PMGT1865 Chap.16 Earned Value Measurement and Forecasting
Earned Value Measurement and Forecasting
Earned value management is a way of taking the measure of a project, reporting where it stands, and projecting where it will end up from how it has behaved so far. It compares three things: what was planned, which is the baseline, what was achieved, and what was spent. Four quantities carry the whole method. Budget at completion is the total budgeted cost.
Planned value is the authorised budget assigned to an activity or breakdown component, corresponding to the time phased budget baseline. Earned value is the value of completed work expressed in the budget assigned to it, computed as percent complete multiplied by the budget allocated. Actual cost is what was actually incurred. From those come two variances, two indices and a family of forecasts.
Being quantitative, it leaves little scope for wishful reporting or for running a project on impressions, and it acts as an early warning system for delays and overruns. It is also sharply limited, and the list of things a schedule variance does not address is examinable in its own right.
What this chapter covers
- 01
The three comparisons the method rests on, and the four defined quantities
- 02
Earned value priced at budget rather than at actual cost, and why that is the whole idea
- 03
Planned value as the cumulative cost baseline, and what a straight baseline does to the numbers
- 04
Cost variance and schedule variance, both computed from earned value, both negative when unfavourable
- 05
Why schedule variance is expressed in money rather than in time
- 06
Seven things schedule variance does not address, including the critical path
- 07
Cost and schedule performance indices, and why a rate can be projected where a variance cannot
- 08
Percent complete against percent of budget, read as a pair
- 09
Estimate to complete and estimate at completion under both assumptions about the remaining work
- 10
Special against common cause variation, and naming which one your forecast assumes
A full earned value analysis and forecast
- +2Earned value, activity by activity: $9,000 plus $24,000 plus $18,000 plus half of $12,000 plus a fifth of $30,000 plus $15,500 plus nothing, which is $78,500.
- +1Cost variance is earned value minus actual cost: $78,500 minus $79,000 is minus $500, a small overrun on the work done to date.
- +1Schedule variance is earned value minus planned value: $78,500 minus $88,500 is minus $10,000, so ten thousand dollars of budgeted work that should be finished is not.
- +2The indices. Cost performance is $78,500 over $79,000, which is 0.9937, so each dollar spent has bought 99.4 cents of value. Schedule performance is $78,500 over $88,500, which is 0.8870, so about 89 per cent of the planned progress has been achieved.
- +1The two percentages. Percent complete is 78,500 over 110,500, or 71.0 per cent, and percent of budget is 79,000 over 110,500, or 71.5 per cent, so money is very slightly ahead of work.
- +2Forecast if the remaining work goes as it has so far. Estimate at completion is budget at completion divided by the cost performance index, which is $110,500 over 0.9937, or $111,204, and variance at completion is $110,500 minus $111,204, or minus $704.
Key terms
- Budget at completion
- The total budgeted cost of the project, adding up labour, materials and equipment as fixed at the outset.
- Planned value
- The authorised budget assigned to an activity or work breakdown component, corresponding to the time phased budget baseline. Its cumulative form is the curve performance is measured against.
- Actual cost
- What was really spent getting a given activity or component to the percentage it has reached. Committed cost rather than accounts payable is the reliable source for it.
- Cost variance
- Earned value minus actual cost. A positive result is an under-run and a negative result is an overrun, and it describes only the work already finished.
- Schedule variance
- Earned value minus planned value, expressed in money rather than in time. A positive result is on or ahead of schedule and a negative result is behind.
- Cost performance index
- Earned value divided by actual cost, measuring cost efficiency. Being a rate rather than an amount, it can be projected forward, which is what the forecasting formulas do.
- Estimate at completion
- What the whole job is now expected to cost, as forecast on the reporting date, computed either as actual cost plus the remaining budget or as budget at completion divided by the cost performance index.
- Variance at completion
- Budget at completion minus estimate at completion, so a forecast overrun appears as a negative number, consistent with the two period variances.
Earned Value Measurement and Forecasting FAQ
Why is earned value priced at budget rather than at what the work actually cost?
Because pricing it at actual cost would make earned value and actual cost identical, every cost variance would be zero, and the method would report that no project has ever overrun. Valuing completed work at what you said it would cost is what creates the gap that a cost variance measures. It is the least intuitive idea in the topic and the one everything else depends on.
What can a schedule variance not tell me?
A great deal, and the list is examinable. It does not address the sequence of the work or its importance, it does not reflect a critical path assessment, it does not indicate how much time a schedule will slip or how far ahead or behind the project is, it does not identify whether the variance came from labour or materials, and it does not indicate what recovering the slippage would cost.
What it does is give a dollar value difference between work ahead of and behind plan, reflecting whatever percent complete convention was used.
Why does the method need the critical path work as well?
Because it sums dollars and does not look at the network. A project behind by ten thousand dollars entirely on activities with float and a project behind by the same amount on its critical path report an identical number and need opposite responses.
Earned value tells you that something is behind; the network tells you whether it matters, and forecasting a completion date means updating remaining durations and rerunning the passes rather than manipulating an index.
Should contingency be included in the baseline that earned value measures against?
No. Including contingency in the integrated baseline is on the list of things not to do, alongside padding estimates, making retrospective changes to the baseline so past performance looks better, paying for overruns out of other cost accounts rather than drawing down contingency, and building artificial scope in to create hidden reserve.
All five compromise the tool and degrade the historical data the next project will estimate from.
Assessment move
Compute in a fixed order and put each result on its own labelled line: earned value per activity then summed, cost variance, schedule variance, cost performance index, schedule performance index, then the forecast. Each line depends only on the ones above it, so an error stays where it was made and everything after it can still be marked as method.
Drill against the five recurring errors, which are computing earned value from actual cost, reversing a subtraction and inverting the conclusion, reporting a schedule variance as a number of days, choosing a forecasting assumption without naming it, and treating a healthy index on a barely started project as though it settled anything.
Then practise the closing sentence, which carries more marks than any single calculation: state the two variances with their signs, say what the pair together implies, name the one thing you would do next, and say what the method cannot see. The technique exists to prompt investigation, analysis and action rather than to produce numbers.
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