1. What is Earned Value Management? Earned Value Management is a critical Construction Project Management method that enables project managers to forecast project costs and additionally shows current performance and productivity metrics throughout a project's execution. Earned Value Management sounds way more complicated than it is. It is actually something that you’ve likely done many times before - both when managing projects, as well as in day-to-day life - but you may not have known that it had such an elaborate name as 'Earned Value Management' (EVM). The concepts of EVM are not complicated, but they’re not necessarily familiar to most people; so this document provides an explanation that describes what EVM is, how the numbers are calculated, and most importantly, what they should mean to you. Earned Value Management (EVM) is described as an effective method of analyzing your project costs objectively. So what does that mean? Here’s a simple example to give you some context (you’ll have to reach back to a little 3rd grade math): “I’m half-way through replacing the sink in my bathroom, but I’ve just realized that I’ve already spent $600 of my $1,000 budget that I originally estimated for the job. My initial $1,000 estimate included all labor and materials, and it’s taken a bit longer and cost a bit more than I thought.” With that description, I’ve just done an earned value assessment of my little job. To run Earned Value calculations, I only need three numbers: 1) the original estimate, 2) the percent complete, and 3) how much I've spent so far. Here’s what it looks like from an EVM perspective: Estimate: $1,000 Percent Complete: 50% Current Actual Costs: $600 Percent Spent: 60% Estimate to Complete: $500.
A must-read article on the effects of change in projects by Arthur O’Leary called Coping with Changes during Construction takes a very savvy look at both the reasons changes happen, along with strategies around managing the risk. While O'Leary's focus is on construction projects, this advice and rules are equally valid for projects in any industry that have complexities such as: many moving parts, suppliers, subcontractors, customers, complex WBS, multiple resource types, etc. O’Leary states: “It is seldom that any construction contract can be pursued from start to finish without some changes having to be made. This is in spite of the best of intentions of all parties. Despite stories about fat contractor profits in changes during construction, in reality they are an onerous economic burden on all concerned. Contractors often have difficulty in breaking even on changes.” So why is it that change has such a big effect on projects? O’Leary goes on to discuss exactly that point: “Projects plagued by numerous changes can become mired in confusion if they are not administered in an orderly manner. Serious problems arise when multitudes of changes are in various stages of progress. Some in the stages of deciding what to do, redesign or engineering, pricing, reconsidering, negotiation of price, contention about responsibility, approval in part, final approval, or cancelation. Some changes will have a profound effect on scheduling while others will have unexpected effects on interfacing trades. Some parts of the work may have to be deferred while awaiting final decisions and ultimate approvals of proposed changes. In some cases the proposed changes, after careful consideration, are canceled, and the deferred work then becomes critical to the time schedule." "Often, controversy develops among owner, architect,
Wanting to know where things are at during all stages of a project is a healthy thing to do. Whether you’re the owner, operator or customer, there’s no question that every day of your project, you’ll want to know if things are moving along as expected. And you’ll want to know details; because whether you’re running a $10 million or a $100 million project, going 10% over budget is a lot of money. So you’d better be asking a lot of questions. Where are we at with our suppliers? Where are we at with the Cement Crews? Where am I at with those materials commitments? Where am I at with Task XYZ? Where am I at with cash, did we get paid from our last 2 invoices In this post, I’d like to touch on the top 4 things you’ll need to have in place in order to have easy access to answers on the “Where am I at” questions that flow through the veins of the project manager or financial professional. The first thing you need is a Reliable Estimate The first part of answering ‘where are things at’ is knowing where you expected you should be at - which is all about Estimating & Planning. You need to have spent sufficient upfront effort in detailing the component parts of the project to determine cost and complexity. (I hopefully don’t need to convince anyone of the need to plan out projects – but you’d be surprised). What’s key to point out though, is the importance of being able to determine costs down to the resource level. This is absolutely vital to estimating accuracy. If you’re only estimating at the task, or phase level, you’re really only guessing
Luck I’ve always had mixed feelings about whether or not I believe in concepts such as “Luck” and “Destiny”. My dad always told me that there’s no such thing as luck and that you create your own destiny. He was very much a realist and firmly believed in taking responsibility for all the good and bad that happens to us in life. Regarding luck, he probably said it something like this, “Luck, ha, what a load of crap. Luck is nothing more than where preparation meets opportunity. You make your own luck. Now go clean your room.” Being a business owner, I've had a lot of conversations with other entrepreneurs that share their stories about how they built their business, the struggles they endured and the choice moments of success that made it all worthwhile. The amount of hard work, commitment and passion that’s required is always far greater than anyone ever imagined or expected. Interestingly, however, almost everyone that’s built a business will tell you that, in addition to the intense amount of hard work, there’s a certain amount of luck involved with business success. When I hear this of course, my dad’s voice chimes off in my head saying “ah what a load of crap”, but I keep this inner voice to myself and just listen and agree. In some ways, unlike my dad, I do believe in a certain amount of luck – there are things that happen in life and in business that just seem to come out of nowhere, that give a sudden boost in success. It’s tough to explain events like that in any other way than as pure luck. For the most part, however, I don’t think luck
A friend of mine that runs a mid-sized Oil & Gas services company once shared this little nugget of advice with me, “I tell you what, cash flow is your friend and your enemy. It’s the angry gorilla at the door one day, and a warm spring sun the next day. If you don’t have a good handle on your cash flow in business, you’re in deep trouble.” So true isn’t it? But what does it really mean? And what can you do to get a good handle on your cash flow? There’s a lot of talk about cash flow out there, but put simply, it’s the term used to define the highs and lows of available money as it flows in and out of your business or project (Wikipedia has a good description of cash flow). The big challenge with cash flow for most businesses however; is knowing when it’s going to be high and when it’s going to be low. It’s rare that there is a uniform, predictable ebb and flow of cash in any business, so having good information and tools to be able to calculate when those winters and summers are likely going to be, is crucial. This is especially true of project-based organizations; particularly those that have to invest heavily in a project before it begins to pay off. Investing in a project could mean anything from procurement of equipment or materials to just covering payroll for a few months until you receive your first payments on invoices. It could take months into a project before breaking even, and if you have several projects on the go at the same time, having a good read on how & when the
4castplus offers the capability for you to categorize your Labor, Equipment and Materials resources into what are called resource classes. This capability is an extremely powerful control and reporting mechanism that enables you to achieve two key objectives: To standardize billing rates To organize resources into strategic groupings for reporting and vendor negotiations To get a handle on how you would make best use of resource classes in your organization, I’ll give you a few examples below. I’ll break out the discussion into two areas: Billing and Reporting to give you some ideas as to how they’d be used in either scenario. There’s a lot of overlap between the two usages and most organizations can make use of both – even if you have no billable resources in your projects. For this post, I’ll focus in on the Billing side. Billing Having a standard set of project billing rates is a key part of the business of generating revenue from billable resources. Establishing the rates themselves, however, is only one part of the whole picture. Resource Classes in 4castplus are there to help bring some structure to simplify the often complex management of Billing Rates. In a nutshell, resource classes are a convenient way to group resources together that have the same billing rate. Each actual resource grouped under the same Class may have a unique Cost Rate (what the cost is to you), but using a Resource Class, you can bill them out at the same Billing rate. For instance, when negotiating with customers on a project bid, you’ll probably share your charge-out (billing) rates with them; and on your rate sheet that you send to your customer, you’ll most likely specify the type
Establishing a starting-point and benchmark for costing out new projects is greatly simplified if you have good information to start with. When negotiating prices with subcontractors or suppliers, it helps to have good historical trend and benchmark data to support your negotiating position (at the very least to know what things have cost in the past, and how those costs have changed over time). Looking back on past projects and reporting on, for example, the average cost you’ve paid for a particular material over the past year or two; can be incredibly empowering during negotiations. A further advantage is being able to side-by-side compare costing items such as average material rates and total amounts purchased - by Supplier and even by Project. Additionally, Side-by-side comparisons of subcontractors, in terms of both rate and productivity, will give you further sway in future contract negotiations with those and other contractors. Vendors will often up their rates without much of an announcement and also add in their own contingency factors somewhere in their bid to make up for historical losses. Rate increases are obviously a normal course of business and are often justified. But, if over time, consistent rate increases are sneaking in without your notice, then you’ll have little or no position to negotiate a better rate if you don’t have good historical reporting and trending tools to position yourself with. Looking at it from a slightly different angle – if you’re a Contractor and you’re bidding on projects, it’s vital to know how your charge-out rates have played out over time to give yourself maximum credibility in your customer’s eyes. It also positions you with a good strategy of how, when, and how much to increase your
Excel is an amazing tool. It is truly the great multi-purpose software of our time. People can bend and twist spreadsheets to do pretty miraculous things - from planning a children’s party to full enterprise budgeting & forecasting. Like anything, of course, it has its limits. Excel works just fine in many cases, but when it comes to more complex jobs - like estimating, tracking, controlling and analyzing large construction projects – it simply breaks down. People certainly try to force Excel to work in this field, and there’s no question that with enough time, resources and effort, a person could achieve some - rather limited - results. But the truth is, it’s just not worth it. Especially when there are good tools available which are designed specifically for that task. Don’t get me wrong, I love Excel, I use it all the time and I think it’s a spectacular product. But getting a handle on your project cash-flow, costs, revenues, and having real-time visibility & project progress reporting is far too important to your business just make up your own solution out of a spreadsheet.