hello and welcome in today's video we
are going to talk about an important
topic in the field of cost management
earned value management this topic is a
highly tested one in the PMP exam and
you can expect at least six to seven
questions in your final exam from this
topic so make sure you watch this video
till the end so that you do not miss out
on any of the critical part of the
theory or the tricky earned value
management problems that we are going to
solve towards the end of this video
keep watching hi I am ray and I'm a PMP
certified project manager the tips and
strategies that I share in this channel
are exactly the same ones which were
used by me to pass my PMP exam on the
very first attempt so before we move
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you pass your PMP exam on the very first
attend itself so let's start by first
understanding the theory behind earned
value management so first we will start
with the definition of value management
so it is very important to understand
what is value management so here is the
definition for you so on value
management is something which helps
project managers to measure the project
performance okay so it is a performance
management tool which you can use in the
project at any point of time to
ascertain how your project is doing at
any particular point of time
okay now it's a systematic project
management tool which is used to find
variances in projects based on
comparison of work performed and work
planned so there is always something
which you plan during the planning stage
of the project and there is always
something which you keep on executing at
the execution stage okay so on value
management helps you to understand the
difference between the work planned and
the work performed
okay now on value management is used on
cost schedule control and can be very
useful in project focusing and
decision-making so in the end you
actually use a tool to drive some
decisions okay so on value management is
a tool which helps you to drive
decisions during exam
a project now if you see this diagram
right here so this is the cost scope and
schedule triangle and whenever you
understand the health of a project you
always measure the health of a project
based on primarily cost scope and
schedule so whenever we will talk about
decision-making with respect to using
the tools of foreign value management we
will always think of the project as a
function of cost scope and schedule okay
because in the end a project is what it
is some scope which you need to execute
at some cost with respect to a
particular schedule which is given to
you right so that way we will understand
the project with respect to these three
parameters whenever we talk of earned
value management now how we will learn
the topic of on value management the
best possible way to learn the topic of
current value management is to an
example so what we'll do next we will
take up an example of a small project
and try to learn this concepts of one
value management through this project
okay so let's start now if you see here
this is the project scope so there is a
field and you need to construct fencing
across the four sides of the field okay
pretty simple that there is a field here
I need you to construct fencing across
all the four sides
that's your project now the total budget
allocated to you for this project is
twenty dollars per side of the project
okay simple enough and the total time
provided to you by your client or by
your customer is one week per side so
that way the customer or the client
expects the project to be completed in
four weeks now here comes the definition
of the first important term related to
the earned value management which is
budget at completion or BAC so it is the
total planned cost estimate of the
project before start okay so now if you
see here the project has not yet started
the client has given you some money and
the client has given you some
expectations in terms of schedule so
what is the total cost estimate of the
project before start so if you see here
it is twenty dollars per side right so
it will be eighty dollars right so for
this project my BAC is $80 simple enough
now here comes the best part and here we
will understand what our value
management actually means now here is a
scenario which gives you the status of
the project after week one so if you see
here this is the field and after week
one what has been completed is one side
of the fencing is complete and the
second side is 25% complete okay and the
cost incurred for completing this one
full side and 25% of the second side is
$30 okay now with this data point we
will understand the next three important
definitions of value management
terminologies which is planned value
earned value and the actual cost okay
now what is planned value this is the
approved budget for the work scheduled
to be completed by a set date now here
the date is after week 1 ok so now see
guys what is the approved budget for the
work schedule to be completed by week 1
it is $20 right because if you see here
it's $20 per side one side per week so
after week 1 the planned
value for the project was you will be
spending $20 so the planned value of the
project is $20 now here comes the
definition of earned value which is the
approved budget for the work actually
completed by the specific date okay now
you need to understand this terminology
a bit carefully now what is meant by
approved project for work actually
completed now if you see here the
planned work completion was only one
side right so the customer didn't want
you to start the second side as well but
maybe you were add of schedule and you
started the second side so that's fine
now what will be the value for this much
amount of work so if you see here for
this portion the value will be $20 right
now for this portion since you have
completed 25% the value will be 20 by 4
which is $5 right so the earned value
till week 1 is dollar 20
five dollars which is twenty five
dollars so it is the worth of work which
you completed after week one okay so how
much is the work of work which you
completed after week one so that is
given by our value next is the actual
cost which is the cost actually incurred
for the work to be completed by the
specific date so if you see here we have
already mentioned that the cost incurred
after week one was thirty dollars so
your actual cost is $30 okay now you may
find it a bit difficult to calculate
earn value in this manner like we have
calculated right so next what we'll do
is I'll give you a very simple formula
which you can use whenever you solve any
on value problem to calculate the earned
value so if you see the formula here
what it is it is evey equal to budget at
completion multiplied by completed units
of work divided by total units of work
in the project scope so let us use this
formula in the context of this example
what we have just learned right so what
is the budgeted completion for this
project it is $80 right we have it right
here
so multiplied by how much is the
completed units of work so if you see in
terms of units so if we take one side as
one unit so we have completed one and
0.25 units right so total units of work
which we have completed is 1.25 okay
simple enough so it's one point two five
divided by the total units of work in
the project scope so the project scope
has four units so forth because at the
end of the day it was four sides of the
field where you need it to build the
fencing so divided by four so if you use
this formula as well it will come to the
same figure of twenty five dollars which
you have seen right here so this way
also you can calculate the earned value
of any project at any particular time
so now what we'll do is we'll take some
time and understand something called
spending curves and some more
terminologies related to the own value
management topic now if you see here
spending curve is nothing but it is a
graphical representation of time versus
the amount of spending okay now if you
see with respect to our project what we
discussed right now
the planned value of the project was $80
right in four weeks so if we see here in
terms of the four weeks time line if you
see the black line so this represents
our planned value okay which ends at $80
and if you see here which is the budget
at completion which is at $80 right now
next if you see here the orange line it
is the earned value so how much worth of
work you completed at week one so at
week one we calculated that we have
completed twenty five dollars worth of
work so this orange line represents your
earned value in the time spending graph
and the red line if you see it's the
actual cost so for example we have spent
thirty dollars to construct that much
amount of fence and for that the
spending curve for the actual costs at
week one stands at $30 right now with
that we need to understand some more
concepts in terms of the variance matrix
when it comes to on value management so
first metric which you need to
understand is the schedule variance
which is owned value - planned value
okay now we'll quickly come back and
calculate the actual values of these
variances in a while but let's
understand the terminologies first okay
next is the cost variance which is on
value minus actual cost
next comes the SPI which is the schedule
Performance Index which is e V divided
by P V and next is the CPI which is the
cost performance index which is e V by
AC so pretty simple you know all these
terms with respect to these formulas
which is e V P V and AC so all these
four formulas depends on these three
terms which is planned value on value
and actual cost now you need to remember
a couple of more terminologies when it
comes to earned value management
problems which are estimate and
completion and estimated to complete
now if you see what is estimate at
completion now if you see this red line
of the actual cost we're in week one it
stands at $30 and if you keep on
spending in this manner at week four you
may end up spending somewhat around $120
let's say for this example so your
project is actually overspent by $40 and
you end up spending 120 dollars instead
of a budget allocated of $80 so this is
your EA C which is estimate at
completion which is the estimated total
cost of project focused as of time equal
to T which is week 1 here now how it
drives decision making now if at week
one you calculate your EA C and you see
that your EA C is coming around 120
instead of 80 you know that you will be
shooting over budget when you end the
project now this helps you to take some
actions and some proactive calls to
actually control the budget at week one
so that at the end of week four you can
end up actually completing the project
within your project cost estimate which
is $80 now the next term is estimated to
complete which is the estimated total
cost of remaining work focused at as of
time T so here as a week one the next
amount of remaining work which is
focused at is $90 ends up at 90 plus 30
that is 120 dollars for AAC so etc' for
this one is $90 right now what we'll do
is we'll quickly calculate the schedule
variances and cause variances of this
project with respect to the data that we
have right here okay so how much is the
schedule variance for this problem so
Evie it's 25 for me and P V it's 20 for
me so the schedule variance is of $5
right how much is the cost variance the
Evy is 25 for me the AC is 30 so the
cause variance for this is - $5 what is
the SPI for this project it is 25
divided by 20 right that is 1.25 and
what is the CPI for this project it is
25 by
30 which is 0.8 3 so here what we have
done is we have learned 6 more important
terminologies with respect to the earned
value management topic which are
schedule variance cost variance schedule
performance index
cost performance index estimate at
completion and estimated to complete now
guys it is very important to understand
the meaning of these figures right so we
have calculated SPI as 1.25 CPI as point
83 but in terms of project management
you need to understand what these
numbers mean otherwise it will not help
you to take any decisions and just
calculating these numbers is of no good
if in the end you are not able to take
any decisions out of it right so this
table right here actually gives you how
to interpret these numbers and take
decisions accordingly so if you see CPI
if the CPI is greater than 1 it means
that your project is within budget and
you can keep on doing what you are doing
but your CPI if it is less than 1 it
means it is exceeding your Bridget and
you need to take some corrective actions
okay so for our case the CPI is 0.8 3
which is exceeding the budget and if we
see here also yes the redline of actual
cost it is crossing the land value of
$20 and we have already spent $30 at the
end of week 1 so it is exceeding the
budget right so that way also if you
have your CPI less than 1 you need to
take some corrective actions to control
your budget otherwise you will end up
spending a lot more in the end of the
project which you see right here in the
EA see that since this project if it
keeps on spending like this it will end
up at spending 120 dollars instead of 80
dollars right so next comes
SPI so if your SPI is greater than 1 it
means your project is ahead of schedule
so for our case our SPI is 1.25 which
means our project is ahead of schedule
and if you remember in week 1 we have
already started fencing around the
second side of the field
right so that gives an indication that
yes my project is ahead of schedule and
that is why the SPI is coming at 1.25
but if in a problem your SPI is less
than 1 it means that your project is
behind schedule and that way you need to
take the corrective actions which is
required either crashing or fast
tracking or the different schedule
optimization techniques which you need
to do to bring your project
within schedule so this is how actually
you can use earned value management to
drive decisions so the main takeaway of
this discussion is guys don't treat
earned value management as just
numerical problems or add just some
thing where you need to add or subtract
or divide to arrive at some answers
always think of earned value management
problems as some decision-making
problems and some decision-making tools
because after you become PMP you will be
using on value management in your day-in
day-out projects and that's where you
will use the power of the tool to drive
decisions whenever you are doing a
project
now we will end today's discussion by
understanding another important term in
terms of on value management which is to
complete performance index shortly
called TCP I so TCP I is the amount of
work as a function of cost pending to be
completed to finish the project okay so
it goes by the formula as BAC - e V
which is your work remaining right
because II V is a function of your work
divided by B AC minus AC which is your
funds remaining right so that way if you
calculate your TCP I for our project it
is 80 minus 25 divided by 80 minus 30
which is 55 divided by 50 which is 1.1
so if you see our TCP I is greater than
1 and if you see here what it means is
if your TCP I is greater than 1 it means
that your project is out of budget and
if it is less than 1 it means that your
project is within budget so for our
discussion our project is out of budget
right and if you see here in terms of
CPI also where we have calculated 0.83
so which is less than 1 it also gave us
the same result where it says that the
project is out of budget ok so that's
how you calculate the tcpi of a
particular project so that completes the
whole discussion of earned value
management guys so today we learnt what
is earned value management we learned
how I earned value management is linked
to cost scope and schedule we took up an
example of a small project and we
calculated budgeted completion planned
value earned value actual cost etcetera
we learnt an important formula of earned
value as well we learned what are called
spending curves and we learnt the
variance formulas for earned value
management which is schedule variance
cost variance schedule performance
indexed cost performance index we
learned some other metrics which are
estimated completion EAC and estimated
to complete which is et Cie we also
learned how to interpret CPI and SPI in
terms of greater than 1 and less than 1
values and finally we learned something
which is called the to complete
performance in day
and we also learned how to interpret
this value so that was all you needed to
know about earned value management for
your PMP exam if you have liked the
video don't forget to give me a thumbs
up and in the comment section below let
me know which other topics of the PMP
exam you want me to cover through these
videos so thank you for today and I'll
see you again in this video right
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