11/4/23, 10:42 PM How To Control Cost: Earned Value Management Basics

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Blog > Project Controls Tips & Tutorials > How To Control Cost: Earned Value Management Basics

How To Control Cost: Earned Value

Management Basics
JULY 5, 2018 BY JUAN RODRIGUEZ — 1 COMMENT

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Cost is one of the triple constraints in

project management and one of the most
important of every project. While
challenging to manage and control, not
impossible and there are many tools and
methods out there to help you.

One of the most accepted tools is the

Earned Value Management (EVM) process POPULAR ARTICLES

that can capture project health and performance easily. The process incorporates Primavera P6 Version 20.12 Is Out. Here’s
project progress, schedule and costs, so you can project and analyze how the What’s New.
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The following paragraphs provide basic and general knowledge about EVM and
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how costs are controlled when the EVM gets implemented. Online Learning
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Earned Value Management Terms Project Controller
Let’s start by defining the terms used during the process and what they mean, so 7 Earned Value Management Formulas To Make
Your Life Easier As A Project Controls
you can properly understand the methodology.
Professional
Planned Value (PV) represents the budgeted cost of the work. In Microsoft How to Audit Your Primavera P6 Global Activity
Projects and other tools, it’s also known as budgeted cost of work scheduled Codes
(BCWS). In other words, it represents the money to be spent in the project on Boring Project Reports? 8 Project Timeline Tools
To Help You Create Visual Reports
a given task or overall project.
Actual Costs (AC) is the cost incurred for the work already completed. It can
also be known as actual cost of work performed (ACWP). Browse All Article Topics
Earned Value (EV) is the total budget of work completed at any given time. In
Microsoft Project and other software, it’s known as budgeted cost of work
performed (BCWP).
Cost Performance Index is the ratio representing the amount of work
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completed for every unit of cost spent. When greater than 1, the project is in
good health and under budget. It is calculated by dividing EV/AC.
Schedule Performance Index shows how much work has been completed
compared to the baseline schedule. When it is greater than 1, the project is
ahead of schedule. It is calculated by dividing EV/PV.

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11/4/23, 10:42 PM How To Control Cost: Earned Value Management Basics

Using EVM is a great approach at identifying risks and understanding when a

project is going to be over budget or coming at budget.

The previous terms are calculated comparing the baseline schedule and the
original budget to the actual costs incurred in the project. The different ratios and
tools that the EVM provide are important tools to forecast the actual cost
performance and the budget at completion at any given time. The tools can also
be used to determine the estimate at completion and from those numbers you
can put together a plan to bring the project on track and close the actual budgeted
cost.

Check out our 7 Earned Value Management Formulas To Know For Project
Controls & the 70 Project Scheduling Terms That Every Planner Needs To Know
article.

Benefits of Earned Value Management

The benefits of using EVM to control cost are many, but it is important because it
presents an opportunity to calculate the cost on a per task or activity basis. For
each activity you will know how the cost and indexes are performing. By doing this,
you can direct your resources and effort to that particular level to improve its
performance.

The schedule indexes and ratio are good information to have, because most of the
time a project that is behind schedule might tend to add resources or increase its
cost to meet the schedule. One critical index is the “to complete Performance
Index”, as it provides a snapshot of how the project must perform to meet the
financial goal or commitment.

The analysis is now mandatory on all federal contracts and every contractor must
have a good understanding of the analysis. EVM is a good tool to prevent scope
creep and helps maintain a good forecasting analysis of the project. Because it
demonstrates how a project is performing, the tools will help identify risk and
potential areas of concern related to cost and schedule.

The variance at completion is another component which tells you how much over
or under budget will the project be once it gets completed. These ratios and
indexes are beneficial to the project team and to the communication when there
are problems affecting the project cost. By knowing how each activity is
performing, you can free up resources that can be reallocated to other activities
without affecting the overall project budget and cost – keeping the project on
track.

It is very important to record accurate information about the costs and

expenditure of critical activities. Do you used EV to record and control your costs?

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11/4/23, 10:42 PM How To Control Cost: Earned Value Management Basics

Filed Under: Project Controls Tips & Tutorials, Trends

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About Juan Rodriguez

Juan Rodriguez is a Project Management Professional (PMP) and a
registered Professional Engineer in Illinois, New York and Puerto Rico with
over 21 years of experience managing large civil works, power generation and
renewable energy projects. He has international experience working in US,
Canada and the Caribbean. Mr. Rodriguez also offers his services as a
consultant to builders, contractors and construction related professionals.
Juan is an excellent speaker and a true leader that knows how to combine
plain old school with new technology, maximizing results for your
organization. Juan will contribute with his thorough understanding of
corporate and industry practices, applicable laws, processes, standards, and
will provide evaluation of project activities. He has demonstrated excellent
communication and interpersonal skills, magnificent contract and business
acumen.

Comments

Penny says:
July 07, 2018 at 12:27 am
Juan Rodriguez, thanks a lot for the post.Really thank you! Much obliged.

Reply

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11/4/23, 10:42 PM How To Control Cost: Earned Value Management Basics

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