What Is Earned Value Management in Construction?
January 12, 2021
https://ineight.com/process-solutions/work-planning-packaging/Earned Value Management: What it is and Why It’s Important
When it comes to the management of construction projects, no matter the size and scale, there are numerous variables to consider. And with the ample number of processes project managers can use, it can be challenging to know the right one for a specific project. One of the most common methods to help project managers navigate such situations is earned value management (EVM).
Earned value management is an effective tool, but with all the moving parts, it can start to confuse even the best project managers. Keep reading as we break down everything regarding EVM and how you can incorporate this approach into your next project.
What is Earned Value Management?
Earned value management (EVM), also known as earned value analysis, is a method for tracking ongoing construction project performance. As one of the best methods in use today, EVM relies on three different numeric values to calculate your construction project’s progress—planned value (PV), actual cost (AC), and earned value (EV).
These fundamental principles give you objective insights into your project’s performance throughout its life cycle that budget and schedule point solutions alone cannot provide.
But why does this matter for a construction project? 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?”
The ability to answer these questions will allow you to satisfy clients who prefer to have regular progress updates and also craftspeople who need feedback on how their efforts affect project performance. In addition, you’ll be able to 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 EVM to help keep tabs on and improve progress every step of the way.
The Benefits of Earned Value Management
The ability to track the progress of a construction project effectively and accurately is critical to reaching deadlines and ensuring that each step is appropriately budgeted. Yet while those aspects are essential, they only scratch the surface of the various benefits of EVM.
The benefits of EVM include:
- Progress tracking: 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 allows you to recommend measures to solve shortfalls, such as speeding up the work pace, hiring more craftspeople if you’re behind, or finding other resources to cover budget overruns.
- Planning and execution: EVM helps 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 level of productivity. This allows project team members to model different scenarios and choose the best use of their resources before spending money or workforce hours in the field.
- Forecasting tool: EVM becomes a vital component in your ongoing risk-management strategy, serving as an alert system for potential problems affecting cost or schedule. The predictive visibility and immediacy of your data gives you a chance to course-correct before such issues worsen.
- Quantifying real-time results: By quantifying work completion using real-time calculations based on actual values, you gain visibility into performance at multiple points throughout the project life cycle, supporting informed decision-making to keep the project moving.
- Quality control: EVM provides you with certainty in your project planning and management, giving 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.
Basic Concepts of Earned Value Management
Despite its growth and popularity and its original intent to make measuring project progress easier, EVM remains a challenging and sometimes murky concept for many. In theory, it’s easy to see the value that project performance metrics bring to monitoring your large-scale capital projects. What isn’t so easy are all the calculations behind it and how best to interpret the resulting numeric values.
We’ve broken it down into easy-to-understand basic concepts and the specific earned value management formulas associated with each concept.
Planned Value (PV)
Planned value (PV) answers the question: How much work should be done by the end of the project or by a certain point based on the schedule? PV may vary depending on the scope of the project and where you’re at within the project.
Here is how PV is calculated:
- % Complete (Planned) x Budget at Completion (BAC)
BAC is the project’s total planned value (or established budget) from the estimate, determined before the project began. BAC serves as the baseline against which to compare your progress going forward. PV measures the value of the work that should have been completed by a certain point in time. Lastly, it should be reflected as a dollar amount.
Actual Cost (AC)
Actual costs (AC) answers the question: How much did the work cost for a given period? Be sure to include relevant project expenses, both direct and indirect. AC will grow throughout your project.
Unlike PV, AC doesn’t have a standard equation. It’s the tallied-up real dollars spent to complete the work accomplished by a certain point.
Earned Value (EV)
Earned value (EV) answers the question: How much should have been spent to achieve this much progress? EV is calculated by using the following formula:
- % Complete (Actual) x BAC
EV is the monetary value of the work that’s been done to a certain point. Like the other concepts, EV should be reflected as a dollar value.
Schedule Performance Index (SPI)
Schedule Performance Index (SPI) answers the question: How efficient is our schedule, or how well are we spending our time? These are the values to note from your SPI equation:
|Project’s Timing Efficiency
|Greater than 1 (SPI > 1)
|Ahead of schedule
|Less than 1 (SPI < 1)
|Equal to 1 (SPI = 1)
|On schedule as planned
SPI is determined by dividing EV by PV (EV/PV). SPI is the schedule efficiency (the amount of progress) of your project in relation to the planned timeline. The concept is expressed via a percentage.
Cost Performance Index (CPI)
Cost Performance Index (CPI) answers the question: How efficient is our budget? Or, how well are we spending our money? These are the values to note from your CPI equation:
|Project’s Cost Efficiency
|Greater than 1 (CPI > 1)
|Less than 1 (CPI < 1)
|Equal to 1 (CPI = 1)
|On budget so far
CPI is determined by dividing EV by AC (EV/AC). CPI is the cost efficiency (the amount of progress) of your project in relation to the actual cost. This concept is also expressed through a percentage.
Schedule Variance (SV)
Schedule Variance (SV) answers the question: How far ahead or behind schedule are we compared to the plan? These are the values to note from your SV equation:
|Positive value (SV > 0)
|Ahead of schedule
|Negative value (SV < 0)
|Behind schedule and shows how much delays are costing your project so far
|Zero value (SV = 0)
SV is determined by subtracting EV from PV (EV – PV). SV measures the variation, or difference, between actual work done and the expected work to date (or by a certain date). It shows whether the project is on schedule, behind, or early. SV is reflected as a dollar value (yes, even the schedule is shown in dollar terms).
Cost Variance (CV)
Cost Variance (CV) answers the question: How far above or below budget are we compared to the plan? These are the values to note from your CV equation:
|Positive value (CV > 0)
|Negative value ((CV < 0)
|Zero value (CV = 0)
CV is determined by subtracting EV from AC (EV – AC). CV measures the variation, or difference, between the budgeted amount for work that should have been completed to date (or by a certain date) and the actual amount spent for the completed work. It shows whether your project is under, over, or on budget. Lastly, CV should be reflected as a dollar value.
You may have noticed that performance indexes and the variances seem similar. Here’s how they differ:
- CPI and SPI are efficiency measures and are represented as ratios of the performed work to the budgeted or scheduled work.
- CV and SV measure how much deviation there is in the actual work compared to the planned budget or schedule.
The Different Applications for Earned Value Management
EVM’s value goes beyond being the barometer of cost and schedule progress tracking. When data is captured, organized, and processed through data analytics software, EVM enables you to leverage insights into how to solve the challenges common among construction projects.
Let’s delve into the various applications of EVM to help you get a holistic picture of the power of EVM.
EVM as a Planning Tool
Keeping things from getting beyond set timeline milestones and budget thresholds takes skill and data. Assuming source data from your estimate provides an accurate baseline against which to gauge progress, EVM gives you real-time visibility into your project’s performance.
So, you can know that everything is humming along within the operating ranges you set at the project’s start. Conversely, you can spot and analyze gradually developing trends or sudden deviations in any of the data of your earned value metric calculations. Knowing what these metrics are at any given moment and the specific values unique to each calculation mean, you can identify when you need to keep an eye on a trending shift or take more urgent corrective action.
- Regarding schedule and cost variances (SV and CV), 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 budget.
- When tracking schedule and cost performance (SPI, CPI), values greater than one are ahead of schedule or below budget. However, less than one indicates it’s behind schedule or over budget. Zero represents whether the project is on schedule or budget.
- Operating ranges for your SPI and CPI are natural high/low swings within the parameters you establish at the beginning of your project. They’re what is deemed acceptable to you based on the particulars of your project. For example, you may have a smaller range for projects or tasks completed in controlled environments because fewer outdoor factors can affect it. In contrast, those performed in harsher, uncontrollable conditions would have a wider operating range to account for the effect of severe weather.
In essence, your data gives you actionable insights. What you gain from these insights into your project metrics is certainty — regardless of whether the numbers are reassuring or cause for concern. Granted, very little is ever truly 100% certain in construction. But EVM could be as close as you get to a crystal ball. With the level of accuracy EVM affords in the degree and direction of your project’s performance, it allows you to better plan as circumstances evolve.
EVM as a Risk-Management Tool
Nobody likes surprises during a massive construction project. The most important aspect of EVM is its ability to serve as an alert system, essentially waving red flags when the metrics indicate something is wrong or heading in that direction. This alert enables you to identify anything impacting your ability to complete the project according to your contractual requirements. There will always be surprises during a project’s life cycle but using EVM can at least remove project performance metrics as a contender.
For example, EVM reduces risk by enabling project managers and contractors to respond in real-time to current or forecasted deviations or problems rather than after they’ve worsened. It allows you to launch any contingency plans you developed before the project began.
This can range from calling on extra backup craftspeople to complete a task that is at risk of running late to reallocating funds from one below-budget portion of your project to another that is fast approaching its limit and more.
EVM as a Collaborative Decision-Making Tool
Much of a construction project’s success relies on timely decisions. By relying on data, you can make the best, most informed decision for the project.
Real-time data from the field feeds ongoing EVM’s cost, schedule and scope metrics. When armed with these objective details, there’s no second guessing — just more confidence. Much of that confidence comes from the reporting transparency made possible by earned value management.
As a result, there’s more trust, accountability, and better-managed expectations between the project owner and the contractor. Because everyone has access and visibility into the same facts, making collaboration possible and more productive. And it also helps close the knowledge gap between the contractor and the owner.
Frequently Asked Questions
Here are the answers to some frequently asked questions regarding earned value management.
What Are the Top Three Earned Value Management?
Earned value management (EV) contains three core concepts—planned value (PV), actual cost (AC), and earned value (EV). Each basic value affects the overall project budget and schedule.
How Do You Calculate Earned Value Management?
Earned value = % Complete (Actual) x BAC (Budget at Completion)
For example, if the actual percent complete is 50% and the budget is $15,000 then the earned value of the project is $7,500.
What Are the Three Earned Value Methods?
The three earned value methods consist of planned value (PV), actual cost (AC), earned value (EV).
Investing in Earned Value Management
Despite these capabilities that earned value management metrics deliver, these are areas that historically have been missed opportunities in the industry. But that’s changing. Owners and contractors alike consider investing in data analytics technology to be critical to the success of projects in the future.
Earned value management is a critical aspect to ensuring project timelines and budget are delivered with quality. Unfortunately, calculating all earned value management concepts manually isn’t feasible and is inefficient. That’s why we recommend investing in cost management software to improve efficiency on every project. Schedule a demo with InEight to learn more.