3.4 Cost Management and Earned Value

The Four Cost Processes

Anatomy of the Budget

Total Project Budget
├── Cost Baseline (what you measure against)
│   ├── Work package cost estimates
│   └── Contingency reserves (known risks)
└── Management reserves (unknown risks)

Key rule: the cost baseline includes contingency but excludes management reserves. Spending management reserve usually requires a change request that adjusts the baseline.

The Three EVM Values

Budget at Completion (BAC) is the total approved cost baseline.

Variances and Indices

Memory aid: EV always comes first in a variance and is always the numerator in an index. Positive variance and index above 1.0 are good.

Forecasting

Fully Worked EVM Example

Given: BAC = $100,000; at the 50% point PV = $50,000; EV = $45,000; AC = $55,000.

• SV = 45,000 − 50,000 = −$5,000 (behind schedule)
• CV = 45,000 − 55,000 = −$10,000 (over budget)
• SPI = 45,000 / 50,000 = 0.90
• CPI = 45,000 / 55,000 = 0.82
• EAC = 100,000 / 0.82 = $121,951
• ETC = 121,951 − 55,000 = $66,951
• VAC = 100,000 − 121,951 = −$21,951 (projected overrun)

This project is both behind and over: it has delivered only 90% of planned schedule value while burning $1.22 for every dollar of value earned. Without corrective action it will finish about $22,000 over budget.

Common trap: A positive CPI with a negative SPI (or vice versa) is normal. CPI describes cost efficiency; SPI describes schedule progress. They are independent — read each separately.

Estimating Methods and Their Accuracy

Cost estimates carry an accuracy range that tightens as the project progresses. A rough order of magnitude (ROM) estimate, made early with little information, is often quoted at roughly −25% to +75%. As planning matures, a definitive estimate narrows to about −5% to +10%. The same techniques used for duration apply to cost: analogous (scale from a similar project, fast but least accurate), parametric (unit rate × quantity), three-point (account for uncertainty), and bottom-up (sum the work packages, most accurate but most effort). Choosing the method to match available information is a recurring exam theme.

How Earned Value Is Measured

A subtle but tested point is how EV is credited as work progresses. Common rules include the 0/100 rule (no credit until a work package is fully complete, then 100%), the 50/50 rule (50% credited when work starts, the remaining 50% on completion), and percent-complete estimates by the responsible owner. The choice affects how smoothly EV accrues and is documented in the cost management plan. Regardless of method, EV can never exceed the work package's budgeted value, and the sum of all EV at completion equals BAC.

Interpreting the Indices Together

Managers read SPI and CPI as a dashboard. SPI below 1.0 with CPI above 1.0 often means the team is understaffed or blocked (slow but cheap); CPI below 1.0 with SPI near 1.0 often means the team is burning extra cost to stay on schedule. The TCPI answers a forward-looking question: given what remains, how efficient must we be to still finish at BAC? A TCPI well above 1.0 when current CPI is below 1.0 is a red flag — the budget is likely unrecoverable, and a re-baseline through change control may be warranted.

Reserve Analysis and Funding Limits

Reserve analysis monitors how much contingency remains against the risks still open; if early risks did not materialize, reserve can sometimes be released back. Projects also face funding limit reconciliation: spending must be smoothed to match the organization's funding schedule, which can force activities to shift in time. Together these ensure the time-phased cost baseline remains both realistic and fundable, and any structural change to it returns once more to integrated change control.