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The construction sector has always faced a broad variety of risks. From environmental risks to financial, design, and safety risks; construction is historically one of the most risk-prone industries in the world. According to a 2023 Nationwide Agency article, for example, “…severe weather events and natural disasters have become more frequent and intense. This has led to significant economic losses and created a challenging environment that [construction] contractors must now navigate.” On top of the environmental impacts, the impact of rising costs in construction have led to projects commanding a much higher price tag due to escalating labor rates and soaring costs of materials. Gordian has stated, between 2022 and 2023, “82% of all construction materials experienced a sizable increase, climbing 19% on average.” This of course imposes a much higher financial risk on construction projects, leading to a greater need to ensure project costs are carefully controlled.
Integrated EVM Project Controls Tools
To mitigate and avoid these risks – and the potential of a disastrous outcome – it is critical to have a clear picture of the performance of a project as it is happening. This clarity comes from insight into key performance metrics such as Earned Value, Cost Variance, Schedule Variance and Estimate at Complete, and will help deliver projects on budget and on time.
Getting a Clear Picture
Use of a project controls solution provides enormous value to the enterprise through easy to interpret analytics, reporting, and a robust Earned Value Management (EVM) module. Elements like the S-Curve in Figure 1 below, user customizable dashboards in Figure 2, and the budget and forecast user interface in Figure 3 further down, provide a presentation layer that is easy to understand and always up to date with real time data. Using these analytical tools, project controls professionals can visualize how their project is performing at any moment and identify issues the instant they arise. Additionally, detailed drilldown reports with built-in key metrics enable project controls teams the tools to dive into details and pinpoint exactly what is causing unwanted anomalies.
S-Curve Chart and Report
The S-Curve in Figure 1 (generated by 4castplus) shows precisely what a project manager needs to determine the overall health of a project. First, you can see that the project’s burn rate, or Actual Cost (AC), is well below what planned (Planned Value or PV). This means exactly as it sounds: the project is burning cash at a slower pace than originally planned. While the chart shows you something unexpected is happening, it does not tell you why it is happening.
The savvy project controls team must uncover the details and determine a corrective action: One plausible reason is the original estimate was a bit high at that point in time. Another scenario is the variance is not a problem that needs correcting. The answer could also be something entirely different.
For more information on S-Curves have a look at the following video: Using the S-Curve to Visualize Project Health
Equally interesting is looking at Earned Value (EV) in Figure 1 above. EV assigns value to completed work on the project and is also well behind plan in this case. Again, this chart provides an alert that there is a potential issue, triggering project controls to investigate further. In a healthy project the planned value (PV), actual cost (AC), and earned value (EV) should ideally all be equal. As this is a timeline chart that records the progress of PV, EV and AC over time, each measurement period will show variances above and below plan.
Dashboard Metrics and Drilldown Reports
While the s-curve is what a lot of busy construction and project managers want to access to get a quick snapshot of project health, inevitably they will also want to dig into the details of exactly what the graph is showing, why it’s happening, and of course, what corrections they need to make. The system provides up-to-date metrics, presented on project dashboards and reports to enable a deeper dive into the numbers that support the charts. The dashboard in Figure 2 (taken from 4castplus) shows an example project with various metrics showing its overall health.
To explore some of these key metrics, let’s start with the three core input data elements that drive EVM calculations:
- Budget
- Actual Cost, and
- Earned Value – or progress
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Three Data Points Driving EVM
With just these three values – budget, actual cost, and %complete – you can start to build an understanding of the health of a project.
1. Project Budget
The budget is the total cost of the project, including all resources, expenses, fees, subcontracts, etc. – known as budget at complete (BAC). This typically begins as the original estimated cost of the project at baseline and then adds the budget amounts from any committed change orders that occur over time. This baseline and approved cost of change orders is the Current Budget. Those costs do not all occur at once so the budget, at the simplest level, is time-phased by a schedule based on how construction will be executed. At any point in time during the project, the amount of expected spending on construction is the planned value (PV).
Once there is a time-phased budget established, and the project begins its execution phase, project controls can start measuring project performance by tracking both actual cost (AC) and the progress of work completed (EV).
2. Actual Cost
For actual costs, the system collects and analyzes project costs daily. These cost transactions are a result of any activity or expenditure charged against the project, such as labor & equipment hours, received materials, fees, etc. Since costs are recorded on the date that they were incurred on the project, these costs can be compared against the planned value of the time-phased budget.
3. Earned Value (EV)
Earned Value is calculated by carefully measuring the physical progress completed on the project – which is expressed as percent complete (PC) – and multiplying that by the project budget. Earned Value shows the real, or physical, value of the total budget spent on completed work, calculated at any point in time. Using Figure 3 below (taken from pmi.org) as a reference, we can consider performance at a point in time which in this example is day 12.
The PV curve in Figure 3 above shows the total budget is $75. If this project is to excavate 10,000 cubic yards of rock over the course of 12 days, the total amount of completed excavation is 4,000 cubic yards. Using that method of progress, the project progress is therefore:
% Complete = 4,000/10,000
% Complete = .40 or 40%
Substituting values into the earned value formula produces the metric.
EV = %Complete * Budget
EV = .4 * $75
EV = $30
When EV is below the planned value curve the project is less productive than expected. By digging into the details of dashboards and reports, the project team can assess ways to improve production and get the project back on track.
Key EVM Metrics: Indicators of Project Health
Earned Value is a useful, high-level indicator, but real meaning in project performance comes from a set of metrics that form the foundation of Earned Value Management (EVM). Earned value is a key variable in the calculation of performance metrics so accuracy and thoroughness when measuring costs and progress is critical. As a unified cloud solution, 4castplus delivers embedded, robust, and real-time cost capture providing traceability for all resource, subcontract, fees, expenses, incurred procurement costs, etc. From the same job site interface that tracks labor & equipment costs, field staff also enter work progress (i.e. quantities completed or installed) with minimum effort. As you can see in Figure 4 below, up-to-date EVM measurements, calculated in real-time, show exactly how the project is performing down to a much more granular activity level.
Once the budget, actual cost, and percent complete are established, there is no additional work needed since the system automates the calculations and reporting. The costs and progress, combined with the budget, drive all calculations necessary to measure how well each area of the project is performing. As a project control and cost management solution, the EVM System included with 4castplus focuses primarily on financial performance. To gain insight into cost, schedule, and the final cost of the project, there are five key metrics for measuring financial performance. These are:
- Cost Variance (CV)
- Cost Performance Index (CPI)
- Schedule Variance (SV)
- Schedule performance index (SPI)
- Estimate at complete (EAC)
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Cost Variance (CV)
CV = EV - AC (Earned Value - Actual Cost)
CV = $30 – $35
CV = -$5
The Cost Variance represents the difference between earned value and actual cost. A positive CV indicates real production is ahead of spending, while a negative CV implies the project is burning money faster than it is producing on the project. It is a straightforward measure and from our calculation, we see production is $5 below our cost to date. Cost Variance becomes even more powerful when expressed as a as ratio to Earned Value.
CV% = CV / EV
CV% = -$5 / $30
CV% = -0.17 or -17%
Now, not only do we know our project is behind budget by $5, we are also falling behind by 17% of what we are spending.
Cost Performance Index (CPI)
CPI = EV / AC (Earned Value / Actual Cost)
CPI = $30 / $35
CPI = 0.86
The Cost Performance Index assesses the efficiency of the project in relation to the original plan (PV) by comparing the value of work performed (EV) against the actual cost (AC). A CPI greater than 1 indicates that, from a financial perspective, the project is performing above plan. The opposite is true when the CPI is less than 1.
When CV is negative and the CPI is less than 1, the project manager and project controls team can take action to get things back on track. A project manager might negotiate better rates with suppliers, optimize resource allocation, or implement cost-saving measures without compromising quality. This is all a process of analyzing and controlling costs more rigorously or may even require reevaluating the budget and schedule to identify areas for improvement.
Schedule Variance (SV)
SV = EV - PV (Earned Value - Planned Value)
SV = $30 - $50
SV = -$20
Where CV and CPI analyze the performance of costs, SV and SVI provide insight on the schedule. SV shows the difference between earned value and planned value. A positive SV indicates being ahead of schedule, while a negative SV suggests falling behind schedule. The metric expresses in money terms, the degree to which the project is either lagging or ahead of schedule. Like CV, SV has a corresponding ratio to earned value.
SV% = SV / EV
SV% = -$20 / $30
SV% = -0.67 or -67%
With the SV and SV% values, we know we are behind schedule by a factor of $20 or 67% behind schedule.
Schedule Performance Index (SPI)
SPI = EV / PV (Earned Value / Planned Value)
SPI = $30 / $50
SPI = 0.60
SPI is an index that provides insight into how well the project is adhering to the planned schedule. An SPI greater than 1 means there are efficiencies in the project advancing the schedule ahead of planned. When SPI is less than 1 the project is falling behind with inefficiencies relative to time and the schedule.
In the case that SV is negative, and SPI is less than 1, the project manager may focus on optimizing resource allocation, adjusting project schedules, or addressing delays. Certain activities may be fast-tracked, additional resources added to the project, or they may choose to revise the project schedule to enhance efficiency.
At some point during the project, especially if the project is underperforming, the cost controls team and project manager must determine the final project cost. Again, we can look at EVM to generate an estimate of the total final cost or Estimate at Completion (EAC).
Estimate at Completion (EAC)
EAC = BAC / CPI (where BAC is Budget at Completion and CPI is Cost Performance Index)
EAC = $75 / 0.86
EAC = $87
The EAC forecasts the total project cost based on current project performance. There are several methods for calculating EAC. The “cumulative method” is the most straightforward calculation and assumes the entire project will progress with a constant CPI. As construction forecasting software, 4castplus uses advanced formulas, and accounts for several factors to produce EAC at a detailed Workpackage level and overall, for the project. The budget and forecast interface in Figure 4, combined with the S-Curve in Figure 1 and Analytics Dashboards in Figure 2, are all designed to support the project controls team to produce top-performing projects.
Confidence in Your Solution
How solutions manage and present these calculations should be a significant driver when choosing a project controls and cost management solution. Those responsible for delivering on-budget and on-schedule need both an understanding of the data and a way to visually check the performance of the project on an ongoing basis. While this article talks about the mechanics behind these calculations, today’s project managers, construction managers, and other stakeholders need a quick and reliable solution to give them confidence they are in control of the project. While there are more metrics that measure other aspects of a project, these basic Earned Value Analytics are a cornerstone for keeping projects on budget and on time.
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Maintain tight visibility and control on the costs, activities and productivity of all your subcontractors and suppliers. Materials management, equipment rentals, miscellaneous purchases and subcontracted services can all coexist together with full control over budget, accruals, project inventory and much more. There is no other software system on the market that provides such comprehensive procurement management for construction projects.