Join Aileen Ellis for an in-depth discussion in this video Calculating budget at completion (BAC), planned value (PV), earned value (EV), and actual cost (AC), part of Project Management: Calculating Earned Value.
Let's take our first example. Your project is to build a fence. Remember, to use Earned Value we need to know the plan for the project scope, schedule and cost. Let's listen for these ideas as I describe the project. The fence will have four sides and each side of the fence will be exactly the same. This is our project scope. The project will begin on Monday and run through Thursday. The plan is to build one side of the fence per day.
This is our project schedule. The total budget for the fence is $400. The plan is to spend $100 for each side of the fence. This is our project budget. Now we have our planned scope, schedule and cost determined. We cannot use Earned Value management unless we have a plan for scope, schedule and cost. To use Earned Value management we need to understand the scope of the project. I like to visualize this through a Work Breakdown Structure.
In our Work Breakdown Structure we can see the project has four work packages. The four packages are the north side, the east side, the west side, and the south side. As project managers, we need to define our scope usually through a Work Breakdown Structure to use Earned Value management. Next, we need a project schedule. The plan is to complete one side per day. The project begins on Monday and should end by the end of the day on Thursday.
You can see the schedule I have developed is very simplistic. On our projects, we need to have a project schedule to use Earned Value. Next we need a project budget that includes a planned value for each component. You can see the total budget is $400 for four sides. This gives us a planned value of $100 per side. On our projects, we need a project budget to use Earned Value. Now we need to Time Phase this budget.
This means we need to plan over time when we will be spending our budget. You can see the plan is $100 per side and one side per day. Therefore, we plan to spend $100 per day if we stay on schedule. While we can visualize the spending plan in our schedule, most organizations would build a Cumulative Cost Curve. There are multiple ways to measure Earned Value for a work element. As an example, we could use a fixed formula.
One fixed formula we could use is the 0/100 rule. With this formula, an activity gets 0% Earned Value credit when it starts, and all 100% credit when it ends. Therefore, an activity would get no Earned Value credit when it starts or even no Earned Value credit when it's 75% complete. All the Earned Value credit would come when an activity is 100% complete. There are many other methods we could discuss, but for this project let's use the 0/100 rule.
Remember, this means a task gets full Earned Value credit only when the task is 100% complete. What do we want to do with this example? Here is a list of some of the things we may want to determine based on the plan for the fence amd the status report that we will receive shortly. We are going to start with the first four terms, the BAC, the PV, the EV, and the AC. The project has started and now we receive a status report.
It is the end of the day on Tuesday. We have the north side complete. We have spent $400 to complete the north side. For me I like to visualize the project plan and compare that to the project status. I always go back to scope, schedule and cost. For scope, the plan is to build a four-sided fence. Each side will be exactly the same. As of today, the north side is complete. No other work has started.
As far as schedule, the plan is to begin on Monday and finish on Thursday completing one side per day. Our status report states that it's the end of the day on Tuesday. Our budget is $400 with the plan being $100 per side. Our status report states that we have spent $400 for the one side that is complete. Let's now determine the four critical terms.
These terms are Budget at Completion, Planned Value, Earned Value, and Actual Cost. Remember that the Budget at Completion is the full project budget. The Budget at Completion is $400. Planned Value, Earned Value and Actual Cost are figures as of today meaning as of the end of the day on Tuesday. If we think about Planned Value, Planned Value is a measure of how much work should be complete as of today.
It is the end of the day on Tuesday. Two sides should be complete. The value of two sides based on the original budget is $200. Our Earned Value is a measure of how much work is complete. Remember we are using the 0/100 rule. The status report states that one side is complete. Therefore, the Earned Value is $100 as that is the value of one side from the original budget.
The Actual Cost is a measure or how much money we have spent for the work complete. The status report states that we have spent $400 for the work that is complete. Therefore, the Actual Cost is $400. We often plot the four Earned Value critical terms on the XY bar chart. All Earned Value equations and calculations are based on these four terms. Here, the blue line represents our Planned Value.
This is a measure of how much work should be complete. The top of the blue line is the Budget at Completion, the BAC. This is the total budget for the project. The red line represents the Earned Value, the EV. This is a measure of how much work is complete. The green line represents the Actual Cost. This is a measure of how much has been spent for the work that is complete.
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- What is earned value management?
- Who uses EVM?
- Determining budget at completion, planned value, and earned value
- Calculating schedule and cost variance as well as schedule and cost performance index
- Forecasting future costs
- Computing TCPI for project success
- Exploring limitations of EVM<br><br>
- The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.