Earned Value Management (EVM) in construction projects

The Us federal government introduced Earned Value management(EVM) in 1967 as a part of the cost/schedule control systems criteria (C/SCSC) to understand the financial aspects of programs and to be used in acquisition programs of large degree in an attempt to generate a consistent method based on best practices. Earned Value management and methods that vary from EVM to a small degree have been used under handful of names, including earned value project management, earned value analysis, earned value method and cost/schedule summary reporting. Earned Value management is a systematic process that is used to measure the performance of a project at different times throughout the life cycle of a project. EVM is useful to help project managers or people in general that are responsible for a project to determine whether a project is on schedule, or if the project is over or under budget. EVM can also be used to compare the actual work that has been performed to the work that was estimated and planned for the project at a certain time during the project, EVM can also be used to forecast projected performance. EVM is a technique that can be applied, to at least some degree, to the management of projects in any industry and using any contracting approach.

EVM measures project progress and performance by the integrated management of three fundamental elements of project management, cost, schedule and scope which make up the Project Management Triangle as can be seen in figure 1.

figure 1:Project management triangle source: http://www.ambysoft.com/essays/brokenTriangle.html

In most cases in practice, the progress of an project is evaluated by comparing it against earned value indices and estimates against historically values, past projects or according to numerous criterias http://production.datastore.cvt.dk/filestore?oid=53a7918e4ad04bb77203f099&targetid=53a7918e4ad04bb77203f09b

Implementation of the method

Steps to EVM

In this sector there will be an simplification of the steps that need to be taken in EVM, this is done since each of the step is quite comprehensive and each and every one could be an article on its own.

              step 1-5 is before the project starts

step 1. Building the foundation for the project - this step is about deconstructing the project Statement of Work(SOW) into more discrete, measurable components to develop the Work Breakdown Structure(WBS) and the tasks/activities that are essential to execute the work

step 2. Determine the resources and effort required to execute the work. This is an estimation, and it can provide useful for the company to use previous projects that have been similar to make the estimations.

step 3. Make up a Resource leaded schedule of the time that it is expected to take executing the work

step 4. Define a methodology to measure activity/task completion that suits the project (EV methods)

step 5. This steps is about pricing the resources and efforts that are expected to be used during the project, this is done to make a project budget (Budgeted Cost of Work Scheduled or Planned value)

              step 6-10 is after the project has begun

step 6. Now the project has begun and in this step the actual cost(AC) of work performed by period is collected against the WBS below the level required for reporting. step 7. Using which ever methodology created in step 4, calculation are made to determine the completion percentage of an activity/task

step 8. In this step Earned Value(EV) or Budgeted Cost of work is calculated. That is achieved by multiplying the completion percentage of the task/activity against the total budget for that task/activity

step 9. In this step Schedule Variance(SV) is calculated. that is achieved by subtracting the Planned value from the Earned value(EV)

step 10. Calculate the Cost Performance Index, which is often referred to as the cost efficiency of a project in order to calculate the Estimate at completion(EAC) which is the new projected estimated total cost at project completion given the information at time calculated. Formula $EAC=BAC/CPI$

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Parameters

Parameter	Description
Planned Value (PV)	Is a budget baseline that has been established for a project/work package/activity. It is a function of cost and time as can be seen in figure 1. PV baseline can be used to view the value to be earned at a certain time/phase in the project. PV is frequently referred to as the S curve simply because of the shape of the curve
Budget at completion (BAC)	BAC is the final point and the highest value of the cumulative Planned value curve. BAC represents the total budget for the project/work package/activity.
Actual Cost (AC)	Is the cumulative actual cost that has been spent on a project/work package/activity
Earned value (EV)	is the cumulative value that has been earned for the work completed at a certain point in time. Formula: Earned value(EV)=total budget for activity*completed proportion

Earned Value Variances	Description	Formula	Result
Cost Variance (CV)	The difference between the amount budgeted and the amount that was actually spent on the work performed. CV shows whether and by how much amount the project is over or under pre-approved budget	= Earned Value (EV) - Actual Cost (AC)	> 0 means under budget < 0 means over budget
Schedule Variance (SV)	The difference between the amount budgeted and the amount that was planned for the project. SV is a good indicator to show if and by how much your work is behind or ahead of pre-approved schedule	= Earned Value (EV) - Planned Value (PV)	> 0 means ahead of schedule < 0 means behind schedule

Earned Value Indices	Description	Formula	Result
Cost Performance Index (CPI)	The ratio of approved budget for work performed(EV) to what was actually spent on the work(AC). CPI reflect the relative value of the work that has been completed to the amount paid for the task. CPI is often reffered to as the Cost efficiency of a project	= EV/AC	> 1 means better progress for the money spent < 1 means less progress for the money spent
Schedule Performance Index (SPI)	The ratio of approved budget for work performed to the actual approved budget for work performed(EV) to what was budgeted for the project(PV). SPI is useful since it reviels if the project is behind or ahead of schedule	= EV/PV	> 1 means more work performed than had been scheduled < 1 means less work performed than had been scheduled
Project Percent Complete	Percent of project work complete at a given time. Remember BAC = Budget at Completion	= (EV/BAC) * 100
To Complete Performance Index (TCPI)	The cost performance index required to complete the project on the predetermined budget or the required future cost efficiency that is needed to achieve the target Budget at completion(BAC)	=(BAC-EV)/(BAC-AC)

Earned Value Forecast	Description	Formula
Estimate at completion (EAC)	The estimated total cost at project completion. The formula for EAC is based on the assumption that the current performance gives a fair indication of future performance	= BAC/CPI
Variance at completion (VAC)	The estimated variance between actual total cost(EAC) and planned total cost(BAC) at project completion.	= BAC-EAC

Limitations

There are several limitations when it comes to applying earned value management... Here below is a compilation of limitations from different perspectives

Is the plan correct EVM was never meant to be a stand-alone tool. But rather, it should be applied with other schedules and reports to understand where your project time line and budget stands. Moreover, if the initial plan is inaccurate, then the tracking of the project will never match the plan. This becomes wearying task since then it becomes necessary not only to adjust the planned project, but also the actual plan needs to be adjusted.

Convoying the information Understanding of the Earned value management is often beyond most of the stakeholders. Formulas and terminology are unfamiliar to those who are not using the application daily. That is way it is necessary to convoy the information to stakeholders and team members in the most straight forward manner. This can be achieved by using charts e.g. the S-shaped curve and not going into to much detail regarding exact formulas.

Mismatched opinions and quality control If a project team is used to Earned Value Management there can often occur debates on the best mathematical formulas that should be used in the tracking of the projects process, also there could be different view on what to track.

http://www.brighthubpm.com/monitoring-projects/10056-how-earned-value-management-is-limited/

Annotated Bibliography

• • BLAA

http://edward-designer.com/web/pmp-earned-value-questions-explanined/ </ref>

References

Further reading

THE USE OF EARNED VALUE ANALYSIS (EVA) IN THE COST MANAGEMENT OF CONSTRUCTION PROJECTS

http://citeseerx.ist.psu.edu/viewdoc/download;jsessionid=F4DDB0399E4FD8D8A2557BEDC86B9862?doi=10.1.1.549.6673&rep=rep1&type=pdf

CRITICAL ANALYSIS ON EARNED VALUE MANAGEMENT (EVM) TECHNIQUE IN BUILDING CONSTRUCTION

file:///C:/Users/Lib1/Downloads/Candido%20et%20al.%20%202014%20-%20Critical%20Analysis%20on%20Earned%20Value%20Management%20(EVM)%20Technique%20in%20Building%20Construction%20.pdf