In the course of my career I have encountered on numerous occasions a situation where executives, top managers and even project managers had issues with understanding the concept of Earned Value. So, I have developed a series of very simple examples to address that issue.
Imagine the following:
You have ten days to produce ten glasses at a total cost of $10. You project does not have Initiation, Planning or Close-out stages; only Execution and Monitoring. Having said that, it is reasonable to assume that you should be producing 1 glass a day and spending $1 per glass.
1 glass per day @ $1/glass
The key EV formulas are:
PV = Planned Quantity X Planned Cost
AC = Actual Quantity X Actual Cost
EV = Actual Quantity X Planned Cost
Schedule Variance = SV = EV – PV
Where:
- SV = $0 means we are on plan in terms of spending (neutral)
- SV > $0 means we are ahead of plan in terms of producing more value than you have anticipated (good)
- SV < $0 means we are behind plan in terms of spending (bad)
Cost Variance = CV = EV – AC
Where:
- CV = $0 means we spent the same amount as the value of the work we received (neutral)
- CV > $0 means we spent a lesser amount than the value of the work we received (good)
- CV < $0 means we spent a greater amount than the value of the work we received (bad)
NOTE: Don’t worry if the formulas don’t make sense at this point of time, they will become clear very soon!
Let us examine several potential situations:
Day 7
7 glasses @ $2/glass
It is day 7 and you have produced 7 glasses at a cost of $14. Where do you think (without going into formulas) you are in terms of budget and time? It is day 7 and you have manufactured 7 glasses, so you are on time. However, you have exceeded your budget of $1/glass.
Let us examine the following situation using our formulas:
- PV = Planned Quantity X Planned Cost = 7G*$1/G = $7
- AC = Actual Quantity X Actual Cost = 7G*$2/G = $14
- EV = Actual Quantity X Planned Cost = 7G*$1/G = $7
- SV = EV – PV = $7 – $7 = $0 – On-time
- CV = EV – AC = $7 – $14 = – $7 – Over budget
The EV formulas just confirmed what our instincts were telling us all along. We are on schedule but over budget!
Here is another scenario:
Day 5
2 glasses @ $1/glass
It is day 5 and you have produced 2 glasses at a cost of $1/glass. Common sense tells us that we are behind the schedule (2 glasses instead of 5) but on-budget. These conclusions are, indeed, confirmed by the formulas:
- PV = 5G*$1/G = $5
- AC = 2G*$1/G = $2
- EV = 2G*$1/G = $2
- SV = EV – PV = $2 – $5 = – $3 – Late
- CV = EV – AC = $2 – $2 = $0 – On budget
Let us examine another case:
Day 9
8 glasses @ $2/glass
Our instincts tell us that we are behind the schedule (8 glasses instead of 9) and over the budget ($2 per glass instead of $1). Let us see if we are correct:
- PV = 9G*$1/G = $9
- AC = 8G*$2/G = $16
- EV = 8G*$1/G = $8
- SV = EV – PV = $8 – $9 = – $1 – Late
- CV = EV – AC = $8 – $16 = – $8 – Over budget
And finally, the following scenario:
Day 6
7 glasses @ $0.5/glass
We are obviously ahead of schedule (produced 7 glasses instead of 6) and spent only $0.5 per glass instead of $1. Let us check our formulas:
- PV = 6G*$1/G = $6
- AC = 7G*$0.5/G = $3.5
- EV = 7G*$1/G = $7
- SV = EV – PV = $7 – $6 = $1 – Ahead of schedule
- CV = EV – AC = $7 – $3.5 = $3.5 – Under budget
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