In the course of my career I have encountered on numerous occasions a situation where executives, top managers and even project managers had issues with understanding the concept of Earned Value. So, I have developed a series of very simple examples to address that issue.
Imagine the following:
You have ten days to produce ten glasses at a total cost of $10. You project does not have Initiation, Planning or Close-out stages; only Execution and Monitoring. Having said that, it is reasonable to assume that you should be producing 1 glass a day and spending $1 per glass.
1 glass per day @ $1/glass
The key EV formulas are:
PV = Planned Quantity X Planned Cost
AC = Actual Quantity X Actual Cost
EV = Actual Quantity X Planned Cost
Schedule Variance = SV = EV – PV
- SV = $0 means we are on plan in terms of spending (neutral)
- SV > $0 means we are ahead of plan in terms of spending (good)
- SV < $0 means we are behind plan in terms of spending (bad)
Cost Variance = CV = EV – AC
- CV = $0 means we spent the same amount as the value of the work we received (neutral)
- CV > $0 means we spent a lesser amount than the value of the work we received (good)
- CV < $0 means we spent a greater amount than the value of the work we received (bad)
NOTE: Don’t worry if the formulas don’t make sense at this point of time, they will become clear very soon!
Let us examine several potential situations:
7 glasses @ $2/glass
It is day 7 and you have produced 7 glasses at a cost of $14. Where do you think (without going into formulas) you are in terms of budget and time? It is day 7 and you have manufactured 7 glasses, so you are on time. However, you have exceeded your budget of $1/glass.
Let us examine the following situation using our formulas: