VELAMMAL COLLEGE OF ENGINEERING & TECHNOLOGY, MADURAI-625 009

DEPARTMENT OF INFORMATION TECHNOLOGY

Degree B.Tech-IT

Course Code-Title CS6403/Software Engineering

Course Component Professional Core

Name of the Instructor Mrs.N.Shanmuga Sundari

Earned Value Analysis in Project Cost Management: Calculate Cost Performance Index
(CPI) and Schedule Performance Index (SPI)

Project Cost Management involves monitoring project performance based on indices.

In this article, we’ll explore the Cost Performance Index (CPI) and the Schedule Performance
Index (SPI) by conducting Earned Value Analysis. Examples are also provided for Earned Value
Analysis.

Performance Index (SPI)

Earned Value (EV) Analysis leverages the Earned Value Fundamental Formula to determine the
project performance indices pertaining to project cost and schedule. Earned Value is part of the
Control Costs process group in Project Cost Management. Earned Value Performance formula
consists of:

 Cost Performance Index (CPI): Represents the amount of work being completed on a
project for every unit of cost spent. CPI is computed by Earned Value / Actual Cost. A
value of above 1 means that the project is doing well against the budget.
 Schedule Performance Index (SPI): Represents how close actual work is being completed
compared to the schedule. SPI is computed by Earned Value / Planned Value. A value of
above one means that the project is doing well against the schedule.

Abbreviations

EV = Earned Value, PV = Planned Value, BAC = Budget at Completion, AC = Actual Cost

Formulas
The following formulas will be used for the following examples.

PV = Planned Completion (%) * BAC

EV = Actual Completion (%) * BAC

CPI = EV/AC

SPI = EV/PV

Earned Value Analysis Example 1

Suppose we have a budgeted cost of a project at $900,000. The project is to be completed in 9

months. After a month, we have completed 10 percent of the project at a total expense of
$100,000. The planned completion should have been 15 percent.

We will see how healthy the project is by computing the CPI and SPI.

From the scenario, you can extract the following:

BAC = $900,000
AC = $100,000

The Planned Value (PV) and Earned Value (EV) can then be computed as follows:

Planned Value = Planned Completion (%) * BAC = 15% * $ 900,000 = $ 135,000

Earned Value = Actual Completion (%) * BAC = 10% * $ 900,000 = $ 90,000

Compute the earned value variances:

Cost Performance Index (CPI) = EV / AC = $90,000 / $100,000 = 0.90. This means for every $1
spent, the project is producing only 90 cents in work.

Schedule Performance Index (SPI) = EV / PV = $90,000 / $135,000 = 0.67. This means for every
estimated hour of work, the project team is completing only 0.67 hours (approximately 40
minutes).

Interpretation: Since both Cost Performance Index (CPI index) and Schedule Performance
Index (SPI index) are less than 1, it means that the project is over budget and behind schedule.
This example project is in major trouble and corrective action needs to be taken. Risks
management needs to kick-in.

Earned Value Analysis - Example 2

Suppose we are managing a software development project. The project is expected to be

completed in 8 months at a cost of $10,000 per month. After 2 months, you realize that the
project is 30 percent completed at a cost of $40,000. You need to determine whether the project
is on-time and on-budget after 2 months.
Step 1: Calculate the Planned Value (PV) and Earned Value (EV)

From the scenario,

Budget at Completion (BAC) = $10,000 * 8 = $80,000

Actual Cost (AC) = $40,000
Planned Completion = 2/8 = 25%
Actual Completion = 30%
Therefore,

Planned Value = Planned Completion (%) * BAC = 25% * $ 80,000 = $ 20,000

Earned Value = Actual Completion (%) * BAC = 30% * $ 80,000 = $ 24,000
Step 2: Compute the Cost Performance Index (CPI) and Schedule Performance Index (SPI)

Cost Performance Index (CPI) = EV / AC = $24,000 / $40,000 = 0.6

Schedule Performance Index (SPI) = EV / PV = $24,000 / $20,000 = 1.2

Interpretation: Since Cost Performance Index (CPI) is less than one, this means the project is
over budget. For every dollar spent we are getting 60 cents' worth of performance. Since
Schedule Performance Index (SPI) is more than one, the project is ahead of schedule. However,
this has come at a cost of going over budget. If work is continued at this rate, the project will be
delivered ahead of schedule and over budget. Therefore, corrective action should be taken.

Apart from computing the Cost Performance Index (CPI) and Schedule Performance Index
(SPI), we can calculate the earned value cost and schedule variance.

Examples of Cost Variance (CV) and Schedule Variance (SV) in a Project

Measuring against a baseline gives you a variance. In projects, the cost variance and schedule
variance tell us whether our project is on-budget and on-time. we will see how Earned Value
Management aids in project cost variance and schedule variance computations.

Earned Value Management Variance Formulae leverage the Earned Value Management
Fundamental Formulae (BAC, AC, PV, and EV) to determine the variances pertaining to project
cost and schedule. Earned Value Management Variance formulae consist of:

Cost Variance (CV): This is the completed work cost when compared to the planned cost. Cost
Variance is computed by calculating the difference between the earned value and the actual cost,
i.e. EV – AC. As you can deduce from the formula, Cost Variance will be negative for projects
that are over-budget. Monitoring project cost variance is critical to ensuring the project is
delivered on budget. Using realistic project estimations is a good start to ensuring there isn't
significant cost variance.
 Schedule Variance (SV): This is the completed work when compared to the planned
schedule. Schedule Variance is computed by calculating the difference between the
earned value and the planned value, i.e. EV – PV. A positive Schedule Variance tells you
that the project is ahead of schedule, while a negative Schedule Variance tells us the
project is behind schedule. Monitoring Schedule Variance is critical to delivering the
project on-time.
Earned value cost and schedule variances are part of the Control Costs process group.

Example 1

Suppose we have a budgeted cost of a project at $900,000. The project is to be completed in 9

months. After a month, we have completed 10 percent of the project at a total expense of
$100,000. The planned completion should have been 15 percent.

Planned Value = Planned Completion (%) * BAC = 15% * $900,000 = $135,000

Earned Value = Actual Completion (%) * BAC = 10% * $900,000 = $ 90,000
Compute the earned value management cost and schedule variances:

Cost Variance = EV – AC = $90,000 - $100,000 = -$10,000

Schedule Variance = EV – PV = $90,000 - $135,000 = -$45,000

Interpretation: Since the Project Cost Variance is negative, this means the project is over-
budget. Since Schedule Variance is negative, the project is behind schedule. This example
project is in major trouble and corrective action needs to be taken to get it back on track. Earned
Value Management cost variance and schedule variance will help you identify a project in
trouble. To fix the problem areas is a different ball game. You will need to use effective risk
management. In this case, the project schedule variance can be controlled by using the critical
path method.

Example 2

Suppose we are managing a software development project. The project is expected to be

completed in 8 months at a cost of $10,000 per month. After 2 months, we realize that the project
is 30 percent completed at a cost of $40,000. We need to determine whether the project is on-
time and on-budget after 2 months. Let's see how healthy the project is by calculating the cost
variance and schedule variance.

Step 1: Calculate the Planned Value and Earned Value

From the scenario:

Budget at Completion (BAC) = $10,000 * 8 = $80,000

Actual Cost (AC) = $40,000
Planned Completion = 2/8 = 25%
Actual Completion = 30%
Therefore,

Planned Value = Planned Completion (%) * BAC = 25% * $80,000 = $20,000

Earned Value = Actual Completion (%) * BAC = 30% * $80,000 = $24,000
Step 2: Compute the earned value management cost and schedule variances:

Cost Variance = EV – AC = $24,000 - $40,000 = -$16,000

Schedule Variance = EV – PV = $24,000 - $20,000 = $4,000
Interpretation: Since Cost Variance is negative, this means the project is over-budget. Since
Schedule Variance is positive, the project is ahead of schedule. However, this has come at a cost
of going over-budget. If work is continued at this rate, the project will be delivered ahead of
schedule and over-budget. Therefore, corrective action should be taken in terms of cost. To
control the project cost variance, we will need to monitor resource utilization more carefully. It is
also possible that the initial project estimate was unrealistic. Hence, our need to protect our
project from cost overruns. We consider not using techniques that increase the cost variance,
such as crashing the project schedule.

Earned Value Management System

In any given project, there are three variables that control the project from its conception to
finish. These three variables are the Scope, Cost and Time factors. The Scope outlines the reason
for the project being carried out and remains constant throughout the project life cycle, while
Cost and Time may be adjusted according to the need and the phase. Ideally, while managing a
project, cost estimates and time estimates are separately taken into consideration. The main
concern of all stakeholders during each phase would be, “How much time will it take, and how
much is it going to cost in the end?" Separate time and cost reports can be tedious to interpret as
they many not necessarily be along the same plane.Earned Value is a technique that calculates
the cost and time factors to deduce a monetary value for the project. It follows the Earned Value
Management System to arrive at a value known as the EAC or Estimate at Completion. The EAC
gives an approximate estimation of what the project is likely to cost based on the project’s
performance at any given time. It gives a fairly accurate estimate of the project’s progress based
on Planned Values and Actual Values at the end of the project. In the following sections we will
understand how to calculate earned value based on a few 'work' values.

1. Planned Value (PV)

Planned value is also known as the Budgeted Cost of Work Scheduled (BCWS). It is the physical
work as per time schedule alongside an authorized budget for the work. This is a value that may
be assigned at the beginning of the project, based on the different ‘work’ phases in a project. A
combination of different works in the WBS (Work Breakdown Structure) gives rise to the
Budget at Completion (BAC).

2. Actual Cost / Actual Value (AC)

The Actual Cost was once known as Actual Cost of Work Performed (ACWP). As the term
implies, it is the cost for the actual physical work accomplished.
3. Earned Value (EV)
Every project manager has to develop the knack on how to calculate earned value with ease. It is
simple to understand once the above mentioned terms are familiarized with and calculated.

Earned Value is the percentage of work covered by the PV, or planned value.

For example, if the PV is $1,000 and the project is 20% complete, the EV would be calculated
as,

EV = PV x % = 1,000 x 20/100 = $200

When the Earned Value is used in conjunction with Actual Cost Values, it results in a
performance ratio of the project.

For example, in addition to the values stated in the previous example, if the Actual Costs on
project completion for that phase is 20%, or $800, then the performance ratio would be:

(800 / 1000) x 100 = 80%

If the Performance Ratio is more than 100%, it means the project exceeds the budget (negative
expenditure), and if it is equal to 100%, it means that it is alongside the planned budget. In this
case, it is well below 100%, at 80% and gives room for positive expenditure.