Earned Value

This is one part of the Control phase that is unique to projects. It is also questioned on the examination, so it is a good idea to know it well. Having taught this concept for many classes, I find that if you can get the general concept, it is fairly easy to understand and use the various formulas for earned value. Understand that this concept is project-oriented and that if you discuss it with the accounting department at your firm, they will often look at you with glazed eyes, or even worse, with a slightly demeaning smile. Earned value is not taught in standard accounting, and the concepts, although simple, are not a part of the vocabulary of an accountant. Let us go gently into the good night that is earned value.

When you do standard corporate accounting, for the most part you look at one year at a time. This becomes the grade card against which the company is measured and the standard by which the managers are analyzed and compensated. When you do a project that takes a six-month period or a fourteen-month period, the way you analyze and control the information about the project changes.

Earned value analysis is simply the analysis of what has actually been done so far on the project. Think of a six-month project. You are now at the end of the third month. By looking at the plan, you will see how far along you should be at this point. You will also see how much money you were supposed to have spent by the end of the third month.

All you do is measure what was in the plan against what you actually have done at the end of the third month. If you were scheduled to be 50% done with all your tasks by the end of the third month and you find that you are only 45% done, then you are behind the original schedule. If you were to have spent 55% of the funds for the project by the end of the third month and you have only spent 50% of the funds, you are under the budget at this time. There are formulas to explain these calculations.

Two sets of acronyms are used on the exam. The old ones were used through the 1996 edition of the PMBOK, and the new ones came out with the 2000 edition of the same book and are used in the 3^rd edition. Most people, myself included, think that the new acronyms are much easier to use. (On the exam, both sets are shown at the same time.) They are easy to comprehend. Here are the acronyms.

EV=Earned Value. This is the value of the work on the project that is actually completed. The old acronym was BCWP, or Budgeted Cost of Work Performed. EV and BCWP mean the same thing.

PV=The new abbreviation (PMBOK 2000), which stands for Planned Value. This means that PV equals what you have in your plan for the project. It was your baseline and also your best estimate of what resources would be needed and used for the activities in a given time frame.

PV is the new abbreviation. The old one (PMBOK 1996) for the concept was BCWS or Budgeted Cost of Work Scheduled. PV and BCWS are the same thing with different letters.

OK so far? Here are the new and old acronyms:

The new acronym is EV. The old acronym is BCWP. These are the same concept and mean the same thing.

The new acronym is PV. The old acronym is BCWS. These are the same concept and mean the same thing.

AC=Actual Cost. This is the new abbreviation, which is the amount actually spent during the period of the project you want to analyze. Let's say that you have an eight-month project and that you have finished the fourth month of that project. You need to take the amount of money that you have actually spent and measure that against what you thought you were going to spend in your plan. If you have spent less than you planned, you are under budget. If you have spent more than you planned, you are over budget.

The old designation for actual cost was the four-letter acronym ACWP: Actual Cost of Work Performed. AC and ACWP mean the same thing.

The new acronym is AC. The old acronym is ACWP. These are the same concept and mean the same thing.

Here are several questions on the acronyms.

Q.	The acronym for the value of the work already completed on the project is:
		A.	PV
		B.	AC
		C.	EV
		D.	AM

The answer is C, EV. Learn this definition for Earned Value.

Q.	EV, or Earned Value, is the same as:
		A.	ALCS
		B.	BCWP
		C.	NLCS
		D.	ACWP

The answer is B, BCWP. This stands for Budgeted Cost of Work Performed.

Q.	PV is the same as:
		A.	BCWS
		B.	BCWP
		C.	IPRG
		D.	ALCS

The answer is A. This stands for Budgeted Cost of Work Scheduled.

Here come the formulas. Memorize these; you will be using them for the exam. There are also a few other acronyms you need to know.

CV=Cost Variance. This is your measurement of how you are doing compared to the expected cost. The actual amount in dollars that your project varies from what you planned is represented by the formula EV-AC. So you have the earned value and the actual cost. You subtract the Actual Cost from the Earned Value, and you will have the dollar variance.

Let's do one to find the Cost Variance of your project.

Q.	If your AC = $25,000 and your EV = $20,000, how are you doing?
		A.	Over Budget $5,000
		B.	No variance
		C.	Under Budget $5,000
		D.	You are in deep yogurt

A is the correct answer. Fill in the numbers in the formula, EV-AC. $20,000 $25,000 = $5,000. If the number is negative, you are over budget.

Here is another.

Q.	If your AC = $3,000 and your EV = $3,400, how are you doing?
		A.	$400
		B.	No variance
		C.	+$400
		D.	Here's that yogurt again

The answer is C. Fill in the numbers in the formula. $3,400 $3,000 = $400. This means that you planned to spend $3,400 and only spent $3,000, so you are under budget.

CPI=Cost Performance Index. This is used as a measurement to determine the cost efficiency of your project. The formula is simple: EV/AC. You divide the Earned Value by the Actual Cost. The final answer comes out as a decimal.

Let's do one.

Q.	Your Earned Value is $10,000 and your Actual Cost is $8,000. That means that your CPI is:
		A.	Incomprehensible
		B.	.80
		C.	1.25
		D.	80

The answer is C. Fill in the numbers. $10,000 is divided by $8,000. This gives us 1.25 as your Cost Performance Index. If the CPI is above the number 1, as it is in this case, this means that you are doing better than the planned budget.

Here is another example.

Q.	Your Earned Value is $10,000 and your Actual Cost is $12,000. What is your CPI?
		A.	1.20
		B.	2.0
		C.	.80
		D.	.83

The answer is D. Fill in the numbers. $10,000 is divided by $12,000. This gives you .83 as your Cost Performance Index. If the CPI is lower than one, as it is in this case, it means that you are over budget at this time.

SPI=Schedule Performance Index. This is sometimes used with the CPI. The formula for this is simple: SPI=EV/PV. Here is an example.

Q.	Your EV = $8,000 and your PV = $6,000. What is your SPI?
		A.	1.25
		B.	.66
		C.	.80
		D.	1.33

The answer is D. Fill in the numbers. EV = 8,000, PV = 6,000. 8,000/6,000 = 1.33.

Here is another example.

Q.	Your EV = $500 and your PV = $600. What is your SPI?
		A.	.83
		B.	1.25
		C.	.66
		D.	1.20

The answer is A. Let's fill in the numbers. EV=500, PV=600. 500/600=.83.

The only way to learn these is to memorize them. They aren't difficult to do from a math standpoint, and the only part that takes some time is learning the various formulas. These are examples of formulas that you would want to write down immediately at the beginning of the exam. You can't take them into the exam with you, but you can write them down immediately upon starting the exam. This is a best practice for passing the exam.