5th Edition PMBOK® Guide—Chapter 7: Earned Value Management (Part 1)

1. Introduction

Earned Value Management is the first technique listed in the 5th Edition PMBOK® Guide for the only time management knowledge area process in the Monitoring & Controlling Process Group, 7.4 Control Costs. It is also the most powerful in the extent of its use and implications for the proper management of a project. For those of you who are new to the concept, and are wondering “what is earned value management good for?”, let me tell you a story. There once was a young Native American brave who once asked his father, “I know that we’ve from the Halawi tribe, but where did the name come from.” “The chief came up that name. Last winter, when we moving our hunting grounds to this place, I went up to him and asked him the same question you asked me. What’s the name of our tribe? He was standing on a hill looking lost, when he looked up from his map, and said, “where the Halawi?” And that’s how we got our name. The purpose of that little story is to let you know that when you are working on a new project, at some point your “chief” or boss may come to ask you the same question, “where the hell are we?” In other words, is the project under budget and on schedule? That’s what earned value management can tell you.

2. Three Key Quantities: PV, EV, AC

There are three basic quantities you need to know when dealing with earned value analysis: Planned value, earned value, and actual cost. The PMBOK® Guide gives a definition which, although accurate, might be more simply expressed as I have attempted to do in the column marked “English Definition” next to the “PMBOK® Guide Definition.” The reason why earned value measurement works is because the quantity of “earned value” is a measure of both the schedule (“measure of work performed”) and the budget (“expressed in terms of budget authorized for that work”), and a combination of earned value and the planned value or actual cost can give an indication of how the project is doing with respect to the schedule or the budget, respectively.

Quantity Measures PMBOK® Guide Definition English Definition
Planned Value (PV) Schedule Authorized budget assigned to scheduled work. How much work was supposed to be done?
Earned Value (EV) Schedule AND Budget Measure of work performed expressed in terms of budget authorized for that work How much work was actually done?
Actual Cost (AC) Budget Realized cost incurred for the work performed on an activity during a specific time period How much did the work actually cost?

Now the planned value, earned value, and actual cost are measured at various times during the project and thus provide a “snapshot” of how the project is doing.

3. Budget at Completion

One additional quantity you need to be aware that is related to one of the key three quantities above is that of the Budget at Completion. The planned value or PV is the authorized budget assigned to the work scheduled up to that point. If you take the project all the way to its completion, then what should the planned value be at the end of the project? It should be equal to the budget at completion or BAC, in other words, the authorized budget assigned to ALL the work scheduled in the project. However, a word of caution! The actual PMBOK® Guide definition is “sum of all budgets established for the work to be performed”, and then in the chart on page 224 of the Guide, it says in the next column “the value of total planned work, the project cost baseline.” One of the problems about dealing with the project budget is that in reality, it is like a three layer cake, with the bottom layer being the project cost estimate, with a layer of contingency reserves or “filling” on top, which creates the middle layer called the project cost baseline, and a layer of management reserves or “filling” on top of that, which creates the top layer called the project budget. The BAC or budget at completion is, somewhat confusingly, NOT based on the project budget or the top layer, but on the middle layer of the project cost baseline, which includes both the cost estimates and the contingency reserves (but NOT the management reserves). So just be aware that although it says the budget at completion, this will be obtained by getting the project cost baseline for the project, and not the project budget. I guess we could all start calling it the “Baseline at Completion” to avoid confusion, but the terminology of Budget at Completion is so well firmly established, that it would be hard to change the term at this point. The next post shows how these four quantities, PV, EV, AC, and BAC (which is related to PV), can be used to show the variance of the project from its performance baseline of either the schedule or the budget. The fact that it can be used to handle both types of variance is part of the reason why earned value management has such tremendous utility as a technique for monitoring & controlling a project.

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