Earned Value Management for Contractors, Without the Jargon

The three numbers everything is built from

Earned value uses three measurements, all expressed in dollars so they can be compared directly. The trick is that all three are stated in budget dollars except actual cost, which keeps the comparison honest.

• •Planned Value (PV): the budgeted cost of the work you scheduled to have done by now
• •Earned Value (EV): the budgeted cost of the work you have actually completed
• •Actual Cost (AC): what you have actually spent to complete that work

The two ratios that matter

Once you have the three numbers, two simple divisions tell you almost everything.

The Cost Performance Index, CPI = EV / AC, measures how efficiently you are spending. A CPI of 1.0 means you are getting exactly a dollar of budgeted work for every dollar spent. Above 1.0 means you are under budget; below 1.0 means every dollar is buying less than a dollar of progress.

The Schedule Performance Index, SPI = EV / PV, measures how efficiently you are progressing against the plan. Above 1.0 means you are ahead of schedule in dollar terms; below 1.0 means you are behind.

• •CPI = EV / AC, where above 1.0 is under budget and below 1.0 is over budget
• •SPI = EV / PV, where above 1.0 is ahead of schedule and below 1.0 is behind
• •CPI below 1.0 and SPI below 1.0 together is the danger zone: behind and bleeding cash

A worked example

Take a 100,000 dollar concrete package planned to run ten weeks at an even 10,000 dollars per week. At the end of week 5, you planned to be halfway done, so PV is 50,000 dollars.

In reality your crew has completed 40 percent of the work, so EV is 40,000 dollars (40 percent of the 100,000 dollar budget). To get that 40 percent done you have spent 48,000 dollars, so AC is 48,000 dollars.

CPI = 40,000 / 48,000 = 0.83. You are getting 83 cents of budgeted work per dollar spent, so you are over budget. SPI = 40,000 / 50,000 = 0.80. You have earned only 80 percent of what you planned to earn by now, so you are behind schedule. Both numbers are below 1.0, which is a clear signal to act before week 5 becomes week 10.

How EVM relates to the labor Performance Factor

If you already track a labor Performance Factor, EVM will feel familiar. The Performance Factor compares earned labor hours to actual labor hours, which is the same idea as CPI applied specifically to labor instead of total cost. EVM simply widens the lens to include material, equipment, and subcontractor costs and adds the schedule dimension through SPI.

Field PM rolls budget-versus-actual, productivity, and forecasting into one PM dashboard, so the inputs for EV and AC come from the same job-cost data you are already capturing in daily reports and the time clock rather than from a separate spreadsheet.

Using the indexes to forecast

The real payoff is forecasting. If your CPI has been holding around 0.83, it is naive to assume the rest of the job will magically come in on budget. A common estimate at completion divides the total budget by the current CPI: 100,000 / 0.83 is about 120,000 dollars. That projected 20,000 dollar overrun is your early warning, and you get it at week 5 instead of at closeout.