Earned Value management: mitigating the risks associated with construction projects - Risk Management - Brief Article

Program Manager, March, 2002 by Quentin W. Fleming, Joel M. Koppelman

One last point--the final Design-Build contract can take several contract forms, which will vary the risks to the owner, Three contract types are typically used in Design-Build relationships:

* Fixed-Price/Lump-Sum

* Cost-Reimbursable

* Cost-Reimbursable with a Guaranteed Maximum Price.

Some owners will separate the design from the construction phases and use a different contract type for each phase--a cost-type for the design phase and a lump-sum for the construction phase. Others will issue a single contract type for both the design and construction effort. Each of these three types carries its own unique risks, which we cover later in this article.

Monitoring and Analyzing Earned Value Project Metrics

Using Earned Value metrics, any project can accurately monitor and measure the performance of projects against a firm baseline. Measurement will take place at regular intervals--certainly monthly but oftentimes weekly--where, as of a given point in time, the project will be determining: its Planned Value, its Earned Value, and the Actual Costs incurred. These three dimensions provide a wealth of data reflecting the true health of projects.

Using the three dimensions of Earned Value, the project management teams can at all times monitor both the cost and the schedule performance status of their projects.

To determine schedule status, we must first determine the Earned Value measurement. Remember, Earned Value represents two elements:

* The authorized work that has been completed.

* The original budget authorized to perform the completed work.

To determine the schedule position, we must take the Earned Value and subtract the Planned Value for the period being measured. A negative value indicates that the project is behind in its planned schedule position.

Falling behind our planned schedule is one of the first indicators that the project is experiencing problems. However, the Earned Value schedule position is best used in conjunction with critical path methodology. If the late tasks are on or near the critical path, they are important. If the late tasks have lots of float or slack and low risk, they are only interesting and merely indicate that we are behind our original plan.

To determine our cost position, we must also start with our measured Earned Value, but now we subtract the Actual Costs incurred to accomplish the Earned Value. A negative value indicates that we are overrunning our costs. Cost overruns are very serious in that they are rarely (if ever) subsequently recovered by the project. Keep in mind that our best planning, scheduling, and budgets will be front-loaded into the early phases of the project. Thus, if we overrun the early phases of the project, how can we expect to recover the overrun in the latter phases when the plans, schedules, and budgets are more uncertain?

Earned Value metric data can also be converted into efficiency factors so we can compare the efficiency rates of one project against all other projects in the organization. Earned Value data are also excellent for managing a portfolio of projects.