Earned value

0:00Sara: Welcome to Project Management Exam Prep.

0:02This episode is about earned value, a calculation that every project management

0:07exam can ask for.

0:09Leo: One set of numbers shows whether you are on schedule and on budget,

0:13and forecasts the final cost. You will learn the base numbers,

0:18the ratios, the forecasts, and where the method misleads.

0:22We finish with a calculation drill, so keep a pen and a calculator ready.

0:27Sara: Let us start with the three lenses. What does IPMA® say?

0:31Leo: IPMA®, the International Project Management Association, sets out its standard in

0:36the Individual Competence Baseline, the ICB4.

0:40Its element on finance counts earned value among its performance indicators.

0:46You forecast from them, and report a coming cost breach through governance,

0:49with a plan to fix it. Its element on plan and control names earned value analysis

0:55as a skill.

0:56Sara: And PMI®?

0:58Leo: PMI®, the Project Management Institute, publishes the PMBOK® Guide,

1:03its guide to the project management body of knowledge.

1:06In the eighth edition, earned value is a tool for controlling finances.

1:11The outline of PMI®'s Project Management Professional exam, the PMP®,

1:15covers it in two tasks: plan and manage finance, and evaluate project status.

1:22Sara: And APM?

1:24Leo: APM, the Association for Project Management, publishes the APM Body of Knowledge.

1:30It calls the method earned value analysis, one way to track spending and progress

1:35together. The syllabus of APM's Project Management Qualification,

1:39the PMQ, asks you to forecast and refine budgets with techniques such as earned

1:45value.

1:46Sara: Where do the words differ?

1:48Leo: In two places. First, the plan you measure against.

1:51PMI® calls it the performance measurement baseline, and APM the deployment baseline.

1:58Sara: Second?

2:00Leo: The drift you accept before someone acts.

2:03PMI® sets control thresholds, APM speaks of tolerances, and the ICB4 asks you to

2:10signal cost breaches.

2:12Sara: What is the core, whichever exam you take?

2:15Leo: Three ideas. One: measure progress in money.

2:20Every piece of work gets a budget and a place in the schedule.

2:24At each status date, ask what should be done, what is done, and what it cost.

2:30Sara: Who decides what counts as done?

2:32Leo: Credit rules, agreed in advance. For example, nothing is earned until a task is

2:37finished, or half on starting and half on finishing.

2:42Count work only when it is accepted: earned value says nothing about quality.

2:47Sara: Two?

2:48Leo: Compare, then ask why. The numbers show where you are behind or over.

2:53The team tells you why.

2:55Sara: And three?

2:56Leo: Forecast, then act. A breach you forecast early can still be fixed.

3:02Sara: And in agile work?

3:05Leo: The unit changes. The PMBOK® Guide counts planned and earned value in story points,

3:11iteration by iteration. APM notes that iterative teams often use burndown charts

3:16instead.

3:18Sara: The model sheet, free in the description, draws the three curves.

3:22Leo: Planned value, or PV, is the budget of the work the plan expected by the status

3:27date. Earned value, or EV, is the budget of the work really done.

3:33Actual cost, or AC, is what that work cost.

3:37The budget at completion, or BAC, is where planned value ends.

3:42Sara: Give me numbers.

3:43Leo: Take a ten-month project with a budget of nine hundred thousand euros.

3:49At the end of month five, the plan expected four hundred and fifty thousand of work.

3:54The work done is worth three hundred and sixty thousand, and it cost four hundred

4:00thousand.

4:00Sara: So where does it stand?

4:03Leo: First, two variances. Schedule variance is EV minus PV: minus ninety.

4:09Cost variance is EV minus AC: minus forty.

4:15Below zero means behind schedule, or over budget.

4:19Sara: And the indices?

4:20Leo: The schedule performance index, the SPI, is EV divided by PV:

4:25zero point eight. Only eighty percent of the planned work is done.

4:31The cost performance index, the CPI, is EV divided by AC: zero point nine.

4:38Each euro bought ninety cents of planned work.

4:41Below one is bad news, and EV always comes first.

4:46Sara: And the final cost?

4:48Leo: That is the estimate at completion, the EAC.

4:52There are four common formulas, one for each assumption.

4:56Choose one, and say why.

4:59Sara: First?

4:59Leo: The efficiency so far continues: divide the BAC by the CPI.

5:05Nine hundred divided by zero point nine is one million.

5:10Sara: Second?

5:11Leo: The overrun was a one-off, so the rest goes as planned.

5:15Add the remaining budget, five hundred and forty, to the four hundred spent:

5:20nine hundred and forty.

5:21Sara: Third?

5:23Leo: A fixed date pushes cost up too. Divide the remaining work by the CPI times the

5:28SPI, zero point seven two. That gives seven hundred and fifty,

5:32plus four hundred spent: one point one five million.

5:37Sara: And fourth?

5:39Leo: The plan no longer holds. Estimate the rest from the bottom up,

5:43and use the formulas as a check.

5:45Sara: What else?

5:47Leo: EAC minus AC gives the estimate to complete: six hundred.

5:52The variance at completion is BAC minus EAC: minus one hundred.

5:58The to-complete performance index, the TCPI, divides the work left by the money

6:03left. Five hundred and forty over five hundred is one point zero eight,

6:08well above the CPI. Say so.

6:11Sara: Can I trust the numbers?

6:13Leo: Only as far as the baseline and the credit rules.

6:15The SPI averages all the work, so check the critical path.

6:19It also drifts back to one at the end, even on a late project.

6:24Walt Lipke's earned schedule, from two thousand and three, measures the delay in

6:28time instead.

6:30Sara: How does this change between Mid-level and Senior?

6:33Leo: First, the two levels. They are this series' own labels.

6:37Mid-level means leading moderately complex projects, the level of IPMA® Level C and

6:43PMI®'s PMP® exam. Senior means leading complex projects and people,

6:49the level of IPMA® Level B and of APM's chartered status, Chartered Project Professional.

6:56Take Parking Permits Online, a city project that moves resident parking permits

7:01online in eight months. In month four, the project manager, Anna,

7:06finds an SPI of zero point eight and a CPI of zero point nine six.

7:12At Mid-level, she finds the causes with the team, and brings a forecast and options

7:16to the steering group.

7:18Sara: And at Senior level?

7:20Leo: You design the measurement that others report into.

7:24Take One City Account, a thirty-month city project that brings fourteen online services

7:29under one login, led by Anna some years later.

7:33Anna splits the baseline by service, so each gap has an owner.

7:38Suppliers earn value only at accepted milestones.

7:41The board agrees which variances reach it.

7:44And she reports delays in weeks: a service that misses a quarterly release of the

7:49national login waits three months.

7:51Sara: Now the drill. A city is moving resident parking permits online,

7:57with go-live at the end of month eight, weeks before January,

8:00when most residents renew. At the end of month six, the budget at completion is

8:06five hundred and seventy-six thousand euros.

8:09Planned value is four hundred and eighty thousand, earned value four hundred and

8:13thirty-two thousand, and actual cost four hundred and fifty thousand.

8:18The team blames a one-off: cleaning old permit data.

8:23A contingency of twenty-four thousand sits above that budget.

8:28Where does it stand, and what is your forecast?

8:31Leo: Pause and write your answer. You have forty-five seconds.

9:19Sara: First, the status.

9:22Leo: Schedule variance, minus forty-eight thousand; SPI, zero point nine.

9:28Cost variance, minus eighteen thousand; CPI, zero point nine six.

9:33Behind, and slightly over. The work left is five hundred and seventy-six minus four

9:38hundred and thirty-two: one hundred and forty-four.

9:41If the team is right, that work costs its budget.

9:45Add the four hundred and fifty spent: five hundred and ninety-four,

9:48inside the contingency. If not, divide the BAC by the CPI: six hundred,

9:54the whole contingency.

9:56Sara: Why does that shortcut work?

9:58Leo: At a CPI of zero point nine six, the work left costs one hundred and fifty.

10:04Add the four hundred and fifty spent: six hundred.

10:07It always matches: the money spent is the work done divided by the CPI.

10:11So test the one-off claim.

10:14Sara: What lifts that to Senior?

10:16Leo: Ninety-six of work was planned for the last two months, and one hundred and forty-four

10:21remains. A failed January costs the city more than the contingency:

10:27protect the date, and say why. Bring the steering group a range,

10:32its assumptions and options. And welcome early bad news, so it keeps coming.

10:39Sara: How do the exams ask this?

10:41Leo: IPMA®'s exams ask for open answers. IPMA®'s certification also includes an interview,

10:47where assessors ask about your own projects: note how you measured progress on one.

10:54The PMP® exam uses scenarios, and questions built on a case study or a chart.

11:00APM's PMQ asks for short written answers, such as how earned value refines a budget.

11:07Sara: Let us recap.

11:09Leo: One. Planned value, earned value and actual cost measure progress in money.

11:14Sara: Two. Variances subtract, indices divide, and EV comes first.

11:21Leo: Three. Four common formulas forecast the final cost.

11:25Choose one by its assumption.

11:28Sara: Four. The TCPI is the efficiency you now need.

11:32Compare it with the CPI.

11:34Leo: Five. The numbers are only as good as the baseline and the credit rules.

11:39Sara: The model sheet on the three curves is free in the description.

11:42Leo: So is the sheet with every formula, and the study handout.

11:47Next time: NPV, IRR and payback.