What is the difference between Actual Cost and Earned Value? (2024)

Actual Cost (AC) is the amount of money that you have spent on your project until a certain point in time. It includes all the direct and indirect costs that are related to the project work, such as labor, materials, equipment, software, travel, and overhead. AC is also known as Actual Cost of Work Performed (ACWP) or simply Cost. You can calculate AC by adding up all the invoices, receipts, and expenses that you have incurred for your project.

Earned Value (EV) is the amount of money that you have earned from your project until a certain point in time. It represents the value of the work that you have completed, based on the planned budget and scope of your project. EV is also known as Budgeted Cost of Work Performed (BCWP) or simply Value. You can calculate EV by multiplying the percentage of work completed by the planned budget for that work. For example, if you have completed 50% of a task that has a budget of $10,000, your EV for that task is $5,000.

By comparing AC and EV, you can determine whether your project is on budget, over budget, or under budget. If AC and EV are equal, it means that you have spent exactly what you have earned, and your project is on budget. If AC is less than EV, it means that you have spent less than what you have earned, and your project is under budget. If AC is more than EV, it means that you have spent more than what you have earned, and your project is over budget. The difference between AC and EV is called Cost Variance (CV), and it can be expressed as CV = EV - AC. A positive CV indicates that your project is under budget, while a negative CV indicates that your project is over budget.

Besides comparing AC and EV, you can also use them to measure how efficiently and effectively your project is performing. By dividing EV by AC, you can obtain a ratio called Cost Performance Index (CPI), which indicates how much value you are getting for every dollar spent. A CPI of 1 means that you are getting exactly what you paid for, and your project is on budget. A CPI greater than 1 means that you are getting more value than what you paid for, and your project is under budget. A CPI less than 1 means that you are getting less value than what you paid for, and your project is over budget. The higher the CPI, the better your project's cost performance.

Another way to use AC and EV is to forecast the future outcomes of your project, such as the total cost and the completion date. By extrapolating the current trends of AC and EV, you can estimate how much more money you will need to finish your project, and how long it will take. One method to do this is called Estimate at Completion (EAC), which is the expected total cost of your project at the end. You can calculate EAC by dividing the planned budget of your project by the CPI. For example, if your project has a planned budget of $100,000 and a CPI of 0.8, your EAC is $125,000. This means that you will need $25,000 more than what you originally planned to complete your project.

Using AC and EV can help you monitor and control your project's cost and value, and provide you with valuable insights and feedback to make informed decisions and adjustments. AC and EV can also help you communicate your project's status and health to your stakeholders, and demonstrate your accountability and transparency. However, AC and EV also have some limitations that you should be aware of. For instance, AC and EV do not reflect the quality or the customer satisfaction of your project's deliverables, which are also important aspects of value. AC and EV also depend on the accuracy and reliability of your project's plan, scope, and budget, which may change over time due to risks, changes, and uncertainties. Therefore, you should not rely solely on AC and EV, but use them in conjunction with other metrics and indicators that capture the full picture of your project's performance and value.

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Software Project Management

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