How to use Earned Value Method

To start with, let's imagine to collect few parameters that every project manager can easily retrieve from finance and planning, anytime during execution:

Project total duration: 24 months
Project approved budget: 10 MM$
Time elapsed from project start: 12 months
Actual costs accumulated: 5MM$

Now, we have spent half of the budget.. we are half-way through our 2 years path. Could we reasonably state that this project is ontime and it has costs under control?

If you would instinctively answer YES to that question, you'd better read the full article before getting in trouble in a real situation.

Anytime you have a project to kick off with an approved budget, remind yourself that the cost control methods in place will be your tools to monitor the progress and alert functions and management in case something breaks.
The ability of the project manager to scan the work and map the real trend against the baseline, expecially for large projects, is dramatically depending on the personal preparation and the technics that can be utilzed to that purpose.

Back to the basic question arose above, the answer clearly cannot be a yes. We just do not have enough data to evaluate what has been done in 1 year, spending those 5 millions of dollars.
The work might be already completed and in that case be a authentic success (what a saving...half of the budget!) or it might be a complete mess, behind of schedule, over budget, with only a tenth of the tasks completed.
At a glance, nobody knows actually anything about project health just looking at those poor information.

Earned Value Management (EVM)

It took root in US, initially with a different name (PERT/COST). It expanded over the decades 1960-2000 repeatedly changing and fine tuning the criteria of application. 
Adopted by NASA, US government and several government agencies for their internal programs and mandates to external suppliers.
Recognized as an ANSI standard (748) in 1998 and by Australian standards (ref. 4817-2003 and 4817-2006).

Why the method is useful?

The problem statement should be already clear at this point. It would be good to have a reliable system that anytime during execution tells us where we are going with schedule and costs, indicating any variance to plan. 
Undoubtedly, an objective assessment is instrumental to report properly the project health and require management support in case the traffic light in your 4-blocker turns red. 
That's what EVM does.

What EVM is based on

To make sure the system be etched upon your mind let me leverage on an example, intentionally laughable.

There is only one pre-requisite that I need you to accept on faith at this early point of the explanation: EVM works only having a predefined rule to measure the completion of the work.

That's the key. If you are thinking that such evaluation is trivial, consider that multi-million dollar projects can be a mix of materials, engineering and deliverables that vary depending on the business (drawings, software, studies, parts etc...). The tracking of "what is complete" may not be a walk in the park.

Modern project management techniques are all based on the WBS concept (work breakdown structure). In essence, the complete work to be executed is basically decomposed into a multi level bill of sub activities  The number of levels of such hierarchy determines the way you see the project into pieces and deliverables to fulfill and measure.

A WBS with just one-level is not really useful (too high level). Likewise, the tracking of a one-thousand-level scheme is not actionable (too expanded and dispersive).

The point here being that, in order to avoid agonizing over measurements of thousands of smaller and smaller tasks, you may want just an efficient "earning rule".

Whether you decide to consider 50% of the planned value earned at the start of a task and the balance assigned at its end (50/50 rule) or to consider a different threshold (0/100, 25/100 etc...), it does not really matter.

Whichever rule you elect to utilize, it just needs to be adequate in quantifying the degree of completion of the project activities at a certain cut-off date.
If you operate with a software able to track the percentage of completion of all the activities leveraging on a predefined set of rules, that's OK.

For sake of clarity, in the below example, it is just given for granted to be able to quantify the work in percentage.

How EVM works 

EVM will put in comparison the work expected to be complete in a given moment (planned value, or BCWS), with the work that was actually completed in that moment (earned value, or BCWP) and the costs incurred to complete that work (actual costs, or ACWP).

Now, say you need to manage the project of your next house.

Your wife looks after finance, your brother has a small construction company. You are the project manager.

At first, you draft a rough table as depicted here below (a very basic WBS):

You can read the way you want the picture, but it's a fact that not so many nuances exude from that. Unless you really want to start and cross the fingers till the end, you will move soon to something more detailed, implementing a cost baseline coming from a minimum of good planning:

With that, the 6-months-project budget is outlined in three main work packages. Your final target is anyway to be faster and under budget than the data set out above, therefore it is essential to track the progress month per month.

Now, let's stop the clock at the end of the fourth month and examine the "1st floor" column.

  • At this point in time, you expected to spend 35k$ (planned value).
  • Your wife tells you that the activity consolidated costs for 48k$ (actual costs).
  • After analysis with your brother you establish that masons worked hard the first three months and the first floor is 90% completed (remember to apply your "earning rule").

Here is the earned value54k$, namely the planned value (60k$) weighted with the real work progress (90%).

To recap, at month n°4:

EV = 54000 $
PV = 35000 $
AC = 48000 $
It's right time to calculate the few magic metrics that will tell where the project is going compared to where it should be.

Metrics & outcome

EVM system concludes that:

  • CV (cost variance ) = EV - AC = 54000$ - 48000$ = 6000$
A positive value indicates that you have spent less than we planned at this point in time.
  • SV (schedule variance) = EV - PV = 54000$ - 35000$ = 19000$
A positive value indicated that you are going faster than planned.
  • CPI (Cost Performance Index) = EV/AC = 1.125
When CPI is greater than 1, you can report a cost saving trend. Viceversa, less than 1 values should alert for extra costs.
  • SPI (Schedule Performance Index) = EV/PV = 1.54
When SPI is greater than 1, you can report a outperformance trend. Viceversa, less than 1 values should alert for delay.

Other definitions

ETC (estimate TO completion): it is the estimated cost that you expect to bear to complete the project, evaluated in a given moment.
EAC (estimate AT completion): basically, it is the estimated overall bill at the end of project.
As a consequence:
EAC = AC + ETC, as simple as that.