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TOPIC: Earned Value vs. Actual Costs

Earned Value vs. Actual Costs 4 years 1 month ago #2946

  • James Pursley
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If earned value (EV) = how much work has been accomplished on the project and Actual Cost (AC) = the true costs incurred, what is the difference between the two terms and how they relate?

Earned Value vs. Actual Costs 4 years 1 month ago #2947

  • Rachu
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Hi James,

Let me first take an example. Lets say a very small project has total BAC (budget at completion) value of USD1000 and duration estimate of 4 weeks. Following are some numbers after 2nd week of completion in the project,

The project is 40% complete. The Actual Cost incurred on the project so far is USD 350.

Now according to the duration estimate, the project should be 50% complete (2 weeks in 4 weeks duration), so the PLANNED VALUE is USD 500 (50% of total BAC of USD1000). But the project is only 40% complete so far, so the value we earned in the project, EARNED VALUE is USD400 (40% of the BAC). We also have the ACTUAL COST of USD350.

So the EV is the value we earned in the project and AC is the cost to earn that value. If AC is lower than the EV that mean we are under budget (at that point, which is the case in this example). CPI (Cost Performance Index =EV/AC) gives that value. Think about if AC is USD450 in lieu of USD350, the same project becomes over budget.

Not sure if my explanation is clear or not, experts please chime in with your valuable comments.

Regards, R.

Earned Value vs. Actual Costs 4 years 1 month ago #2949

  • Khurram Hussain
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Rachu’s example is correct. However, allow me to explain the underlying fundamental concept.

Projects are carried out to attain different objectives. External projects are usually carried out to earn revenue while internal projects are carried out either to earn revenue or achieve an organization’s objective or goal. Revenue analysis for the projects carried out to earn revenue is easy and you would use measures as NPV, IRR or Rate of Return to analyze these revenues. However, the majority of projects do not contribute directly to earning revenues. For example, setting up a new enterprise resource planning system for an organization doesn’t directly earn revenue of the organization. This is an internal project and the associated benefits are intangible. To analyze cost performance, a project manager needs a system that is impartial of revenue contributions of the project and is rather based on the original budget approved for the project.

The Earned Value Management system compares the cost and schedule performance of a project by comparing the current state with the approved cost and schedule baselines.

Every project eats its allocated budget to progress. If the project is eating the budget more than the planned rate, it is likely to go over budget. The Actual Cost “AC” is the budget that has been consumed to date. The Planned Value “PV” is the amount of budget that was allocated to be consumed to date. The Earned Value “EV”, is the amount of work the project has completed in reference to the original project budget “BAC”. It would have been better if we could base the EV on the actual revenues generated by the project, however as I have already explained, most of the projects do not have direct revenue contributions. Hence, the EV is a comparison against the approved budget (BAC) instead of the forecasted revenues.

To summarize, EV is the sum of the planned budget allocation for the amount of work completed to date. PV is the sum of the planned budget allocation for the amount of work “that should have been” completed to date. The difference of EV and PV will tell you about the schedule variance.

If you'll read Rachu's comment now, it should be easier to grab. Please let me know if I have been successful in explaining the core concept?

Warm regards,

Khurram Hussain, PMP, CSSBB

Earned Value vs. Actual Costs 4 years 1 month ago #2950

  • James Pursley
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Thank you both for two very well thought out responses! Based on your explanations is still seems like that AC and EV totals will be the same at any point of the effort since even for non-revenue-generating projects you will still have costs. I get the feeling I'm still missing something. If you start back with the definition I used of EV and AC in the starting thread (i.e. EV is equal to the work that has been accomplished on the project; and, AC is equal to the true costs incurred) then maybe my beginning premise is not accurate. Doesn't EV and AC apply to both revenue-generatong AND non-revenue generating projects or is there some exclusion for either scenario that is not needed for one of the two variables?

Thank you,
Jim

Earned Value vs. Actual Costs 4 years 1 month ago #2952

  • Khurram Hussain
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Hi Jim:

The Earned Value Management is independent of whether project is revenue generating or not. All it considers is the approved project budget and schedule, that is the baselines.

Please also note that there are projects which do not incur direct costs, hence no AC. For example, if I am managing a project internally for my organization that requires development of a reporting system, it won’t cost me anything except me and my team’s time. One can argue that a portion of our salaries contributes to this project as its cost, but that’s indirect cost. Usually for internal projects that do not require capital investment, AC is not recorded.

Coming back to your question whether AC and EV be equal for projects having direct costs; yes they can be equal, but that will be a very rare and unlikely situation. If the project budget and schedule was very well defined, and everything goes as planned, then you might have both these values be equal.

Imagine if we are exactly completed half of the project work having an approved budget of $100,000, what would be our current EV? That is, how much ‘value’ have we earned so far in comparison to the approved budget? 50% of it right? So the EV is $50,000. Now, what is our AC? Is it $50,000 as well? No, it can’t be determined by that. AC is independent of the baselines; it is the amount we have spent so far. The AC can be $40,000 or $60,000 or anything else depending upon how much we have actually spent.

So, here are the answers to your questions:

1. No, AC and EV totals are generally not the same.
2. EV is based on the ‘value’ of work completed in comparison to the BAC.
3. AC is the actual costs incurred to date; independent of EV or BAC.
4. EV, and AC are not related to project revenues at all. Both, revenue-generating and non-revenue-generating projects have EV and AC.
5. Your definitions of EV and AC are correct.

Please feel free to let me know if I have failed again in clearing your confusion. If that’s the case, perhaps I have not understood your question. Please try rephrasing your question with some sort of an example.

Regards,

Khurram Hussain, PMP, CSSBB

Earned Value vs. Actual Costs 4 years 1 month ago #2954

  • James Pursley
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Khurram - Thank you once again and especially for such a thorough and thoughtful reply! Your assistance is far from failing me. It is greatly helping me understand a problem area for me and what may as well be a foreign language to me - finances ;) . Your insight is huge help and I greatly appreciate it. I'm scheduled to sit for the exam on December 2 and along with continued review of the knowledge areas and process groups I am spending the last month or so primarily focusing on the finance and formula aspects so I will probably have more questions - fair warning B) .

Thank you,
Jim

Earned Value vs. Actual Costs 4 years 1 month ago #2955

  • Khurram Hussain
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Thanks and best of luck for your exam :)

Regards,

Khurram Hussain, PMP, CSSBB
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