Mastering Earned Value Calcuations for PMP Exam - Part-1 (AC, BAC, PV and EV)

Note:

These all  articles are dedicated to my teachers, my seniors, colleagues, internet bloggers, online technical material, reference books from where I learned all these. There are chances that the material presented here is duplicated somewhere on the web. If anything is replicated anywhere, I sincerely give proper credits to the contributor.

All the Cost Calculations for PMP exam are related to each other and tightly linked. When you get a bunch of data in the question, you start getting confused. Sometimes you don’t even need to calculate anything and answer is given directly in the question. All that jargon AC, PV, EV blah, blah is given there to confuse the exam taker.

The only trick here is just know basics. Understand the basic definition of each of the cost related term which may appear in the question and you can answer those questions perfectly correct in the exam.

So are you ready? We will start with the easiest thing ever, which you also encounter in daily life i.e. Actual Cost. Isn’t it easy? The amount which cost you to do anything....

Anyway, let’s start with all those definitions with the examples calculation.

1. Actual Cost (AC) or Actual Cost of Work Performed (ACWP)
    
   In simple terms, “How much we have spent till today?”. This “Today” is called the Data Date as we are measuring the performance on this date.
    
   In other words, Actual Cost (AC) is the actual costs incurred by the project as of a certain point in time.
    
   There is no as such formula. You need to look at how much we have spent till the date in question.
    
   Example: Anil has budgeted $1.5 million for his construction project. The project has spent $300,000 on foundation and wall construction, $30,000 Electricity installation and, $13,000 on team management activities. What is the AC of the project?
    
   Answer: See how much project has spent till date.
   It is 300000+30000+13000 = $343000.
   No need to look at the Budget. Just concentrate on what has been spent.
    
    
2. Budget at Completion (BAC)
    
   It is the estimated cost when the project will be completed. Generally it is determined when the project is started (Remember “Determine Budget” process). Most of the times, it is given in the question unless the question is not intentionally made to create confusion.
    
   So, simply this is the money you need to complete the project.
    
   Example: Sujit is the project manager on a project to develop a public park. The materials are estimated to cost $200,000. The labor cost is estimated at $55,000. There are other costs which are directly attributed to the project and are  estimated at $25,000. Maintenance cost of the park (including the salary of the gardener) is estimated at $40,000. Find the BAC?
    
   Answer: See how much the project will cost at completion.
   200000+55000+25000 = $280000
    
   Note: Ongoing operation and maintenance costs are not part of the project, so we have not included them in our Budget.
    
3. Planned Value (PV) or Budgeted Cost of Work Scheduled (BCWS)

This is the estimated value of work for a specified time period. It means how much budget (out of the total) you have planned for that particular period when you are measuring your project performance.

Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. The total Budget for the project is $200000. After 5 months projects has planned for 40% work to be completed. What is the Planned Value (PV)?

Answer: After 5 months project is planned to be completed 40%, and the total budget is $200000. So our Planned Value is 40% of total budget. And that should be

                        40% of 200000 = (40/100)*200000 = $80000

Warning: Sometime it is not mentioned that how much you have planned. For example in above example, if it is not given that after 5 months project will be completed 40% then there is no way you can find the PV as you do not know what is planned in those 5 months. Exam takers assume the budget is divided equally for each month and they do the calculation accordingly. Never do that because you do not know what is planned.

    4. Earned Value (EV) or Budgeted Cost of Work Performed (BCWP) 

         This the estimated value of actual work performed as of today (this “as of today” is also   

        called  Data Date).

         Note the difference between PV and EV. PV was what you have planned and EV is what you have achieved.

 

What does it mean?

 

If the project is terminated today itself, EV will show you the value project achieved. If you see some question where it talks about Post Mortem Analysis of a project and give you PV, EV and AC,  and these values shows you project is behind schedule and under budget (how, we will see later) please assume the project was terminated.

 

Earned Value (EV) is used to calculate Schedule Variance (SV), Cost Variance (CV), Schedule Performance Index (SPI), Cost Performance Index (CPI) and To-Complete Performance Index (TCPI). How, we will see in this article only, but a bit later.

 

Let’s modify the above example to make it easy.

Example: Shampi is the project manager on a project for developing and E-Commerce portal. The project is expected to last 12 months. The total Budget for the project is $200000. After 5 months projects has planned for 40% work to be completed. She was able to complete half of the project. What is the Earned Value (EV)?

Answer: Now from the above example of PV, we know that the PV is $80000 as we have planned for 40% of the work of $200000.

Since we have achieved half of the work (50%), the earned value will be:

            EV = (50/100)*200000 = $100000

It shows that the project has achieved more than what was planned. Good for the project, right?

 

Note: Please note that ACWP, BCWS and BCWP are the terms used previously by the exam for AC, PV and EV. You do not need to remember these terms as the question states both the terms.

This concludes the Part-1 of “Mastering the Earned Value Calculations for PMP Exam”. In Part-2, we will master the calculations related to Project Performance i.e. Cost Variance (CV), Schedule Variance (SV), Cost Performance Index (CPI) and Schedule Performance Index (SPI).