What is the earned value (EV) method?

In project management, tracking costs and progress can feel like an ongoing battle. Projects either run behind schedule, blow past budgets, or, worst of all—both. Traditional methods of keeping tabs on project status, like simply comparing money spent to work performed (BCWP), only tell part of the story.

That’s where the Earned Value (EV) Method comes in.

The EV method is a practical approach that allows project managers to evaluate how much value they are truly creating out of the resources invested. It looks beyond simple budget tracking, giving you a full view of whether a project is performing well in terms of time, cost, and the actual amount of completed work.

Let’s walk through how this works, using a real-life scenario and breaking down the key metrics.

What is earned value calculation?

Earned Value (EV) is a key metric in project management that represents the value of the actual work completed as a percentage of the total budget. It allows project managers to measure project performance by comparing the work accomplished against the project's total cost.

EV formula: EV = Total Budget × % of Actual Work Completed

Other metrics like Planned Value (PV) and Actual Cost (AC) can also be used to assess project performance, but EV focuses solely on the value of the work done so far.

How to apply the earned value calculation

Let’s take a software development project with a budget of $100,000 and a timeline of 10 months. Halfway through (5 months in), the project manager needs to assess the progress:

• Planned Value (PV): At month 5, 50% of the work should be completed, so PV = $50,000.
• Earned Value (EV): In reality, only 40% of the work is done, which makes EV = $40,000.
• Actual Cost (AC): The actual spending so far has been $55,000.

Using the EV to gain more project insights

You can now calculate cost variance (CV) and schedule variance (SV), which help identify whether you're within budget and on schedule:

• CV = EV - AC = $40,000 - $55,000 = -$15,000 (Over budget)
• SV = EV - PV = $40,000 - $50,000 = -$10,000 (Behind schedule)

The project is ahead of schedule if SV is positive and behind if it's negative. You can also calculate the Cost Performance Index (CPI) and Schedule Performance Index (SPI) to further analyze the project’s efficiency:

• CPI = EV / AC = 0.73 (Not cost-efficient)
• SPI = EV / PV = 0.8 (Behind schedule)

These calculations help you monitor the real-time status of the project.

Forecasting revenue

EV is one way of tracking project progress, but if you want to ensure your projects are profitable, you’ll need to forecast your revenue and comparing it to the accurate cost (AC) of your resources. While you're juggling multiple projects, it can be nearly impossible to stay on top of the latest figures for each of them.

The good news is, you don’t need to calculate your revenue forecast manually. With PSA software, your revenue forecast will be automatically calculated based on the work package costs, budgeted cost of work performed (ACWP), and the revenue you are due to bring in based on T&M or your planned fixed-fee billing. This way, you can look 12 months into the future and see if your project will be profitable.

If you would like to know more about revenue forecasting, you can read about it here.

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