EVM #1: EV, PV, AC, BAC, SV, CV, SPI, CPI and all that Jazz

To understand these terms, imagine a project that is broken into 10 parts (or phases in PMP speak).
Now, lets assume the project budget is $10K. This is the Budget at completion (BAC).
Assuming that we assign a value of $1K to each phase i.e. if the project hits the phase 1 milestone, it
would have earned $1K in terms of the projects total value. Similarly, at phase 3, the value is $3K
since value is accumulated. The following diagram depicts this.

Project phases and value at each phase (click on image to view full image)
These points are the Planned Value (PV) of each phase e.g. the planned value of phase 5 is $5K.
Now say according to the project schedule the deadlines for each phase are weeks 1,2,3 e.g. deadline
for phase 4 is week 4. The following diagram depicts this:

Project phases and value at each phase with phase deadlines (click on image to view full image)
Say, at this point in time, the project has reached the phase 2 milestone. Then the Earned Value (EV)
is $2K since it reached phase 2.
Now say this point in time is week 3. This means the project is late since it was supposed to complete
in week 2!
In EVM terms, we use the 2 metrics Schedule Variance (SV) and Schedule Performance Index (SPI)
to say just that.
Schedule Variance (SV) = EV PV = $2K $3K = -$1K
This is bad since SV < 0 as it means what was earned is less than what was planned at this phase.
Similarly, if SV = 0, it is on schedule and if SV &gt 0, it is ahead.
Schedule Performance Index (SPI) = EV / PV = $2K / $3K = 0.67
This is bad since SPI < 1. Again, it means that what was earned is less than what was planned for this
phase. Similarly, if SPI = 1, it is on schedule and if SPI > 1, it is ahead.
To put it simply, in both SV and SPI we are comparing what was earned vs what was planned.
Now lets look at things from a Cost point of view.
Say at week 3 the total accumulated cost of running the project is $1K. This accumulated cost is known
as Actual Cost (AC). In other words, the project has earned $2K of value while only spending $1K. This
is good from a cost perspective.
In EVM terms, we say that:
Cost Variance (CV) = EV AC = $2K $1K = $1K
This is good since CV > 0. Similarly, CV = 0 means the project is on budget and CV < 0 means the project
is exceeding budget.
Cost Performance Index (CPI) = EV / AC = $2K / $1K = 2
This is good since CPI > 1. Similarly, CPI = 1 means the project is on budget and CPI < 1 means the
project is exceeding budget.
Another way to look at this is that for every $1 spent, the project is generating $2 of value.
EVM #3 : CPI > 1, SPI > 1 good or bad?
Now say your Cost Variance (CV) or Schedule Variance (SV) are > 0. In other words, CPI > 1 or SPI > 1.
Is this necessarily a good thing?
It really depends.
If the variance is small, its OK. It is definitely better than having a negative variance which means you
are either over budget or late. However, if the positive variance is large it points to poor estimation
during the planning stage.
From an organizational resource allocation perspective, this is not good as the resources could be used
elsewhere.
One may argue that a certain amount of over-estimation is good as it creates buffers in case of delays
or unforeseen circumstances. The counter argument to that is that those risks should then have been
identified and contingency reserves allocated to them.
EVM #4 : EAC and ETC looking into the future

Imagine you are in the middle of a project and your CPI is < 1. This means you're over-budget. After
reporting the status, your sponsor asks, "Ok so you're over-budget. What is the new estimated total
cost?"
He is in fact asking for the Estimate at Completion (EAC).
Now as a follow up question, your sponsor is likely to ask, How much more do we have to spend to
complete the project?
He is asking for the Estimate to Completion (ETC).
In other words: ETC = EAC AC.
Juggling things around: EAC = AC + ETC
This is what the section on EAC and ETC in PMBOK is trying to explain:
EAC forecast for ETC work performed at budgeted rate
This means that we are calculating EAC with existing estimates of budget. Usually this is used when
the variance (cost and schedule) is zero or very very low.
EAC = AC + (BAC EV)
Because the variance is low, we can assume that ETC = BAC EV. Now, BAC is the Budget at
Completion ie. the planned budget for the entire project. Also since EV is the work completed, whats
left to do is BAC EV.
EAC forecast for ETC work performed at the present CPI
Now, say there is material cost variance. We dont know what the variance is going to be in the work
yet to be performed. However, we can assume that it is going to continue the fundamental
assumption being that the cost has been over (or under) estimated throughout the project in the same
order.
This order of magnitude is the CPI. Well more correctly 1/CPI ie. AC/EV.
So to calculate the EAC in this case, we can use BAC / CPI since this means BAC x (AC/EV).
EAC forecast for ETC work considering both CPI and SPI
Now, if you want to get really sophisticated (LOL) you could include the SPI, CPI into the estimate.
In this case the ETC is calculated using (BAC EV) / (CPI x SPI).
How do we understand this? Well (BAC EV) is the undiscounted ETC ie. it is ETC if both CPI and SPI
are 1 no variance. If SPI is 1 and CPI is not 1, then ETC is discounted by the CPI (and similarly if CPI
is 1 and SPI is not 1). If both CPI and SPI are not 1 then we are discounting the (BAC EV) by the
product of both.
Hence EAC = AC + (BAC EV) / (CPI x SPI)
Earned value management (EVM) is used to assess the schedule and cost performance of a project
with EVM, the project manager will know exactly whether the project is:

ahead of / on / behind schedule

under / on / over budget
Earned value management (EVM) bases on the concept that i) work completed will deliver value and
ii) the value delivered equals the budget put into the work. The value gained can be assessed along the
progression of the project. In reality, earned value management is very complicated as value usually
cannot simply be assessed based on the percentage of completion.

Good news here: PMI has simplified PMP EVM calculation to very ideal situations! You will just need
to know the following to get your PMP EVM questions correct.

Basic EVM Formulas

To speak more clearly how the value is to be managed, a number of terms are defined in
EVM (explained with the example of building 10 houses each has a value of US$1000 expected to be
completed in 10 weeks in proportion):
Planned Value (PV) The budgeted value of the work completed so far at a specific date
example: at end of week 4, altogether 4 houses should be completed, the PV is US$4000
Earned Value (EV) The actual value of the work completed so far at a specific date (refer
to the Notes on Earned Value Measurement section below)
example: by end of week 4, only 3 houses are completed, the EV is US$3000
Actual Cost (AC) The total expenditure for the work so far at a specific date
example: by end of week 4, US$4000 was spend, the AC is US$4000
EVM is based on monitoring these three aspects along the project in order to reveal the health of the
project with the following indices:

Schedule Variance (SV) difference between PV and EV, to tell whether the project work
is ahead of / on / behind schedule
SV = EV PV
If the project is behind schedule the SV will be negative (i.e. achieved less than what planned)
If the project is on schedule the SV = 0
If the project is ahead of schedule the SV will be positive (i.e. achieved more than what planned)
example: by end of week 4, the SV = EV PV = US$3000 US$4000 = -US$1000 (behind
schedule)
 Schedule Performance Index (SPI) ratio between EV and PV, to reflect whether the project
work is ahead of / on / behind schedule in relative terms
SPI = EV/PV
If the project is behind schedule the SPI < 1 (i.e. achieved less than what planned)
If the project is on schedule the SPI = 1
If the project is ahead of schedule the SPI > 1 (i.e. achieved more than what planned)
example: by end of week 4, the SPI = EV/PV = US$3000/US$4000 = 0.75 (behind schedule)
Cost Variance (CV) difference between PV and AC, to tell whether the project work is under
/ on / over budget
CV = EV AC
If the project is over budget the CV will be negative (i.e. achieved less than spent)
If the project is on budget the CV = 0
If the project is under budget the CV will be positive (i.e. achieved more than spent)
example: by end of week 4, the CV = EV AC = US$3000 US$4000 = -US$1000 (over
budget)
Cost Performance Index (CPI) ratio between EV and AC, to reflect whether the project
work is under / on / over budget in relative terms
CPI = EV/AC
If the project is over budget the CPI < 1 (i.e. achieved less than spent)
If the project is on budget the CPI = 1
If the project is under budget the CPI > 1 (i.e. achieved more than spent)
example: by end of week 4, the CPI = EV/AC = US$3000/US$4000 = 0.75 (over budget)
Note both SV and SPI / CV and CPI give similar information on schedule / budget but the indices will
give more insights into the actual performance with a meaning comparison.

From my experience, the most difficult process of solving EVM problems for PMP Exams is to identify
the PV, EV and AC from the wordy calculation questions. Then you will just have to recall the correct
formula to substitute the values into to get the answer the question will usually ask you directly
about the actual indices to get.

Advanced EVM Formulas

Budget at Completion (BAC) also known as the project/work budget, that is the total
amount of money originally planned to spend on the project/work
example: the BAC for the housing project = US$1000 x 10 = US$10000
Estimate at completion (EAC) as the project goes on, there may be variations into the
actual final cost from the planned final cost, EAC is a way to project/estimate the planned cost at
project finish based on the currently available data
The following formulas can be used to calculate EAC based on which information and
conditions given in the question:
EAC = BAC/CPI
If we believe the project will continue to spend at the same rate up to now
The delay is caused by reasons which is likely to continue (e.g. labour with
less skilled than expected)
example: the EAC for the housing project = US$10000 / 0.75 = US$13333
EAC = AC + (BAC-EV)
If we believe that future expenditures will occur at the original forecasted amount (no more
delays of the same kind in future)

The delay might be caused by some unforeseen reasons (e.g. typhoon)

which is not likely to happen again
 example: the EAC for the housing project = US$4000 + (US$10000
$3000) = US$11000
EAC = AC + [(BAC-EV)/(SPI*CPI)]
If we believe that both current cost and current schedule performance will impact future
cost performance
The performance of the project will continue with sub-prime standards
(over budget and behind schedule)
This formula is less likely to be used for the PMP Exam
example: the EAC for the housing project = US$4000 + [(US$10000
$3000)/(0.75*0.75)] = US$16444
EAC = AC + New Estimate
If we believe the original conditions and assumptions are wrong
Will not be tested as there is nothing to calculate
Variance at Completion (VAC) the variance at completion, i.e. the difference between the
new estimate at completion and original planned value
VAC = BAC EAC
If we forecast the project will be over budget, VAC will be negative
If we forecast the project will be under budget, VAC will be positive
example: the VAC for the housing project = US$10000 US$13333 (just take the 1st EAC
as an example only) = -US$3333
To Complete Performance Index (TCPI) the efficiency needed to finish the project on
budget, it is the ratio between budgeted cost of work remaining and money remaining
TCPI = (BAC-EV)/(BAC-AC)
Use this equation if the project is required to finish within BAC
example: the TCPI for the housing project at end of week 4 = (US$10000
US$3000) / (US$10000 US$4000) = 1.167
TCPI = (BAC-EV)/(EAC-AC)
Use this equation if the project is required to finish within new EAC
example: the TCPI for the housing project at end of week 4 with new EAC US$13333
= (US$10000 US$3000) / (US$13333 US$4000) = 0.75

Notes on Earned Value Measurement

The following will discuss how earned value is measured for project and work, from simple physical
measurements, percentage complete to weighted milestones. Since the PMP EVM questions cannot
describe a lot of information, the part on earned value measurements will normally be based on
simplified situations like physical measurements or percentage complete.

It is likely that you will not be tested on the more difficult ways of measuring earned values. These are
included here for your reference only.

Physical Measurement directly transform the physical measurement of the amount of

work completed into EV
example: building 10 houses each has a value of US$1000 expected to be completed in 10
weeks in proportion, earned value of 3 house built is US$3000
Percentage Complete directly transform the percentage of the amount of work completed
into EV
example: building 10 houses each has a value of US$1000 expected to be completed in 10
weeks in proportion, earned value of 30% complete is US$3000
Weighted Milestone a EV is assigned to the 100% completion of each milestone of the work
packages with prior agreement with stakeholders
 Fixed Formula a specific percentage of the overall PV is assigned to the start of a work
package and the remaining assigned upon completion; these must be agreed upon in the project
management plan
0/100 rule: 0% EV at the activity begins; 100% EV upon completion
20/80 rule: 20% EV at the activity begins; 80% EV upon completion.
50/50 rule: 50% EV at the activity begins; 50% EV upon completion

EVM Charts

In common practices, EVM will also involve plotting the values on a graph in order to help stakeholders
concerned to visualize the progress and the health of the project. More often than not you will find the
EV, AC and PV plotted on a graph and you will be asked on the interpretation of the graph.

Insights to be gained from the chart:

If EV line is below PV, the project is behind schedule; if EV is above PV, the project is ahead of
schedule.
If AC line is below EV, the project is within budget; if AC is above EV, the project is over budget.
Below is an example of the EVM charts you would be likely to encounter in your PMP Exam solid
lines represent actual figures while dotted lines represent forecasted figures:

Judging from the chart above, we can infer that the project is currently over budget and behind
schedule.