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Earned value is a way to measure true cost performance; i.e. – what we spent versus what we actually accomplished. Although this is an easy concept to grasp, many organizations avoid using earned value due to the perception that it is difficult to implement. These organizations still rely on forms of traditional cost management systems which measure cost in isolation of work progress. This approach may make management feel good about the cost performance of a project during a particular period, but this picture may be deceptive.

As an example, a project manager may have a budget of $500k to spend on his or her project for the first quarter of the year. At the quarterly management meeting, the project manager reports that he or she has spent $490k, or just under the budget. At first glance this appears to be good news as the project is under budget. However, the missing piece of this information is whether the project is on time, or has completed the forecasted work for that quarter.

Figure 1.Traditional Cost Management. Note that according to this graph the project is under budget. Good news?

This is where earned value can make a difference. Earned value measures three dimensions of data to associate project expenditures with project progress. These dimensions provide a complete status, including:

• Planned value of the work that has been scheduled
• The actual value of the work that has been accomplished
• The actual costs incurred in accomplishing the work that has been scheduled

Comparing the traditional cost management approach with the earned value approach for the example above reveals how different the results may be between these two measures. The earned value approach tells a different story than the traditional cost management approach, as it takes into account the budgeted value of the work planned, as well as the actual value of the work that has been completed, in addition to the costs incurred. If the project is behind schedule, for instance, it may also be over budget even though only $490k of the budgeted $500k has been spent. This may be the case if individual work packages cost more than has been budgeted. In other words, the project may still be over budget because the $490k that has been spent has not achieved the work that the money was budgeted for.

Figure 2. Comparison of Traditional Cost Management v. Earned Value. Note the different story told when actual earned value is graphed against budgeted and actual costs. Earned value takes into account the amount and value of work actually accomplished during the time period measured.

By calculating the cost of the work actually performed, the expected cost of the work that was performed, and the actual value of the work performed, project managers have the means of linking schedule and cost performance. Traditional cost management techniques may be in many cases easier to implement, but they do not tell the full story of project progress as measured against project budgets. Earned value represents a more complete method of measuring project performance, as well as a means of predicting future performance based on progress to date, making it well worth the additional effort that may be required for its implementation.