Earned Value Analysis in Construction Project Management

Many have associated construction projects with budget overruns and schedule delays. These problems have long been a staple of the building game. Several distinctive features of construction projects have cultivated a hotbed of a plethora of risks that often result in many different forms of project delays and budget overruns. Lengthy and complicated processes, the involvement of many various parties, and exposure to a significantly-dynamic environment are just some of the many culprits behind these time or cost-impacting risks.

The word ‘inevitability’ is often used in the context of budget overruns and schedule delays concerning construction projects because of the long-running prevalence of these problems in the construction industry. However, these issues are usually unavoidable. Avoiding them in a construction activity requires a proactive intervention that helps identify any sign of their early presence. In any construction activity, identifying an early indicator that signals the risk of a budget overrun or schedule delay permits the dealing of the underlying cause before the problem goes too deep and beyond control.

What is Earned Value Analysis?

Project management tools and techniques are extensive, and they serve varying functions, from schedule planning to resource management and reporting. Earned Value Analysis (EVA) is a performance measurement technique that compares the performance of a project with its cost and schedule baseline.

It provides an early insight into how likely a construction project will complete on time and within budget. Essentially, it gives you a snapshot of the status of your project at any point in time concerning the schedule and cost performance against the baseline, allowing you to effectively manage cost and schedule variances as the project progresses, and also forecast the final cost and completion date.

The technique involves calculating three EVA variables of activity – the planned value of the work scheduled (PV), the actual cost spent on the work completed (AC), and the earned value of the actual work completed (EV), and plugging these variables into several EVA formulas to measure the activity’s cost and schedule performance.

These formulas provide valuable indicators of the health of your construction project, helping you answer numerous critical questions on your project – how likely is it that the final cost of your project will meet the project’s cost baseline, can your project be completed on time, how many days will your project be delayed if a delay is expected, and by how much the final cost will increase or decrease?

A Practical Example

Imagine a scenario where you are the project manager of an ongoing construction project involving the construction of an apartment. Currently, your construction crew is about to start erecting the internal walls of the building. The crew has previously agreed to complete erecting 100m2 of the internal walls in a day and the cost for the work per m2 is $2.00. A construction schedule has been built accordingly, and in the schedule, the duration of this particular construction activity is 50 days. To summarize this:

Work duration: 50 days
Amount of work to be produced a day: 100m2
Value of work to be produced a day: $200
Budget at completion: $10000

Suppose that 30 days have passed, the crew has completed an area of 2500m2, and the amount spent on the work is $4500. So, if we calculate the three EVA variables of the activity and plug them into some of the EVA formulas, we will get the following results:

The planned value of work scheduled (PV): $6000
The actual cost spent on the work completed (AC): $4500
The earned value of the actual work completed (EV): $5000
Schedule variance (SV): EV – PV:-$1000
Cost variance (CV): EV – AC: $500
Schedule performance index (SPI): EV/PV: 0.83
Cost performance index (CPI): EV/AC:1.11

At first glance, we can see that the activity is behind schedule. The schedule variance tells us that the actual value of the work done is $1000 less than that of the work that should have been done. Additionally, the schedule performance index indicates that we have only achieved 83% of what was planned. On the bright side, the activity is under the budget, and there is a saving of $500. We have spent only $4500 on getting the work done instead of $5000, which is the initial or earned value of the work. Because of this, we have been given $1.11 worth of work for every dollar we have spent.

What we have done so far is that we have analyzed the current cost and schedule performance of the work in dollar terms. The possibility of the work being completed on time and within budget depends on if there are changes to the schedule and cost variance. Let’s assume that the cost variance will not change throughout the work, and we want to forecast the final cost reasonably. To do this, we will use some of the figures we have calculated as inputs into EVA formulas intended for budget forecasting:

Budget at completion (BAC): $10000
Estimate at completion (EAC): BAC/CPI: $9009
Estimate to completion (ETC): EAC – AC: $4509

The EAC tells us if the cost variance does not change, the final cost of the work will be $9009 instead of $10000 – this makes perfect sense as we have been paying only a dollar for $1.11 worth of work. Whereas, the ETC shows the amount to be spent on getting the remaining work completed. Up until now, we still haven’t figured it out by how many days the work will be extended beyond the deadline. In fact, none of the standard EVA formulas can provide us with the answer, but we can still have to come up with a logical estimate.

We know that the crew is expected to complete the remaining work in 20 days – we have assumed that the work duration is 50 days, and 30 days have passed. We also know that the value of the remaining work to be done is $5000, which is BAC minus EV, and the value of work they can complete in a day is $166, obtained from multiplying $200 with SPI. If we divide $5000 by $166, we will get an answer of around 30, and this is the answer we are looking for. To complete the remaining work, it will take the crew 30 days, which means that there will be a 10-day delay to the deadline of the work.

Project managers can definitely benefit from using Earned Value Analysis. It allows a delay or cost overrun in a construction project to be identified early and helps you be more proactive in managing your project. These EVA formulas are simple to use, and the required inputs are easy to obtain. Its simplicity and usefulness are what contribute to it being a powerful and highly-regarded project management technique. If you have never done any of these calculations, you should try it out, and be prepared for what you will discover. Contact us to hire a CPM Scheduling expert for your construction project.