What is earned value? (Key concepts and benefits explained)

By Indeed Editorial Team

Published 7 June 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Earned value is an important technique businesses use to measure the performance of specific projects and evaluate their progress. It allows project managers and senior executives to identify potential issues before they occur. Earned value management is also a key concept businesses use to identify which projects are successful and which ones are likely to fail. In this article, we answer the question 'What is earned value?' and explain its importance.

What is earned value?

Knowing the answer to the question 'What is earned value?' and its overall importance is necessary for project managers to derive value from the different tasks. American engineers Lillian and Frank Gilbreth put forward the concept of earned value management. It is a vital technique that project managers now use to manage schedules and budgets and to meet the objectives of the project. The technique helps managers identify problems and take corrective action to avoid major financial losses or unforeseen delays.

Earned value management focuses on the performance of a project and measures it against the original scope and objectives the management plan outlines. Project managers are responsible for periodically comparing the current performance of the project with the original goals set at the start. This allows them to get a more accurate understanding of the project's performance and lets them take corrective action if necessary.

Related: Project management skills and how to improve them

The basic principle of earned value management

Earned value management offers more comprehensive insights into project performance than conventional tracking options. Earned value focuses on the added value to a project, which helps managers review information with greater transparency and get a better understanding of the different project activities and the overall value each activity generates. This helps managers identify whether project timelines are on track and whether changes are necessary.

The core principle of earned value management is that the amount of budget allocated to a task is equal to the value of the task itself. Project managers decide on a planned value, which is the approved budget, at the start of a project. They track the earned value, which is the approved budget for the completed work on a specific date and then compare it with the actual expenditure for the completion of the work.

Related: 13 milestones in project management (with definitions)

Important indicators for earned value management

Here are several important indicators for calculating earned value:

Schedule variance

The schedule variance indicates the difference between the current or actual progress of the project and the planned progress. To calculate schedule variance, project managers simply subtract earned value from planned value. This indicator helps project managers understand whether the project is on schedule or if they might miss a deadline. This is a very simple metric that project managers calculate regularly to determine factors that cause delays and then quantify their impact.

Example: Let's assume you're four months into a project with a six-month deadline. If the project is only 50% complete, that means your earned value is 3 months (50% of six months). The planned value is four months (actual progress). If you subtract earned value from the planned value (3-4 = 1), the value is negative. This means the project is not on schedule.

Schedule performance index (SPI)

The schedule performance index is a common indicator that project managers use to gain more insight than the schedule variance about the performance of a project. The schedule performance index adds values to specific numbers, allowing project managers to compare these values with other tasks or projects for a better understanding of the project's performance. To calculate this Index, project managers simply divide the earned value from the planned value. If the answer is above 1.00, it indicates the project is ahead of schedule. It's below 1.00, the project is lagging behind.

Example: Let's assume you're four months into a project with a deadline of six months. The earned value (calculated above) is 3 months, and the planned value (calculated above) is four months. To calculate SPI, simply divide EV/PV. In this case, 3/4 = 0.75, which indicates that the project is not on schedule.

Related: How to calculate SPI in 4 steps (with formula and example)

Why is it important to calculate the schedule performance index?

The schedule performance index is a more comprehensive KPI since it doesn't just help project managers identify the immediate problems that are causing delays, but also allow them to understand the impact these problems can have on the project's expected date of completion. With earned value, project managers can calculate the SPI for specific tasks and the project too. This provides project managers with a better understanding of how individual late tasks can affect the milestones and deadlines of the overall project.

Related: KPIs for management: definition, importance and examples

Cost variance

The cost variance is similar to the schedule variance, but it focuses on the difference in the planned costs of the project and the actual costs incurred to date. To calculate the cost variance, project managers simply subtract the earned value from the actual costs. This helps project managers understand whether the project is likely to go over budget or whether specific tasks require more money than the original estimates.

Example: Let's assume the budget for a project is set at £50,000 and the project is 70% complete. This means that the earned value for the project is currently £35,000. But, if the company spent £40,000 to reach 70% completion, the cost variance is -£5,000. This indicates that the project is over budget as the value is negative. The project manager can take action to trim costs for future tasks to mitigate the risks of budget overruns.

Cost performance index (CPI)

The cost performance index is similar to the schedule performance index, offering greater transparency to project managers about the project's finances. To calculate the cost performance index, project managers divide the earned value of the project with its actual costs. If the CPI is over 1.00, the project is under budget, but if the value exceeds 1.00, the company is overspending on the project.

Example: Let's assume the budget for a project is £10,000, and the project is 50% complete. This means the earned value for the project is £5,000. But if the company spent £7,000 to reach 50% completion (the actual costs incurred), the CPI is 0.71 (5,000/7,000). This indicates the project is over budget, and if the project manager fails to take action, the project may cost more than the original forecast.

Benefits of calculating earned value management

There are several benefits of calculating earned value:

Track and measure project progress

Earned value helps project managers understand the overall progress of the project at any particular time. Earned value tracks both the schedules and the costs. Instead of simply focusing on percentages, earned value management offers an objective framework for tracking and measuring the progress of different projects. Managers can also calculate the progress of specific tasks or break down projects into further milestones if they want granular insights.

Create accurate forecasts

Earned value management also helps businesses create more accurate forecasts about future projects. This helps mitigate the chances of budget overruns and ensures reasonable deadlines are set for all future projects. This is very important for high-risk programmes with strict deadlines. By evaluating past performance and taking performance estimations into account, project managers can create more accurate forecasts for similar projects in the future.

This helps stakeholders accurately forecast and allocate resources before a project begins. Companies benefit from improved stability and consistent growth while balancing project costs and creating more accurate forecasts. They also get a better understanding of how the cost performance index stabilises during a project.

Nurtures good project management

The earned value management framework factors risk, schedules, costs and the overall scope of the project. Project managers balance all of these and create forecasts that are generally more accurate and encompass all factors that can impact the project. By integrating different disciplines into their original planning, project managers can better prepare for any contingencies or roadblocks. They evaluate risk and uncertainty and divide milestones accordingly to ensure that they can complete the project as per schedule.

This eventually creates the foundation for better management discipline and allows individual team members to understand how their work plays a key role in the success of different projects. By factoring in the overall impact of specific tasks and assigning percentage values to them, project managers can easily explain to each team member their value to a specific project. This also helps team members and project managers better understand major schedule and cost risks.

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