I just learned the Earned Value formulas and now parts of these formulas have new names. But frankly, we don’t even do Earned Value calculations in my company. What am I missing?
- You’re not missing anything. No one uses Earned Value anyway.
- Shhh! Your friends will be embarrassed that you don’t use Earned Value.
- Nothing has changed; parts of the formulas simply have new names that are a bit easier to understand.
- Earned Value is the profit left after the cost of supplies is deducted.
Answer: C. Nothing has changed. The formulas simply have new names that are easier to understand.
Here's an easy explanation of Earned Value and the new terms.
Imagine that you are the project manager on a simple project. When you began to plan, Budgeted Cost of Work Scheduled (BCWS) was the dollar amount you estimated it would take to complete the schedule, based on the number of hours planned for each task times the hourly rate of the person assigned.
Planned Value (PV), the new term for BCWS, is identical in meaning and calculated the same way.
Now imagine that the first week of the project has passed, and you now know the amount of work that has been done so far. Budgeted Cost of Work Performed (BCWP) is the cost of the work that has been accomplished toward the project.
Remember that the time planned for each task was only an estimate; once the work is underway, the amount team members really finish may vary from the original plan. Workers can miss time for vacations or illness, or just work faster or slower than you planned. So, the amount of work accomplished toward the schedule may be different than you originally estimated.
By calculating the worth in dollars of the tasks, or portions of tasks, completed, (hourly rates x hours spent), we know how much of the scheduled work has been achieved and its dollar value to the project.
This dollar value, previously labeled Budgeted Cost of Work Performed (BCWP), has been renamed Earned Value (EV).
How do you use Planned Value and Earned Value information to make good project management judgments?
Now that you’ve converted the amount of work you thought it would take to complete the schedule when you planned the project (BCWS), and the amount of work that currently has been accomplished toward the project goals (BCWP), into dollars, you can determine if you are ahead or behind schedule at this point in time.
Here’s the formula. BCWP – BCWS = SV (Schedule Variance). Or, using the new terms, EV – PV = SV.
If the Schedule Variance is + (positive) you completed more work and earned more value than expected when you set up the schedule. You are ahead of schedule.
If the Schedule Variance is – (negative), you completed less work than you intended and you are behind schedule.
For example, suppose you planned to spend $4,000/week in worker salaries to do the tasks of the project (400 hours x $10 per hour). When the first week ends, you have $4,000 in salary expense, as team members receive full pay regardless of how much work they accomplish. However, they only completed 320 hours of work toward the project. (320 x $10 = $3,200). For the $4,000 the company spent, the project has earned value from work that is equal to $3,200.
The $3,200 (Budgeted Cost of Work Performed or Earned Value) minus the $4,000 (Budgeted Cost of Work Scheduled or Planned Value) = –$800. You are 80 hours behind schedule ($800/$10 per hour).
If you are 20% behind this week (80 hours/400 hours = .20 or 20%), you could be behind 20% every week.
For Week Two you have scheduled another 400 hours of work, plus you have 80 hours to make up (480 hours). At an 80% work rate (100% – 20%), you will achieve only 384 hours of work, (480 hours x .80), so now you are 96 hours behind.
Unless you can see that the rate of work will increase, or there were unusual circumstances that won’t continue, your estimates were too optimistic. You may need to rethink your schedule. Project management software by Microsoft®, Primavera® or others will calculate BCWS, BCWP and SV for you automatically.
Now you know how to use Earned Value to help spot performance issues early and bring your projects in on time.
Thanks to Barbee Davis, M.A., PHR, PMP, for contributing this Quick Quiz and answer. Ms. Davis is a reviewer for the global PMI Registered Education Provider Review Team. She owns Davis Consulting and is a published author, speaker, writer of training materials and an innovator in presentation skill workshops for corporate trainers. She holds a Black Belt in MS Project and teaches at the university level. Ms. Davis encourages your questions or comments.