Earned Value Management (EVM) is a hot topic in the world of project management. Some project managers (PMs) love EVM for the objective metrics it provides. Others detest EVM due to the steep learning curve and difficulty of getting it right. We’ll wade into the debate about whether EVM is worth the trouble next week (stay tuned!), but first, let’s take a moment to explore exactly what EVM is.
EVM essentially serves as a progress report card for your project. It allows you to measure how efficiently you are using resources, whether you are on schedule, and if you are staying within your budget. This information can help a PM proactively manage their schedule, allowing for adjustments and improvements as needed. To calculate these metrics, EVM relies on a few key concepts you’ll need to understand.
Planned Value (PV) is the budgeted cost for a given task or piece of work. Earned Value (EV), on the other hand, represents the amount of value that has been delivered on a task to date. EV is calculated by multiplying the task’s % Complete by its Planned Value. If a task was budgeted for $1,000 and is 50% complete, its Earned Value is $500 ($1,000 x 50%). At its core, this idea is fairly straightforward: if a task is halfway done, you’ve “earned” half its value.
Making sense so far? Let’s add in a few more EVM terms. Actual Cost (AC) is an easy one – it represents costs incurred to date on the task in question. Now comes the trickier EVM metrics: Cost Performance Index (CPI) and Schedule Performance Index (SPI). Both CPI and SPI use the concept of Earned Value, but CPI compares EV to Actual Costs whereas SPI compares EV to Planned Value. CPI tells us whether our project or task is over-budget, under-budget, or right on-budget, while SPI tells us whether we are behind schedule, ahead of schedule, or precisely on-track with our planned schedule. Table 1 summarizes how these metrics can be calculated and interpreted.
Table 1. SPI and CPI Summary
It may take some time to adjust to the EVM acronyms and ratios, but at their core, the concepts of CPI and SPI should make logical sense. If a task with an Earned Value of $500 incurred Actual Costs of $400, it came in under budget – more value was earned than costs incurred. The CPI of 1.25 (500 ÷ 400) simply confirms this mathematically. However, if that same task had a Planned Value of $800, it is behind schedule compared to where it should have been. The task was expected to earn $800 in value by the current date, but only $500 has been earned so far. Again, the SPI of 0.625 (500 ÷ 800) mathematically confirms that we are behind schedule. Notably, the further from 1 the SPI or CPI is, the more extreme the budget or schedule deviation from what was originally planned.
In the examples provided above, it’s important to note a concept that can at first seem counter intuitive. The CPI is positive, indicating the task is under budget, but the SPI is negative, indicating the task is behind schedule. What does this mean? Is the task only under budget because it is behind schedule? The answer to the second question is no; the positive CPI is not necessarily caused by the negative SPI.
Confused yet? You’re not alone – interpretation of EVM metrics is where a lot of organizations fall short; however, it is also where a stellar project management team can really shine. With their deep knowledge of project activities, the PM can help the leadership team understand how to interpret seemingly conflicting metrics. Perhaps limited resources have impacted the team’s ability to complete work on time, or perhaps additional scope was added to the task, causing delays to the originally planned activities despite steady work and strong cost management. It is incumbent to have a strong Project Management Office (PMO) or team of PMs who are well-versed in EVM to carefully analyze metrics and realize the benefits of this complex management tool.
For those who are interested in EVM, there are a wealth of resources available. This article was intended to provide a brief primer to demystify the concepts for those who are curious about EVM, but not quite ready to dive in headfirst. In our experience, there are a few things an organization needs to have in place for successful adoption of EVM practices. Stay tuned for our blog post next week focused on whether EVM is the right choice for your team!