Last week we discussed the value in using a common framework for the cost plan and program. With the work breakdown structure (WBS) defined and the earned value baseline loaded into the scheduling software, the management of earned value is relatively straightforward throughout construction. However, construction projects still create a number of peculiarities which need to be managed.
A particular nuance of construction projects is the variability in cost performance that can exist between tasks. This is because most of the work is procured from external providers and there are often groups of these which are operating in different markets.
For example, a busy civil construction market might mean higher prices, which creates a large negative cost variance early in the project. However, as the building trades are procured later in the project, a greater appetite for work in that sector might mean that the early trade losses are made up, and this quickly turns into a positive cost variance.
The situation is shown in the graph below, where the actual cost tracks above the earned value early in the project whist the civil works are being delivered, but falls below as the lower prices for the building works are realised.
What this means for the project manager is that the current cost variance is not necessarily an accurate predictor of the final cost outcome. In this environment, knowing the predicted future change in cost variance is almost as important as the current cost variance. In particular, it’s important for the project manager to know what the likely impact of subcontracts that have been let, but have not necessarily started work, will be.
The following steps provide this information:
- The earned value baseline is loaded in the scheduling software to provide the planned value.
- Contract cash flows are input into the scheduling software as subcontracts are let to provide an accurate predicted cashflow. The project manager may choose to predict future contract values based on the outcomes of early lettings.
- Actual costs are input and the program is updated on the status date. The status date for the program must be the same date as that on which the subcontractors invoice to each month. If these dates aren’t aligned, the earned value metrics can be distorted and provide misleading figures.
- The program should be rescheduled and contract cashflow should be updated each month to provide an accurate predicted cashflow and predicted earned value. This provides both the current earned value metrics and predicted future metrics.
In addition to the standard earned value metrics, the report should also address the cost of support tasks against the planned cost and the predicted future earned value. This level of reporting provides an accurate cashflow and shows managers the impact of committed contracts over the medium term – again providing a comprehensive picture of project health.
The report should detail the reasons for any cost variance, such as trade gains or losses, defect rectification or in-ground conditions. The requirement to know and understand how cost variances have occurred is a significant advantage to implementing earned value management.
Managing changes in scope
Changes in scope are an unavoidable part of large engineering projects. Most are minor in nature and won’t affect the WBS as we described it above. These changes would simply be dealt with by updating the committed funds against the relevant contract with no change to the baseline.
We recommend that the baseline is only modified where the cost of the change in scope is funded from, or refunded to, management reserve, i.e. a contingency under the client’s control, or where the client has approved a significant change in the schedule to accommodate the change.
Changes funded by management reserve or attached to an extension of time have been supported by the client providing additional funds to the budget or additional time to the project. In this instance the earned value baseline should also be adjusted to accommodate the change.
Changes in scope where the cost is funded from, or refunded to, the design and construction contingency shouldn’t result in changes to the earned value baseline.
The principal reason for this is that these changes are clearly expected to be delivered within the existing budget. Similarly, if no extension of time is approved for the project milestones, then the change is expected to be delivered within the same timeframe. Therefore, the baseline shouldn’t be changed to accommodate these changes.
We hope you’ve enjoyed these insights and they’ve provided some useful information on earned value management, and how and why it should be implemented on infrastructure projects. Just to recap…
Earned value management integrates scope, cost and schedule to provide an accurate, objective and reliable picture of project health. It encourages more effective planning of the project, closer management of cashflow and is easily rolled up or drilled into to provide valuable reporting at all levels of the project.
These features represent significant advantages for dealing with complexities and objectives of infrastructure projects. The above principles provide a guide on how earned value management can be effectively tailored to deal with the unique characteristic of these projects.
Bringing it all together – to download a copy of the full insight please click here.
Or, if you’d like to discuss this in more detail please contact Daniel Kenny.
For more detail on the essential concepts please refer to ‘AS4817-2006 Project performance measurement using Earned Value,’ or the Wikipedia article is surprisingly good.