Application of earned value management system for Hong Kong Science Park phase 2 development

Abstract

The earned value management system (EVMS) is a useful management tool available for project managers to monitor and control projects. EVMS is a tool that combines the work scope, schedule and the cost elements of a project and facilitates the integrated reporting of a project's progress and the cost status. EVMS in effect integrates time management and cost management which are essential elements of project management. This paper summarizes the basic concepts of EVMS, briefly explains how EVMS was implemented for Hong Kong Science Park Phase 2 Development, the challenges encountered and its benefits to the project as a project management tool.

Introduction

The management of large scale infrastructure projects requires monitoring and control tools for effective project control. The Earned Value Management System (EVMS) is one of the tools for measuring project performance by comparing the amount of work planned against the amount of work actually done and the actual cost incurred. EVMS integrates the scope, cost (or resource) and schedule to help the project team assess project performance (PMI, 2002). The earned value concept was conceived by industrial engineers working in American factories over a century ago (Fleming & Koppelman, 1999). The concept was used to manage the production cost of commercial industrial products. The basic concepts of earned value were originally adopted by the United States Air force in the early 1960s and by 1967, the United States Department of Defence formally endorsed the use of earned value management in all major system acquisitions (Fleming & Koppelman, 1999). The basic concepts of earned value management have not changed since 1967 (Christensen, 1999). Over the years the use of EVMS in the United States has became more widespread and in 1996 all Federal agencies in the United States Government adopted EVMS as a management tool (Fleming & Koppelman, 1999). Earned Value Management is a technique that can be applied to the management of all capital projects, in any industry, while employing any contracting approach (Fleming & Koppelman, 2002).

To better understand EVMS it is important to compare EVMS with the traditional method of management. In the traditional approach there are two data sources, the budget (planned) expenditures and the actual expenditures. The comparison between the budget versus the actual only indicates what was planned to be spent and the actual amount spent at a given time. But this does not give any idea about how much work has been done. Therefore, in the traditional approach there is no measure of the physical amount of work performed. It does not indicate anything about what has been achieved for the money spent. In EVMS, unlike in the traditional approach, there are three data sources, the budget (planned), actual expenditure and the “earned value” which is the physical work done at a given time. Therefore, in EVMS the planned value of the work could be compared with the earned value and actual cost.

The three basic definitions used in EVMS are as follows:

Budgeted Cost of Work Scheduled (BCWS) = Planned Value

Budgeted Cost of Work Performed (BCWP) = Earned Value

Actual Cost of Work Performed (ACWP) = Actual Cost

During the planning stage of a project, a time phased budget is developed based on the estimated cost of various elements of the project and the works programme. This time phased budget serves as a performance measurement baseline against which the project progress is monitored. At a point in time on the date of analysis, the value of the performance measurement baseline becomes the BCWS. The BCWS is compared with the BCWP and ACWP, all expressed in terms of monetary values.

The following variances are used to measure project performance.

Cost Variance (CV) = BCWP – ACWP

CV is an indicator of expenditure measured against the completion of the corresponding work scopes. If CV = 0, the performance is on target, if CV > 1.0, it indicates a favourable performance and if CV < 1.0, it indicates a cost overrun.

Schedule Variance (SV) = BCWP – BCWS

SV is an indicator of the schedule status as compared to the plan in terms of a monetary value. If SV = 0, then the project is progressing as planned, if SV > 0, it indicates the project is ahead of schedule and if SV < 0, it indicates the project is behind schedule.

Exhibit 1 illustrates the graphical representation of the above earned value parameters.

Graphical Representation of Earned Value Parameters

Exhibit 1 – Graphical Representation of Earned Value Parameters

The following indices are used to measure project performance.

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If CPI = 1.0, then the performance is on target, CPI > 1.0, then the performance is exceptional and if CPI<1.0, then the performance is substandard.

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If SPI = 1.0, then the performance is on target, SPI>1.0, then the performance is exceptional and if SPI<1.0, then the performance is substandard.

The two indices CPI and SPI may give results that may seem contradictory if CPI >1 and SPI < 1. In this situation, the project is within budget which is good but it is behind schedule. This indicates that money was saved because not enough work was done. Therefore, the Cost-Schedule Index (CSI) is introduced (Barr, 1996).

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Application of EVMS

Maunsell AECOM the Project Manager (PM) for Hong Kong Science Park Phase 2 Development proposed the use of EVMS as a tool for project monitoring and control. Following a series of presentations and briefings by the PM to the client, the Hong Kong Science and Technology Parks Corporation, it was agreed that EVMS will be used as a project management tool. It was proposed that in order to set-up the EVMS, an Integrated Programme (IP) comprising all aspects of the project was required. The PM was entrusted with the responsibility of setting up and maintaining the IP.

The IP is a collection of individual project level programmes under a Project Group. Exhibit 2 illustrates the structure of the IP adopted for Hong Kong Science Park Phase 2 Development.

Structure of the Integrated Programme

Exhibit 2 - Structure of the Integrated Programme

It became apparent that a formal guideline was essential for the preparation of the project level programmes as various parties were responsible for the preparation of the programmes for their respective scope of works. Therefore, a guideline known as the Protocol for Integration of Programmes was developed by the PM which all parties were required to follow in preparing their own programmes. It was decided that Primavera Project Planner (P3) will be used in preparing all programmes as it has the capability of integrating project programmes to form an IP and also able to handle time and cost data. The necessary clauses were written into the agreements of the Lead Consultant, the Quantity Surveyor and the contract documents of all the works contracts to comply with the Protocol for Integration of Programmes in preparing their programmes.

The Protocol for Integration of Programmes mainly covered the Work Breakdown Structure (WBS), guidelines for the preparation of individual project programmes, the incorporation of project cost information within the project programmes, the procedure for the integration of project programmes and the updating of project progress and cost data. The development of the WBS is considered as the cornerstone of effective project planning, execution, controlling and reporting (US DOE, 2003). A comprehensive WBS was developed by the PM for the Hong Kong Science Park Phase 2 Development which consists of a Project Management Consultancy, a Lead Consultancy, a Quantity Surveying Consultancy, 2 no. Foundation Works Contracts, 4 no. Main Works Contracts, 6 no. Specialist Contracts and 5 no. Nominated Supply Contracts. The Specialist Contracts consists of Automated Refuse Collection System, Security & Smart Card System, Information Technology and Telecommunication System, Special Signage Works and Soft Landscaping Works. The Nominated Supply Contracts consists of Supply of Raised Access Flooring Systems, Supply of Suspended Ceiling Systems, Supply of Landscape Lighting and Façade Lighting, Supply of Lighting Panels and Supply of Ironmongeries. The guidelines for the preparation of individual project programmes covered the activity ID numbering scheme, activity coding structure, activity ID codes, calendar IDs and the resource IDs. The activity coding structure was developed in-line with the WBS with some flexibility built-in for the consultants and contractors to define any new codes if required. Briefings were given by the PM to all consultants and contactors at the commencement of each of the consultancies and works contacts on the Protocol for Integration of Programmes and EVMS.

Flow Chart for Integration of Project Programmes and Updating Progress and Cost Data

Exhibit 3 - Flow Chart for Integration of Project Programmes and Updating Progress and Cost Data

Exhibit 3 illustrates the steps involved in the integration of project programmes (only 3 no. programmes are shown as an illustration) and updating of progress and cost data. These programmes (project programmes) are integrated into the IP by the PM following the approval of the programmes. A quality check is carried out to ensure compliance with the Protocol for Integration of Programmes prior to integration. After the establishment of the Baseline IP, the project programmes are disassembled using the check-out function within P3 and these checked-out programmes are given back to the respective consultants and RSS / contractors for updating the current progress and cost status. The check-out process ensures that any external logic links between project programme established at the IP level and the structure of the IP will be preserved. The project programmes for consultancies are updated by the respective consultants and the project programmes for works contracts are updated by the RSS in consultation with the respective contractors to ensure accuracy. Once the programmes are updated with the latest progress and cost data, they are incorporated back into the IP using the function check-in within P3. The check-in process also ensures that any external logic links between project programmes and the structure of the IP will be preserved. Since the works contracts were tendered out and awarded in stages, there was a practical difficulty in establishing the baseline BCWS to include all the works within Phase 2 Development at the beginning of the project. In order to overcome this problem, the construction activities within the Lead Consultant's Construction Programme were used to generate the earned value data until the respective project programmes of the works contracts were integrated into the IP. The estimated cost figures provided by the Quantity Surveyor were used to generate the BCWS figures prior to the award of the contracts.

Since EVMS is used to report the progress and cost status of the project to the client, it is important that ACWP reflects the cost to the client rather than the cost incurred by the consultants or the contractors. Therefore, ACWP was defined as the total cost of payments that have been certified at any given time. In the case of the works contracts, it is the total amount of works that the Quantity Surveyor has certified. In the case of the consultancies, it is the total amount certified by the PM. For other payments that are directly handled by the client, the ACWP was defined as the total amount issued for payment by the client.

To facilitate the measurement of BCWP, it was necessary to develop a systematic method of breaking down the cost and to assign the cost to the specific activities within each project programme. In the case of consultancies, the schedule of fees was the basis for distributing the consultant's fees among the activities. In the case of works contracts, the contractors were required to propose the breakdown of the cost of works based on the bill of quantities and to assign cost figures to a reasonable number of activities within their works programmes.

Results

Exhibit 4 shows earned value data (BCWS, BCWP and ACWP) from the commencement of the project up to December 2006. As illustrated in Exhibit 4, the original baseline for the BCWS was used from the commencement of the project up to April 2003 which included the BCWS of the Client and the PM. In May 2003, the original baseline was revised (1st revision) to take account of the award of the Lead Consultancy and the Quantity Surveying Consultancy.

Earned Value Graph (Up to December 2006)

Exhibit 4 - Earned Value Graph (Up to December 2006)

The baseline BCWS was further revised (2nd revision) in January 2005 to include the Lead Consultant's revised Detailed Development Programme, the revised Quantity Surveyor's programme, Foundation Works Programmes and the Resident Site Staff Programme. Following the 2nd revision, the IP covered all aspects of the Hong Kong Science Park Phase 2 Development. The Lead Consultant's revised Detailed Development Programme was included within the IP as two separate project programmes covering the design stage and construction stage activities. Further revisions to the IP were carried out in November 2005, June 2006, July 2006, August 2006, September 2006 and October 2006 following the incorporation of the approved works programmes. Until separate Project Programmes were integrated into the IP, the earned value data for these works contracts were generated using the relevant activities of the Lead Consultant's Construction Programme.

Exhibit 5 shows the Cost Variance (CV) and the Schedule Variance (SV) from the commencement of the project up to December 2006. The value of CV is positive and it indicates that the less money has been spent. This is due to the reason that works have already been carried out but yet to be certified and also due to authorized variations for the foundation works. The SV is negative and it indicates that the works are behind schedule. This is mainly due to the slow progress of works under the Main Works (Area A), Main Works (Area B) and the Specialist Contracts. Since September 2006, the negative SV has sharply reduced with the improved progress status of the works contracts.

Cost Variance (CV) and Schedule Variance (SV)

Exhibit 5 – Cost Variance (CV) and Schedule Variance (SV)

Exhibit 6 shows the Cost Performance Index (CPI) and the Schedule Performance Index (SPI) from the commencement of the project up to December 2006. It is noted that the CPI has stabilized around 1.2. This is largely due to the works already carried but yet to be certified. A value of CPI > 1 is considered as a favourable situation. The SPI is around 0.9 in December 2006 and had been in the range between 1.0 and 0.8 during the last three and a half years. A value of SPI < 1 indicates that the project is behind schedule and the SPI has been gradually slipping since June 2005 following the commencement of Main Works (Area A) and Main Works (Area B) contracts. The SPI has been increasing since September 2006 with the improvement in the progress of works contracts.

Cost Performance Index (CPI) and Schedule Performance Index (SPI)

Exhibit 6 – Cost Performance Index (CPI) and Schedule Performance Index (SPI)

Exhibit 7 shows the Cost-Schedule Index (CSI) from the commencement of the project up to December 2006. The value of CSI has been above or around 1.0 with the exception from March 2002 to June 2003 during which the approval of the MLP was deferred and hence the postponement of the award of the design consultancies. In general, it is said that if the CSI value is greater or around 1.0, a project is not having any serious problems (Barr, 1996).

Cost Schedule Index (CSI)

Exhibit 7 – Cost Schedule Index (CSI)

Exhibit 8 shows a plot of the Cost Performance Index (CPI) versus the Schedule Performance Index (SPI). Most of the points are located in the quadrant where the project is behind schedule and under spent. However, a few points are within the least desirable quadrant where the project is behind schedule and overspent. This situation prevailed prior to the award of the design consultancies in the first half of 2003.

Cost Performance Index (CPI) Vs. Schedule Performance Index (SPI)

Exhibit 8 – Cost Performance Index (CPI) Vs. Schedule Performance Index (SPI)

Conclusion

From the SV and the SPI shown in Exhibit 5 and Exhibit 6 indicate that the overall project progress is slightly behind schedule. But based on the value of CSI shown in Exhibit 7, it could be concluded that the project is not having any serious problems with regard to project progress and cost status as the value of CSI is above 1.0. Based on the earned value results it is recommended that the management should focus mainly on the SV and the SPI to ensure that the project does not slip further. Since EVMS was relatively new to Hong Kong, considerable effort by the PM was required to educate the consultants, the resident site staff and the contractors on the application of EVMS and the requirements outlined in the Protocol for Integration of Programmes in preparing the project programmes which formed the IP. The main difficulty encountered during the implementation of EVMS was the slow progress achieved by the contractors in getting their project programmes approved early on to ensure a smooth and timely integration of the works programmes into the IP. Until such time, the Lead Consultant's Construction Programme was used to generate the earned value parameters for these works contracts. It is noted that this arrangement contributed some degree of error to the earned value parameters. It was also observed that some activities in the works programmes especially within the Specialist Contracts had large floats where the early finish and late finish dates were far apart. This has contributed to the SV as the earned value data have been generated based on the early finish dates rather than the late finish dates. Therefore, it is important to ensure that contractor's works programmes are not overly optimistic. It was possible to overcome the above challenges and successfully implement the EVMS as a project management tool for Hong Kong Science Park Phase 2 Development.

References

Barr, Z. (1996). Earned Value Analysis: A Case Study. PM Network, December 1996, 31-37.

Christensen, D. (1999, Summer). Using the Earned Value Cost Management Report to Evaluate the Contractor's Estimate at Completion. Acquisition Review Quarterly, 19, 283-296.

Fleming, Q W. & Koppelman, J. M. (2002). Earned Value Management – Mitigating the Risks Associated with Construction Projects. Program Manager, March – April 2002, 90-95.

Fleming, Q W. & Koppelman, J. M. (1999, October). The Earned Value Body of Knowledge. Proceedings of the 30th Annual Project Management Institute 1999 Seminars and Symposium Philadelphia, Pensylvania, USA retrieved on 25 August 2006 from http://www.suu.edu/faculty/christensend/Pmi99qf.pdf

Project Management Institute. (2000). A Guide to the Project Management Body of Knowledge (PMBOK®) (2000 Edition). Newton Square, PA: Project Management Institute.

U.S. Department of Energy, Office of Management, Budget and Evaluation. (2003, June). Work Breakdown Structure. Project Management Practices (Rev.E, June 2003) retrieved on 1 September 2003 from http://oecm.energy.gov/Portals/2/WorkBreakdownStructure.pdf

©2007, Pujitha B. G. Dissanayake
Originally published as a part of 2007 PMI Global Congress Proceedings – Hong Kong

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