How do you Figure out a Realistic Cost to Complete?

Project Owners spend an extraordinary amount of time trying to get an accurate reading on all the costs to complete for a project. On big projects, it’s hard enough determining what’s been spent to date, nevermind remaining. Gathering the right information to calculate forecasted spend can be tricky to do and requires good tools & processes to piece together a realistic estimate of projected costs.

With hundreds of suppliers and contractors busily doing work and delivering materials every day, it’s a big task for Owners to keep track of how exactly things are progressing. Understanding “progress” is key. Without information on progress to date, you can’t figure out amounts remaining. Most decent project managers (especially on the owner side) understand this very well. As a result, they spend a good part of their day making a lot of phone calls & email requests to vendors – along with regular site visits – to get an idea of how much has been completed and how much is left to do on every project activity.

They’ll then punch in numbers to manually calculate those remaining amounts to produce a status report. In addition to all that, they also rely on vendor invoices. They’ll subtract invoices from the budget, and voila, all in, that’s their gauge on the cost to complete. Off goes the report to internal stakeholders. It’s not very accurate, but it’s what they have to deal with.

Considering it’s such an important piece of information, it’s amazing that such a loose, time-consuming and manual system is still used. Especially one that’s full of guesswork and potential for errors. It can be even more effort if the project manager is required to time-phase remaining costs in a monthly spend forecast. That’s where things get really tricky.

There is a better way

The importance of this hasn’t gone un-noticed.

Here’s my question: What if the contractors on a project were required to provide Earned Value Management metrics as part of their regular status report? What if the effort of determining progress and costs-to-complete were shared amongst the owner, contractors and engineering companies? I can hear the contractors groaning as they read this. Well, I can understand that contractors may groan about having to add yet another thing to their already huge list of contract obligations. But the reality is, the owner is going to drag that information out of you one way or another; so you might as well build it into your business process and make it easier, more accurate and timely for everyone. No matter what, there’s a good chance EVM will improve your business and cash flow in ways you’d never imagined.

EVM isn’t hard or complicated. I’ll bet you a million dollars you’re already doing it but haven’t realized it was called EVM. Check out this revealing article to get an idea about what I mean by that: http://procurement.citsolutions.edu.au/Clients/DOGPM/documentation/Earned_Value.pdf.

Lightweight Earned Value Management for Contractors

Unless you’re working on a government contract that requires full ANSI-748 compliance or equivalent, you can easily introduce a lightweight earned value process into your organization with little extra effort. Here’s why you haven’t done it yet: Sometimes, the purists out there can get pretty caught up in an all-or-nothing theory about EVM that can make it appear intimidating to the small-to-medium-sized contractor. While there are good reasons for the breadth and coverage that a full EVM implementation can require, a lightweight version can bring about enormous value to both contractor and owner.

In its simplest form, to produce EVM metrics, all you need are three numbers:

Budget (revised to include any change orders)
Current actual costs (from the contractor/EPC point of view, this would be billable)
Progress numbers

And That’s it.

If you can figure out those three things on a regular basis, you’re in a great place to calculate EVM. And with EVM, you can calculate much more than just cost to complete. You can also compute: cost variance, schedule variance, estimate at complete, remaining hours, etc. EVM is a way to get a full 3D view of your project.

The first two variables (budget and actual) are hopefully fairly obvious how you would gather those. But the third variable, “Progress”, may require a bit of explanation. The idea of Earned Value, is to relate an actual value (price or cost) against the work that’s been completed to date (i.e. progress). People’s first reaction to calculating progress (or, value of work completed) is to just add up all the expenditures to date, or hours completed, and mark that down as progress. The problem with that approach is that current costs or hours are rarely in lock-step with actual progress to date. In fact, often these two things can vary substantially. You may have, for example, spent 80% of the budget but only completed 60% of the job.

Progress is typically expressed as a percent. Using percent makes the calculations possible: in other words, Percent Complete. Figuring out percent complete is where things can get a bit more involved. Measuring progress can be part art and part science – and is an area that requires a certain amount of internal process. By their nature, Progress Measurements can have a degree of subjectivity in their assessment. That’s really just a way of saying there are imperfections to measuring progress. Despite any imperfections, it’s something you have to do no matter what. EVM software provides good tools for minimizing the chances and sizes of judgement errors.

To give you a quick example, let’s say you’re an engineering company and your deliverable is 12 drawings to complete a project. Once you’ve completed and delivered 6 of those drawings, you could well assume you’re 50% complete. But, you may know better. You may know that you tackled the more challenging drawings first, and the last 6 will only take 30% of the remaining effort. So to accommodate for that, you apply a percent complete of 70%. That’s a simple example, but it gives you the idea. Your assessment of 70% may have come about through good progress measurement techniques; or maybe it’s your experienced gut feel. Either way, knowing percent complete will enable you to calculate that third variable and have the ability to produce an EVM status report.

Once you have values for budget, actual and progress, the next thing to do is run the calculations. Ideally, you should have knowledge of EVM calculations and insert them into your spreadsheet; or use an earned value management software solution to help you with gathering and reporting that information.

What’s in it for the Contractor?

Having an earned value process and reporting practice in your organization obviously requires a bit of extra effort, but is it worth it?

Remember, when the Owner’s happy, the money keeps flowing

As a valued vendor, providing good reporting and transparency helps the Owner with accurate status reporting, schedule and cost information. When the Owner’s happy, their investors are happy. And when the investment community is happy, the money keeps flowing.

EVM helps contractors understand their own profitability.

It should be pretty clear that it’s about more than just providing good reporting to the Owner. Contractors gain tremendous benefit from understanding forecasted revenues, man-hours, costs, etc. This provides far superior cash flow reporting and ability to plan current and future contracts.

The Owner Still has a Responsibility

Regardless of whether the contractors report EVM metrics up the food-chain, Owners still have an obligation to confirm and validate these numbers.