Earned Value Management - explaining the formulae

Start with the 3 corner stones of EVM; there's no need to "understand" what they stand for, at least for the time being.

AC = Actual Cost

EV = Earned Value

PV = Planned Value

Unfortunately, as PMI tends to use old EVM nomenclature, we need the old 3 terms too:

ACWP = Actual Cost of Work Performed = obviously the Actual Cost = AC

BCWP = Budgeted Cost of Work Performed = expected value of work performed = EV

BCWS = Budgeted Cost of Work Scheduled = expected value of work planned = PV

Now that the old and new terms are explained and understood it's time to tackle the formulae.

Remember, EVM is used for measuring and monitoring performance, and the best way to measure performance is to compare it against another value and determine the differences, ie: Variances and Ratios, ie: Cost Variance (CV), Schedule Variance (SV), Cost Performance Index (CPI) and Schedule Performance Index (SPI).

By the way, variances are good only if they're positive, and ratios are good only when they're greater than 1.

Variances: To enforce the effect of AC and EV, they should be in a position where they influence a positive result; ie: smaller AC and larger EV. Presto!

CV = difference between cost incurred (AC) and value expected (EV)

      = EV - AC (smaller AC => positive result, larger AC => negative)

      = BCWP - ACWP

SV = difference between value expected and value planned

      = difference between Earned Value (EV) and Planned Value (PV)

      = EV - PV (larger EV => positive result; smaller EV => negative)

      = BCWP - BCWS

Performance Ratios: Still following the "smaller AC and larger EV" and using them in a ratio to yield greater than 1 value, gives:

CPI = ratio between cost incurred (AC) and value expected (EV)

        = EV/AC

        = BCWP/ACWP

SPI = ratio between value earned (EV) and value expected (PV)

        = EV/PV

        = BCWP/BCWS

Yielding to Project managers' need for putting everything into percentages, the Variance% needs the variance to be represented as a percentage (%) of value that is earned (EV).

CV% = CV/EV * 100

SV% = SV/EV * 100

All the above values are part of the "monitoring: performed using EVM.

"Controlling" would mean changing and forecasting new values, ie: new "Estimates".

Estimate To Complete (ETC) = estimate of how much more expenditure is needed from this point. If all has gone well it would be the difference between budgeted cost (at completion, BAC) and actual cost (AC).

Estimate At Completion (EAC) = estimate of total cost that the project would eventually incur. In an ideal world this would be the same as original planned budget (BAC).

But, all doesn't go always well, so there are some more terms and formulae:

BAC = The planned budget of the project, obviously a known value. Hence no need for a formula

EAC = BAC; if original budgeting holds good; here CPI = 1, CV = 0

(1)    = BAC/CPI                      ; factoring in CPI

(2)    = BAC/CPI - CV               ; factoring in CV

(2)    = BAC/CPI - EV + AC        ; replacing the formula for CV

(3)    = BAC/CPI - EV/CPI + AC ; if present performance is not 

                                                expected to continue CPI affects EV

(3)     = (BAC - EV)/CPI + AC

(4)     = ETC + AC                   ; older budgeting totally a mess!

ETC = BAC - AC                    ; if all is well, which of course it isn't

        = EAC - AC                   ; so factor in new estimates, ie: EAC

And the final measure of whether the entire project is over or under budget, ie: Variance At Completion (VAC) is the difference between original budget (BAC) and revised estimate (EAC)

VAC = BAC - EAC