Earned value analysis worked example
How to Calculate Earned Value
Earned Value Analysis is a proven method for accurately gauging the financial status of a project. Making this calculation allows managers to objectively assess progress and manage resources to complete the project. In addition, it's an effective means for projecting the total cost of a project at completion and the amount of time it will require from different employees or resources. Follow the steps below to calculate earned value.
Determining Key Metrics for the Project
Prepare a project schedule.To take advantage of the power of Earned Value Analysis, your schedule must define when each project task should be done and how much each task should cost. Begin by creating a space to fill out a project schedule, either on paper or in a spreadsheet program like Microsoft Excel.
- List the tasks required to complete the project. All tasks should be included.
- Identify the resources required to perform each task. Include labor and materials.
- For example, imagine that a security company is bidding on a government contract. This requires two separate tasks: compiling and writing the bid document, and checking it for compliance with government standards. These two tasks would be listed separately, along with the employees (resources) and any other equipment needed to complete them.
Determine the amount of each resource that will be required for each task.Generally, this will be an amount of hours needed to complete the task, separated by resource (by employee in the example).
- For our example, the first task requires 20 hours of Employee A's time, and the second requires 30 hours of Employee B's time. Each employee only works on one task in this case.
Ascertain the unit cost for each resource which, for labor, will be an hourly rate.This can be hourly wages for employees or the cost of running necessary machinery or equipment for a given amount of time.
- For our example, Employee A earn per hour but Employee B earns per hour.
Determine the expected cost to perform each task.You'll need to perform some basic math for this step.
- Multiply the hourly rate for each required labor resource by the number of hours required.
- Total this product for all required labor resources.
- Calculate the total cost of materials required to complete the task.
- Add any additional costs for such items as equipment rental, insurance, transportation, government fees, etc.
- The total is the budgeted cost for the task.
- For example, imagine that the expected cost of completing the security contract bid is the cost of the employees' wages and materials used plus a government submission fee. Multiply and add the wage rates of each employee by the number of hours each one works. In this case, this is 0 for employee A (/hr * 20 hours) and 00 for employee B (/hr * 30 hours). In addition, you estimate that the employees will use 0 worth of materials over the course of the project and there is a one time, 0 government submission fee paid at the end.
- When split into separate tasks, this means that the cost for the first task, completed by employee A, will be 0 (0 wage to employee A and half of both the cost of supplies and the government fee). The cost of second task will be the cost of employee B's wages plus the other half of the projected materials cost and the government fee, so 50 (00+0+0).
Estimate the length of time each task will take.This is the elapsed time to complete the task, not the amount of labor (applied time) needed to complete the task.
- In the example, employees A and B are working on other tasks at the same time as this project is being completed. You estimate that the total length of time required will be two weeks (10 business days).
Identify the prerequisites for each task.The prerequisites are the tasks that must be completed before the given task can be started.
- For example, one task that will have to be done before employee A can begin compiling a bid document is to analyze the government contract offer and come up with a list of what is required in the company's submission.
Schedule your project and tasks.Use project scheduling software or manually determine start and finish dates for each task. Spreadsheet software is often used for small projects.
- For example, the security company would create a start and end date for the government contract project that allows for the expected two week timeframe. This allows, for simplicity, one week for the first task and one for the second.
Calculating Earned Value
Determine the actual costs accrued on the project up through the project status date.The total is referred to as the Actual Cost (AC) or Actual Cost of Work Performed (ACWP).This figure will be useful later when calculating earned value measurements.
- Imagine that, at this point, the security company is a week and one day into their government contract project. At this point, the company has recorded 00 in expenses for this project (including the half of the government fee recorded as an expense for the first task, even though it hasn't been paid yet). This is the actual cost.
Calculate planned value.Planned value is essentially the budgeted cost of the project to the project status date (the date at which you are calculating earned value). It is also known as total Budgeted Cost of Work Scheduled (BCWS).
- In the example, the planned value of the project is the budgeted cost of the two tasks at this point, so 0 for the completed task 1 (completed in the first week) and one-fifth of task 2 (as we are one day into the five day duration of task 2). This means that task 2 has a planned value of 0 (1/5 * 50) and the total planned value is 0 + 0, or ,100.
Figure out the project percent completion.Identify tasks that have been started, but not yet completed. Estimate the percent completed for each of these tasks. Tasks that have already been completed will be recorded as 100% complete.
- Imagine that task one was completed ahead of schedule in four days and task 2 was started at the end of of week 1 instead of the scheduled week 2 start. You estimate that task 2 is 40% complete.
Calculate earned value.Multiply the planned value of each task by the percentage completed.The total is the Earned Value (EV) or Budgeted Cost of Work Performed (BCWP).
- Multiply task 1's completion percentage of 100% by its planned value of 0 to get an earned value of 0. Then, multiply task 2's completion percentage of 40% by it's planned value of 50 to get an earned value of 0. Total these to get an earned value of 0 + 0, or ,450.
Calculating Earned Value Measurements
Calculated the Schedule Variance (SV).Subtract the Budgeted Cost of Work Scheduled (planned value) from the Budgeted Cost of Work Performed (earned value).
- SV = BCWP - BCWS or SV = EV - PV
- A positive Schedule Variance indicates that the project is ahead of schedule. Negative means it is behind.
- In the example, this would be the earned value of ,450 minus the planned value of ,100. This gives 0, a positive result which indicates that the project is ahead of schedule.
Calculate the Schedule Performance Index (SPI).Divide the Budgeted Cost of Work Performed by the Budgeted Cost of Work Scheduled.
- SPI = BCWP / BCWS or SPI = EV/PV
- If the SPI is greater than 1, the project is ahead of schedule. If it is less than 1, the project is behind schedule.
- In the example, this would be the earned value of ,450 divided by the planned value of ,100, which gives an SPI of 1.32. This result is greater than 1, indicating that the project is ahead of schedule.
Calculate the Cost Variance (CV).Subtract the Actual Cost of Work Performed from the Budgeted Cost of Work Performed.
- CV = BCWP - ACWP or CV = EV - AC
- A positive Cost Variance indicates that the project is under budget.
- In the example, this would be the earned value of ,450 minus the actual cost of ,600. This gives -0. The negative result means that the project is running over budget and the company may be overspending in some area.
Calculate the Cost Performance Index (CPI).Divide the Budgeted Cost of Work Performed by the Actual Cost of Work Performed.
- CPI = BCWP / ACWP or CPI = EV/AC
- If the CPI is greater than 1, the project is under budget. If it is less than 1, the project is over budget.
- For the security company, their earned value of ,450 divided by the actual cost of ,600 yields a CPI of 0.91, meaning that the project is over budget.
Compute the budgeted cost for the entire project by adding the BCWS or PV for all project tasks.The resulting total is known as the "Budget at Completion" (BAC).
- This is simply the combined budgeted costs of the two tasks which is 0 (task one) plus ,750 (task two) for a total of ,500.
Calculate the Estimate at Completion (EAC).There are two different ways to calculate this measurement. You should use the method more appropriate for the specific circumstances of your project.
- If the current cost variance is the result of something that occurred that is not likely to continue, then the BCWS for the remainder of the project is likely still valid. Subtract the Cost Variance from the Budget at Completion to get the estimated actual cost: EAC = BAC - CV. In the example, this would be ,500 - (-0), which with the negative sign canceling out the subtraction sign, gives ,500 + 0, or ,650.
- If the current cost variance is the result of circumstances that are likely to continue (such as a higher than expected cost of labor), then divide the Budget at Completion by the Cost Performance Index to estimate the total project cost: EAC = BAC / CPI. In the example this would be ,500/0.91, which gives about ,750.
Video: Calculating Earned Value Analysis (EVA) in Project Management — Episode 34
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