Project Management Institute

Differences of earned value management practices in construction

Abstract

Earned Value Management (EVM) is a powerful project management method that is implemented in engineering and construction projects.

There are various recommended methods and frameworks for EVM practices, such as ANSI/EIA-748, PMI's A Guide to the Project Management Body of Knowledge (PMBOK® Guide) and Practice Standard. As much as these recommendations are invaluable, they tend not to go into the level of detail needed to address specific industry needs. The participants in each construction industry have adopted EVM principles in different ways.

This paper shares the author's views, as an adviser and practitioner, on the differences and the underlying reasons for these differences in EVM based project controls applications in four industries: Power, telecommunication, building construction, and transportation. This paper will also review the influence of ownership structure and project service providers on EVM practice.

Introduction

Project Management Institute (PMI) defines Earned Value Management (EVM) as a project management method that requires integrated baseline of cost, scope and schedule against which performance can be measured for the duration of the project (PMI, 2008). The United States (U.S.) Department of Defense (DoD) defines EVM as an integrated management system that coordinates the work scope, schedule, and cost goals of a program or contract, and objectively measures progress toward these goals (OUSD, 2013).

An in-depth technical review of EVM methods is beyond the scope of this paper. However, establishing a basic terminology will help readers follow the discussions in the text (Exhibit 1).

EVM terminology

Exhibit 1: EVM terminology

(Fleming & Koppelman, Using Earned Value Management, 2002)

The basic principle of EVM is that the performer of a scope is recognized for the amount of work that he or she completed. For example, in a widget factory, the value created by each worker is the number of widgets that each worker makes. If the worker is paid by EVM principles, the worker's wage is calculated by multiplying the number of widgets he or she made by a unit wage per widget. The workers who make more widgets earn more than the ones who make fewer widgets. The time they spent to make a widget would be disregarded.

Paying employees solely by the number of widgets they make may not be practiced in many countries with certain labor laws and minimum wage requirements. However, those laws do not apply to companies and contractors, and in many markets and industries, the customer pays for the completed product like when he or she buys a car or computer. This works well if there is a potential market for a standard product like a car. However, in an industry where the products are highly customized for each customer, and the production process is long and involves high risks and costs, like in a regular construction project, the seller may request multiple payments prior to and during the project. EVM is one of the methods that are used to calculate the timing and amount of those payments in a fair and equitable way.

In complex projects, all work is planned, budgeted, and scheduled in time-phased PV increments, constituting a performance measurement baseline. As work progresses, the completed portions are considered as EV on the same basis it was planned, in quantifiable units such as cash, job hours, cubic meter of concrete, ton of steel, etc. Thus, PV compared with EV measures the quantified volume of work planned versus the equivalent quantified volume of work accomplished. (Abba, 1997)

EVM methods were started as cost/schedule control system criteria (C/SCSC) by the U.S. DoD in 1967. C/SCSC was a compilation and consolidation of prior attempts by various U.S. government agencies to establish project management standards that could handle the high-risk and complex contracts these agencies were procuring (Abba, 1997). In 1998, Electronic Industries Alliance (EIA) published the EIA Standard ANSI/EIA-748, “Earned Value Management Systems” (EVMS), in cooperation with the National Defense Industrial Association (NDIA) (CPM, 2013). This standard establishes 32 minimum management control guidelines. The U.S. DoD and the Federal government at large have adopted these comprehensive guidelines in ANSI/EIA-748 (OUSD, 2013). As a result of several publications promoting its use, namely Project Management Institute's (PMI's) A Guide to the Project Management Body of Knowledge (PMBOK® Guide), which initially provided the basic terminology and formulas and subsequently broadened its coverage in the 2000, 2008, and 2013 versions of the publication and in a separate Practice Standard in 2011, EVM's use started to expand outside of U.S. Federal Government agencies (Kwak & Anbari, 2012). Despite EVM principles being generally accepted as effective in project management and able to be implemented in any project from aerospace, construction to information technology and healthcare, standards and guidelines such as ANSI/EIA-748 or the PMBOK® Guide have not found a broad practitioner base in private sector construction industries.

Throughout this paper the word “industry” is used to identify the type of construction; in other words, the industry the project is designed and built for. In many industries, practitioners and owners have adopted or invented project controls methods using EVM principles based on their own experience, risk exposure and control needs. In the first part of this paper, five examples from four such industries will be reviewed; power plants and overhead high voltage transmission lines from the power industry; wireless communication network development from the telecommunication industry; general building construction from the U.S. building construction industry; and road construction from the transportation industry will be reviewed. In the second part of the paper, the influence of ownership structure and service providers on EVM practice will be reviewed from goals, motivation, and benefit/setback perspectives.

All examples, graphics and tables in this paper are created to enhance and supplement the text, and are in abbreviated and simplified forms to serve this purpose. The methods discussed in the paper reflect general practices in the respective industries based on information domains available to the public. If the reader decides to implement any of these methods, further studying and consulting a specialized adviser are recommended.

EVM Applications in Different Engineering and Construction Industries

The application of EVM principles varies among industries, practitioners, and organizations. Each new project controls method should be optimized for the organization to reap the highest benefit from the cost spent.

Power Plants

Power plants are very large and complex machines that are custom designed with high precision to meet specified performance goals. Year round ambient temperature and climate, availability of water, environmental restrictions and mitigations, fuel specification, and many other variables make each project unique. The project's engineering and construction complexities are concentrated in one geographic location. All major components are custom designed and built. The procurement and logistics involve several countries, multiple currencies and often continents.

Establishing a clear Work Breakdown Structure (WBS) is essential in dividing the responsibility among the engineering disciplines, procurement and construction teams. In projects performed by consortiums where the design and construction responsibilities are segregated by corporate boundaries, fragmentation can be overcome and synergies among the teams can be fostered through the use of a consistent WBS. Accountability among the project teams and between the project phases can be improved through the application of EVM. The project activities and controls vary based on the owner's requirements, delivery method, contractor, and practitioners.

Preconstruction Phase

The scoping, financing, siting and permitting activities are typically completed by the owner and its consultants prior to commencing the Engineering, Procurement and Construction (EPC) phases. The permitting process often involves public review of environmental, cultural, and economic impacts on the geographic location. Many projects are developed through an integrated EPC process, where an EPC contractor, joint-venture or consortium takes on design, procurement, and construction responsibilities for a fixed-price “turnkey” delivery.

The engineering phase typically involves mechanical, electrical and civil engineering disciplines and is broken down by disciplines, major components and systems. The performance is monitored by WBS using EVM based models, and can be quantified by the number of drawings, specifications, and components designed. The procurement phase is broken down by major components and the procurement phases each component must go through from Purchase Order (PO) issuance to site delivery. Usually all EV and PV units are converted to monetary equivalents or job hours to compare with AC and calculate Key Performance Indicators (KPI), such as CPI and SPI. For some WBS, EV is based on the judgment of the supervising staff, which may introduce some subjectivity into the analysis.

Construction Phase

Many sophisticated owners such as electric utilities require commodity installation curves, labor-power histograms by craft, and physical percent complete curves (Error! Reference source not found.) constructed using EVM principles.

Commodity installation curves

Exhibit 2 – Commodity installation curves.

Based on public filings, the typical commodity groups requested to be tracked are: earthwork, concrete, steel, cable, terminations, conduit, panels, piping, and support structures (EDGAR Online, 2013). These groups are typically incorporated into the project's WBS and divided further by specification, size and craft where feasible to monitor the craft performance based on EVM principles.

Overhead High Voltage Power Transmission Lines

The High Voltage Transmission Lines' (HVTL) purpose is to transmit power over a physical distance, which may range from a few kilometers to hundreds or thousands of kilometers across different geographies. Overhead HVTLs are the most common form used to transmit high voltage power (XcelEnergy, 2013). The transmission capacity determines the voltage rating, and the voltage rating determines the size of the Right of Way (ROW) and the height of the towers (AEP, 2013). The project WBS accommodates the permitting, engineering, and construction phases to allow for EVM based performance monitoring.

Preconstruction Phase

The longest and most complicated phase of HVTL is permitting, which includes the siting of ROW. The results of the ROW siting process can alter the route, design, construction means and methods and rehabilitation phases of the project. The complexity of the siting process depends on the size and length of the ROW, and the number of stakeholders and jurisdictions it crosses. In the United States, each state has a different legal framework on siting. The process starts with a siting proposal including a statement of need, project costs and route, which must be established as the best out of other alternatives considering safety, environmental impacts, air traffic, impacts on scenic, archeological and historic sights, existing land use, soil and sedimentation, plant and wildlife habitats, terrain, hydrology and landscape. The entity proposing the HVTL has the burden of proof to show a need and that the proposed route is appropriate. All parties who may be affected by the proposed HVTL become stakeholders in the review process and submit questions and comments, objecting or supporting the proposal. Some jurisdictions assign a judge to hold evidentiary hearings regarding the objections. (The U.S. Department of Interior — the Bureau of Land Management [BLM], 2013, and the Pennsylvania Public Utility Commission [PUC], 2013).

Siting activities such as a siting application, environmental impact statement, cultural surveys, public hearings, responses to public comments, revisions to scope, mitigations/easements, and landowner coordination are monitored by tracking the completion, planned budget, and actual costs/job hours of the activities. Once the permit is issued, the engineering activity concentrates around the conductor and high voltage equipment selection, and structural design of towers and foundations (Eskom, 2002). Additional engineering activities may consist of new substations, transformers or interconnection design if needed. Overall progress and performance of the permitting and engineering phases can be periodically calculated and reported using EVM based models. The cost and schedule can be reforecast and risks can be identified using KPIs such as CPI and SPI.

Construction Phase

The construction phase can be monitored by activity completion curves and physical percentage complete curves similar to Error! Reference source not found.. The typical activities tracked are: Clearing, foundation drilling, foundation concrete, tower assembly and erection, stringing the conductors, sag and tension and rehabilitation (Eskom, 2002). As a result of the siting process, the permit may have imposed certain mitigation and rehabilitation activities, which may be critical and monitored in order to ensure the successful completion of the project.

Telecommunication

The wireless networks are composed of cell sites that collectively provide an area with radio signal coverage for voice and data exchange. The development of a wireless network is managed as a program comprised of several small projects to construct individual cell sites. Each cell site has individual development phases such as siting, engineering, permitting, construction, commissioning, and network optimization.

Wireless network development must be managed as a program. Cell sites are related projects and need to be managed in a coordinated manner in order to reach the network coverage goals, and each cell site that comes online improves the network coverage incrementally. Every individual project may not achieve the budget, schedule and scope goals, but the program is considered successful when the overall program schedule, budget and performance goals are achieved. Managing wireless network development also fits the program management definition by PMI (PMI, 2008). To allocate the resources efficiently across the program, it is critical to track every phase and activity of each individual project concurrently. Most development activities are repeated for every cell site. Considering an effective wireless network needs approximately 30,000 to 40,000 cell sites to cover the U.S. customers, a new development or upgrade program has the daunting task of tracking hundreds of thousands of cell site development activities. The performance and progress of the program are calculated using the tracked data and EVM principles (Error! Reference source not found.).

Wireless Communication Network Development Example

Exhibit 3 – Wireless Communication Network Development Example
Only three activities are shown. AC is expressed in % of total budget; PV and EV are expressed in number of sites.

 

Preconstruction Phase

In the permitting and siting phase (also called “site acquisition”), each cell site proposal goes through several public review and approval cycles, in which the proposer has the burden of proof. The process for each site is similar to a new HVTL siting but on a substantially smaller scale. Many jurisdictions have permitting exemptions in place in order to promote wireless communication. Nevertheless, the tall cell towers, typically between 100 feet (~33 meters) and 300 feet (~ 100 meters), raise similar community concerns as HVTLs for each cell site, and coordinating hundreds or thousands of cell sitings is a major undertaking. The Radio Frequency (RF) engineers plan the network, and determine the radio and antenna configurations of each cell site. The radio and power components are typically off-the-shelf or mass manufactured based on standard specifications used by the owner. The civil engineers design support structures such as towers, equipment slabs and platforms.

The typical siting and engineering activities that are tracked for each cell site include network planning, candidate selection, regulatory approvals, environmental and cultural impact studies, landowner consents, public hearings, community presentations, zoning permits, acquisition or lease contract, data network connection, physical engineering and procurement activities (Crown Castle, 2013).

Construction Phase

Construction consists of installation of RF antennas, cables and equipment, and building of the support structures such as towers, foundations, slabs and platforms. In urban areas, rooftops or other tall structures are utilized in lieu of towers to overcome the siting limitations and to fulfill the antenna height requirements. These alternative structures may need structural or environmental upgrades to carry the additional weight. Each construction activity can be tracked including tower erection, slab/platform, antenna/cable work, cabinet installation and overall site testing. The major challenge for the program is supervision and inspection of a large number of projects concurrently.

Building Construction

In the U.S. building construction industry, EVM principles are commonly used to determine contractors' monthly payments. In large projects a “cost loaded schedule” is used to forecast the monthly payments. The field progress is typically reported by describing activities and comparing the budget spend plan to the actual costs spent. Reporting by discrete units of installed commodities or building components is not common. The determination of EV (or progress) is based more on an expert's judgment, often certified by the architect as suggested by the American Institute of Architects (AIA)’s standard contract format A201 (AIA, 2007) than on formal quantitative monitoring.

Preconstruction Phase

The architect typically takes the lead on overall design. The engineers, interior designers and other design consultants are hired and managed by the architect. The architect also represents the owner during the construction phase to inspect the quality of and determine the progress of the work. Construction is typically performed either by a General Contractor (GC) or by a Construction Management firm (CM) under a contract separate from the architect's.

The most commonly used WBS in the U.S. building construction industry is Construction Specifications Institutes' (CSI) MasterFormat Codes/Divisions. MasterFormat is a standardized list of sections for construction requirements, products, and activities to facilitate communication among architects, specification writers, contractors and suppliers (The Construction Specifications Institute, 2013). While the MasterFormat is useful in organizing and communicating design data and dividing the work among the trade subcontractors, it is not sufficient by itself to be used as a WBS to track and calculate project progress because it does not contain location, staging or activity identifiers that link it with a Critical Path Method (CPM) schedule.

Construction Phase

For owners, it is common to hire a CM to manage the construction phase of the project. CM coordinates with the architect, engineer and other consultants, and supervises the trade subcontractors on the owner's behalf. In most CM contracts, the CM acts as a professional service provider with limited exposure to budget overrun and schedule delay risks. A Guaranteed Maximum Price (GMP) agreement is a popular way to shift some of the budget overrun risk exposure to the CM. However, GMP agreements typically do not cover Scope Changes (SC) and schedule delays, which are the major factors that cause budget overruns and revenue losses. A fixed price GC model may be more suitable when the design is substantially completed for construction. However, the GC model is also open to SCs.

It is not common in the building construction industry that a GC or CM agrees on a payment schedule that is tied to project milestones or completion of discrete units of projects or WBS. As a result, the industry does not benefit as much as other industries do from EVM application.

Transportation

Transportation and road infrastructure requires large and risky investments and is highly regulated across the world. In many countries, the roads are owned and operated by government agencies. The environmental and community impacts are arguably greater than any other industry that is covered in this paper. The permitting and siting phase can be expected to be very intense. However, in many locations, a new road is welcomed by the residents and landowners because it typically improves economic fortune of the area as a result of increased traffic. In economically more developed parts of the world however, new roads can be received as a cause for increased noise, pollution and environmental degradation.

Preconstruction Phase

The permitting phase is followed by the engineering phase, which consists primarily of civil and traffic engineering activities. The progress is measured by the linear length of the road designed. Where feasible or required, the valleys and mountains are crossed by tunnels and bridges, which require specialized and focused engineering efforts and are typically handled as separate projects with their own team, schedule and budget.

Construction Phase

Earthmoving, compacting and pavement are the major construction activities. The construction phase has been traditionally managed by tracking the actual cost and schedule against the planned. Many owners are increasingly interested in more effective project controls methods to identify risks early on in order to avoid irrecoverable delays and budget overruns. Brienza and Hildreth's report to the Virginia Department of Transportation (VDOT) advocates commodity tracking for this purpose (Brienza & Hildreth, 2007). The Washington State DOT recognizes the importance of EVM process and has started applying it in 2010 following the deployment of its project management system (software). (Douka, 2010).

The road construction activities can lend themselves to quantity tracking and EVM applications if the accuracy of actual quantity measurements is improved and administrative costs are controlled. Surveying large construction sites is costly and does not always create accurate results. Dealing with earthwork quantities can also be misleading considering the compaction ratios, swell and shrinkage factors of various types of soil and fill material. However, technology such as monitoring earthmoving equipment with Global Positioning Systems (GPS) can improve the effectiveness of quantity tracking and progress reporting (Alshibani, 2008).

Influence of Ownership Structure and Service Providers on EVM Practice

Public versus Private Sector owners

Goals

Governments and their agencies invest in infrastructure and other projects to improve public welfare, generally without short-term profit goals. These investments may improve the economic activities, and consequently the tax revenues in the long-run. The public sector projects have a monetary budget allotted by a political body that must answer to the public. Public agencies can also borrow from the financial markets by issuing bonds and therefore need to maintain their credit ratings. As a result, public sector managers carry the burden of balancing the long-term goals of their organization and satisfying the general public's expectations while keeping the budgets in check.

Private sector “for profit” companies invest in projects in order to earn a profit for their shareholders or owners. The faster and more the company earns, the more it is appreciated by its shareholders. Private sector companies' goal is to improve their profitability by increasing their revenues and controlling their costs and risk.

Motivation/Culture

The U.S. DoD started requiring its contractors to apply EVM procedures in the 1960s in order to establish better control over cost reimbursable (“cost type”) contracts. This requirement expanded to other federal departments and agencies over time. With the expansion, the practice of EVM became complicated until a reformed and unified guidance was published by EIA and ANSI in 1998 as ANSI/EIA-748-98, which the DoD adopted for its acquisitions in 1998 (U.S. Department of Defense, 2013). Since then, federal guidance has evolved, and at the time this paper is written, the fixed price contracts and contracts with a value below US$20 million have been exempted from the EVM application requirement (Kwak & Anbari, 2012).

While the U.S. federal government agencies have scaled back EVM requirements, many state-level agencies such as Virginia Department of Transportation (VDOT) have started to collaborate with researchers (Brienza & Hildreth, 2007) to improve their project controls methods. Some agencies, such as the California Department of Transportation and Washington State Department of Transportation, use EVM programs to execute their projects (Douka, 2010). Following its use on the Los Angeles Metro Rail project, Federal Transportation Administration (FTA) recognized EVM as an effective framework for enhanced visibility for the project management decision making process. FTA lists the early application, project team commitment at all levels and rigorous planning and implementation as catalysts for the success of an EVM application (Federal Transit Administration, 2013).

The private sector by definition has a strong profitability motive. Given the publications that advocate its effectiveness and efficiency, it is surprising that some private sector industries have not adopted EVM (Fleming & Koppelman, The Essence of Evolution of Earned Value, 1994). The building construction industry is one example.

On the other hand, many sophisticated owners and practitioners in power and telecommunication industries have already adopted, or invented project controls methods based on EVM principles to control their projects (EDGAR Online, 2013). These methods may not necessarily be branded as “EVM” but contain at least basic principles of EVM. Many telecommunication project owners tie the contractor payments to completion of discrete project activities.

Benefits and Setbacks

There is a perception in the market that EVM is effective in managing only “cost type” contracts. EVM principles can be effective in most engineering and construction projects to allocate and control risks regardless of the delivery method or type of contract (Fleming & Koppelman, Using Earned Value Management, 2002).

EVM initially came from basic but effective ideas on the factory floor. These ideas are equally effective today and are being used by engineering and construction project managers in various industries. Broader adoption of EVM principles can improve the project performance in many more private sector industries, especially in the allocation of accountability among the project teams and in transitioning between project phases. The application of a project controls framework based on EVM principles can foster communication, leadership, and effectiveness by establishing objectivity and clarity in both sectors.

An ANSI/EIA-748 compliant EVM program would require project managers who need to apply it to receive special training, which may increase the administrative costs and reduce the competition for the contracts. However, EVM principles provide powerful project controls capabilities for those owners that are exposed to and would like to manage project risks. Owners with higher risk tolerance may not require any EVM application to receive competitive bids from smaller contractors, which is similar to driving a car without collision insurance; as long as the driver is confident that he or she will not make a mistake, or drives an inexpensive car that is not worth much, then an insurance policy may not be needed.

Service Providers

Goals

As discussed, many sophisticated construction customers, such as the owners of power or telecommunication utilities, and various government agencies require EVM to be applied on their projects in one form or the other. The contractors and consultants that are interested in these contracts need to be prepared to apply and work with the EVM principles.

In the building construction industry, the CMs and GCs agree to prepare their payment requisitions based on “work completed” certified by an architect. However it is not common that a GC or CM agrees on a payment schedule that is tied to achieving project milestones or completion of discrete units of project scope (WBS units). Milestone achievement or WBS unit completion are arguably more objective ways than architect certification to determine project progress (or EV) and probably would not require an architect's certification.

Architects and other design consultants prefer to be paid as they incur costs. Their consulting and partnership-based business model is typically not structured to maintain high amounts of working capital. Construction contractors and consulting firms, in general, are not highly capitalized firms compared to other businesses.

Motivation

In projects and partnerships, it is generally advisable to allocate a risk to those who have the most influence over it (Irwin, 2007) (Arrow, 1974). Contractors are highly motivated to be paid as early as possible in order to reduce their working capital risk. If each contractor (CM, GC, or trade subcontractor) were paid by the WBS units that they complete, they would bear the risk of not completing the units on time. Since the contractors have influence over their own performance, the overall construction risk allocation would be distributed more efficiently. The contractors would also be arguably more motivated to complete as many WBS units as possible, as early as possible increasing the overall project performance.

Trade subcontractors are small firms with limited financial depth and may not survive to finish the work if they fall behind and do not get paid. If the GC or CM agree on such payment terms, there are two choices if a trade subcontractor falls behind on schedule: (1) Not pay until the WBS is completed, as the owner does not pay, and take the risk of the subcontractor's collapse or walk away; (2) Pay the subcontractor from his or her own funds and take the risk that the subcontractor cannot catch up on his or her schedule the following month.

Many trade subcontractors' scope is not completely independent of others. Their work progress depends not only on their own performance, but also on the performance of other trade subcontractors, vendors, CM/GCs, and owners. Therefore, it may not be reasonable for them to bear the entire performance risk. Since the project coordination and management is the CM/GC's responsibility, he or she must share the performance risk of each trade subcontractor in order to improve the project risk allocation efficiency.

If the owner mandates milestone achievement or WBS completion payment terms, the price of the project increases to account for the additional risks. If the owner does not mandate those payment terms, he or she ends up bearing a greater portion of the construction performance risk, over which he or she has little or no influence.

The leading contractors in many industries such as power, telecommunication, oil and gas have developed their own EVM-based project controls frameworks as the infrastructure facility owners in those industries shift the project performance risk to contractors. This shift still continues. Privatization in emerging markets brings in sophisticated private sector infrastructure owners that demand EPC turnkey project deliveries, forcing local contractors to change and adopt stronger project governance and controls frameworks based on EVM principles.

Benefits and Setbacks

The adoption of strong project governance and controls frameworks based on EVM principles can help contractors grow their business by involving larger and more complex projects with more sophisticated construction customers. It would allow them to bear a higher level of risk, consequently allowing them to increase their fees and profitability.

Cross-industry/Structure Opportunities for using Specific Methods

Methodology

The power industry EPC contractors apply EVM based methods such as commodity curves, labor-power histograms, and physical percentage complete curves to monitor engineering and construction performance. Telecommunication programs apply EVM principles in their development and upgrades to monitor and analyze all phases, including siting, permitting, engineering, and construction of thousands of sites concurrently. The Los Angeles Metro Rail's project planning, permitting, and engineering phases have been successfully controlled using a formal EVM program (Federal Transit Administration, 2013). Federal government agencies have completed numerous successful projects by using the ANSI/EIA-748 standard.

Conditions for Success

Prior to implementing a new project controls method, the project sponsors should evaluate the cost and benefit of the method. EVM based project controls frameworks are very effective in identifying the project's risks early on, thus can be thought of as an equivalent to an insurance policy. Selecting the commodities to track (Brienza & Hildreth, 2007) and the procedures and metrics to apply are critical decisions for a successful project controls framework. Organizations must implement the frameworks that fit their unique position in the market. Typical scope, company culture, risk tolerance and customer profiles are the major areas of consideration when designing a project controls framework.

Benefits/Setbacks

All participants in the building construction industry—owners, architects, CMs, GCs, subcontractors, lenders and insurance companies—can benefit from more rigorous use of EVM principles. For example, payment terms based on completion of discrete WBS units would help allocate the project risk among the project participants more efficiently and improve the objectivity in payment requisitions.

As an aside, the practice of certifying progress by an expert without formal quantity tracking or WBS monitoring can cause cost increases and delays. For example, on a scale of 100%, the difference between 9% and 10% of monthly progress of a trade may look insignificant. However, an innocent 1% of over-reporting per month over a 10-month period can add up to 10%. If the trade subcontractor uses its monthly payments to pay off its bills and payroll for that month, then it will arguably not have enough money in the bank to build the final 10% of the scope in month 10. Consequently, the owner will be in a bind to pay the extra 10% for that trade in order to “bail out” its project. Curiously, the change order traffic intensifies toward the end of projects.

The industries where EVM principles are not widely used can greatly benefit from tracking commodity quantities (Brienza & Hildreth, 2007) as a way of measuring construction progress. The tracking of individual project components can flag risks that can be investigated and addressed early on, before they become irreversible delays and losses.

Conclusion

Earned Value Management originated from a basic idea of recognition for the “work completed” in lieu of the “efforts made” to complete that work. This idea was adopted by the U.S. government agencies in the 1960s and incorporated into their project management procedures as a way of managing “cost type” complex projects. Many practitioners have advocated the efficiency and effectiveness of these procedures in project controls. Over time, these procedures have been branded as “EVM” and have evolved to become “best practice” and standard methods in project management.

Whether or not it is branded as “EVM,” the basic concept of recognition for the work completed is used successfully in many engineering and construction industries. This concept is widely used in the power, telecommunication, and several other industries where participants have higher risk exposure or lower risk tolerance than other industries. Commodity installation curves, craft and labor histograms, and physical percentage complete curves are some of the methods used in the permitting, engineering, and construction phases.

The concept of EVM is not used in the transportation or building construction industries as rigorously as it could be. Many transportation owners and construction customers are beginning to recognize the effectiveness of EVM principles in project controls and risk management. Contractor payments based on the completion of discrete project units or WBS can reduce the overall project risk and improve performance by allocating each risk item to project participants that have the most influence over that risk item.

EVM concepts have been adopted by project participants who have had high risk exposure. The government agencies and sophisticated construction customers such as power and telecommunication utilities required their application in order to shift the performance risk to service providers. Service providers adopted these concepts as a way of becoming more competitive on higher risk projects with higher profit potential. They did this in their own way by using the basic principles behind EVM. Engineering and construction project participants that want to control their project risk exposure need strong project controls and governance, and can do so by adopting EVM principles.

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XcelEnergy. (2013, March 17). Overhead vs. Underground - Information about Undergrounding High-Voltage Transmission Lines. Retrieved from http://www.xcelenergy.com/staticfiles/xe/Regulatory/Transmission/OverheadvsUnderground.pdf

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI or any listed author.

©2013 Attila Boydak
Originally published as a part of 2013 PMI Global Congress Proceedings – Istanbul, Turkey

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