20.2 Earned Value and Cost Forecasting
Key Takeaways
- Earned value integrates scope, schedule, and cost using Planned Value (PV), Earned Value (EV), and Actual Cost (AC) at a common data date.
- Core formulas: CV = EV − AC, SV = EV − PV, CPI = EV / AC, SPI = EV / PV — positive variances and indices above 1.0 are favourable.
- Spend being under the cash profile does not mean the project is healthy; it may simply mean work is late and not yet invoiced.
- Where current cost efficiency is expected to continue, EAC is approximated as BAC divided by CPI, with ETC as EAC minus AC and VAC as BAC minus EAC.
- SPI is a value-based signal rather than a calendar measure, so critical path analysis is still required when the question is about dates.
Outcome 22b asks you to know how to forecast and refine budgets using cost control techniques, for example earned value. The syllabus names earned value directly, so expect to compute and — more importantly — interpret it. Marks are lost far more often on interpretation than on arithmetic.
From budget to control
Creating a budget (previous section) is only half of LO22. You must also forecast and refine budgets using cost control techniques such as earned value, monitor and report financial performance, and close down finances at the end of the project. This section teaches those outcomes with numbers simple enough for PMQ long-response and calculation-style reasoning.
Core idea: Spend alone does not tell you health. A project can spend under its monthly profile while delivering almost nothing — or spend ahead while delivering more value than planned. Earned value compares what you planned to earn, what you did earn, and what you spent.
Earned value management — the three measures
At any data date (status date), three quantities sit at the heart of earned value:
| Measure | Common name | Meaning |
|---|---|---|
| PV | Planned Value (also BCWS — budgeted cost of work scheduled) | Budgeted cost of work scheduled to be done by the data date |
| EV | Earned Value (also BCWP — budgeted cost of work performed) | Budgeted cost of work actually completed by the data date |
| AC | Actual Cost (also ACWP — actual cost of work performed) | Actual cost incurred for the work performed by the data date |
Budget at Completion (BAC) is the total authorised budget for the project (or control account) used as the full planned value at completion.
All three of PV, EV, and AC must use compatible scope and coding (the CBS/WBS baseline). Comparing random invoices to an outdated schedule produces fake insight.
Variances and indices
| Metric | Formula | Interpretation |
|---|---|---|
| Cost Variance (CV) | EV − AC | Positive = under budget (earned more value than spent); negative = over budget |
| Schedule Variance (SV) | EV − PV | Positive = ahead of schedule in value terms; negative = behind |
| Cost Performance Index (CPI) | EV / AC | >1 efficient (under budget); <1 inefficient (over budget); =1 on cost plan |
| Schedule Performance Index (SPI) | EV / PV | >1 ahead; <1 behind; =1 on schedule plan (in EV terms) |
Memory aid: Variances subtract; indices divide. EV is always the first term in these standard forms. Favourable is positive CV/SV and CPI/SPI above 1.0.
Exam trap: Using AC − EV or PV − EV without stating you inverted the standard form. Stick to EV − AC and EV − PV so signs match common APM/PM practice teaching.
What the indices mean in plain language
- CPI 0.80 means each £1 actually spent earned only £0.80 of budgeted work.
- SPI 1.10 means the project has earned 10% more budgeted work than was scheduled by the data date.
SPI is a value-based schedule signal. It is not a pure calendar-day measure; critical path analysis still matters for date forecasting. For PMQ, use SPI/SV as integrated progress indicators and still discuss critical path when dates are the issue.
Worked numerical example (PMQ-suitable)
Project facts
- BAC (total budget) = £200,000
- At the end of month 4 (data date):
- PV = £80,000 (work scheduled to be done by now, valued at budget)
- EV = £70,000 (work actually completed, valued at budget)
- AC = £90,000 (actual cost incurred for work performed)
Step 1 — variances
- CV = EV − AC = 70,000 − 90,000 = −£20,000 → over budget by £20,000 for work done
- SV = EV − PV = 70,000 − 80,000 = −£10,000 → behind schedule by £10,000 of planned value
Step 2 — indices
- CPI = EV / AC = 70,000 / 90,000 = 0.78 (approximately) → cost efficiency poor
- SPI = EV / PV = 70,000 / 80,000 = 0.875 → schedule performance behind in value terms
Step 3 — story for the sponsor
The project has completed less work than planned (negative SV / SPI < 1) and the work completed cost more than its budgeted value (negative CV / CPI < 1). Status is behind and overspending relative to value earned — not merely "cash high" or "cash low."
| Metric | Value | Traffic-light meaning |
|---|---|---|
| CV | −£20,000 | Over budget on work performed |
| SV | −£10,000 | Behind plan in earned value |
| CPI | 0.78 | £0.78 earned per £1 spent |
| SPI | 0.875 | Only 87.5% of scheduled value earned |
Second quick check (different pattern)
Suppose instead PV = £80,000, EV = £90,000, AC = £85,000:
- CV = 90,000 − 85,000 = +£5,000 (under budget)
- SV = 90,000 − 80,000 = +£10,000 (ahead)
- CPI = 90/85 ≈ 1.06; SPI = 90/80 = 1.125
Same BAC, opposite narrative: ahead and slightly efficient.
Forecasting and refining the budget (EAC conceptual)
Forecasting updates the expected final cost and remaining need so leaders can decide whether to recover, re-baseline, descope, or cancel.
| Forecast idea | Conceptual meaning | Simple form often taught |
|---|---|---|
| EAC — Estimate at Completion | Expected total cost when the project finishes | If current cost efficiency continues: EAC ≈ BAC / CPI |
| ETC — Estimate to Complete | Expected cost from now to finish | Often EAC − AC (remaining) |
| VAC — Variance at Completion | Expected final cost variance | BAC − EAC (positive = under budget at end) |
Using the worked example: BAC = £200,000; CPI ≈ 0.78.
- EAC ≈ 200,000 / 0.78 ≈ £256,400 (order of magnitude: substantially above BAC)
- Rough message: if efficiency does not improve, out-turn cost is far above the authorised budget.
Other conceptual EAC logics (know the idea, not every textbook variant):
| Assumption | When used |
|---|---|
| Future work at planned rates | Past problems fixed; remaining work expected on budget |
| Future work at current CPI | Systemic cost performance will continue |
| CPI and SPI combined (advanced mention) | Both cost and schedule performance drive remaining cost |
| Bottom-up re-estimate | Detailed remaining work re-priced from current knowledge |
Refining the budget means using these forecasts plus change control and risk updates — not silently rewriting the baseline to match actuals. Baseline changes need authority; forecasts update more frequently.
Scenario A — spend looks fine, EV does not
A dashboard shows year-to-date spend 5% under the cash profile. EV is only 60% of PV and CPI is 0.85. The PM must not report "under budget = healthy." Cash under-profile may mean work is late (not yet spent) or invoices delayed. Earned value shows delivery value and efficiency, which the sponsor needs for real control.
Scenario B — recovery options when CPI is poor
With CPI 0.78, options include: improve productivity, reduce remaining scope, re-sequence, renegotiate supplier rates, accept higher EAC and seek funding, or stop. Each option has benefits and risk impacts. Present forecast + options + authority needed.
A control account has Planned Value (PV) = £50,000, Earned Value (EV) = £40,000, and Actual Cost (AC) = £45,000. What are CV and CPI?
Using the same figures (PV £50,000, EV £40,000, AC £45,000), what do SV and SPI indicate?