Using Earned Value Management to Predict Final Project Costs

Delivering successful outcomes within budgetary constraints is one of the primary goals of project management. One effective tool for achieving this is earned value management (EVM), which measures project progress and predicts final project costs. By integrating project scope, schedule, risk and budget, EVM provides project managers with invaluable insights for accurate and confident cost forecasting.

What is Earned Value Management?

At its core, EVM is a project management technique that brings together three key performance dimensions: planned value (PV), earned value (EV), and actual cost (AC). Together, these metrics provide a comprehensive overview of project health and progress.

Planned value, also called the budgeted cost of work scheduled (BCWS), represents the original value of the work to be completed at a specific point in time according to the project plan.

Earned value is also known as the Budgeted Cost of Work Performed (BCWP) and is the value of work completed per the defined metrics at a particular point in time.

Actual cost is also called Actual Cost of Work Performed (ACWP) and denotes the actual cost incurred for the work completed until the reporting date.

How Does EVM Predict Project Costs?

EVM's predictive power lies in its ability to compare the planned value and the actual costs against the project’s earned value. By analyzing these three metrics, project managers can forecast the final project cost with remarkable accuracy.

Cost variance (CV) signifies whether a project is under or over budget at a given time and is calculated by subtracting the actual cost from the earned value (CV = EV - AC). A positive CV indicates the project is under budget, while a negative CV implies overspending.

Schedule variance (SV) highlights whether the project is ahead of or behind schedule by measuring the difference between earned and planned values and is calculated by subtracting the planned value from the earned value (SV = EV - PV). A positive SV indicates the project is ahead of schedule, whereas a negative SV denotes a delay.

The cost performance index (CPI) compares earned value to actual cost and provides insights into cost efficiency. It is calculated by dividing the earned value by the actual cost (CPI =EV / AC). A CPI value above one signals efficiency, while a value below 1 indicates a cost overrun.

Schedule performance index (SPI) compares earned value to planned value and provides insights into schedule efficiency.  It is calculated as by dividing the earned value by the planned value (SPI = EV / PV).  A SPI value above one signals efficiency, while a value below one indicates a schedule overrun.

Estimate at completion (EAC) is an estimation of the total cost required to complete a project considering its performance up to the reporting date. It is either provided directly from inputs by project team members or calculated using methods such as CPI-based forecasts.

Variance at completion (VAC) shows the difference between budgeted cost and expected total cost at project completion (VAC = BAC – EAC, where BAC stands for budget at completion).

CPI Stability Rule

The concept of a cost performance index “stability rule” originated with an article from Christensen and Payne over 30 years ago. This article states that after reviewing 155 government projects, once a project is 20% complete, the cumulative CPI rarely changes. This means you can predict the total cost of a project using this formula:

EAC = 1/CPI (BAC – EV) + AC

Another popular statical forecasts is:

EAC = 1/CPI*SPI (BAC – EV) + AC

Since the stability of the CPI has been validated, you can compare the CPI required to maintain the EAC being reported. This metric is called to complete performance indicator for estimate at completion (TCPI_eac):

TCPI_eac = (Budget – Earned) / (EAC – Actual)

TCPI_eac is an index showing the efficiency at which the resources on the project should be utilized for the remainder of the project to achieve the EAC. TCPI_eac is an indicator of the validity of the EAC. If TCPI_eac is significantly different from CPI, there should be an explanation for how the performance is going to improve for the remaining work to achieve the reported EAC.

The ideal analysis of a project forecast includes comparing the following KPIs:

• The estimated remaining work reported by those doing the work
• One or more statistical forecasts
• Contrast the CPI and the TCPI

Predicting Final Project Costs with EVM

EVM is beneficial for identifying early signs of cost overruns or schedule delays so project managers can take corrective actions promptly. In addition, EVM metrics enable project managers to predict the final project cost and validate estimates provided by those doing the work.

Project managers gain a comprehensive understanding of project financial health by comparing planned value, earned value, and actual cost. If earned value surpasses planned value and the cost performance index exceeds one, the project is efficiently managing costs. However, if the earned value falls behind the planned value and the cost performance index is below one, cost overrun concerns indicate the need for corrective action.

Using these insights, project managers can make informed decisions about resource allocation, risk management, and project scope adjustments. By proactively addressing issues flagged by EVM metrics, project managers can maintain better control over project costs, ensuring that the final budget aligns with initial estimates.

In the dynamic landscape of project management, predicting final project costs is crucial to achieving successful outcomes. Earned Value Management is a powerful technique for harmonizing project scope, schedule, and budget, empowering project managers with a robust predictive toolset. Deltek Cobra is the trusted industry leader in cost and earned value management. By analyzing metrics like planned value, earned value, and actual cost, Deltek Cobra enables project managers to forecast cost variations and take timely corrective actions, guiding projects toward efficient cost management and enhancing the likelihood of success within budgetary constraints.