Earned value refers to an idea which describes the financial progress of a project or a component activity of one. This helps provide a clearer picture of a project’s development, especially in terms of how much of the projected income has already been generated. This does not necessarily require the actual amount to be concretely available though, especially if the project has not yet been completed. For instance, a venture that is set to earn ten million dollars may be considered worth three million dollars once around a third of it has been completed. In such a situation, it would be impossible for the three million to have been actually made, but the phase at which the project is at the moment is equivalent to this value.
However, utilizing the concept of earned value is not as simple as looking at the percentage of the project which has been completed. For this to be useful, the costs incurred during the project duration must also be taken into account. For example, a project which has been set to last for a year is already on its ninth month. Ideally, three-fourths of the project should have been completed, and three-fourths of the total budget spent. If, say, only half of the actual work has been done, but the amount allotted for expenses is almost completely depleted, then this means the remaining percentage of work will have to be completed with much less money than was originally allotted for it. By determining the adverse project variance, which is about 25% in this case, as well as the adverse budget variance, companies will be better able to decide on what plans of action should be taken in order to complete the project while maximizing the value to be gained from it.
