Project Management Institute

The Use of EVA—Earned Value Analysis in the Cost Management of Construction Projects

Abstract

The objective of this article is to present and discuss the main aspects of the use of Earned Value Analysis - EVA - in the cost management of civil construction projects. These aspects are related to advantages and disadvantages, difficulties and benefits, problems and solutions, criteria and results, based on the experience of a real case study in Brazil.

EVA was applied in the civil construction of an indoors amusement park, named Monica Park, inside the Citta America Shopping Center, in Rio de Janeiro, Brazil. The park has 30 attractions, 10.000 square meters and it has been built in 10 months, from January to October 2000, for US$ 5 millions.

The case is documented with reports, graphs, analyses and comments. A critical review of the application of EVA in the Amusement Park is provided. It is shown that EVA had a relevant role in the integrated management of scope, time, progress, cost, risks and procurement of the main supplies and services of the project.

EVA contributed to the success of the case study (finished on time / on budget) and the case study will contribute to the further use of EVA in other projects by identifying the main problems and solutions. The results are analysed and the article recommends 10 steps for further implementation of EVA.

Introduction

This paper discuss how to assign earned value to the project stakeholders, related to the theme of this congress. The Earned Value Analysis (EVA) is a valuable technique to determine real gains and losses. EVA provides means to balance gains/losses, optimize the balance and maximize the gains. EVA is a powerful tool to control simultaneously physical and cost performance. EVA provides an integrated schedule (time), progress, and cost management, related to scope and procurement, quality, and risks.

Harold Kerzner (1998) considers EVA a relevant maturity differential in project management. To manage costs using EVA is called “manage with open eyes” because the manager can clearly see what was planned, what was performed, and the actual costs. This is a powerful tool in the decision making process. In the day-by-day of the manager, EVA provides “alarm” signs and allows decisions that keep the project on time and on budget.

The cost management in Construction Projects needs the planning of budgeted costs and their control. This is related to all the knowledge areas in the project. The actual costs are related with the work performed, but the work performed is not often exactly equal to the work scheduled. The solution is the control, measurement and determination of the budgeted cost of the work performed and compare it to the actual costs. One difficulty is the determination of the proper accounting system and deal with scope changes. The solution is an appropriate WBS – Work Breakdown Structure, and a suitable account plan. The solution requires distinguishing the financial control and cost control.

Kenneth Humphreys explained, “financial control is concerned with the receipts and expenditures of importance to good bookkeeping and accepted accounting practices. The structure for such accounting must be in accordance with accepted rules of accounting and serve whatever requirements may relate to contract payment provisions, taxation, regulation, or project capitalization. Financial accounting will also reflect the pricing of a contract which may differ significantly from its costing because of unbalancing and the tracking of indirect accounts such as profits and undistributables. Field construction managers are concerned with costs – what specific operation should cost and what they do cost. Cost control should be approached as an application of Pareto's law which essentially states that 80 percent of the outcome of a project is determined by 20 percent of the included elements. Thus, in establishing a cost control system, the idea is isolate and control in detail those elements with the greatest potential impact in final cost, with only summary-level control on the remaining elements” (1991, p 97).

The objective of this article is to present and discuss the main aspects about the use of Earned Value Analysis - EVA - in the cost management of civil construction projects. These aspects are related to advantages and disadvantages, difficulties and benefits, problems and solutions, criteria and results, based on the experience of a real case study in Brazil.

EVA was applied in the civil construction of an indoor amusement park, named Monica Park, inside the Citta America Shopping Centre, in Rio de Janeiro, Brazil. The park has 30 attractions, 10.000 square meters and it was built in 10 months, from January to October 2000, for US$ 5 millions.

The case is documented with reports, graphs, analyses and comments. A critical review of the application of EVA in the Amusement Park is provided. It is shown that EVA had a relevant role in the integrated management of scope, time, progress, cost, risks and procurement of the main supplies and services of the project.

EVA contributed to the success case study (finished on time / on budget) and the case study contributed to the further use of EVA in other projects by identifying the main problems and solutions. The results are analysed and the article recommends 10 steps for further implementation of EVA.

This paper shows a documented use of EVA in Brazil, by means of empirical approach of a real study case: the Monica Park project, as follows:

Section 1 – Introduction, objectives and methodology.

Section 2 – Earned Value Analysis – EVA - Basics and Concepts.

Section 3 –The use of EVA in the Monica Park Project

Section 4 – Critical analysis of the use of EVA in Monica Park Project, with comparative analysis of vantages and disadvantages, problems and benefits, difficulties and solutions and the 10 steps recommended to implement EVA in further construction projects.

Section 5 – Conclusions and References.

Study cases can be exploratory, explanatory or descriptive. The research methodology, in this case, comprises a simple descriptive real case study, provided by the authors. The reports from Monica Park were used to get data for the paper. Some tables are reproduced in the paper. Case studies are particularly suitable to answer questions like “How?” and “Why?”. They are also useful to elaborate theories where little data is available (Yin, 1994). Case studies allow the researcher to use the “controlled opportunism”, so that the answers can be achieved as far as new data are collected (Eisenhardt, 1989). Yin's approach (1994) for case studies was used in this paper through external validation of the content, since the comments and concerns of the participants of the Monica Park project have been considered.

As a simple descriptive study case, the replication logic was used verifying the possibility to repeat the EVA process in other construction projects and 10 steps used in the Monica Park are modelled and provided for future use. The confirmability is assured by the observation, by the results and reports provided (Yin, 1994) and analysed by the authors: the first one has intensely participated of the Monica Park Project in the database and in the planning and control services. All the data, reports, databases, perceptions, and concerns were obtained with the other participants of the Project, which were the primary source of information in this study case, as well as the reports. These data are partially reproduced in this paper. According to Morra and Friedlander (1999), descriptive cases describe what occurred, why and how, so we can get a clear picture of the actual status. In addition to the methodology action research was applied also by the authors. Action research is a method which deals with research as well as action (Dick, 1999): action to generate change in an organization or in a community, in order to enhance the understanding by the researcher. In this method, according to Checkland and Holwell (1998), the researcher should participate of the action team involved with the proposed change, such as occurred in this study case. In this method, accuracy and relevance are searched. The EVA method is already considered relevant by the community of project managers and cost engineers. So, the theoretical referential related to EVA was researched in order to compare with practical results and guarantee value to this real case study conclusions by comparison of the action research with the actual theory. So, the simple descriptive case was complemented with action research, as far as the first author participated actively of the team responsible by the transformation in analysis. One limitation of this methodology is that only one case was studied. Nevertheless, the empirical approach was rich enough to allow the critical analysis provided in section 4 and validate the conclusions in section 5, since the author participated in the study case.

The terminology used in this paper are referenced by the appendix A “Cost Engineering Terminology” – of the book: Basic Cost Engineering, by Kenneth K. Humphreys (1996).

Earned Value Analysis – EVA – Basics and Concepts

According to Flemming (1996) EVA was originated in the DOD- Department of Defence – USA, from the former C/SCSC (Cost/Schedule Control Systems Criteria). The EVA technique is used in several countries, by great companies to get better cost and schedule control, with different names, such as: EVA - Earned Value Analysis, EVM - Earned Value Management, EVMS - Earned Value Management System and EVT - Earned Value Technique.

The main EVA variables (indicators) are:

  • BCWS (Budgeted Cost of Work Scheduled) - PV (Planned Value)
  • BCWP (Budgeted Cost of Work Performed) - EV (Earned Value)
  • ACWP (Actual Cost of Work Performed) - AC (Actual Cost)
  • SV (Schedule Variance) : VP = EV – PV; CV (Cost Variance): VC = EV - AC
  • SPI (Schedule Performed Index): SPI = EV / PV; SPI = 1 (project on time)
  • SPI <1 (performing less than planned); SPI > 1 (performing more than planned)
  • CPI (Cost Performed Index): CPI = EV / AC; CPI = 1 (project on budget)
  • CPI < 1 (spending more than planned); CPI > 1 (spending less than planned)

EVA is now an American pattern (standard) – American National Standard Institute (ANSI) for electronic industry, through the standard ANSI-EIA-748-98, (American National Standards Institute/Electronic Industries Alliance – 1998 - Earned Value Management Systems). The use of EVA is guided by 35 criteria stated by DOD - Department of Defense - USA. According to DOD/5000-2R, the main EVA processes are: model definition, planning activities, resources and costs in an accounting plan, register of results for financial control, EVA Progress Report elaboration and monitoring/control with actions.

These processes are related with the Project Management (PM) processes (planning, execution and control) according to the Exhibit 1, provided by the Project Management Institute - Practice Standard for Earned Value Management (2003):

EVA processes related with PM processes

Exhibit 1 – EVA processes related with PM processes

These criteria are very important. They shall be read, studied and applied as key procedures to get success in EVA application.

EVA Applied to Monica Amusement Park Project

Monica Park is an indoor amusement park, a children entertainment centre, in the concept of FEC - Family Entertainment Centre, located at the Citta America Shopping Center, in Rio de Janeiro City – Brazil. The park has 30 attractions, with an instantaneous capacity for 1.300 people, a daily capacity of 4.000 people, with a peak annual capacity of 300.000 people. The park has an area of 10.000 square meters, including areas for fast food, special parties and a shop with products related to the theme of Monica, a child book character famous in Brazil. The construction of the park is the object of this study case. The construction works took 10 months, started in January 2000 and finished in October 2000.

The construction works have been contracted to several suppliers:

  • Architecture, Engineering and Construction Consultants;
  • Civil construction contractors, erection, assembly and industrial facilities;
  • Electronic and eletromechanics equipment manufacturers;
  • Construction materials manufactures and resellers;
  • Urban equipment manufactures, including garden equipment;

Thematization of the complex services related to provide the park with thematic elements related to the theme of the park: Monica Park. One of the main suppliers was the company which provided the thematization of the park, hereinafter called “Thematizer”. For operation of the park some companies have been contracted, such as: fast food operators, thematic shop operators, cleaning services, safety services, attraction operations and maintenance.

The success of EVA requires clear responsibilities in each work package. The Monica park project has the following tables showing the responsibility of the main participants (“actors”) in the specific areas of the project: conceptual and detailed design (show below in Exhibit 2 2), planning and control, attractions and thematization, special equipments, civil construction works and pre-operations.

The main participants are identified in the tables by letters O: Owner / M: Manager / C: Contractor (Civil Construction, erection, assembly & facilities) / T: Thematizer / A: Architect.

The code in table means: R = Responsible (Responsibility by); A = Approval

Responsibility Matrix – Conceptual and Detailed Design

Exhibit 2 – Responsibility Matrix – Conceptual and Detailed Design

According to Humphreys (1993): “the WBS – Work Breakdown Structure – can graphically display the work to be done ...The WBS acts as a vehicle for integrating baseline cost and time plan, and, thus, is an aid in relating plans to objectives”. (See also AACE standards Nr. 10-S-90, in appendix B.)

The Monica Park WBS has the following levels:

  • Level 1: Monica Park Project
  • Level 2: Physical area of Monica Park;
  • Level 3: Services to be done in Monica Park
  • Level 4: Work Packages (lowest level).

The reports from the Monica Park EVA Cost/Schedule Control System were obtained from a suitable database of activities, cost and schedule data implemented by the project manager.

The baseline cost for Monica Park civil construction, including erection, assembly, thematization and attractions totalize approximately 5 million US dollars, or exactly in Brazilian currency (reals) R$ 12.563.452,00.

Monica Park – Earned Value Analysis – PV, EV and AC

Exhibit 3 – Monica Park – Earned Value Analysis – PV, EV and AC

Monica Park - EVA – Values in R$ (Brazilian reals)

Exhibit 4 – Monica Park - EVA – Values in R$ (Brazilian reals)

Following, the EVA indexes SPI and CPI are presented in Exhibit 5, below.

IDP = CPI, IDC = SPI, MESES = MONTHS

Monica Park – EVA indexes CPI (IDP) and SPI (IDC)

Exhibit 5 – Monica Park – EVA indexes CPI (IDP) and SPI (IDC)

Monica Park – EVA Indexes SPI and CPI – Mes=Month

Exhibit 6 – Monica Park – EVA Indexes SPI and CPI – Mes = Month

Critical Analysis of EVA in Monica Park Project

The main objective obtained with EVA in the Monica Park project is that the project finished on time and on budget, education of the project team in the EVA criteria and procedures, as well as training the team in EVA related software.

differences with EVA and without EVA

Exhibit 7 – differences with EVA and without EVA

The main problems of EVA are the cultural change needed in the first implementation, the negative resistance of some people in the project due to the effort to implement, without see clearly the benefits. EVA demanded great effort in Monica Park project in order to:

  • Plan the Cost/Schedule Control System, database and reporting
  • Orient and training the related people in the Monica Park project software
  • Collect, digitize, analyse consistency of information to database
  • Elaborate reports, analyse consistency of results, deal with scope changes;

The main benefits of EVA, identified in the Monica Park Case are: integrated cost, progress and time management, better vision of the project in terms of scope and procurement, early alert to problems, vision of trend for some deviations, reduced time to perception and understanding of problems and solutions, support for negotiations and decision making process, motivation of people to the project control process.

10 Steps to Successful EVA Implementation

1. Obtain top level organization commitment with EVA

2. Education and training of the people in the project in EVA

3. Scope well defined, detailed and identified, with proper WBS and packages

4. Schedule and budget organized according to the WBS

5. Clear Project Responsibility Tables, with clear responsibility descriptions

6. Clear flowchart of activities and relationship with the main participants

7. Cost/Schedule Control System with database and data collection procedures

8. Suitable reports related to EVA, well planned, analysed and distributed

9. Procedures to consistency analysis and validation of information

10. Lessons Learned - continuous improvement process

Conclusions

The main conclusion is that EVA provides a relevant contribution to the cost management in construction projects, namely in the case Monica Park Project, which was finished on time and on budget, as shown in section 3 and analysed in section 4. EVA contributed to cost management in Monica Park Project and the use of EVA in Monica Park Project contributed also to the application of EVA in construction projects, in general, and in the future, through the data, perceptions and concerns developed in this paper.

Some considerations were added to the ones found in the main EVA book references. EVA is very sensitive for scope changes. This was very clear in the use of EVA in Monica Park. One perception that reduced difficulties was that the reports allow easy and fast debugging of mistakes. Not only mistakes on digitizing numbers, but mistakes in the assumptions related to the measuring criteria. The database and reporting system provide easy consistency analysis of data. Wrong data was easily detected and corrected. Error detection allowed improved practices and provided support for the decision making process, as well a, negotiations with suppliers and 3rd parties.

EVA allowed scope change management to keep the final budget of the project, providing alternatives to decide in what activities to reduce scope or reduce specifications / performance to save money in order to fit cost overruns in other activities. Another interesting contribution is the perception that the SPI – Schedule Performance Index - is NOT a “time” performance index, and it is really a “progress” performance index, related only to physical progress. The SPI index deals with variables planned values (PV) and earned values (EV) expressed in costs, in the vertical axis, but the time is the horizontal axis. The managers can measure delays in horizontal axis. We suggest changing the name from Schedule Performance index to Progress Performance index. It is related to progress, not time.

The WBS – Work Breakdown Structure is called the “soul” of the management process. It is very important to define the suitable structure for control and accounting. The work packages must have clear responsibilities and criteria for measurements. Is important to balance greater or smaller packages in order to get better results in the process. Greater or smaller packages do not directly mean better or worse results, regarding precision and effectiveness. Good judgement is necessary to define the level of control and the amount of results to deal with.

The main contribution of EVA process was the motivation of the manager and his staff concerning the cost management and the goal to finish the project on budget. The EVA process provided more perception about the costs and its related elements of scope, contracts, performance, suppliers, risks, procurement, communications, quality, people and negotiations. EVA process provided more clear concerns about scope issues, because the scope was better modelled through the WBS and appropriate account packages.

EVA provide measures for integrated management of schedule, progress and cost based on three variables: Planned Value (PV), Earned Value (EV) and Actual Costs (AC), as well as the related indexes Schedule Performance Index (SPI) and Cost Performance Index (CPI). More than the curves, EVA inspires the participants to pay more attention to costs and progresses, motivates the participants to discuss the cost elements with more intensity and optimize the costs, resulting in a project finished on time and on budget, as in the case of Monica Park project.

The participants of the Monica Park Project are concerned that the charts displaying the SPI, CPI index were of less contribution than the process itself. The process to determine the indexes allow perceptions and supported the decision making process. The proper application of the 35 criteria shown in section 2 were considered more important than the graphs itself. The graph of indexes are not the result of the EVA process. The result of the EVA process is the project finished on time, on budget and on happiness.

References

American National Standards Institute/Electronic Industries Alliance (1998). ANSI-EIA-748-98, Earned Value Management Systems. Arlington, VA: Electronic Industries Alliance; USA, 1998

Checkland, P, & Holwell, S. (1998) Action Research: Its Nature and Validity, Systemic Practice and Action Research, 11(1) pp.13-16.

Dick, R. (1999) What is Action Research,, disponível em http://www.scu.edu.au/schools/gcm/ar/whatisar.html, access in July, 29th, 2002.

DOD/500-2R Department of Defense - Earned Value Management http://www.acq.osd.mil/pm – access in November 15th, 2004.

Earned Value WebSite http://www.earnedvalue.com. Retrieved in November 15th, 2004

Einsenhardt, K. M. (1989) Building Theories from Case Study Research, Academy of Management Review,14, (4) pp. 532-550,.

Flemming, Q. W.; Koppelmann, J.M., (1999). Earned Value Project Management2nd. Ed., Newtown Square, PA: Project Management Institute

Flemming, Q. W. (1988). Cost / Schedule Control Systems Criteria. The Management Guide to C/SCSC. England: Probus Publishing Company, 1988.

Humphreys, K., Bent, J. A., (1996) .Effective Project Management Through Applied Cost and Schedule Control, New York: Marcel Dekker, Inc,,

Humphreys, K., Wellman, P. (1996) Basic Cost Engineering., 3rd Ed., New York: Marcel Dekker, Inc, Humphreys, K., English, L. M., (1993) Project and Cost Engineers HandBook, 3rd Ed., New York: Marcel Dekker, Inc

Humphreys, K. (1991); Jelen's Cost and optimization Engineering”, 3rd. Edition, New York: MacGraw-Hill Inc 1991

Kerzner, H., (1998) .Project Management, A Systems Approach to Planning, Scheduling and Controlling, 6a Edição Van Nostrand Reinhold.

Morra, L.G. & Friedlander, A.C. (1999, May) Case study evaluations. World Bank Operations Evaluation Department, The World Bank, Washing ton D. C..

PMI -Practice Standard for Earned Value Management http://www.pmi.org, access in November 15th, 2004.

Smith, N. J., (1995) Project Cost Estimating, London, UK, Thomas Telford

Yin, R. (1994) Case Study Research and Design, Thousand Oaks, California, USA: SAGE Publications.

Young D., O'Byrne, S. F. (2001) EVA and value-based management.:New York, USA: McGraw-Hill Book.

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.

© 2006Valle & Soares
Originally published as a part of 2006 PMI Global Congress Proceedings – Madrid Spain

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