For many of us, the Earned Value (EV) and Actual Cost (AC) values always should be the same on lump sum construction contracts when earned value metrics are being reported from the project owner perspective. This practice is based on the following two assumptions. The first assumption is that the project budget also known as (BAC) always equal to the awarded commitment values to ensure that the Planned Value (PV), Earned Value (EV) are Actual Cost (AC) measures are based on the same total value which makes sense and a must requirement on lump sum contracts. The second assumption is that the project schedule percent complete which is the basis for calculating the Earned Value (EV) is the same percent complete value used to calculate the Actual Cost (AC), or the approved work in place, which might not be true. The assumption of having similar percent complete values will be only applicable if the cost loaded project schedule is approved by the project owner as the basis for calculating the contractor’s interim payment value which represents the Actual Cost (AC).
For most projects in the Middle East and North Africa (MENA) region, project owners continue to base the value of the contractor’s interim payment on the approved valuation of work completed against the Bill of Quantity (BoQ) line items which in most cases not fully aligned with the contractor’s project schedule. In other words, the percent complete for approved work in place could differ from the percent complete of the updated project schedule. This means that the Actual Cost (AC) which is based on percent complete for approved work in place multiplied by the total contract value which equals to the project budget (BAC) value will differ from the Earned Value (EV) which is based on the percent complete of the updated project schedule multiplied by the project budget (BAC).
Capturing the Earned Value Method Values
Using a Project Management Information System (PMIS) like PMWeb, project owners can have this earned value reporting which usually a basic earned value or project schedule application cannot do. The PMWeb forecast module will automatically capture all the data sources needed to calculate the earned value metrics from their relevant module. For example, the budget at completion (BAC) and planned value (PV) will be automatically captured from PMWeb budget module. The Earned Value (EV) will be automatically calculated from the imported project schedule percent complete value multiplied by the budget at completion (BAC) value. The actual cost (AC) will be automatically captured from the approved progress invoice value of the contractor’s contract. Those values will be automatically calculated at the cost breakdown structure (CBS) defined for the project.
Calculating the Earned Value Metrics
Those values will be the basis for calculating earned value metrics which will include Cost Variance (CV) which is “EV – AC”, Schedule Variance (SV) which is “EV – PV”, Cost Performance Index (CPI) which is “EV/AC”, Schedule Performance Index (SPI) which is “EV/PV”, Estimate To Complete (ETC) which is “BAC – EV”, Estimate At Completion (EAC) which is “ETC + AC”, Variance at Completion (VAC) which is “BAC – EAC” and To Complete Cost Performance Index (TCPI) which “1 / CPI” which is rarely used by project owners.
The Estimate To Complete (ETC) will be adjusted to reflect the past periods performance which will be reflected in the calculated Cost Performance Index (CPI). If the current variances are seen as atypical and similar variances will not occur in the future, then ETC will equal (BAC- EV).
Nevertheless, if the current variances are seen as typical of future variances, ETC will equal (BAC- EV)/CPI. In addition, for the case of being seen as typical of future variances, ETC can be influenced by factors of 80% of past cost and 20% past schedule performance (ETC = (BAC-EV)/ (0.8 X CPI + 0.2 X SPI)), be influenced by last 3 months cost performance (ETC = (BAC-EV)/ (CPI1+ CPI2+ CPI3)) or be influenced by past cost and schedule performance (ETC = (BAC-EV)/ (CPI X SPI)).
Additional Measure for Dealing with Lump Sum Contracts
When dealing with lump sum contracts, the Budget at Completion (BAC) and Estimate at Completion (EAC) should always remain the same. This means that in addition to the Estimate to Complete (ETC), a new measure will be added which will be called Balance to Complete (BTC) which is “BAC – AC”.
The formula to calculate the Estimate At Completion (EAC) will become “BTC + AC”, which also means that the Variance at Completion (VAC) will be always equal to “Zero”. Accordingly, the EAC and VAC will become of no value to report on.
Supportive Documents and Formal Approval of the Earned Value Analysis
Similar to all other PMWeb modules, all supportive documents including the updated project schedule report can be uploaded into PMWeb document management repository and attached to relevant forecast period report. In addition, links to the approved progress invoice as well as other PMWeb records and imported MS Outlook emails can be linked to the forecast form.
To ensure that the earned value measures and metrics are formally reviewed and approved, similar to other PMWeb forms, a workflow can be assigned to forecast module to ensure formal review and approval for the reported metrics. The workflow will include all the steps assigned to the relevant project team members to review and add all necessary comments before it formally approved.
The Earned Value Measures History and Trend
PMWeb allows capturing the earned value measures and metrics for each elapsed project period. This is a must a requirement for creating the earned value trend reports which one of the reports commonly generated when reporting projects’ earned value performance.
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 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.
About the Author
Bassam Samman, PMP, PSP, EVP, GPM, is a Senior Project Management Consultant with over 35-year service record providing project management and controls services to over 100 projects with a total value of over US $5 Billion. Those projects included Commercial, Residential, Education, and Healthcare Buildings and Infrastructure, Entertainment and Shopping Malls, Oil and Gas Plants and Refineries, Telecommunication, and Information Technology projects. He is thoroughly experienced in project management, including project management control systems, computerized project control software, claims analysis/prevention, risk analysis/management (contingency planning), design, supervision, training, and business development.
Bassam is a frequent speaker on Project Management, Strategic Project Management, and Project Management Personal Skills. Over the past 35 years, he has lectured at more than 350 events and courses at different locations in the Middle East, North Africa, Europe, and South America. He has written over 250 project management and information systems articles featured in international and regional magazines and newspapers. He is a co-founder of the Project Management Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for over six years. He is a certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning and Scheduling Professional (PSP), an Earned Value Professional (EVP) from the American Association of Cost Engineers (AACE), and a Green Project Management (GPM).
Bassam holds a Master’s in Engineering Administration (Construction Management) with Faculty Commendation from George Washington University, Washington, DC, USA, Bachelor’s in Civil Engineering – from Kuwait University, Kuwait, and has attended many executive management programs at Harvard Business School, Boston, USA, and London Business School, London, UK.