What is Earned Value Management in Construction?
January 12, 2021
Earned value management (EVM), also known as earned value analysis, is a method for tracking ongoing construction project performance. One of the best methods in use today, it relies on three different numeric values to calculate your construction project’s progress: planned value (PV), actual cost (AC) and earned value (EV). These give you objective insights into your project’s performance throughout its life cycle that budget and schedule point solutions alone simply cannot provide.
Why does this matter? Because being able to effectively gauge and control project progress in real time is a must for all successful large-scale, complex construction projects. Ultimately, these three aspects of EVM help answer the questions, “Are we where we should be at this point?” and “Where are we going next?”
Having these answers will not only satisfy clients who like to have regular progress updates and craftspeople who need feedback on how their efforts impact project performance but will provide project managers with the opportunity to detect problems or deviations early enough to course-correct quickly, saving wasted time and money. With so many projects coming in over budget and behind schedule, it makes more sense than ever to rely on an industry best practice process such as EVM to help keep tabs on – and improve – progress every step of the way.
Determining the numbers you’ll use in earned value management
The numbers you’ll use as the basis of your EVM process will come from the estimates you created during the pre-build phase. That means in order to get the true benefit of EVM, those estimates must be as accurate as possible, whether you use historical data from prior similar projects or industry averages. Guesstimates won’t work here. The more precise those numbers are, the more reliable your performance calculations will be moving forward. Here’s how these numbers will be determined.
- Budgeted value answers the question, “How much work should be done by the end of the project or for a given set of activities?” This is the approved budget (as a dollar figure and/or workforce hours) of what it will take to complete the project and is determined during the project estimation phase. This is also referred to as Budget at Completion, or BAC.
To illustrate this, let’s say we’re installing 500 feet of pipe and we’ve estimated this is going to cost $20 per foot.
BAC = 500 feet x $20 / ft
BAC = $100,000
- Actual cost addresses “How much has the work cost us to complete this amount of progress?” There’s no equation for this, and it doesn’t depend on how much work was done at any point. So, AC is simply:
AC = Actual dollars spent
In our example, let’s assume our AC = $55,000
- Earned value tells you “How much (in dollars and/or workforce hours) should I have spent to achieve this much progress?”
EV = % complete (physical) x Budget at Completion (BAC)
Using the examples from above, let’s say we’ve installed 300 feet of pipe.
EV = Percent Complete x BAC
EV = 300 feet / 500 feet x BAC
EV = 60% x $100,000
EV = $60,000
So, while we should have spent $60,000 to achieve this much progress, we’ve only spent $55,000. So, we’re earning more value that we’re spending, which is a good thing.
If an estimate is tied to a schedule, then another layer of visibility exists; how much should we have spent (costs and/or workforce hours) at this point in time? This allows us to measure our progress as compared to the schedule, in addition to our progress as compared to the budget.
PV is the point on the budget curve that corresponds to a specific date as seen in the graphic below.
These resulting PV, AC and EV values can then be used to determine other measures of how your project is faring compared to the schedule and budget you created at the beginning.
Now let’s take it a step further. Do you need to know how far ahead or behind your project is, or how over or under budget? Determine the Schedule Variance (SV = EV – PV) and Cost Variance (CV = EV – AC). Positive values mean a project is ahead of schedule or below budget, negative values mean behind schedule or over budget, and “0” means on schedule or on budget. Continuing with the values from the scenario above:
SV = EV – PV
SV = $50,000 – $60,000
SV = -$10,000, with this negative value indicating the project is behind schedule.
CV = EV – AC
CV = $50,000 – $30,000
CV = $20,000, meaning the project is below budget.
To get an idea of how efficient your project is, you can calculate Schedule Performance Index (SPI = EV/PV) and Cost Performance Index (CPI = EV/AC). Values greater than 1 are ahead of schedule or below budget and less than 1 is behind schedule or over budget, with “1” being on schedule or on budget. Again, using the scenario above:
SPI = EV/PV
SPI = $50,000/$60,000
SPI = .833 (or 83.3%), so this less than “1” value shows the project is behind schedule
CPI = EV/AC
CPI = $50,000/$30,000
CPI = 1.67, which indicates the project is below budget
How does earned value management improve project management?
- EVM helps you evaluate progress throughout the build with data that serves as verifiable proof of any portion of a project that is meeting, beating or lagging in schedule or budget. This gives you the opportunity to recommend measures to solve for shortfalls, such as speeding up the work pace, or hiring more craftspeople if you’re behind, or finding other resources to cover budget overruns.
- EVM can help in the daily planning during project execution. Project Team members can model the day’s work, using resources and installed quantities to determine if they’ll make or break the budget with that team and that productivity. This allows project team members to model different scenarios and choose the best use of their resources before spending one dollar or workforce hour in the field.
- As a forecasting tool, EVM becomes a vital component in your ongoing risk-management strategy, serving as a sort of alert system for potential problems impacting cost or schedule. Think of this as reducing the “uh-oh” factor because this kind of predictive visibility and immediacy of your data gives you a chance to course-correct before such problems worsen.
- By quantifying work completion using real-time calculations based on real values, you gain visibility into performance at multiple points throughout the project life cycle, which supports informed decision-making to keep the project moving along.
- With EVM, you gain a level of certainty in your project planning and management that gives you more control over cost and time factors. Even if that certainty indicates things are a little off track, you know you can trust the numbers and plan accordingly. Without EVM, you may wind up with a misrepresentation of how your project is performing against original estimates.
Even though the calculations themselves are relatively easy, software solutions can help you manage the earned value management process for the projects you manage even better. InEight’s Connected Analytics is a data analytics solution that helps you track where your construction project is at any given moment. Through easily-digestible reports that provide at-a-glance data through visual charts, you can get valuable insights into the health of your project to be proactive rather than reactive in your project management.