Why Earned Value Method Is Important for Capital Projects’ Investors?

Capital projects investors are always keen on ensuring that their approved project budget, which represents the approved investment, is always respected and the project actual cost should never exceed this budget, otherwise the project’s return on investment (ROI) will be negatively affected. The Earned Value Method (EVM) is one of the proven project management techniques used for monitoring and controlling the project performance budget as well as provide a trusted technique to forecast the expected cost at completion.

The concept of EVM is based on managing four variables, the project approved budget, the actual project cost for completed scope of work to date, the earned budget performance for completed scope of work to date and the expected additional cost for completing the balance of the project’s scope of work.

Using project management information systems (PMIS) like PMWeb provides the organizations with a single integrated platform not only to monitor, evaluate and report the project’s earned value performance but to ensure that the right data for the EVM is captured in the right format, right time by the right team member. Unlike traditional earned value analysis used by contractors which is mainly driven by the cost-loaded project execution schedule, the earned value analysis for a project investor requires capturing the budget, actual cost and cost to complete data using specific project management processes. Those include project budget and budget adjustments, progress invoices, miscellaneous invoices, timesheets, potential change orders, change orders and claims.

All those project management processes will be formalized using PMWeb. There will be an input form that will capture the needed data along with the supportive documents and records. This form will use a workflow to formalize the process for submitting, reviewing, approving and sharing the content. The workflow will take into consideration the level of approval authorities when it comes to financial transactions. This real-time captured data will then become available for the needed earned value analysis.

Managing the Project Budget

The project approved budget is based on the direct and indirect cost estimate for the approved project’s scope of work. The approved budget, also known as Budget at Completion (BAC), needs to be aligned with the project’s execution schedule to provide the planned budget value for each project period. This is also known as the planned value (PV). Linear, front-loaded, back-loaded, bell and other types of distribution curves are usually use to help in matching the way those funds will be spent.

To be able to effectively manage the project budget performance, the budget needs to be decomposed to the level where better monitor and control can be achieved. The Work Breakdown Structure (WBS) is a proven project management technique that helps in subdividing the project scope of work into smaller, more manageable components. This will enable the organization to estimate the direct and indirect costs needed to execute each one of those components. For projects that involve scope of work for which the budget cost is based on currency other than the project’s currency, PMWeb allows multi-currency at line item level. In addition, those WBS levels will be the same levels used to capture the actual project’s cost and earned performance.

It is important that project budget is updated to reflect the current status of the project. It is important to differentiate between in scope and out of scope changes. The in-scope changes are those changes that although could affect the project’s actual cost but they should not change the current approved budget as those are changes that are increasing or decreasing the project’s original scope of work. Those could be changes that could be attributed to design issues, unforeseen conditions among others. On the other hand, out of scope changes are changes that could increase or decrease the current approved project’s scope of work. For example, it could include adding additional rooms, upgrading the facility, changing originally specified materials among others. It is usually assumed that out of scope changes could also have an impact on the project’s operations revenue. All those budget changes need to be formally managed using what is known as budget requests.

Managing the Project Actual Cost

The project actual cost (AC) is the actual cost paid by the organization for the approved completed project’s scope of work. Actual cost is usually captured from the monthly progress invoices issued against each awarded contract for the outsourced project’s scope of work. Those contracts could be for professional services, design and supervision services, construction works, material supplies among others.

The actual cost for the approved completed project’s scope of work will also include the actual cost for approved change orders whether those changes were for in-scope or out-of-scope work. Those change orders could also have an impact on the project’s completion date and the actual cost could include compensation for the contract prolongation.

In addition, actual cost could be for miscellaneous invoices that are not part of an awarded contract. In addition, actual cost could be for the organization’s own resources spent on managing the project’s delivery which are usually captured using timesheets.

Managing the Project Earned Value

The earned value (EV) for each WBS level or project component is the current budget value for that level multiplied by the approved percent complete for the same level. The percent complete is usually the approved percent complete reported in the current project schedule for the same WBS level. PMWeb will import the updated project schedule at the end of each progress period to capture the percent complete as reported in the approved updated project schedule.

Of course, PMWeb also provides the option of creating and maintaining the project schedule within PMWeb itself and without the need to import the updated schedule at the end of each progress period from either Oracle Primavera P6 or MS Project. This will be achieved using PMWeb scheduling module.

Estimated Additional Cost

The organization needs to capture all additional cost the could affect the completion of each WBS level or project component. Those additional costs could be as a result of potential change orders that the contractors, suppliers, vendors and other project organizations have submitted to the project owner or his/her authorized representative.

Additional cost could be also attributed to pending or disputed change orders as well as claims submitted by the contractors, suppliers, vendors and other project organizations. In addition, the project owner or his/her authorized representative could also include allowances for additional costs that they anticipate could be impact the project’s cost to complete. Those could include allowance for inflation and other possible sources for additional cost. PMWeb custom form builder will be used to create those additional forms to capture those additional cost types which are not available by default in PMWeb.

The sum of those additional costs and the balance committed cost that are part of each awarded contract will represent the estimated cost to complete each WBS level or project component (ETC). The sum of this ETC and AC to date will be the estimated cost at completion (EAC) for the relevant WBS level or project component.

The Earned Value Metrics Calculations

The first metric that earned value provides is the schedule variance (SV) metrics which is a metric that details if the actual budget spending (EV) is aligned with planned budget spending (PV). A negative value will indicate a delay in spending the allocated budget which is not favorable. Another related metric is the schedule performance index (SPI) which reflects the efficiency in spending the allocated budget as of today.

The third metric is the cost variance (CV) which is the variance between the earned budget value (EV) for completed works and the actual cost for completing the same works (AC). A negative value indicates that the cost for completing the relevant WBS level or project component exceeds its value which is not favorable. Another related metric is the cost performance index (CPI) which reflects the efficiency in maintaining the project’s value.

The last metric is the variance at completion (VAC) which is the difference between the current approved budget (BAC) and the forecasted estimated cost at completion (EAC). A negative value indicates that the project’s actual cost will exceed the approved project budget which will have direct impact on the project’s return on investment (ROI).

Reporting the Project’s Earned Value Performance

The captured project’s performance data can be designed in different form and format to fulfill the organization’s reporting requirement. Nevertheless, the one that is used most is a report that details the earned value method key values for each period which include the approved budget at completion (BAC), planned budget value for the current period (PV), earned value for completed works (EV), total actual cost to date (AC), estimated cost to complete the balance of the works (ETC) and project estimate at completion (EAC). In addition, the report will display the variances at each period those being the schedule variance (SV), cost variance (CV) and the estimated cost variance at completion (VAC). Further, the report will display the schedule performance index (SPI) and cost performance index (CPI) for the same periods. The report will also display the variances and performance indices trend charts.

In addition, the organization could have a report to monitor, evaluate and report on the variances and indices across the organization’s complete projects portfolio or selected projects that could be part of a program or any other attribute like location, type, sponsor among others. The organization might display the earned value as a scorecard or link it to a map that will display the location of the selected projects as well as the performance indices. The size of the bubble on the map could be used to reflect the project’s approved current budget.