Career Development

# How To Use the Earned Value Formula

June 3, 2021

Earned value = (% completed) x (project budget)

Earned value of a project is a metric for tracking and evaluating a project's value and progress. The earned value formula is effective for estimating the value of a project's completed parts and can tell you whether a project is over or under budget. You can use the formula throughout the project life cycle to gain insight into productivity and budgeting efficiency. In this article, we explore what earned value is, what the earned value formula is, how to apply the earned value formula and why it's beneficial to understand what this metric means for project planning, initiation and completion.

## What is earned value?

The earned value of a project—also budgeted cost of work performed (BCWP)—allows project managers and their teams to track and evaluate project performance throughout the project life cycle. The earned value measures the relationship between a business's project budget and the percentage of completion so teams can calculate the progress, costs and timeline of a project. Unlike actual value and planned value, earned value shows you the value of the actual finished parts of a project, giving you insight into how much value the project accumulates for the costs your organization covers.

Calculating earned value can also indicate whether a project is over or under its budget. You can apply two methods—the time schedule and cost methods—to track what a project's status is regarding timelines and budgets. In situations where companies terminate projects mid-completion, earned value shows the total value of the completed portions.

## What is the earned value formula?

The earned value formula (earned value = % of completion x project budget) is an effective tool to calculate your earned value quickly and easily. You can apply the formula to either method you use for tracking project status. In the formula, the percentage of work your team completes becomes the first factor, and the total budget for the project is the second factor. Multiplying these two metrics results in a dollar value for only the portion of the project that your team finishes at the time of your calculations.

## How to apply the earned value formula

Use the earned value formula and the following steps as a guide when calculating the earned value of a project:

### 1. Determine the percentage of completed work

To apply the formula, you need to know how much of the project your team has completed. To determine the percentage of completion, conduct an analysis of the entire project. For instance, consider project goals and how much progress your team has already made toward achieving those end objectives. The more accurate this metric is, the more accurate your earned value estimation is, as well.

As an example, assume a software development team initiates a six-month-long project that requires 12 distinct tasks to complete. If the project manager determines their team completes four of the essential tasks and is about halfway through the fifth task, the percentage of work the team completes is four out of the 12 tasks, plus a quarter of the fifth task. So the team's percentage of completion amounts to 4.5 out of the 12 tasks, or 37.5%. Substituting this value in the earned value formula gives you:

**Earned value = % of completion x project budget =**

Earned value = (37.5%) x project budget

### 2. Calculate the total costs of the entire project

Since the earned value measures the costs of the project against the amount of work your team completes, you need to know the total project budget. Find the direct costs associated with the project, such as production team salaries, material costs, overhead and any vendor fees associated directly with the project account. Using the previous example software development project, assume the company estimates \$150,000 for the development team's salary, \$35,000 for direct costs of production operations and \$15,000 for overhead. In this case, the project manager may set the budget at \$200,000. Plug this value into the formula:

Earned value = % of completion x project budget =

Earned value = (37.5%) x project budget =

Earned value = (37.5%) x (\$200,000)

### 3. Multiply percent complete by the project budget

Once you have both your completion percentage and your budget value, multiply the two factors together. The result is your earned value. Apply the formula to the previous example when the software development team's completion rate is 37.5% and the project budget is \$200,000:

Earned value = % of completion x project budget =

Earned value = (37.5%) x project budget =

Earned value = (37.5%) x (\$200,000) = 0.375 x \$200,000 = \$75,000

### 4. Evaluate the earned value

From the above examples, you can assume the total value of the completed portion of the development team's project is \$75,000. This means that if the company ends the project before it can reach completion, the value is worth \$75,000 should the company sell the finished components. It's important to note that the earned value result serves as an estimate with which to develop budgets, cost reduction strategies and generalized projections.

Additionally, the result you get when estimating your earned value can provide insight into the financial status of your projects. For instance, the example software development company may estimate that the project is on track. Since the total budget is \$200,000 and the project requires 12 tasks, an earned value of \$75,000 is acceptable for less than half of the project being complete.

### 5. Implement and track strategies

As your team continues advancing through projects and related milestones, it's crucial to track both completion status and budget. Set performance indicators that allow you to measure the earned value over time, and compare this metric with both the planned and actual values you and your team establish for the project. Similarly, collaborate with your team to implement risk mitigation strategies that help you keep your project on track and within budget.

## Benefits of applying the earned value formula

The earned value provides valuable insight into the worth and progress of a project's elements as you complete them. In addition to this advantage, consider several more benefits of calculating earned value:

• Allows teams to identify differences in costs: Earned value allows teams to identify any gaps between earned value, planned costs and actual costs, resulting in a higher level of efficiency when integrating cost reduction and value-boosting strategies.

• Improves communication with key stakeholders: Understanding the value of the work as you complete it can help you communicate ongoing updates to company stakeholders.

• Tracks projects more efficiently: Because you can apply the earned value formula continuously, your team can perform regular check-ins to monitor the progress and cost-efficiency of your project.

• Boosts productivity: Earned value gives you greater control and visibility over project activities, allowing you to support your team in achieving objectives more quickly.

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