Earned Value


This topic was discussed in Chapter 4. If you do not need this topic explained again, skip to the next section. However, this time I will use only the new abbreviations without worrying about the old ones. There are still three values for each activity that we will be measuring.

  1. The first value is called the planned value (PV). This is the cost that was estimated for activities during the projectwhat you estimated and planned.

  2. The second value is called actual cost (AC). This is the money amount that was actually spent on activities for the project.

  3. The third value is called the earned value (EV). This is the value of the work that has been completed on the project.

Using these three values in various combinations gives us information about how the work is going compared to how we thought the work would go. Variance management is a standard for project management, and earned value is no exception. There are two variances that we look at: cost and schedule. Cost Variance (CV) is calculated by taking earned value and subtracting actual costs. The formula for this reads CV=EVAC.


Schedule Variance (SV) is calculated by subtracting planned value from earned value. The formula reads SV=EVPV.


Note that in both types of variance, you subtract something from earned value (EV).

Q.

The abbreviation for the portion of the approved cost estimate that is to be spent on tasks during a given measured period is:

 

A.

EV

 

B.

AC

 

C.

PV

 

D.

DC


The answer is C. The two letters stand for "planned value," which means that the estimates you used to put together your cost plan are represented by planned value. At any point in the project, you should be able to calculate how much you planned for the activities to cost up to that time. Planned value is a future value. It is your best estimate of what things will cost in the future.

Q.

The abbreviation for the amount that was budgeted for work to be performed is:

 

A.

EV

 

B.

AC

 

C.

PV

 

D.

DC


The answer is C, planned value.

Q.

The abbreviation for costs actually incurred is:

 

A.

EV

 

B.

AC

 

C.

PV

 

D.

DC


The answer is B. The letters stand for "actual costs," which are the real costs that have been incurred during the project. Your accounting department may give this number to you.

After looking at the two main types of variance information, the next step is to look at two performance indices. These are efficiency indicators that can be used to show how the cost and schedule parts of the project are progressing. As with most of the tools used in performance reporting, the performance indices show performance as a variance from plan. If your costs are exactly what you planned at the beginning of the project, your cost performance index will be 1.0. If your schedule is going exactly as you planned, your schedule performance index will be 1.0.


The cost performance index equals earned value divided by actual costs.

Q.

What is your CPI if EV = 5 and AC = 4?

 

A.

.80

 

B.

1.0

 

C.

1.25

 

D.

2.0


The answer is C. EV = 5, AC = 4, and the formula reads CPI = 5/4, which is 1.25.

Q.

What is your CPI if AC = 10 and EV = 8?

 

A.

.80

 

B.

80

 

C.

1.25

 

D.

2.0


The answer is A. EV = 8, AC = 4, and the formula reads CPI = 8/10, which is .80.

Q.

What is your CPI if EV = 20 and AC = 20?

 

A.

4.0

 

B.

1.0

 

C.

2.0

 

D.

1.25


The answer is B. AC = 20, EV = 20, and the formula reads CPI = 20/20, which is 1.

With this formula, the best possible outcome is 1.0. If your cost performance index is above 1.0, it indicates that you have costs that are less then estimated. Some people think that this is a good thing to do, but a professional project manager knows that any variance from the estimate means that incorrect assumptions were made in the planning. A second factor occurs if you bring a project in under budget where your CPI was above 1.0. Bringing a project in under budget will often mean that your budgets are challenged for each subsequent project. Being as close as you can to budget is the optimum for CPI.


The second performance index is the schedule variance index, or SPI. The SPI equals the earned value divided by the planned value.

Q.

What is your SPI if EV = 8 and PV = 6?

 

A.

1.33

 

B.

.66

 

C.

1.0

 

D.

.75


The answer is A. EV = 8 and PV = 6, and the formula reads SPI=8/6, which is 1.33.

Q.

What is your SPI if PV = 8 and EV = 6?

 

A.

1.0

 

B.

.75

 

C.

1.33

 

D.

2.0


The answer is B. EV = 6 and PV = 8, and the formula reads SPI=6/8, which is .75.

As with the cost performance index, you should be looking for 1.0 as the answer to the formula. Any variance from 1.0 means that you should be looking at what caused the variance to determine whether there is something you can do in the future to bring the project back in line.

This concludes the section on earned value analysis. The concept is simple, and the formulas are simple. One thing to remember for either the variance formulas of the performance formulas in earned value analysis is that the earned value (EV) is always the first number in the formula.

CV=EVAC

SV=EVPV

CPI=EV/AC

SPI=EV/PV

Project closeout is also an output from cost control. In the project closeout, it is helpful if the organization has specific processes to use. If projects are closing or being canceled, it is a good idea to have a standard set of procedures for all projects.

Lessons learned are an important part of analyzing cost performance of a project. As discussed previously, lessons learned should be kept from the beginning of the project and discussed at regular intervals, not only when the project is over. Lessons learned should show why there were variances in the costs of the project from the original plan and how the various actions taken to correct the problems were chosen. The lessons learned for the cost portion of the project are only one part of the larger lessons learned database kept for the entire project.

The majority of the outputs for cost control are updates of some kind. Cost estimates, cost baseline, organizational process assets, and the project management plan are examples of these updates.

You will also have change requests in cost that have occurred as you go through the entire budgeting process. These need to be documented and will be kept throughout the project to show who requested the changes and the outcome of each request.

Any corrective actions done in costs will pertain to adjusting schedule budgets. These corrective actions should be tracked as much as any of the changes done during the project so that the project manager can always look at them and see why they were done.



Passing the PMP Exam. How to Take It and Pass It
Passing the PMP Exam: How to Take It and Pass It: How to Take It and Pass It
ISBN: 0131860070
EAN: 2147483647
Year: 2003
Pages: 167
Authors: Rudd McGary

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