Managing with the Lights On: Planned vs. Earned vs.
September 21, 2023
You can’t possibly know where you are going if you don’t know where you are or where you’ve been.
We’ve all heard this countless times about life in general. And guess what? It’s no different for the world of project controls. Because how can we possibly know how much money we will spend in the future on a project if we don’t know how much of the total we have already spent as of today?
While you may have heard that “knowing your cost is a condition of employment,” there are a great many other variables worth keeping track of on a project. For instance, if we are executing self-perform work through a unit price contract, quantities and labor hours are also important. Let’s look at where all of this comes from and how they work together when looking at planned vs. earned vs. as-built value management.
Turning the Lights on to Where We’ve Been
There is a simple trifecta when implementing high-quality cost control, and these are cost, labor hours and quantities. But ask any project controller about these and they will probably start happily geeking out over a litany of terms like CPI, SPI, PV, EV, AC and so on. Project controls may even have more acronyms than CrossFit! Yet like anything else in life, you learn them over time, and they become second nature. (Now if I could just figure out what a CrossFit AMRAP is.)
Where did all these terms start? First off, NASA and the U.S. Department of Defense are recognized as the founders of what we now know as modern project management, which also encompasses the concept of Earned Value Management (EVM). While it is impressive to see how many regulations such entities have created around project management, it’s not surprising.
Going back further, the Earned Value (EV) method itself began way back in the late 18th century in American factories where it was used to evaluate performance efficiencies by comparing planned values vs. actual accumulated costs.
The U.S. Navy later implemented something called the Program Evaluation Review Technique (PERT) in the 1960s as more of a network planning technique. Nowadays though, it is difficult to run a project without hearing of the Project Management Institute (PMI) and their Project Management Body of Knowledge (PMBOK). This entity gathers a collection of processes, best practices, terminologies, and guidelines that are now the accepted standard for project management within the industry.
Within the PMI’s PMBOK is nestled earned value management. EVM is based on the principle that past patterns (Planned Value or PV) and trends (Actual Cost or AC) can indicate future conditions. EVM helps you clearly and objectively see where your project is headed compared to where it is supposed to be. This is what many consider “doing project management with the lights on,” knowing where you are going based on where you’ve been.
Where We are Now: CPI, SPI and S-Curves
There are three key values and parameters we tend to highlight as most important for overall cost control. The first one is the Cost Performance Index (CPI). According to PMBOK, the CPI “measures the cost efficiency of budgeted resources expressed at the ratio of earned value to actual cost.” In other words, when CPI is less than 1, we are over budget, or the cost of completing the work is higher than planned. On the other hand, when CPI is greater than 1, we are under budget.
Put simply, CPI < 1 = bad, CPI > 1 = good.
The second key parameter is somewhat like CPI and that is Schedule Performance Index (SPI). When SPI is less than 1, we are behind schedule. Greater than 1, we’re still good. While these may seem to be quite simple calculations, they can be developed by the project controllers at multiple levels in our project. Whether it be the cost breakdown or work breakdown structures, having a visual way of seeing all the detail is vital.
Which brings us to the third and arguably most important project management parameter, the S-curve. An aptly named term thanks to its recognizable shape, this curve is a mathematical graph that shows the progress of a project over time. While the S-curve starts off slow initially and seems to hold a straight line, it eventually accelerates as the project gains momentum. Then, as the project begins to wind down, final touches lead to a deceleration and final leveling off to finish the project.
S-curves become increasingly powerful as you layer them together. A common project chart (below) helps compare the actual progress to the planned progress, allowing for a visual representation of the graphical variances.
The Future? Integrated EVM
So, after all this history, graphs, explanations, acronyms, and even a little sweat, it is easy to see why EVM remains the most popular and accepted best practice for project management:
- EVM predicts project peaks to better manage shared resources.
- It allows project teams to visually manage stakeholder expectations including early warnings, accurate reporting, consistent and clear communication and project status.
- EVM enables the planning of multiple scenarios, identifying problem areas for immediate and proactive management attention.
- It integrates technical, schedule, and cost performance for greater project certainty.
But did you know that this management of a project with the lights on is possible with today’s best construction technology? Or even more importantly, do you have enough energy in your current tech stack to power it up?
At InEight, we have spent decades growing and maturing our cost control solution to follow all these exact principles and formulas. Accurately capturing the actual costs, quantities and labor hours in multiple ways ensures a live performance review, complete with final forecast cost, allowing users to collaborate with all gauges on the dashboard lit. Because of this, many of our customers are now able to manage their project budget and its changes in accordance with industry best practices for more project wins more often.
Ready to take a deeper dive? Schedule a one-on-one consultation to find out how InEight can help you succeed in your construction management journey.