Earned Value – A Key Management Tool for Contractors
By Sheldon Needle
Defining Earned Value:
It may be defined as follows:
The process of considering scope, schedule, and resources, measured against a project’s actual performance. It compares the planned amount of work to the completed tasks, to the project’s cost, to determine if the cost, schedule, and work completed (thus far) are all in sync with the plan. This analysis will show past performance and will estimate future efforts to complete the project.
Earned value may be also considered what you are entitled to progress bill the customer for work performed to date. The report which most closely provides earned value data is the cost to complete report offered by any mid-market construction software solution.
Most contractors will simply compare the dollar cost to date, including labor and materials, to see if the estimated percentage of work completed is in line with the estimate. For example, if the total estimate for finishing work is $20K and they think they have completed 40% of the work, the earned value for the job is $8K. But suppose the man hour units expended are already 50% of the total estimated. They are now running a schedule variance of -$2K. They have identified a work efficiency problem.
To get the best handle on managing earned value and schedule variances you will need construction software that measures both dollar variance, using estimated cost to complete, and a schedule variance metric based on units or hours that tells you if work production is ahead of or behind the estimate. A resource management component can also help to see if adequate manpower is available to meet the schedule.
These comparisons can be done at a summary job level or by cost type/phase and reviewed at intervals appropriate to the size and scope of the job. Of course, the sooner disparities are discovered, the easier it is to correct and minimize negative actual cost to estimate variances and avoid negative cash flow for the job.
There are many construction project management programs that will track costs at various levels of detail but very few (Primavera P6 is a notable exception) that tracks cost variances to schedule in detail.
Most of the mid-market vendors will offer a Gantt chart capability for scheduling that show timelines for various job phases. Other tools like Microsoft Project will do critical path scheduling. Neither really deals with cost tracking.
Advanced Management Reports
To keep senior management, owners and other stakeholders informed, reports can consider other factors such as specific variances for labor, material, subcontracts, equipment and overhead. Overall job performance with forecasts and adjusted budget of completed costs and variances per division may also be useful for larger jobs.
Effective management of construction projects requires real time data for cost and productivity to schedule so that construction managers can proactively insure the best possible outcome for the job.