2.5Earned value management

For a PM, EVM is not about computing numbers for their own sake—it is a tool for translating the resulting indicators into a decision about what state the project is in right now and what to do about it. Being shown SPI = 0.8 and CPI = 1.1 and merely "knowing the formulas" is of no practical use. This section covers the procedure for computing each indicator from the three underlying data points—PV, EV, and AC—and builds the skill of judging the corrective action a PM should take for each combination pattern of values.

2.5.1PV, EV, AC and variance analysis

• PV (planned value) is the cost-equivalent value of the work that should have been completed by a given point according to plan. EV (earned value) is the cost-equivalent value of the work actually completed by that point. AC (actual cost) is the cost actually spent by that point. These three form the base data for every indicator.
• SV (schedule variance) = EV - PV (positive means ahead of plan, negative means behind). CV (cost variance) = EV - AC (positive means under budget, negative means over budget). SPI (schedule performance index) = EV/PV (above 1 means ahead, below 1 means behind). CPI (cost performance index) = EV/AC (above 1 means more cost-efficient than planned, below 1 means over budget). The most common mistake is reversing the sign or the numerator/denominator, so always remember: "subtract or divide PV/AC from EV as the reference point."

2.5.2EAC, ETC, and deciding corrective action

• EAC (estimate at completion) re-forecasts the total cost to complete the project, based on current actuals (AC) and expected future efficiency (CPI). The most common formula, assuming the current cost efficiency continues for the rest of the project, is EAC = BAC/CPI (BAC = budget at completion). ETC (estimate to complete) = EAC - AC (the cost still needed). VAC (variance at completion) = BAC - EAC (the gap from the original budget expected at completion).
• Interpreting the indicators requires reading SPI and CPI together. SPI < 1 and CPI < 1 (behind schedule and over budget) is the most serious and calls for a scope review or escalation to higher management. SPI < 1 and CPI > 1 (behind schedule but under budget) calls for examining whether there is room to crash by adding staff. SPI > 1 and CPI < 1 (ahead of schedule but over budget) calls for analyzing what is driving the inefficiency (overtime pay, the cost of rushed work, etc.). Diagnosing the situation from the combination of indicators, not a single one alone, and turning that into corrective action, is the PM's real job.

A PM's project has a total budget at completion of BAC = 10,000,000 yen. At a certain month-end, the data show PV (the value that should have been completed per plan) = 6,000,000 yen, EV (the value actually completed) = 4,800,000 yen, and AC (the cost actually spent) = 6,000,000 yen. Computing the variances first: SV = EV - PV = 4,800,000 - 6,000,000 = -1,200,000 yen (negative, meaning behind plan), and CV = EV - AC = 4,800,000 - 6,000,000 = -1,200,000 yen (negative, meaning over budget). For the indices: SPI = EV/PV = 4,800,000/6,000,000 = 0.80 (below 1, meaning progress is at 80% of plan), and CPI = EV/AC = 4,800,000/6,000,000 = 0.80 (below 1, meaning the actual output achieved is only 80% of the cost invested—inefficient). With both SPI and CPI at 0.80, this is the most serious pattern, where delay and budget overrun are occurring simultaneously, and the PM can conclude that more than a mere alert is needed—a root-cause analysis (staff skill gaps, rework from missed requirements, or an interruption from an external factor) and prompt escalation to the project owner are required. Furthermore, assuming this efficiency continues, computing EAC gives EAC = BAC/CPI = 10,000,000/0.80 = 12,500,000 yen (projected to exceed the original budget by 2,500,000 yen, i.e., VAC = BAC - EAC = 10,000,000 - 12,500,000 = -2,500,000 yen), and the cost still needed is ETC = EAC - AC = 12,500,000 - 6,000,000 = 6,500,000 yen. Based on this projection, the PM reports to management with the numeric fact that "if nothing changes, a 2,500,000-yen budget overrun becomes essentially certain," seeking a decision on scope reduction, securing additional budget, or restructuring the staffing. If a different month instead yields SPI = 1.125 and CPI = 0.90 (ahead of schedule but over budget), the PM should suspect not delay but that "rushing progress via overtime pay or additional outsourcing is degrading cost efficiency," and prioritize analyzing the cause of the cost overrun instead. Shifting the diagnostic angle and corrective action according to the combination pattern of SPI and CPI is the core of operating EVM in practice.

2.5.3Section summary

• SV = EV - PV, CV = EV - AC, SPI = EV/PV, CPI = EV/AC. Negative/below 1 = worse off, positive/above 1 = good
• EAC = BAC/CPI forecasts the cost at completion, and VAC = BAC - EAC shows the gap from the original budget
• Diagnose SPI and CPI in combination, not individually, and judge a different corrective action for each pattern (root-cause analysis / considering crashing / analyzing the cause of inefficiency)