- Lets understand the earned value concept by taking an simple example with lower values for efficient understanding and easy elaboration.
P.V. = Planned Value
A.C. = Actual Cost
B.A.C. = Budget At Completion
E.V. = Earned Value
C.V. = Cost Variance
S.V. = Schedule Variance
C.P.I. = Cost Performance Index
S.P.I = Schedule Performance Index
- Suppose I want to complete with 3 jobs and I plan Rs.10 for each job. So this goes as —
- Now I have planned to spend Rs.30 i.e. (Budget At Completion, BAC). But in actual, I have spend @Rs.25 i.e. Actual Cost, AC.
Job P.V. A.C.
A Rs.10 Rs.15
B Rs.10 Rs.10
C Rs.10 Rs.00
- If we look at the surface level, we would think that the cost-wise we are not performing good, but to know exactly how are we performing cost-wise and schedule-wise, we need to get the Earned Value.
- To get the earned value, we would require the actual % progress as follows —
- We know that we have spend Rs.25 for the Jobs A & B, but we do not know how much work we have performed. Therefore, we cannot compare the planned value & the actual cost in deciding the performance.
Job P.V. A.C. % Progress
A Rs.10 Rs.15 100%
B Rs.10 Rs.10 50%
C Rs.10 Rs.00 0%
- Now consider Job A, you have planned Rs.10 but the actual cost incurred to complete the work, costs you Rs.15 as whole.
- So though you have spend Rs.15 actually, but you are budgeted to spend only Rs.10. Thus the earned value is the value that you have budgeted to spend and not the actual cost.
- Thus, EV = % Progress x P.V.
Job P.V. A.C. % Progress E.V.
A Rs.10 Rs.15 100% Rs.10
B Rs.10 Rs.10 50% Rs.5
C Rs.10 Rs.00 0% Rs.0
TOTAL Rs.30 Rs.25 Rs.15
- In Summary, we get
BAC = Rs.30
(P.V) = Rs.20 ……….This is the planned value as of today for 2 jobs because we haven’t yet begin with 3rd Job.
A.C. = Rs.25
E.V. = Rs.15
- So now, we can conclude that; we planned to spend Rs.20 for which we are supposed to complete the two jobs, but we have actually spend Rs.25.
- But what is the actual work we completed and how much its worth? So the worth of work we completed is Rs.15.
Now we will consider what is the Cost Variance, CV & Schedule Variance, SV —
- Cost Variance, CV = Earned Value – AC = 15 – 25 = – Rs.10
i.e. (we have spend Rs.10 extra for the job)
- Cost Performance Index, CPI = EV / AC = 15 / 25 = 0.6
CPI shows the efficiency of the utilization of the resources on the project.
- Schedule Variance, SV = Earned Value – PV = 15 – 20 = – Rs.5
- Schedule Performance Index, SPI = EV / PV = 15 / 20 = 0.75
Thus we have,
CPI = 0.6
SPI = 0.75
Anything less than 1 means BAD. It indicates that you are Over-budget as well as Behind the Schedule.
Hope the concept was pretty understood by the mere example. Have a nice day!