Contruent Blog

How EVM Forecasts Delays and Cost Overruns in Capital Construction

April 2024
by Ryan Posnikoff, Senior Director of Product Management

How EVM Forecasts Delays and Cost Overruns in Capital Construction

Have you managed any sizable capital projects that were on time and on budget? This is more the exception than the rule.

According to a 2022 McKinsey study of over 500 large capital projects worldwide, costs overran estimates by an average of 79 percent, while the average for schedule delays was 52 percent. And a 2016 McKinsey study of megaprojects revealed that 98 percent exceeded their budget (by an average of 80 percent) or took a lot longer than expected (by more than a year and a half).

Such outcomes chip away at profit margins, harm reputations and taint client relationships—consequences no construction company can afford to risk with tight margins and high cash-flow needs.

Turning this trend around will largely depend on how accurately overruns and delays can be forecasted.

Earned value management (EVM), a reliable project performance and progress methodology, provides predictive insights into a project’s direction. EVM provides a baseline means to assess cost and schedule performance. From there, it empowers construction companies to forecast the likelihood and degree of changes and risk factors that will affect outcomes. With this information, companies can mitigate and manage risks more effectively.

Understanding How Cost, Schedule and Scope Affect Each Other

Off-target outcomes and quality often result from an imbalance among cost, schedule and scope—the three project management constraints known as the iron triangle. Modifying one of these constraints will have a ripple effect on the others and compromise quality requirements.

Consider these general scenarios and some of the questions you may need to address:

  • If you focus on scope in a specific timeframe agnostic of cost, you’ll inevitably run over on costs. The same can happen when modifying scope incrementally; over time, the costs incurred from those modifications add up. Assuming the scope creep is necessary, that extra money has to come from somewhere. Can you reallocate the budget from elsewhere, and if so, how does it impact where it was drawn from? Can you obtain additional financial resources to cover it?
  • Fixating on cost to complete puts you at risk of failing to complete. How could the cost to complete be more accurate so it doesn’t compromise schedule or scope? How would the scope have to change to bring the project to substantial completion? If the schedule is adjusted, does it put dependent business needs and opportunities at risk?
  • Accommodating a strict schedule and avoiding delays will likely compromise scope, costs and quality. How might the scope be adjusted to achieve an on-time outcome? What would be the impact of additional shifts and overtime on overall cost versus value gained?

The challenge is predicting the extent of those effects; this is where EVM can be leveraged for its forecasting abilities.

Leveraging EVM to Gauge Cost and Schedule Outcomes

So, how does earned value management do this? It starts with the three variables that form the basis for EVM:

  • Planned Value (PV) is how much work should be done by specific times throughout the schedule.
  • Earned Value (EV) represents the monetary value of work actually completed by specific times during construction.
  • Actual Cost (AC) reflects the total costs incurred for work up to a specific point.

These three variables are used in simple equations that determine how well the project is performing:

  • Cost Performance Index (CPI = EV/PV) shows how well the project spend is going versus the established budget.
  • Schedule Performance Index (SPI = EV/AC) tells you whether you use time efficiently against the planned schedule.

Using EVM metrics empowers construction companies to take a proactive approach to managing project risks. Through scenario planning, trend analysis and data-driven course correction—construction software that supports EVM streamlines these—you can anticipate potential issues and navigate challenges before they disrupt the project timeline or budget.

Scenario planning. By addressing the iron triangle constraints holistically as an integrated group rather than as silos, EVM can measure the effect of “what would happen if” scenarios on each one.

Test different factors to predict the impact of potential issues. For example, you might want to see the effect of earlier or later completion dates, material price fluctuations, alternative material options, or adding extra labor shifts.

Looking at the resulting impact on each iron triangle component gives you something to act on. With regard to material pricing, how might increased pricing for steel or aggregate affect project costs? Would opting for lower-priced, comparable alternative materials make more financial sense? Or, if you’re looking at labor resource allocation, EVM results may show that hiring more site crews for critical path tasks is worth the investment to ensure the completion deadline is met without incurring liquidated damages.

Trend analysis. By analyzing EVM metric trends, you can anticipate cost overruns and schedule delays before they become problematic.

Construction software dashboards are invaluable for this. Visualizing trends in spending and timelines allows you to detect abrupt or slow yet concerning swings. How are actual costs performing against planned value? Is your SPI showing a decline over time? How do the metrics compare with similar prior projects?

Notice that these metrics act as an alert system, identifying deviations from the baseline when any of them meanders beyond its respective operating range (which is determined before the project begins). Think of EVM as an early warning mechanism that gives stakeholders the time and opportunity to drill down to locate the issue.

Course correction. What do you do with the insights gained from EVM, once scenarios have been explored or an issue is spotted? While this methodology doesn’t explicitly tell you the root causes of a problem or the best way to mitigate a current or potential risk, it does serve as an immensely reliable guide in making critical course-correcting decisions and adjustments. In other words, it’s actionable data intelligence.

EVM becomes an empowerment tool. Armed with objective metrics, you (along with other stakeholders) can confidently decide on the best course of action. Experiencing pricing spikes for materials? Consider looking into value engineering or finding a way to work with existing or new suppliers. Are metrics showing that resources are a bit thin in one area? Before it shows up in a worrying SPI, explore whether reallocating from another part of the project or temporarily bringing on reinforcements is the most cost-effective option.

See into Your Projects’ Future with EVM

EVM may be as close as you can get to having a crystal ball. But its real strength is its ability to empower you to avoid potential cost overruns and schedule delays.

Forecasting risks and opportunities is a must in large-scale capital projects. While EVM is a highly reliable tool for gaining insights into performance and progress, it’s infinitely more effective when enabled with cost management software that delivers on its promise.

You can gain these insights faster and more accurately with Contruent Enterprise. Find out more and schedule a demo.