Analysis by Earned Value Method

(Construction Management Part III)

Quantity of work planned or completed in specified duration should be measured with a reliable variable. The measure should be applicable with same units for all kinds of work and should be relatable to the quantity of resource-effort and duration of work.

Budgeted cost of work BCW is a reliable measure in planning (BCWP) and tracking (BCWC). This measure can be made dimensionless by considering the ratio over budgeted cost of the project. For purposes of analysis, fraction of budgeted cost of project in works (or parts thereof) planned during a control period is called the Planned Value in the control period. Fraction of budgeted cost of project in works (or parts thereof) completed during a control period is called the Earned Value in the control period. Tracking projects by earned value is called Earned Value method and is amenable to PDCA analysis.

A PDCA analysis following above approach attempts to quantify problems in the project as deviations in planned value, earned value and actual cost over project duration elapsed. Such measures of deviation that require corrective action can be identified as:

• Resource variance RV when Actual cost to date is greater than Planned Value to date.
• Schedule variance SV when Earned value to date is less than Planned value to date.
• Cost variance CV when Actual cost to date is greater than Earned value to date.
• Time variance TV when Planned duration for current earned value is less than duration elapsed.

These definitions of variances measure non-concurrence of projects to plan. Many of these variance measures may appear redundant and much literature has examined the efficiency of these measures under various situations. A conceptual description of earned value method may be presented here without emphasizing the measures of variances.

Earned value analysis identifies two major contingencies in a project – delay and cost over-run. Delays are usually caused by insufficient or inefficient resources; cost over-runs are caused by purchase price escalations and wastages. Delays might themselves cause cost escalation during idling of resources. Moreover, delays and cost rise might be planning errors, as well. On the EVM curve, a downward deviation of earned value (EV) curve from planned value (PV) indicates a project delay. An upward deviation of actual cost (AC) from planned value indicates a cost over-run.

For a delay, an affine transformation of PV curve may be used to estimate the projected project completion time. It is conventional to scale the PV curve to arrive at a proportionate delay at project closure. The scale factor may be ratio of PV/EV at generic time or Actual Time (AT)/ Scheduled Time (ST) at generic EV. Similarly, an affine transformation by scaling PV curve is used to estimate the cost at completion, the scale being the ratio AC/EV at generic time.

These estimates do not deterministically predict actual delay or cost over-run because the PV curve is itself not deterministic. Indeterminacy of PV curves may be due to various reasons:

• Probabilistic nature of planning: Optimistic PV curves are steeper, accommodates minimum float and does not allow for schedule compression. Pessimistic PV curves are flatter and allows for expedition during execution.
• Adjustment of float in non-critical tasks: Early start PV curves are steeper during initial stages and flatter at later stages. Late start PV curves are flatter at initial stages and steeper at later stages.
• Inventory management method: By definition, PV curves are plotted with JIT inventory management basis. When materials are purchased in bulk and stored in central stores, planned costs (PC) are likely to be greater than planned values during initial stages of the project. In such cases, it may be necessary to plot PC as a separate curve in the time domain.

Although, PV curves are in reality smeared over the time domain by probabilistic nature, adjustment of float and cash flow parameters, it is customary in EVM analysis to regard PV curve as a deterministic curve. Thus, estimates of project delays or expenditure over budget at completion turn indicative and non-deterministic.