How to Explain Earned Value to Dummies

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

About the Author

Jamal Moustafaev, MBA, PMP – president and founder of Thinktank Consulting is an internationally acclaimed expert and speaker in the areas of project/portfolio management, scope definition, process improvement and corporate training. Jamal Moustafaev has done work for private-sector companies and government organizations in Canada, US, Asia, Europe and Middle East.  Read Jamal’s Blog @ www.thinktankconsulting.ca

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Jamal is an author of three very popular books: 

1. Delivering Exceptional Project Results: A Practical Guide to Project Selection, Scoping, Estimation and Management 
2. Project Scope Management: A Practical Guide to Requirements for Engineering, Product, Construction, IT and Enterprise Projects
3. Project Portfolio Management in Theory and Practice: Thirty Case Studies from around the World