The two biggest indicators of construction project success are the project’s budget and schedule, but they don’t provide much insight in a vacuum. By tracking the project’s earned value, contractors and subs can better understand how their budget and plan are working together. Most importantly, it will help identify cash flow problems before they snowball out of control.
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What is an earned value analysis?
Earned value analysis refers to a project management process that tracks how the construction budget and plan are working together. It’s a performance measurement that provides more insight than if the project is simply under budget or ahead of schedule. Rather than looking at the budget or plan themselves, an earned value analysis will look at exactly how the work and budget are performing against the project plans and specifications as well as the initial schedule of values.
Performing an earned value analysis can be as simple as comparing actual costs with expected costs, while keeping an eye on the overall budget. For those who really want to dig into the numbers, there are more specific formulas that shed light on a project’s earned value (we’ll discuss some of those below). Regardless of how the matter is approached, being aware of the project’s earned value is what really matters. Even an imperfect and informal analysis will give a peek behind the curtain into the actual health of the project, or more importantly, the project’s future cash flow.
Earned value management and spotting cash flow problems
Between job cost estimates, building a work breakdown structure, and submitting an initial schedule of values – it’s easy to set out a plan for success. Project planning is important, but without regularly checking in on the project’s health, it’s impossible to know how things are really going.
This is one area where a business in the construction industry can run into cash flow problems. If the upcoming costs won’t be covered by the what’s remaining on the budget, a construction business might find themselves paying out of pocket or requesting additional funds to carry on with work. Plenty of contractors and subs live draw-to-draw, and to some degree that might be the industry norm. But even if that’s the case – isn’t worth taking a look ahead to make sure there will be cash to cover future costs? Wouldn’t an early warning of potential problems be invaluable?
When a business compares it’s planned costs vs. its actual costs, then compares that to what the cost should have been to reach that point of the project, it’s easy to identify how the rest of the project will go. A contractor may be a ways away from their total budget number, but if upcoming costs exceed what’s planned, cash flow issues can cripple the project and even the business as a whole. By constantly keeping an eye on both the actual cost of work performed and the earned value of the project, it’s easier to nip potential issues in the bud.
Calculating a project’s earned value
At it’s most simple, earned value represents the value of the work completed – but through the prism of the project plans. i.e. If the cost for some work ended up being more than the project plan, the earned value wouldn’t show those raised costs – instead, it’d represent the value of the work that’s been performed based on the cost of that work that was set out in the original budget.
So, comparing the initial schedule of values with costs as they come up might be a simple way to calculate and analyze earned value. Taking that a step further, if a detailed work breakdown structure is used, it will be a lot easier to dive into the details.
An earned value analysis doesn’t always have to be complex
For most contractors and subs, simply paying attention to project progress and performing rough calculations might be an improvement over what’s currently being done. By taking an honest look at the numbers, it will be infinitely easier to identify what’s going well, what isn’t, and what cash flow will look like for the rest of the project.
Still, for those construction businesses and project managers who want to take things a step further, utilizing a formal earned value formula provides great insight.
Additional resources for performing earned value analyses
For some construction businesses, particularly more sophisticated front offices and project managers, taking a deeper look at earned value might be appropriate. After all, when properly calculated and analyzed, an earned value formula might be able to pinpoint an undetected issue with a job.
For a deep dive on earned value formulas and how they shed light on project successes and failures, here are some great advanced resources: