The concept of earned value management (EVM) conjures up images of stressed out project managers trying to get their projects back on track. However, this paper attempts to clarify that the subject of earned value is not nearly as complex as many popular misconceptions suggest. In fact, it can be used for setting up best practices in the relatively unorganised construction industry for better project performance and decision-making processes.
What is EVM?
Earned value is an ideal mechanism to instill work discipline. Simply put, EVM is a set of best practices in business that focus on a combination of people, tools and processes. Its philosophy integrates the scope, schedule, cost and baseline of projects, and this enables efficient project planning, monitoring and control throughout the project lifecycle.
EVM is a powerful management tool for enabling better project performance and decision-making. EVM compares the amount of work or effort that was planned with what was actually earned and spent to determine if cost and schedule performances are as planned.
To illustrate, let us examine any of the following questions:
The first query are based on conventional management, while the second is based on EVM. What do project managers really want to know? The second query’s answers are more comprehensive that that of the first. The following abstract brings out the contrast between the two management approaches.
In conventional management, there are two data sources, the budget (or planned) costs and the actual costs. The comparison of budget versus actual costs merely indicates what was planned to be spent versus what is actually spent at any given time. But how much has been performed is still not determined?
Unlike conventional management, there are three data sources in EVM:
Planned value (PV) of the work scheduled: How much work should have been completed as per the baseline plan?
Earned value (EV) of the physical work completed: How much of the planned work has been accomplished?
Actual cost (AC) of the work completed: How much of the actual money has been spent to convert PV into EV?
Based on the cumulative PV of the work across the project, one can derive the total required budget for the project.
With the above parameters, project managers (planning and control) can now calculate some useful key performance indicators (KPIs) at any point of time of the project to analyse the project performance:
Cost variance (CV)=EV–AC Negative is over budget, while positive is under budget.
Schedule variance (SV)=EV–PV Negative is behind schedule, while positive is ahead of schedule.
Cost performance index (CPI)=EV/AC Under one is over budget, while above one is under budget.
Schedule performance index (SPI)=EV/PV Under one is over budget, while above one is under budget.
Along with the schedule and cost results discussed, EVM enables project managers to forecast the results of the project.
But can we really catch up to our baseline plan? This can again be calculated with another index based on the above derived parameters.
The above index suggests that extra effort is required than that what was initially planned to adhere to the original budget. At each derivation point of such KPIs, the project managers can have some very important information about the project performance and its trend. This creates a mechanism for implementing risk mitigation plans and providing early warning signals and appropriate corrective actions.
Why is EVM required?
The 15 percent point-A survey of over 800 Department of Defense (DoD) programmes showed that no programme has ever improved its performance than where its performance was measured at the 15 percent complete point. This means that more attention is needed during the initial stages of a project. The earlier a company incorporates EVM best practices and processes, the greater are the chances that performance will result in lower cost and schedule variances. The company will be in a better position to deliver within the originally contracted budget and schedule expectations.
Early warning signal
The management of technical projects is becoming a challenge for professional engineers in an increasingly competitive marketplace in which effective project planning and control approaches in compliance with clients’ contractual requirements are desired.
Successful project managers ensure that their projects are completed on schedule and within budget while meeting all the technical objectives. To ensure success, management requires timely and accurate information on deviations of cost and time parameters from the target objectives established during the planning cycle of the project. EVMS is an effective project control system that shows trends and mitigates potential performance problems.
EVM is an internationally recognised industry best practice for project management in both government and commercial projects. It is an objective computation and assessment of work accomplished.
How is EVM implemented?
EVM requires combining the standardised processes and procedures with reliable and consistent EV data. People, processes and tools are the foundations of a standard EVM system. An effective manner of deploying EVM system is by means of micro-scheduling of the project activities. This entails a sufficient level of detail in project planning to identify useful tasks that can be measured in days or at most a week. The construction projects are complex, intricate and have several interdependencies.
To deploy any EVM system successfully in such an environment, a proper project framework needs to be developed. The ANSI/EIA-748A-2002 specification specifies 35 performance criteria required for compliance and success criteria of EVM. However, these criteria are very complex in nature, but we have tried to simplify them with a simple ten-step process based on our experiences:
Define the project with work breakdown structures (WBS).
Identify authorities and define accountability for each WBS.
Define activities for each WBS and assign resources and other expenses to each activity.
Define duration estimates and logic for each activity in the project and schedule the project.
Identify milestones for various phases of the project to mark project progress.
Establish project baseline plan with cost and schedule data after the management’s approval
Update projects regularly and periodically generate metrics for measuring performance.
Analyse project performance based on various KPIs.
Take corrective actions to bring projects back on track and prepare revised plans to match up to the schedule and cost variances occurred.
Authorise changes in a timely manner to cater to the revised cost estimates for estimates at completion.
Challenges of adopting EVM in construction projects
Some of the contributing factors that have led to sub-optimal development of EVM usage in construction industry include the following:
Inefficient project planning and budgeting: Although tracking EV occurs during project execution, it cannot be accomplished if appropriate project planning and budget allocation have not occurred directly.
Lack of integration: Non-integrated cost, schedule, budgets and other systems result in delayed project management action due to the lack of timely information.
Unclear and duplicate roles and responsibilities: There is a lack of a collaborative environment for process improvement since too many people are involved in the project. When EV information is skilfully interpreted and applied, it will make a major contribution and ensure the success of the project.
The infrastructure industry in India has witnessed significant boom in the past few years owing to the growth in the economy and the demand generated by several key sectors. To keep up the pace with the use of the latest technologies and best practices, leading organisations would have to deal with complexities related to execution excellence, operational efficiency, manpower planning and deployment, equipment utilisation and technology optimisation.
Organisations need to recognise the role of strong project management and technology enablement as a valuable enabler in ensuring sustainable competitive advantage. EV is a control and monitoring system used to assess project performance.
All the values used in EVM are based on the WBS, schedule, estimates and cumulative costs. The synergy of all these elements makes EVM an easy and valuable process. Businesses that adopt these principles should resolve to continuously and objectively analyse and improve their processes, organisations and supporting technologies to accomplish the true benefits of an EVM system.
UG Krishna is the Vertical Head, Engineering, Construction and Transportation, Infrastructure (ECTI), Wipro Infotech, and Vikram Singh is the Practice Manager, ECTI, Wipro Infotech