# Calculating Earned Value: A Guide to Project Budget Management

March 26, 2023

Written by Yemisi Iyilade, Project Management Consultant, Scientist & Innovation Expert.

Calculating earned value is an essential part of project management. It helps project managers to measure the progress of a project and compare it with the planned work and budget. By calculating earned value, project managers can identify any deviations from the plan and take proactive measures to control the project budget.

The process of calculating earned value involves several steps. First, project managers need to quantify the amount of work completed. This involves analyzing the project and determining the percentage of completed work.

Once the percentage of completed work is determined, project managers can use it to calculate the earned value. There are several formulas that project managers need to know to calculate the earned value, including the formula for earned value, planned value, and actual cost.

In this article, we share a guide to important project budget management including earned value. By understanding these formulas, project managers can be proactive in managing and controlling project budgets.

Overall, calculating earned value is a crucial part of project management. It helps project managers to measure the progress of a project and identify any deviations from the plan.

## Understanding Earned Value

### What is Earned Value Management?

Earned Value Management (EVM) is a project management methodology that integrates schedule, costs, and scope to measure project performance. It provides a comprehensive view of the project’s health and progress by comparing actual progress and costs against the planned progress and costs.

EVM is a proactive approach to project management that helps project managers identify potential issues and take corrective actions before they become bigger problems.

### Why is Earned Value Management Important?

EVM is important for several reasons. Firstly, it helps project managers to track the progress of the project and identify potential issues early on. Secondly, it provides a clear and objective way to measure project performance, which is essential for effective communication with stakeholders.

Thirdly, it helps project managers to make data-driven decisions and take corrective actions based on actual project performance, rather than relying on assumptions or guesses.

### How is Earned Value Calculated?

EVM is calculated using several formulas that measure the project’s progress and performance. The most important formulas are:

• Planned Value (PV): The authorized budget assigned to scheduled work. It represents the planned cost of the work that is scheduled to be completed at a specific point in time.
• Actual Cost (AC): The actual cost incurred for the work completed to date.
• Earned Value (EV): The value of the work actually completed to date. It represents the budgeted cost of the work that is actually completed at a specific point in time.
• Cost Variance (CV): The difference between the earned value and the actual cost. It represents the amount by which the project is over or under budget.
• Schedule Variance (SV): The difference between the earned value and the planned value. It represents the amount by which the project is ahead or behind schedule.
• Cost Performance Index (CPI): The ratio of earned value to actual cost. It represents the project’s cost efficiency.
• Schedule Performance Index (SPI): The ratio of earned value to planned value. It represents the project’s schedule efficiency.
• Estimate at Completion (EAC): The estimated total cost of the project at completion, based on the current project performance.

To calculate these formulas, project managers need to have accurate and up-to-date information on the project’s progress and costs. This information can be obtained from project management software, timesheets, invoices, and other sources.

## The Earned Value Calculation Process

### Step 1: Determine the Planned Value (PV)

The planned value (PV) is the amount of work that should have been completed at a given point in time, according to the project schedule. The planned value is also called the budgeted cost of work scheduled (BCWS). To calculate the planned value, multiply the total project budget by the percentage of the project that should have been completed at the given point in time.

### Step 2: Determine the Actual Cost (AC)

The actual cost (AC) is the total cost incurred to complete the work performed to date. The actual cost is also called the actual cost of work performed (ACWP). To calculate the actual cost, add up all the costs associated with the work performed to date.

### Step 3: Determine the Earned Value (EV)

The earned value (EV) is the value of the work that has actually been completed to date. The earned value is also called the budgeted cost of work performed (BCWP). To calculate the earned value, multiply the total project budget by the percentage of the project that has been completed to date.

### Step 4: Calculate the Schedule Variance (SV)

The schedule variance (SV) measures the difference between the planned value and the earned value. A positive SV indicates that the project is ahead of schedule, while a negative SV indicates that the project is behind schedule. To calculate the schedule variance, subtract the planned value from the earned value.

### Step 5: Calculate the Cost Variance (CV)

The cost variance (CV) measures the difference between the earned value and the actual cost. A positive CV indicates that the project is under budget, while a negative CV indicates that the project is over budget. To calculate the cost variance, subtract the actual cost from the earned value.

### Step 6: Calculate the Schedule Performance Index (SPI)

The schedule performance index (SPI) measures the efficiency of the project schedule. A SPI greater than 1 indicates that the project is ahead of schedule, while a SPI less than 1 indicates that the project is behind schedule. To calculate the schedule performance index, divide the earned value by the planned value.

### Step 7: Calculate the Cost Performance Index (CPI)

The cost performance index (CPI) measures the efficiency of the project budget. A CPI greater than 1 indicates that the project is under budget, while a CPI less than 1 indicates that the project is over budget. To calculate the cost performance index, divide the earned value by the actual cost.

## 3 Main Formulas for Proactive Budget Management

### Estimate at Completion (EAC)

One of the most important formulas for proactive budget management is the Estimate at Completion (EAC) formula. This formula helps project managers estimate the total cost of the project at completion. There are three ways to calculate EAC:

• Estimate to Complete (ETC) + Actual Cost (AC)
• Budget at Completion (BAC) / Cost Performance Index (CPI)
• Actual Cost (AC) + (BAC – Earned Value (EV)) / Cost Performance Index (CPI)

Using the EAC formula, project managers can identify potential cost overruns and take corrective actions to bring the project back on track.

### Variance at Completion (VAC)

Variance at Completion (VAC) is another important formula for proactive budget management. It helps project managers estimate the difference between the budgeted cost of the project and the actual cost at completion. The formula for VAC is:

• Budget at Completion (BAC) – Estimate at Completion (EAC)

If the VAC is positive, it means the project is under budget, while a negative VAC indicates the project is over budget. Project managers can use VAC to predict the final cost of the project and take corrective actions to prevent cost overruns.

### To-Complete Performance Index (TCPI)

The To-Complete Performance Index (TCPI) formula helps project managers estimate the cost performance required to complete the project within the budget. The formula for TCPI is:

• (Budget at Completion (BAC) – Earned Value (EV)) / (Budget at Completion (BAC) – Actual Cost (AC))

If the TCPI is greater than 1, it means the project needs to perform better than planned to complete within the budget. If the TCPI is less than 1, it means the project can complete within the budget even if it performs worse than planned. Project managers can use TCPI to adjust the project plan and take corrective actions to ensure the project completes within the budget.

## Final Thoughts

In conclusion, project managers must use key metrics, such as Schedule Variance (SV), Cost Variance (CV), Schedule Performance Index (SPI) and Cost Performance Index (CPI) to measure the performance of a project.

Additionally, important formulas for proactive budget management, such as Estimate at Completion (EAC), Variance at Completion (VAC), and To-Complete Performance Index (TCPI) must be used to help project managers accurately estimate the total cost of the project and ensure it is completed within budget.

By closely tracking essential metrics, employing important formulas and making timely adjustments, project managers can expertly manage a project’s budget. With this data-driven approach to management, the entire team will benefit from accurate budgeting that lasts.

This will lead to successful projects with accurate cost estimations and timely completion. Thus, proactive budget management is an essential part of successful project management.

By understanding the formulas involved in calculating earned value, project managers can take proactive measures to manage and control project budgets, ensuring that projects are completed on time and within budget.

Yemisi Iyilade is a Project Management Professional, PMP and Maxwell Leadership Coach and Trainer. She has worked in the environmental, nonprofit, and technology industries, developing new products and services, providing leadership, and facilitating meaningful engagement with stakeholders. Yemisi is driven by a mission to empower young people, women, and immigrant professionals through content delivery, coaching and training. She believes that if given the right tools and tactics, any motivated person can gain the awareness and grit needed to create better opportunities.

Yemisi