Using Planned Value, Earned Value, and Actual Cost to Manage Projects Effectively

Understanding and properly utilizing planned value, earned value, and actual cost metrics is crucial for successful project management. These concepts allow project managers to track project performance and progress to ensure the project stays on time and within budget. This article will provide an in-depth look at planned value, earned value, and actual cost, explaining what they are, how to calculate them, and how they can be used together to manage projects effectively.

What is Planned Value?

Planned value (PV), also referred to as budgeted cost of work scheduled (BCWS), is the authorized budget allocated to scheduled work. It represents the cost of project work that should have been completed by a certain point in time as outlined in the project plan.

Planned value is calculated by determining the budgeted cost or resources assigned to the work scheduled according to the project's baseline plan, usually divided across the project timeline. The total planned value for the project is referred to as the budget at completion (BAC).

Some key things to know about planned value:

• It is calculated based on the project budget and schedule

• It represents how much work should be completed by a certain date

• It is a reflection of the project plan, not actual work performed

• It provides a baseline to measure against actual work completed

What is Earned Value?

Earned value (EV) represents the value of work actually completed and the budget actually spent on that completed work. It allows project managers to determine if the project is on track regarding both cost and schedule.

Earned value is calculated by multiplying the completed percentage of each project task by its planned value. The sums of all the earned values provide the total earned value to date.

Some important points about earned value:

• It measures the actual work completed, not just the costs incurred

• It is expressed in dollar amounts to enable comparison with planned value

• It indicates whether the project is ahead, on track, or behind schedule

• It helps assess cost and schedule performance

What is Actual Cost?

Actual cost (AC) represents the actual cost incurred and money spent completing project work. It reflects the real costs of resources, materials, labor, etc. used to complete project activities.

Actual costs are calculated by totaling the real expenditures and charges for work performed within a certain period. They can include direct costs like employee time as well as indirect costs like office supplies or utilities.

Key aspects of actual cost:

• It reflects the real money spent, not the budgeted costs

• It is a historical measure, while PV and EV are predictive

• It may differ significantly from the planned or earned values

• It is needed to calculate cost variance

How Are PV, EV, and AC Used Together?

While each metric provides useful insights individually, their full power lies in analyzing them together. By comparing planned value, earned value, and actual cost, project managers gain important indicators of project performance and forecasts.

Some key variances and indices calculated from PV, EV, and AC include:

• Schedule Variance (SV) - EV minus PV, indicates if ahead or behind schedule

• Cost Variance (CV) - EV minus AC, indicates if over or under budget

• Schedule Performance Index (SPI) - EV divided by PV, predicts whether project will finish on time

• Cost Performance Index (CPI) - EV divided by AC, predicts whether project will finish within budget

By regularly monitoring and analyzing PV, EV, and AC, project managers can identify schedule delays, cost overruns, and overall project challenges early. This enables them to take corrective actions to get the project back on track.

How to Calculate Planned Value

Calculating planned value requires information from the project plan regarding the budget and schedule. Follow these steps:

1. Identify all the project tasks or work packages in the work breakdown structure (WBS).

2. Determine the planned cost of each task based on the resources and budget assigned.

3. Sum the costs of all tasks to determine the total budget at completion (BAC).

4. Based on the project schedule, determine how much of each task should be complete by the status date.

5. Multiply the planned percentage complete by the task budget to determine the planned value.

6. Sum the planned values for all tasks to determine the total planned value for the status date.

How to Calculate Earned Value

To calculate earned value, information on % complete for each task and the original task budgets are needed. Follow these steps:

1. For each task in the WBS, assess the % complete as of the status date.

2. Multiply the % complete by the budget of the task to determine the earned value.

3. Sum the earned values across all tasks to determine the total earned value to date.

The earned value reflects how much of the budget has actually been “earned” by work performed on each task. Comparing it to the planned value shows whether more or less work was expected.

How to Calculate Actual Cost

Calculating actual cost involves totaling all the real expenditures for project work within the designated period. Follow these steps:

1. Determine all direct costs incurred for project work, such as labor hours billed.

2. Determine all indirect costs incurred, like supplies, overhead, etc.

3. Sum the direct and indirect costs.

4. Verify the total against accounting records and expenditures.

5. The result is the actual cost for the period.

Actual costs provide an unequivocal measure of how much was truly spent on the project work performed.

How to Calculate and Interpret Variances

By comparing planned, earned, and actual values, variances that indicate project performance are calculated:

Schedule Variance (SV) 

SV = Earned Value (EV) - Planned Value (PV)

A positive SV indicates the project is ahead of schedule. A negative SV indicates it is behind.

Cost Variance (CV)

CV = Earned Value (EV) - Actual Cost (AC) 

A positive CV means the project is under budget. A negative CV indicates it is over budget.

Schedule Performance Index (SPI)

SPI = Earned Value (EV) / Planned Value (PV)

An SPI value less than 1 indicates the project is behind schedule. Greater than 1 indicates it is ahead of schedule.

Cost Performance Index (CPI)

CPI = Earned Value (EV) / Actual Cost (AC)

A CPI value less than 1 indicates the project is over budget. Greater than 1 indicates it is under budget.

Analyzing variances enables project managers to identify and address issues before they escalate. For example, a large, negative schedule variance would signal the need to implement get-well actions to catch up.

Using Earned Value Data to Forecast Project Performance

In addition to monitoring current project status, earned value data can be used to forecast final project duration and costs. This is done using the schedule and cost performance indices:

Estimate at Completion (EAC)

EAC = Actual Cost (AC) + [(Budget at Completion (BAC) – Earned Value (EV)) / Cost Performance Index (CPI)]

The EACprojects the expected total cost of completing the remaining project work. Comparing it to the BAC shows the likely cost variance at completion.

Estimate to Complete (ETC) 

ETC = Earned Value (EV) – Actual Cost (AC)

ETC projects how much more will be spent to complete the remaining project work.

Estimate at Completion (EAC)

EAC = Actual Cost (AC) + Estimate to Complete (ETC)

Another way to calculate the projected total cost.

Time Estimate at Completion 

EAC = Actual Duration + [(Total Planned Duration – Earned Duration) / Schedule Performance Index (SPI)]

Projects the expected total project duration based on schedule performance.

Implementing Earned Value Management

To effectively use earned value management concepts, projects must provide certain information like well-defined work breakdown structures, task budgets, and status reporting on % complete. Implementing earned value management involves:

• Developing detailed project plans with tasks, budgets, and timelines

• Incorporating EV metrics into status reports and dashboards

• Training team members on earned value management

• Holding regular performance review meetings on EV metrics

• Taking corrective actions when variances exceed thresholds

Many project management software tools include earned value management capabilities or integrations. This makes gathering the needed data and calculating metrics easier.

Properly implementing earned value management and consistently reviewing performance indicators enables project managers to minimize surprises and keep projects on track. But it requires commitment, discipline, and coordination across the project team.

Key Takeaways and Tips

• Planned value represents how much work should be done by a certain point. It is the budgeted costs.

• Earned value measures how much work has actually been completed in dollar amounts.

• Actual costs are the real amounts spent on performing project work.

• Variances between PV, EV, and AC provide indicators of project performance.

• Earned value data enables forecasting estimates at completion for project duration and costs. 

• Effective use of earned value management requires detailed plans, reporting, training, and governance.

• Implement EV metrics into dashboards, reports, and meetings to enable data-driven management.

• Take quick corrective action when variances exceed expected thresholds.

• Earned value management provides objective measures of project progress to minimize surprises.

Understanding and leveraging earned value management metrics and analysis is a key project management skill. Proper use of planned value, earned value, and actual cost allows project managers to measure whether projects are on track and catch issues early. This ultimately leads to more successful projects delivered on time and within budget.