Mastering Earned Value Calcuations for PMP Exam - Part-2 (CV, SV, CPI and SPI)

Note:

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In Part-1 of “Mastering the Earned Value Calculations for PMP Exam”, we have studied about simple things like Actual Cost (AC), Planned Value (PV) and Earned Value (EV). Those were the very basic things and need to be understood well to move forward. In this part, 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).

 Cost Variance (CV)

It represents any variation in the cost of the project as of today (data date).

• If cost variance is positive, project is under budget.
• If cost variance is negative, project is over budget.
• If cost variance is zero, project is on budget.

The formula for Cost Variance (CV) is

                        CV = EV – AC

So, it shows you the difference between what was achieved and what we have spent. This clearly makes us understand that if we have spent (AC) more than we achieved (EV), then we are over budget and CV will be negative.

Let’s modify the previous example (no need to see anywhere, I have reproduced the complete question below) 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 and spent $90000. What is the Cost Variance (CV)?

Answer: From the above examples of PV and EV we know that:

            PV = 80000

            EV = 100000

            AC = 90000

Before doing any calculation, just look at the data.

We have spent less Dollars what we have achieved. This means??? You got it right, project is under budget.

            CV = EV – AC = 100000-90000 = 10000 i.e. positive CV, Under budget.

 

Question: Can being under budget be bad for the project on a Data Date?

Answer: Yes, it can be. May be something was missed in the project which was planned and we didn’t do it and the project spent less. We need to investigate before coming to a conclusion.

Schedule Variance (SV)

It represents any variation in the Scheduled Value of the project as of today (data date).

• If schedule variance is positive, project is ahead of schedule.
• If schedule variance is negative, project is behind schedule.
• If schedule variance is zero, project is on schedule.

Warning: Please do not get confuse with the word Schedule. Schedule Variance will not calculate anything in terms of time. We are talking here about the values, so everything will be in Dollars (or Currency). It focuses on the value (amount) which was planned during a period not the period itself.

The formula for Schedule Variance (SV) is

                        SV = EV – PV

So, it shows you the difference between what was achieved and what was planned (contrary to the CV where we looked at what was spent). This clearly makes us understand that if we have planned (PV) more than we achieved (EV), then we are behind schedule and SV will be negative. But it will be in terms of Dollars or Currency not in terms of time period.

Let’s modify the above example again.

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 and spent $90000. What is the Cost Variance (CV)?

Answer: From the above examples of PV and EV we know that:

            PV = 80000

            EV = 100000

            AC = 90000

Before doing any calculation, just look at the data.

We have planned less Dollars (80000) what we have achieved (100000). This means??? You got it right, project is ahead of schedule.

            SV = EV – PV = 100000-80000 = 20000 i.e. positive SV, ahead of schedule.

 

Question: Can being ahead of schedule be bad for the project on a Data Date?

Answer: Yes, it can be. It shows that we finished the work earlier. May be the team worked overtime or missed something of a piece of equipment was not supplied by a vendor and the work related to that equipment was not completed or we skipped some quality tests, so we are ahead of schedule. We need to investigate before coming to a conclusion.

Cost Performance Index (CPI)

It is more or less like Cost Variance but it is expressed as Index. Instead of subtracting the AC from EV, we divide EV by AC. This means this will not be expressed in Dollars.

But the purpose is same, to determine, how the project is doing in terms of Costs.

It will be expressed in Number as you are dividing something in Dollars by another thing in Dollars (Simple Mathematics, right?)

CPI represents the efficiency of the money you spent till date. In other words it shows the value you are getting for each Dollar (or other currency) spent.

            CPI = EV/AC

Note the difference from CV, it was EV-AC, so instead of subtracting, you are dividing here.

As I mentioned earlier, CPI represents a number not the Dollar value. So what does it mean if a CPI is 1.1. It means EV>AC, right? It shows that we are getting more than what we are spending. Means project is under budget. It also represents that you are getting $1.1 on each $1 spent. Makes sense!

 

• If CPI is >1, project is under budget.
• If CPI is <1, project is over budget.
• If CPI is =1, project is on budget.

 

Let’s continue with the above example.

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 and spent $90000. What is the Cost Variance (CV)?

Answer: From the above examples of PV and EV we know that:

            PV = 80000

            EV = 100000

            AC = 90000

Before doing any calculation, just look at the data.

We have spent less Dollars what we have achieved. This means??? You got it right, project is under budget. Now we need to see what is we are getting in return of each Dollar invested.

            CPI = EV / AC = 100000 / 90000 = 1.111, CPI > 1 Under budget

CPI = 1.111 represents that we are getting about $1.111 for each $1 invested.

 

Schedule Performance Index (SPI)

It is more or less like Schedule Variance but it is expressed as Index. Instead of subtracting the PV from EV, we divide EV by PV. This means this will not be expressed in Dollars.

But the purpose is same, to determine, how the project is doing in terms of Schedule.

It will be expressed in Number as you are dividing something in Dollars by another thing in Dollars (Simple Mathematics, right?)

SPI represents the efficiency of the schedule in terms of value. In other words it shows the at what rate we are progressing in terms of schedule. For example if CPI is 0.8, we are just progressing 80% of the Planned Value.

            SPI = EV/PV

Note the difference from SV, it was EV-PV, so instead of subtracting, you are dividing here.

As I mentioned earlier, SPI represents a number not the Dollar value. So what does it mean if a SPI is 1.1. It means EV>PV, right? It shows that we are getting more than what we have planned for a particular period (see, time comes in picture here, however we are still talking the about Dollars), Means project is ahead of budget. It also represents that we are progressing 10% above than what we have planned.

 

• If SPI is >1, project is ahead of schedule.
• If SPI is <1, project is behind schedule.
• If SPI is =1, project is on schedule.

 

Let’s continue with the above example.

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 and spent $90000. What is the Cost Variance (CV)?

Answer: From the above examples of PV and EV we know that:

            PV = 80000

            EV = 100000

            AC = 90000

Before doing any calculation, just look at the data.

We have achieved more than what we have planned for. This means??? You got it right, project is ahead of schedule. Now we need to see progressing in terms of schedule.

            SPI = EV / PV = 100000 / 80000 = 1.25, SPI > 1 Ahead of Schedule

SPI = 1.25 represents that we are progressing 25% better in terms of Schedule.

This concludes the Part-2 of “Mastering the Earned Value Calculation for PMP Exam”. In Part-3, we will master the calculation related to Forecasting i.e. Estimate At Completion (EAC), Estimate to Complete (ETC), To-Complete Performance Index (TCPI) and Variance at Completion (VAC).