Earned value is great for project status reporting, because, by combining information about cost, time and progress, it tells you the truth about your project status at a glance.

Now, think about it…Once you have SPI and CPI, do you really need to put much more “EV stuff” in your reports? Do you really want your execs to know what is your project’s To Complete Performance Index? Not really, unless they all understand well EV's basics.

Many Project Management tools provide CPI and SPI (and, often, many other) metrics automatically, sometimes allowing to apply them to the whole project as well as to each project task. This makes project reporting easy and very insightful.

In conclusion, my advice to all those who are starting using Earned Value is to focus on a few key metrics. You do not like SPI and CPI? Then feel free to start from TCPI (never met anybody who would dare, but go ahead!), but do not try to learn all at once. It will just confuse you even more.

Once you have grasped the basic concept of EV, CPI and SPI, then the road to more complex metrics will look at lot easier!