PMI RMP – MATH FORMULA GUIDE part 3

5. EARNED VALUE ANALYSIS

Hi, welcome back again to one of the most important techniques in project management, the earned value measurement, where the majority of the exam math questions come from the earned value techniques. So the Earned value analysis is an analysis technique that compares the actual schedule and cost to the performance measurement baseline. The performance measurement baseline which is part of the project management plan, and it integrates the scope, cost and schedule baselines. So the core value of the value analysis is to keep tracking and comparing the actual performance regarding schedule, scope and cost to the performance measurement baselines.

The end value integrates cost, schedule and scope or work done and it can be used to forecast future performance and project composing dates and costs. It is used as a part of the controlling project costs performed in monitor and control processing group to assess the schedule and cost performance of a project. With Earned Value Management, the project manager will know exactly whether the project is ahead or behind the schedule, under or over the planned budget. So as a result of performing the Earned value analysis, as the project manager at any point of time during the project life, you can be able to determine if your project is ahead or behind the schedule or if your project is under or over budget.

Earned Value Management compares what you have received or produced to what you have spent. This is why it’s critical. This is the most important part of the earn value measurement. It compares what you have received or produced in your project to what you have actually spent. And this is what matters for the owners or the customers or the sponsors. The Earned value measurement or management continuously monitors the planned value, earn value and actual costs expended to produce the work of the project. So these are the three key terms of the earn value measurement, the plan value or PV, earn value or EV, and the actual costs or AC. Now to perform these calculations, you need first together the three measurements mentioned earlier PV, AC and EV.

The plan value or the PV is the cost of work that has been authorized and budgeted for a schedule, activity or WPS component during a given time period or phase. Total planned value of the project is known as the budget at completion at a certain point of time in your project. What’s the cost of work that has been budgeted for? This is the planned value, what we planned before the project execution starts. Now what’s the earned value? It’s the actual the value of the work completed to date as it compares to the authorized budgeted amount assigned to the wall component. EV is typically expressed as a percentage of the work completed compared to the budget.

So the PV or the planned value is the value of work planned to be done at a certain point of time, while the earned value is the actual value for them at a certain point of time, the actual cost or the AC is the actual cost of completing the work component in a given time period. Actual costs might include direct and indirect costs, but correspond to what was budgeted for this activity. Now in this graph the three terms will be more clear. Here is the original plan of your project today. This is the plan value. It’s the value of work to be done in this period of time. And the plan value or the PV is well known for us before the start of the project. It’s a plan value.

At the end of the project, the total plan value equals the BAC or the budget of composition. Here is the actual spending till today, what we have actually spent on the project. So you will go to your finance department or accounting department and ask them what was actually spent on the project till the moment the work progress here as of today, what is the value of the work actually done in this period of time? These are the three key dimensions for the earned value measurement. So let’s start with the variances. What’s the variance? It’s the difference between planned and actually we planned for something and what happened. Actually the difference between these values is the variance.

The target value of the variance is zero. Positive means good, negative means bad for the project. The variances are the cost variance and the scheduled variance. CV or the cost variance equals the earned value minus the actual cost EV minus AC, while the schedule variance or SV equals EV minus PV or the earned value minus planned value. Now, if the cost variance CV result is positive, the project is within or under budget. If the cost values of CV result is negative, then the project is above budget and you should take an action for this. If the schedule values of the SV is positive, project is ahead of schedule. If the schedule values SV is negative, then the project is behind the schedule.

So positive is good for your project, negative is bad for your project. As an example, refer to the following information in order to determine the earned value of your project given the actual cost AC, the planned value or the PV and the cost variance, how to find out the EV of your project by applying the cost variance formula CV equals EV minus AC. CV is given in the question, AC also is given in the question. So by applying the numbers minus $10,000 equals EV -120 so the earnings value of pure project is $110,000 a negative cost variance means that the pure project is over the planned budget. Now, what are the indexes? The index is the ratio of plan to actual. So the variance is the difference, while the index is the ratio.

The target value or the ideal value is one. Greater than one is good and less than one is bad. Now the CPI or the cost performance index equals EV divided by AC, while the SPI or the scheduled performance index equals EV divided by PV. Now the performance index’s results. If the CPI is above than one, then your project is under budget. If the CPI is below one, then the project is above budget. If scheduled performance index is above one, your project is ahead of schedule, and if the SPI is below one, then your project is behind the schedule. An example here your team wrote for you the latest earned value report with a CPI of 1. 2, SPI of zero eight, PV of $600,000, and SV or schedule variance with minus $120,000.

Cost variance is missing from the report. What’s the project? CV? So CPI, SPI, PV and SV are all given. We want to find out the CV or the cost variance. What’s the cost variance formula? It’s EV minus AC. EV and AC are not given in the question, but we can find out the EV value from the scheduled variance formula. SV equals EV minus PV. SV is given. PV as well is given, so EV equals $480,000, while the CPI equals EV divided by AC. CPI is given, EV is given, so we can find out actual cost by returning back to the formula. CV equals EV minus AC. The cost variance $80,000. Now, the most critical part of the earned value analysis is the forecasting majority of the earned value measurement exam questions refer to this topic.

There are many ways to calculate the estimate at completion depending on the assumptions made. You should pay attention to information provided in the question to decide which formula to use. So when it comes to forecasting, we have like seven formulas to memorize for the exam. For the estimate at completion only, there are four formulas what’s the estimate at completion as of today, how much we expect the total project to cost at the end of the project, what’s the expectation of the total project cost, the estimate to complete, or etc. How much more will the project cost variance at completion or Vac as of today? How much over or under budget do we expect to be at the end of the project? Note that the estimate at completion, the estimate to complete, and the various at completion looks forward.

It forecasts future performance based on what has actually occurred in the project. They are all forecasting figures for study purposes, the EAC formula, and the three EAC calculations which I’m going to explain. Now remember that if you monitor the estimate as completion on a regular basis, you will know the project is within the acceptable and what are the formulas you need to understand and memorize for your exam? First of all, the EAC equals the actual cost plus the bottom up estimate to complete, in case all original estimations are not available or are not valid. Now, due to a lot of change requests on the project, a lot of delays.

You will send your project team to find a bottom up estimate to complete, check all the work remaining on the project and perform a bottom up estimate to know the estimate to complete value sum up the estimate to complete value the actual cost till now, we will have the estimate at completion of the project. Now the estimate at completion. Second formula, it uses the actual cost to date and assuming that EPC uses budgeted rate, the estimate to complete is still as per the budgeted rate. EAC equals AC plus BAC minus EV actual cost plus budgeted completion minus the earned value. Assuming that Etc uses budgeted rate.

The third formula EAC, assuming future performance will behave like past performance, it’s the budget at completion divided by the cost performance index and the last formula, when cost performance is negative and scheduled dates must be met, you will follow the formula of actual cost plus BAC minus EV divided by CPI by SPI. These are the formula four formulas of the estimate at completion. You need to check the question carefully to select the proper formula. Now we have one more index here to complete performance index or the Tcpi. It’s the projected cost performance the remaining work of the project must achieve in order to meet the budget accomplishment or the estimate at completion.

It’s calculated by dividing the work that’s remaining by the funds that are remaining. It’s the only index with below one is good, above one is bad. So it’s the cost performance the remaining work of the project must achieve to meet the budgeted cost. Tcpi equals BAC minus earned value divided by BAC minus actual cost. It’s dividing the work that’s remaining by the funds that are remaining. The variance at completion is how much overall under budget will be at the end of the project. Vacance at completion means the budget at completion minus estimate at completion. If the variance is negative, then your project spent more than the budgeted. If it’s positive, it means that your project spent less than the budgeted. This formula need to be memorized also.

The last formula will be the estimate to complete, etc. How much more will the project cost from today? How much more I’m going to pay to finish the project? It can be found out by using the following formula or by reestimating the remaining or performing a bottom up estimate, etc equals EAC minus the actual costs. This is the conclusion of all what I explained. Now the green line here represents the actual cost, while this purple line represents the planned value or the PV. And this yellow line or orange line represents the earned value. This black line here represents our status today. Now for the purple line or the planned value at the end of the project, the total planned value here equals the budget at completion. This is what I mentioned in the definition of the PV. Starting from day one.

The total planned value of the project equals the budget at completion, where the total actual cost at the end of the project equals the estimate at completion. The actual estimate at completion and the difference or the variance between the estimate at completion and the budget at completion at the end of the project equals the dhc, or the variance at completion. The difference today between the earning value and the planning value will have the schedule variance or will result with the schedule variance. While the difference between the green line, the actual cost and the orange line, the earning value, represents the cost variance and the difference between the estimate at completion and the budget at completion will be the amount of the management reserves you needed for your project.

And from today, this green line represents the estimate to complete the project. All the terms I explained of the end value are represented in this graph. Let’s move to solve a few examples. Example number one a project with an end value of $350, actual cost of $280, planned value of $500, and total project budget of $1,000. Assuming that you will spend at the same rate until the project is completed, what’s the project estimate to complete? So EV, AC, PV and the budget at completion or BAC are all given in the question, and the question is asking about the estimate to complete, giving that the assumption that you will spend at the same rate until the project is completed.

The etc formula equals EAC minus AC. AC is $280 given in the question. We need to find out the estimate at completion, and based on the assumption made in the question, EAC equals BAC divided by CPR. We reuse this formula CPI equals the EV divided by AC. Both figures are given in the question, so the CPI is 1. 25, the BAC is $1,000, so the estimate at completion value is $800 and the actual cost is $280. Applying both numbers to this formula, the estimate to complete equals $520. It means that from today till the end of the project, I will need $520 to complete the project scope. Another example here a project with earned value of $350, actual cost of $280, PV or plan value $500, and total project budget or budget accomplishment of $1,000.

Assuming that the remaining work will be influenced by both current host and schedule performance, what’s the project estimate at completion? Now, the assumption made in the question that the remaining order will be influenced by both cost and schedule performance. So I’m going to use the formula EAC equals the actual cost plus BAC minus earned value divided by the cost and schedule performance indexes. You need to find out the CPI and the SPI to plug the numbers into this formula EV divided by AC. Both figures are given EV divided by PV for the SPI. Also both figures are given so the estimate at completion by putting all numbers together will be $1,000 or $1,023. The last example the actual cost of your project is $200,000.

The budget accomplishment is $325,000 and the CV, or the cost variant is -20 $5,000 from this data calculate to complete performance index or Tcpi. Given that senior management did not agree to revise the estimate at completion based on current performance. So what’s the Tcpi formula? It’s BAC minus earned value divided by BAC minus actual cost BAC given in the question earned value is not given the actual cost also is given. So we need to find out the earned value from the cost values formula. CV equals EV minus AC CV is given in the question -20 $5,000 equals EV minus $200,000. So the earnings value equals $175,000. Plugging this number into the formula here you would have the Tcpi of 1. 2.