Corporate Finance For Dummies
Book image
Explore Book Buy On Amazon

Earned value management includes ensuring that everything remains on schedule. Time is money. So anytime that there’s a deviation in the schedule regarding when a project will be completed or when it will reach certain milestones in earned value, there’s a problem.

Not only do you have a problem if you’re falling behind, which is especially bad, but you also have a problem if the project is generating value ahead of schedule to the extent that the corporation’s assets could have been managed more efficiently.

Schedule variation

The deviation between earned value (EV) at time t and planned value (PV) for time t is called the schedule variation (SV), and it’s calculated using the following equation:

SV = EV – PV

This equation says that the schedule variation is equal to the earned value less the planned value. Think of it like this: If the earned value that you’ve actually generated at any given point in time is equal to the value that you planned to have generated at that point in time, then schedule variation will be 0.

Being above 0 is also a good thing, but it still warrants an explanation so you can figure out how to improve projections or repeat successes in the future. If the schedule variation is less than 0, people will likely start to get mad at you.

There are two explanations for having a negative SV:

  • The project simply may not be generating as much value as anticipated. This scenario can be fairly easily discovered by auditing each of the cash flows from the investment to determine why cash flows are deviating from their planned net value, and whether that trend will continue or will influence the total rate of returns for the life of the investment.

  • Earned value simply may be taking longer to actualize. Perhaps the operating cycle is longer than expected. Merely being behind schedule, rather than under planned value, is certainly the less harmful scenario, although neither situation is good.

Schedule performance

Another way to look at the variance between EV and PV is through a ratio calculation called schedule performance (SP). It’s calculated as follows:


This equation essentially says that SP equals earned value (EV) divided by planned value (PV). SP can be measured using time increments or dollar-denominated value increments. For example, if a project is taking longer than expected, that would be a deviation in SPt whereas a deviation in dollar value would be measured in SP$ (or whatever other currency you’re using).

An SP of 1 means that the investment is generating value exactly as planned. Less than 1 means that the project is coming in behind schedule or under value. More than 1 means that the project is coming in ahead of schedule or over value. In both of the latter two cases, the corporation isn’t using its assets as effectively as it could be.

Even if the investment is generating more value than anticipated, the corporation has no plan in place to reinvest that surplus income to optimize returns. Perhaps it could have pursued another investment with it, or more effectively managed its economic capital.

In any case, the performance of earned value management is usually based on performance metrics at given time milestones.

Because the value and time performance of a project will be 1 by the end no matter how you measure it, these measurements are taken at intervals chosen before the investment is made. It’s common to measure the investment’s performance at, for example, 10 percent repayment period, 50 percent repayment period, 50 percent asset lifespan, or any other intervals, usually measuring multiple times over a given duration.

About This Article

This article is from the book:

About the book author:

Kenneth W. Boyd has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics.

This article can be found in the category: