April 2024
by Ryan Craaybeek, Director, Solutions Consultant at Contruent
Despite earned value management (EVM) being one of the cool kids on the construction technology block, there’s still an air of mystery about it.
Conceptually, this may stem from an assumption that EVM is too complicated to understand or use with its various equations (especially among the math-challenged), confusion over how to interpret what the calculations are telling you, or the perception that EVM might be overkill for your projects. These are common impressions when something isn’t completely understood or appreciated.
In reality, EVM is a powerful tool. It’s a must-have for anyone responsible for effectively monitoring and managing large-scale capital project progress and performance. Some projects even require it.
While a good cost management software solution will do the EVM calculations for you, it’s worth getting (re)acquainted with this methodology to appreciate — and put to use — what each EVM value is telling you about your project’s health.
Let’s start with a simple refresher that addresses what it is.
What Is It? Taking the Mystery Out of EVM
In a nutshell, EVM is a methodology that tracks and measures real-time performance and progress at different points in a project by integrating the time (schedule), money (cost) and amount of work (scope) needed to complete it.
Several elements are used for EVM’s equations: budget at completion (BAC), planned value (PV), earned value (EV) and actual cost (AC).
Budget at completion (BAC)
- Definition: The original total project budget determined before work begins; it’s used in several EVM equations. This number should be as accurate as possible so that all the calculation results below can be trusted.
- Answers the question: What do we anticipate the project will cost?
- Equation: None
Planned value (PV) (aka Budgeted Cost of Work Scheduled (BCWS))
- Definition: A project’s approved budget. While this is the same as the BAC at the outset, it’s most often used to reflect how much work should be done by specific points during construction.
- Answers the question: How much work should be/have been done by a specific point?
- Equation: (Planned % of work to be done) x (BAC)
Earned value (EV) (aka Budgeted Cost of Work Performed (BCWP))
- Definition: The monetary value of work done up to a specific point. It can be for the overall project or individual tasks.
- Answers the question: How much work was done by a specific point?
- Equation: (Actual % of work done) x (BAC)
Actual cost (AC) (aka Actual Cost of Work Performed (ACWP))
- Definition: The actual money spent to do the work by a specific point.
- Answers the question: What is the total cost for work done by a specific point?
- Equation: None, just add up the real costs
The resulting values of all the equations above are expressed in monetary units.
Now for the fun part. The PV, EV and AC variables go into calculating the following four key metrics, which give you context for making critical, data-driven decisions.
The following two performance-based metrics measure how efficient your project is with money and time.
Cost performance index (CPI)
- Definition: The amount of project progress relative to actual cost.
- Answers the question: How efficiently are we spending the project’s budget?
- Equation: EV / AC (result expressed as a percentage)
- Meaning of resulting value: CPI = 1 is on budget; CPI > 1 is below budget; CPI < 1 is over budget
Schedule performance index (SPI)
- Definition: The amount of project progress relative to the planned schedule.
- Answers the question: How efficiently are we using our time on the project?
- Equation: EV / PV (result expressed as a percentage)
- Meaning of resulting value: SPI = 1 is on time; SPI > 1 is ahead of schedule; SPI < 1 is behind schedule
The following two variance-based metrics measure how much of a difference there is between planned and actual values for costs and schedules.
Cost variance (CV)
- Definition: The difference between the budgeted amount allocated to do the work and the actual amount spent for that work.
- Answers the question: Is the project on track, above or below budget?
- Equation: EV – AC (result expressed as a monetary unit)
- Meaning of resulting value: CV = 0 is on track; CV > 0 is below budget; CV < 0 is over budget
Schedule variance (SV)
- Definition: The difference between the actual time to do the work and the planned (estimated) time to do the work.
- Answers the question: Is the project on track, ahead of or behind schedule?
- Equation: EV – PV (result expressed as a monetary unit)
- Meaning of resulting value: SV = 0 is on track; SV > 0 is ahead of schedule; SV < 0 is behind schedule
This high-level refresher provides a foundation for understanding how EVM benefits cost management for capital projects.
Why Is EVM Important? The Benefits for Your Cost Management
Enhances project status visibility and cost control
Traditional project management relies on static reports that don’t tell the whole story and can compromise the decision-making process. EVM overcomes this limitation. Its metrics provide real-time project insights that reflect how well project execution is aligning with the planned budget and schedule. So, as your project evolves, your metrics evolve, delivering a constant flow of actionable data you can use to make adjustments along the way.
This enhanced visibility is crucial for proactive cost control. Control depends on more than having the means to monitor and manage the factors that impact the budget; it also depends on having a line of sight into those factors. With EVM, you’re able to see metric deviations early on when there’s time and opportunity to examine the cause and take corrective action that will prevent problems from worsening. By surfacing what isn’t always readily apparent, EVM empowers you to make cost control decisions from a more strategic place rather than reacting to crises.
Enables better forecasting
What does the future hold for your project? EVM not only tracks progress but can also predict it, helping you better plan for it.
For example, feeding real-world industry benchmarks or historical project data into EVM metrics can help forecast more realistic budgets, timelines and resource requirements when creating an estimate. With this more precise estimate, expectations for the project going forward are more realistic and progress against the estimate can be gauged far more accurately.
Once a project is underway, EVM’s data analysis capabilities can offer foresights that inform a more proactive cost management practice. From identifying potential cost trends and budget deficits to modeling the financial impact of what-if scenarios, this methodology makes forecasting less of a guesswork exercise and more of a data-driven management strategy.
Reduces project risk and improves risk mitigation
With EVM, you’re less likely to be entirely unprepared for risks. Its multitasking capabilities continue with its early identification of potential scope creep, schedule delays or cost overruns.
Let’s go back to the performance and variance metrics. There’s such a thing as having a CPI, SPI, CV or SV that is too low or too high. At the beginning of the project, operating ranges should be set. These are the low/high parameters within which each should naturally fluctuate in response to project changes and risk factors. Any metrics moving outside these parameters become an early warning mechanism for potential risk impact. That’s your cue to take a deeper look to determine a cause and ways to best mitigate its effects.
Are You Ready for EVM?
We’ve shown just a snapshot of earned value management’s vast capabilities. Understanding these basics is the first step in harnessing the power of its metrics and becoming more advanced in your cost management practices.
Learn how Contruent can help you manage your capital projects better with tried-and-true EVM methodology. To learn more, visit our EVM page and Contruent.com or request a demo.