1) In a large skillet, add sugar and water and stir to combine. Turn heat on to medium and let cook for 15 minutes WITHOUT stirring. You should see the mixture get golden brown. Remove from heat and let skillet stand for 1 minute.
2) Now set the butter in the skillet and start stirring until the butter melts.
3) Slowly begin pouring in the evaporated milk, stirring constantly as you pour. Your caramel will start to harden now. Put skillet back on medium heat.
4) Allow to cook now for 2 minutes, stirring constantly. Your caramel should get smooth and thicker.
5) Remove from heat again and stir in vanilla extract.