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How to calculate earned value in projects?

Artto K., Aaltonen K., Turkulainen V., Helsinki University of Technology, 2009

Table of contents:
How to calculate earned value in projects ..................................................................... 1
1. Earned value calculation ........................................................................................ 1
2. Forecasting completion .......................................................................................... 6
3. Aspects associated with the level of hierarchy ...................................................... 8
4. Estimating percent complete.................................................................................. 9
5. Recording costs - time lags reconsidered............................................................. 10
6. Aspects of earned quantity................................................................................... 11

1.

Earned value calculation

An estimate and budget are prepared to serve as the basis for controlling costs. Thus,
the estimate and budget structure is derived to facilitate the cost control process.
Actual performance is compared against budget figures. Cost control should support
in identifying variances (differences) and planning of appropriate corrective measures
to be taken.
The most common mistake of cost control is just to compare the actual rate of
expenditure (cost) with the budgeted (baseline) expenditure rate with time. A cost
estimate and budget is prepared against the work breakdown structure. This is then
scheduled in time by scheduling the work elements to produce a cost (expenditure)
profile. This predicted rate of expenditure is variously called:1
scheduled cost
time phased cost
planned cost of work scheduled
Budgeted (or baseline) Cost of Work Scheduled (BCWS).
As work is done, actual expenditure is recorded. This actual rate of expenditure is
variously called:
accrual
Actual Cost of Work Performed (ACWP).
For cash based expenditures, the terms planned or budgeted cash flow and actual
cash flow are appropriate.
Let us consider a project, or WBS item, having the following information available
(see Figure 1):
the total budget figure, Budget at Completion (BAC) is $ 1000
project has used $350 against the budgeted $500, and accordingly, there is a cost
deviation of $150

Turner (1993, p. 198)

Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009

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In Figure 1 and in the following figures, for simplicity and clarity, we expect that
instead of the typical S-curve form, the progress is assumed to be constant. Thus,
linear straight lines are used instead of S-curves.

Cost
Budget, Baseline
(BAC, $1000)

Cost
Deviation
$150

BCWS
$500
Actual (ACWP)

$350

Time
Time now
Figure 1

Cumulative Actual Cost vs. Budgeted Cost

To determine whether the project is overspent or underspent, actual expenditure is

compared to the scheduled cost, and, if less, all is assumed to be well. However, this
assumption may be false because no measure is made of what work has been done for
the expenditure. In the most extreme case no work may have been done, and yet
expenditure accrued. To control costs you must compare the actual expenditure not to
the schedule of expenditure, but to some measure of the value of work done. The
WBS provides the means to do this. As an element of work is complete, you can
compare how much it actually cost against what it was budgeted to cost. This
budgeted cost of the actual work done is variously called:2
Earned Value (EV)
Budgeted (baseline) Cost of Work Performed (BCWP)
Now, if we have the information available that in our project 300 drawings are
produced out of 1200, we can now reason by the ratio of those two figures that the
percent complete is 25 %. Earned Value (EV), or BCWP, can be derived by
multiplying the Budget at Completion (BAC) by the percent complete:
BCWP =

% Complete * BAC

Thus, in this case, EV is $250 (see Figure 2). In Figure 2 we can also see the schedule
deviation. Only 25% of the work is completed compared to the scheduled 50%. We
can now illustrate the accumulation of EV (see Figure 3).

Turner (1993, pp. 198-199)

Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009

Cost

We have
produced
300 drawings
out of 1200
% Complete
25%
BCWP = $250

Schedule
Deviation

Budget, Baseline
(BAC, $1000)

Cost
Deviation
$150

BCWS
$500
Actual (ACWP)

$350

BCWP or
Earned Value (EV)

Time
Time now
Figure 2

Cost

We have
produced
300 drawings
out of 1200
% Complete
25%
BCWP = $250
BCWP or
Earned Value (EV)

Earned Value

Schedule
Deviation

Budget, Baseline
(BAC, $1000)

Cost
Deviation
$150

BCWS
$500
Actual (ACWP)
BCWP

$350
$250

Time
Time now
Figure 3

Illustration of Accumulation of Earned Value

The background of the earned value methodology is in developments of the U.S.

Department of Defense (DoD) and the Department of Energy (DoE) to control large
military and energy facility investments. Integrated cost and schedule control is
described in detail in DoDs Cost/Schedule Control System Criteria (C/SCSC)
document, and project management processes described in several military standards
are based on applying C/SCSC.
The basic idea of the earned value calculation is to follow-up the progress of project
work associated with scope and results, project schedule, and costs simultaneously, in
Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009

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an integrated manner. The purpose is to get an unbiased and realistic conception of
project progress and performance in the project.
To understand their relative impact they can be expressed relative to the magnitude of
the work entity. Cost is controlled by comparing the earned value to the actual
expenditure, and calculating a cost variance:
Cost variance =
Earned value - Accrual
, or
Cost variance (CV) =
BCWP - ACWP
Now, in our case project or WBS element, variances and indices can be calculated. In
our case (see Figure 4):
Cost variance (CV) =
BCWP - ACWP
= - $100
If the variance is negative, the project is overspent, and if it is positive it is underspent.
Action is taken if this variance is non-zero.
The relative performance interpretation for cost performance is (see Figure 5):
Cost Performance Index (CPI)
= BCWP / ACWP
= 0.7
Cost Variance Index % (CVI)
= 100% * CV / BCWP
= - 40%
It was implied above that the comparison between the scheduled cost and actual cost
is meaningless. If the actual cost is less than the scheduled cost, it does not tell us
whether the project is underspent or late. It was shown that the comparison between
the earned value and actual cost indicates whether the project is overspent or
underspent. The comparison between the earned value and the scheduled cost tells us
whether the project is early or late: if the earned value is greater than the scheduled
cost, the project is on average early, and if it is less, it is on average late. We should
say on average, because it gives us no information about progress on the critical path,
critical work can have been delayed, but a larger, non-critical job brought forward,
and the project appear to be early.3 We can calculate a second variance, the schedule
variance as:
Schedule variance =
Earned value Scheduled cost
, or
Schedule variance (SV) =
BCWP - BCWS
In our case (see Figure 4):
Schedule variance (SV) =

BCWP - BCWS

= - $250

Note that cost variance and schedule variance are both presented in dollars.
The relative performance interpretation for schedule performance is (see Figure 5):
Schedule Performance Index (SPI)
= BCWP / BCWS
= 0.5
Schedule Variance Index % (SVI)
= 100% * SV / BCWS
= - 50%
If CPI = 1.0, we have perfect performance. If CPI > 1.0, we have exceptional
performance. If CPI < 1.0, we have poor performance. Similar reasoning can be
applied to the SPI.

Turner (1993, pp. 199-200)

Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009

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The indices of our drawing case project indicate that both the schedule and the cost
performance in the drawing project has been poor.
Variance indices present the same as variances but compared to budget figures. If the
percent value is positive, the performance has been exceptional. If the variance index
is zero, the performance has been perfect, and if a variance index is negative, the
performance has been poor.

We have
produced
Cost
300 drawings
out of 1200

Schedule
Deviation

Budget, Baseline
(BAC, $1000)

Cost
Deviation
$150

% Complete
25%
BCWP = $250

BCWS
$500
SV

Actual (ACWP)
BCWP

BCWP or
Earned Value (EV)

CV

$350
$250

Cost Variance (CV) =

BCWP - ACWP = - $100
Schedule Variance (SV) = Time

Time now BCWP - BCWS = - $250

Figure 4

Cost

We have
produced
300 drawings
out of 1200

% Complete
25%
BCWP = $250

Cost Variance and Schedule Variance

Schedule
Deviation

Budget, Baseline
(BAC, $1000)
Cost
Deviation
$150

BCWS
$500
SV

Actual (ACWP)
BCWP or
Earned Value (EV)

BCWP

$350
CV

$250

Cost Performance Index (CPI) =

BCWP/ACWP = 0.7
(CVI = CV/BCWP = -40%)
Schedule Performance Index (SPI) =
Schedule Variance (SV) =
BCWP/BCWS = 0.5
Time now BCWP - BCWS = - $250
(SVI = SV/BCWS = -50%)
Cost Variance (CV) =
BCWP - ACWP = - $100

Figure 5

Cost and Schedule Indices

Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009

2.

Forecasting completion

An essential part of the project progress management is forecasting future costs of the
project. The earned value variance calculation presented above provides us a vehicle
to forecast the likely cost to complete the project. The principle of estimate updating or forecasting - is explained in the following discussion.
The total cost of the project can be forecast by using different assumptions. The most
used (simplifying) assumptions are:
1)
The rest of the work is done according to the budget, i.e. the absolute variance at
completion equals the variance to date. Thus,
Estimate at completion =
Estimate at Completion (EAC) =

Budget at Completion + Variance to date

ACWP + ( BAC - BCWP)

This is illustrated graphically in Figure 6, with the assumption that the schedule
slippage would be somewhat reduced during the rest of the project.

2)
The cost performance remains the same, i.e. the percentage variance at completion
equals the percentage variance to date. Thus,
Estimate at completion =
Estimate at Completion (EAC) =

Budget at Completion / Cost Performance Index

BAC / CPI

This is depicted in Figure 7, assuming simultaneously that also the schedule

performance remains the same.

3)
In fact the most accurate forecasts are obtained by applying the second formula above
at lower levels of the WBS, since some of the future tasks will exceed the budget
while some will go under the budget. However, because of the information received
during the project, the costs left can be forecast more exactly than in the beginning of
the project; thus, it is appropriate to apply the current cost performance (modified
according to most recent experience) achieved with similar work elements.

The first two assumptions give quick estimates. The second one is more realistic, but
the first is also often used. If the costs have been exceeded, the first assumption
derives a smaller total cost forecast than the latter one. Using it can be justified by the
argument that some cost overruns happen just once; they have been discovered during
the project, and, the costs can be cut in the following activities with this experience.
Measures might also be taken to achieve cost savings that balance further
overspending.
The most exact forecast of the project total cost is achieved by using the third
assumption, which, in turn, uses the second one by allowing manual adjustments
Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009

7
based on experience. The cost variances occurred in work already completed can be
used in forecasting similar work not yet completed, and at the same time take into
consideration the effect of the experience obtained.
To forecast the completion date of the project accurately enough, an analysis of a
different nature is needed. The chief importance is to find out the reasons for the
project delay. When these reasons have been determined, the completion date can be
forecast, with the help of the project activity network updated with the most recent
information. The actual critical path can be analyzed, and work can be accelerated
where necessary for moving the project completion date earlier.

Projected schedule slippage

Cost

We have
produced
300 drawings
out of 1200

% Complete
25%
BCWP = $250

Schedule
Deviation

EAC = ACWP + (BAC - BCWP) = $1100

Budget, Baseline
(BAC, $1000)

Cost
Deviation
$150

BCWS
$500
SV

Actual (ACWP)
BCWP or
Earned Value (EV)

BCWP

$350
CV

Cost Variance (CV) =

BCWP - ACWP = - $100

Schedule Variance (SV) =

Time now BCWP - BCWS = - $250

Figure 6

Cost

$250
Cost Performance Index (CPI) =
BCWP/ACWP = 0.7
Schedule Performance Index (SPI) =
BCWP/BCWS = 0.5

Forecasting Completion, Assuming that the Rest of the Work is Done

According to Budget

We have
produced
300 drawings
out of 1200

% Complete
25%
BCWP = $250

EAC = BAC / CPI = $1430

Schedule
Deviation

Budget, Baseline
(BAC, $1000)
Cost
Deviation
$150

BCWS
$500
SV

Actual (ACWP)
BCWP or
Earned Value (EV)

BCWP

$350
CV

Cost Variance (CV) =

BCWP - ACWP = - $100

Schedule Variance (SV) =

Time now BCWP - BCWS = - $250

$250
Cost Performance Index (CPI) =
BCWP/ACWP = 0.7
Schedule Performance Index (SPI) =
BCWP/BCWS = 0.5

Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009

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Figure 7

3.

Forecasting Completion, Assuming that Cost Performance (and

Schedule Performance) Remains the Same

Aspects associated with the level of hierarchy

The earned value for a WBS item or the whole project is the sum of the estimate of
the completed activities that constitute it. These costs (BCWS, ACWP, BCWP) as
well as variances and indices (CV, SV, CPI, CVI, SPI, SVI) can be applied to any
level of the work breakdown structure (i.e. project, task, work package) for the work
that is completed, in-program, or anticipated, and then get a good picture of the
project progress.
The hierarchical aspect leads to the following: At the higher levels, earned value based
progress reporting provides weighted average values rather than focusing on items
with good or bad performance. When the schedule variances are examined, it must be
remembered that the schedule variance does not necessarily give the right picture of
the project progress. Often several activities are behind the schedule and several ahead
of the schedule. As a whole, the project seems to go within the schedule and budget.
However, if those postponed activities are on the critical path and those completed
ahead of the schedule are not critical ones, the project might meet concrete scheduling
problems, although the schedule variance does not indicate that.
Figure 8 provides an illustration of multiplicity of the information obtained from
hierarchical reporting structures, depending on the viewpoint and report data selection
criteria. In the project reporting structures level, the data is usually reported by WBS
(Work Breakdown Structure, i.e. the projects hierarchical product+work structure),
OBS (Organization Breakdown Structure, i.e. the firms hierarchical organizational
structure: units, functions, etc.), and CBS (Cost Breakdown Structure, i.e. the firms
hierarchical cost account structure: materials, wages etc.) , or a combination of them.
Above the project reporting there is the management structures reporting level that
combines various aspects, e.g. combines the projects in the company and allows
selections from different project portfolios according to project-owner business units,
project types, etc. Figure 8 describes the situation with two activity level work
packages of different sizes. The other is, say a purchase of $10,000 with % complete
of 50%. The other is a $100 engineering work already performed with complete of
100%.
When selecting only the design engineering work to be reported by using CBS for
the selection, still reporting the construction WBS item, gives the view of the WBS
element being 100% complete (but from the design engineering aspect only). See the
dotted box in Figure 8 illustrating the reporting aspect. However, another report on the
construction WBS item - but now without cost type selections - merges the two
work packages by weighting the packages by their sizes, thus providing roughly a
percent complete of 50% for the WBS item.

Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009

BAC = 10100
BCWS = 6100
Management BCWP = 5100
Reporting ACWP = 6590
Structures % = 50 !!!

Project
Reporting
Structures

WBS
Design

Construction

Engineering

Manpower

Materials

Design
engineer

%=100

BAC = 10000
BCWS = 6000
BCWP = 5000
ACWP = 6500

Figure 8

4.

Production

CBS

Proj.
man.

%=50
Activity
Level
(Cost, Time,
Resources)

OBS

BAC = 100
BCWS = 100
BCWP = 100
ACWP = 90

BAC = 100
BCWS = 100
BCWP = 100
ACWP = 90
% = 100

Data Consolidation

Estimating percent complete

In earned value calculation, the completed part of the work may be used by applying
equivalent units completed, or achieved results measured, or some other appropriate
rule. We used equivalent units in our drawing project example when assuming that the
300 drawings out of 1200 were standard units, which seldom is the case in projects.
However, at the end the estimate must be converted to a percent complete form, and
the Budget at Completion be multiplied by percent complete.
If we used the strict definition of earned value given above, based only on work
complete, a bias would be introduced, because no allowance is made for work in
progress. At some WBS or project levels some allowance must be made for activities
started but not finished. A subjective estimate of the percentage completion of
activities can be made, but this is usually an overestimate (always 99%!). It is often
more accurate to assume thatactivities in progress are , on average, half finished. This
principle could be adopted especially when WBS elements subject to percent
complete estimates represent a sufficient level of detail. In the case of sufficient level
of detail, applying roughly half complete estimates on activities does not implicate the
risk of biasing the project control too much. Thus, it can be assumed that there are
several tasks or activities in-program to be estimated and they are small and their
budgets are not remarkable. We, therefore, could apply for activities that percent
complete is always 0%, 50% or 100%. Zero percent would represent an activity that is
not started, 50% an activity already started but not completed, and 100% would be a
completed activity.4
Then, for higher level WBS items, percent complete could be calculated by
summarizing the lower level of the WBS values to calculate the value at an upper
4

Turner (1993, p. 199)

Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009

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level. The percent complete is the ratio of Earned Value / Budget at Completion,
where Earned Value is the sum of % Complete x Budget at Completion, with the
sum taken over the constituent activities.5
In addition to the above-mentioned methods, there is an option to apply visual
inspection for estimating the percent complete. Visual inspection can be used, for
example, when the progress of painting work is estimated. These estimates often tend
to overestimate the progress. And if the contractors reward is paid in several parts
according to the progress, the contractor has a temptation to overestimate the progress
to receive his income earlier.
Another method is to calculate the work complete and the work not yet done, and
using them calculating the level of completeness. A more realistic estimate will be
provided if the completed workload and workload required to complete the rest of the
work are estimated separately. Estimating the work left may be difficult and it might
be that the estimates tend to be too small.

5.

Recording costs - time lags reconsidered

Actual costs are usually derived from company cost accounting application where
costs are recorded. A common mistake in cost control is to record costs and earned
value only as invoices are recorded or paid, i.e. after a considerable timely delay from
the point of time of when the work was conducted. Although this might provide a
valid comparison, it might be too late to overcome problems.
Earned value should be based on costs recorded in an early phase in order to timely
match the accomplishments achieved.6 Therefore, it is suggested that costs be
recorded on accrual basis for earned value calculation, i.e. as the work progresses.
Moreover, similar timing principles to those used in recording actual costs must be
applied when preparing estimates and budgets. Thus, as the accrual-based actual costs
were suggested above, time-phased budgets and estimates should be prepared by
assuming accrual basis accordingly.
From a technical cost control application viewpoint, it does not matter what is
assumed for individual cost items, as long as the same assumption for the timing
principle is made throughout for each item. That is, the cost is accrued and the value is
earned together, and at the same timing base as the expenditure was planned.
However, the accrual basis suggested above gives the most effective means of control.
Accrued costs include labor costs and costs for purchased items. We cannot assume
that the monetary values of non-completed work for purchased items could be
available in accounting applications, even after a certain time lag. This occurs
especially if the agreed payment schedule does not reflect the cost accumulation
aligned to work progress. Thus, information about purchase item prices (committed
5
6

Turner (1993, p. 199)

Turner (1993, p. 200)
Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009

11
costs) can usually be derived from the companys materials management system
where order and purchase contract information is registered. Use of such a purchase
order related to committed costs and other data would enable calculating actual
accrual-based costs for those items for which accounting or other systems do not
provide relevant cost data for our purposes.

6.

Aspects of earned quantity

Quantity measures, such as manhours, could be used in a similar manner to monetary

figures, to measure the value of work performed and progress achieved, and to derive
forecasts to complete. However, the manhour quantity aspect omits valuable materials
used for the job, and does not make a distinction with manhours of different cost and
value.
Using quantities gives a new meaning to the variables presented above, and it is
appropriate to define new variables analogous to those introduced above:

Variable:

Budgeted Quantity of Work Scheduled

Budgeted Quantity of Work Performed
Actual Quantity of Work Performed
Budgeted Quantity at Completion
Estimated Quantity at Completion

Being Analogous to:

(BQWS)
(BQWP)
(AQWP)
(BQAC)
(EQAC)

BCWS
BCWP
ACWP
BAC
EAC

Figure 9 illustrates the distinction between quantity based and monetary based
measures. Consider the figure. We can assume that indices in Figure 9 are based on
the following equations:
Cost Performance Index (CPI)
= BCWP / ACWP
Schedule Performance Index (SPI)
= BCWP / BCWS
Productivity
= BQWP / AQWP
Based on the recent development of indices in Figure 9, we could conclude that:
the work productivity is high
the work is ahead of schedule (on average)
the cost efficiency is poor, we have used expensive resources (and achieved high
productivity accordingly)

Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009

12

Schedule Performance Index

1.3
1.2

Productivity

1.1

Time

1.0
0.9

Cost Performance Index

0.8

Figure 9

Development of Index Values During the Project Life Cycle

Karlos Artto & Kirsi Aaltonen & Virpi Turkulainen, Helsinki University of Technology, 2009