Construction of major infrastructure projects requires the coordination of hundreds of subcontractors to deliver numerous work elements with a complex network of dependencies. Each component is subject to different schedule and cost influences, such as site conditions, the availability of trades and the performance of commodity markets.
The result is often large variances in cost and schedule performance across the project. Accurate, objective assessment and reporting of project performance in terms of scope, cost and schedule is critical to taking informed management action – this is often difficult to achieve.
Earned value management (EVM) is the ideal solution because it forces the integration of scope, cost plan and schedule to provide a single, objective and integrated picture of project health.
Plenty of information is available about the technical use of EVM. However much of this is focussed on product development or software projects. Despite its clear advantages, the utilisation of EVM as a discipline in the construction industry is limited. This insight discusses the relevant advantages of EVM for infrastructure projects, and addresses some of the particular issues which might be experienced by practitioners delivering these types of projects.
The advantages of an EVM approach
Earned value encourages better planning in the design stages of the project, ensures the alignment of the program and cost plan, and provides early warning of issues during construction.
The integration of cost, schedule and scope into a single project baseline imposes a discipline on the project which will ensure an accurate, up to date cashflow is maintained. It complements traditional critical path and estimated cost-to-complete methodologies to provide a more accurate and comprehensive picture of project health.
For example, a typical infrastructure project schedule like the example above might have six work elements tracking – one major and one minor work element behind schedule, three on schedule and one delivered ahead of schedule. Meanwhile, the cost plan report for this month may show that the project has spent less than expected. However, this raw data does not tell the project manager when the project is tracking to finish ahead or behind budget.
Traditional estimated-cost-to-complete assessment will provide an indication of the health of the cost plan. However, it relies on a subjective assessment of future costs and will not provide information on how the under-run to date will affect cashflow in the future.
Earned value provides an objective assessment of the cost and schedule performance to date without relying on any predictions and will ensure the cashflow is updated in real time to give accurate up to date information.For the example above, it will tell the project manager how much of the cost under-run is attributable to the works being behind or ahead of schedule, and/or to the cost of completing the work differing from the cost estimate. This is important information when explaining cashflow changes to executive committees or project governance boards.
A further benefit of earned value is that it provides a picture of project health that can be easily rolled up or drilled down into. Accurate information summarising the overall health of the project can be provided to the project manager or executive review committee as easily as information about a particular work element or group of work elements can be provided to the construction manager. This feature also means that project data can be easily analysed to find the origin of under or over performance.
So what is Earned Value Management?
For a more detailed explanation of earned value, I recommend AS4817-2006 Project performance measurement using Earned Value. It sets out the basic process and calculations for earned value management, the steps to set up a project and the analytics to report. The following is a quick summary of the basic concepts as they relate to infrastructure projects.
Earned value combines the cost plan and schedule into a single baseline, which generates the planned value curve. This is essentially a planned cashflow for the project. Expected cashflow is calculated at an elemental level. The elements are then added together providing a planned value curve for the entire project. A typical curve is shown below.
As the project progresses two metrics are tracked – earned value and actual cost. Earned value is best explained as the costs that would have been incurred for the completed activities had all of the subcontracts been let at exactly the value estimated in the cost plan. The emphasis is on ‘completed’ because earned value is a measure of progress, even though it is expressed in terms of dollars.
The actual cost is simply the costs which have been certified by the project. As with the planned value, these metrics are calculated at the elemental level and then added together to give the metrics for the project as a whole.
These metrics provide two important pieces of information:
- Cost variance (CV) is calculated by subtracting actual costs from earned value. This metric tells the project manager how much the completed work has cost, relative to the original estimate. The graph above shows a negative cost variance where the actual cost for the work completed is more than the earned value i.e. the project is tracking towards a cost overrun, even though the project has spent less money than was planned at this point in time.
CV = EV - AC
- Schedule variance (SV) is calculated by subtracting planned value from the earned value. This metric tells the project manager how far ahead or behind schedule the project is – expressed in terms of cashflow. In the graph above, this would be a negative figure indicating the project is behind schedule.
SV = EV - PV
To further demonstrate this concept, the graph below should bring tears of joy to a project manager’s eyes. Not only is the project tracking ahead of schedule, i.e. a positive SV, but it’s also at a cost far less than estimated, shown by a positive CV. The cost variance is so large that the additional work has been completed at a cost that is considerably less than the planned work was estimated to cost. To be honest, if this were my project, I’d be starting to question why the estimate was so far off, or where we were getting the figures wrong.
Importantly, these calculations can be conducted on a single element, a group of elements (perhaps a site or work area), or the project as a whole by summing the metric for all of the elements within that part of the project. For example, the earned value for a site is simply the sum of the earned value for each of the elements on that site.
Look out next week for Part 2 in this series where we’ll discuss the value in using a common framework to define scope for both the cost plan and program.
In the meantime if you’d like to discuss this in more detail please contact Daniel Kenny.