Journal of Construction Research, Vol 3 No 1, March 2002

EARNED VALUE METHOD AND CUSTOMER EARNED VALUE

Yong-Woo Kim1 and Glenn Ballard2

ABSTRACT
The earned value method (EVM) is considered an advanced project control technique for
integration of schedule and cost. However, prevailing project control, including the earned
value method, is an effective tool only under the limiting assumption that every activity (or
cost account) is independent. EVM lacks flow and value generation concepts in that value
is created only if what a customer wants is made when the customer needs it. This paper
shows that EVM does not differentiate between value generating work and non-value-
generating work. The study suggests a new cost measure, Customer Earned Value (CEV),
which can differentiate between value and non-value-generating work. With the use of
CEV, managers can get information on work-in-process inventory levels and coordination
between trades. CEV motivates trades to consider their internal customer’s needs, thereby it
can contribute to improvement of work flow.
The critique of EVM and creation of CEV is part of an on-going research effort, the
next step in which will be development of a methodology for implementation of the CEV
concept.

KEY WORDS
Earned value method, customer earned value, work flow, and value generation

1
Ph.D Student, Constr. Engrg. And Mgmt. Program, Civil and Envir. Engrg. Dept., 215 McLaughlin Hall
#1712, University of California at Berkeley, CA 94720, ywkim@uclink4.berkeley.edu
2
Director of Research, Lean Construction Institute, and Associate Adjunct Professor, Construction
Engineering and Management Program, Civil and Envir. Engrg. Dept., University of California at
Berkeley, 4536 Fieldbrook Road, Oakland, CA 94619, ballard@leanconstruction.org

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Journal of Construction Research, Vol 3 No 1, March 2002

INTRODUCTION
Cost control has received much attention because construction is a business, a primary
purpose of which is to make profit. Furthermore, a cost control method is extended to more
comprehensive project performance measurement when it is joined with progress
(schedule) control3.
The earned value method (EVM)4 as an integrated cost/schedule control tool. Project
progress is measured based on the budgeted dollars or labor hours for completing various
types of work. If earth moving has a budget of $5 per cubic meter (m3), then every cubic
meter (m3) of soil moved earns $5. The entire project is divided into the various types of
work required, each with their own budget unit rates, with 100% corresponding to their
aggregated budgets.
Separate control of cost and schedule is vulnerable to well recognized distortions. With
EVM, such distortion is less likely because progress is itself expressed in terms of budgeted
rates. However, EVM is still vulnerable to distortions, which are themselves part of its
conceptual underpinnings, primarily the assumption that one earned hour is as good as
another.
The purpose of this paper is to expose the weaknesses5 of EVM and to suggest a new
measure, customer6 earned value (CEV), in order to compensate for the shortcomings of
EVM. In the first section below, EVM is described. In the following sections, EVM is
critiqued, then CEV is presented. The paper ends with conclusions and a description of the
next steps in the research program.

THE EARNED VALUE METHOD

The Earned Value Method (EVM) is a project control technique that provides a quantitative
measure of work performance. It involves a crediting of budget dollars as scheduled work
is performed. The earned value technique is superior to independent schedule and cost
control for evaluating work progress in order to identify potential schedule slippage and
areas of budget overruns.
The earned value method (EVM) is a variance analysis method. Variance analysis
quantifies the deviation of measures of actual performance from a standard. Variance used
in EVM can be usually divided into two indexes: Cost Variance (CV) and Schedule
Variance (SV). On the other hand, the data collected for analysis can be divided into three
measures: Actual Cost of Work Performed (ACWP), Budgeted Cost of Work Performed
(BCWP), and Budgeted Cost of Work Scheduled (BCWS).

3
E.g., Halpin (1985) and Carr (1991).
4
For an account of how EVM is used in project management, see PMI (1996).
5
This critique of EVM was first presented in Kim and Ballard (2000) and the substance of that critique is
included here in order to lay the groundwork for the introduction of CEV.
6
In this expression, the term ‘customer’ refers primarily to the internal customer, the recipient of work
completed by upstream specialists. The final customer is the one who receives the entire work product
from the entire team of specialists.

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Journal of Construction Research, Vol 3 No 1, March 2002

Actual Cost of Work Performed (ACWP) is the actual incurred cost, usually in terms of
dollars or man-hours, of work performed in a specified period of time (Actual).
Budgeted Cost of Work Performed (BCWP), or Earned Value, is the budgeted value,
usually in terms of dollars or man-hours, of work actually performed in a specified period
of time.
Budgeted Cost of Work Scheduled (BCWS) is the budgeted value, usually in terms of
dollars or man-hours, of work scheduled to be performed in a specified period of time
(Plan).

Two kinds of variance indexes are needed to achieve an integrated cost/schedule progress
monitoring and control system.

Cost Variance (CV) is the difference between the budgeted and actual costs of the work
performed:
CV = BCWP – ACWP, or
CV (%) = (BCWP – ACWP) / BCWP

Schedule Variance (SV) is the difference between the budgeted cost of work actually
performed and the budgeted cost of the work scheduled to be performed:
SV = BCWP – BCWS, or
SV (%) = (BCWP – BCWS) / BCWS

Exhibit 1 shows the relationships between BCWS, BCWP, ACWP, CV, and SV.

The performance interpretations that may be drawn from cost and schedule variance values
are summarized in Exhibit 2.
Report Date
Budget At Completion

C
BCWS o
C
o m
s p
t l
($) e
AV
ACWP CV
t
SV
e
BCWP

Reporting Period
Exhibit 1. Relations between indices and variances

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Journal of Construction Research, Vol 3 No 1, March 2002

Variance - 0 +
Cost Variance (CV) Cost Overrun On Budget Cost Underrun
Schedule Variance (SV) Schedule Delay On Schedule Ahead of Sched.

Exhibit 2. Variance Indexes in EVM

CRITIQUE OF EVM
The purpose of this section of the paper is to show that EVM is a flawed technique. The
critique has several bases, each presented in a subsection below, beginning with the impact
of activity dependency within a system subject to variability in work flow through a
network of interdependent specialists7.

IMPACT OF ACTIVITY DEPENDENCY AND VARIABILITY

In the last 5 years, the importance of work flow for project control has been advanced by
several authors. The neglect of work flow in traditional project control thinking and
practice was critiqued by Howell and Ballard (1996) and Tommelein and Ballard (1997).
Subsequently, simulation techniques were used to illustrate the effect of dependence and
variability in construction by Tommelein et al (1998) and by Alarcon and Ashley (1999).
Even though the EVM considers the variances of each cost account to be independent
(McConnell 1985), the problem of dependence and variability in cost control can be
illustrated with a simple example.
It is not uncommon that trades follow one another in a linear sequence. In such
instances, the work output of Trade A becomes an input of Trade B, and so on. Therefore
performance of Trade B depends heavily on the performance of Trade A, a predecessor of
Trade B. Schedule (starting/finishing date and duration) as well as budget should be
assigned to each activity of each trade. Suppose Trade A is to produce 200 units of output
in one month, with a budget of $100.
If Trade A produces 50 good units each week for four weeks (50/50/50/50), 200
monthly within budget, workflow is very stable. In this situation, performance of Trade B
in terms of schedule as well as cost is not constrained or limited by A. In other words,
everything else being equal, B is solely responsible if the result of performance of its work
turns out to be behind schedule or over budget.
On the other hand, if Trade A was supposed to produce 50 units each week, but actually
produces 30/80/35/55 units over four weeks, 200 monthly within budget, work flow
becomes unreliable. In this situation, performance of B might be worse (behind schedule

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Work flow is defined as the movement of information and materials through a network of production units,
each of which processes them before releasing to those downstream. Work flow variability refers to the
degree of predictability of that movement; i.e., the extent to which the release or delivery of prerequisite
work to a sucessor specialist can be predicted in advance. Percent Plan Complete (PPC) has been
developed as a measure of work flow variability. See Glossary of Terms at www.leanconstruction.org.

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Journal of Construction Research, Vol 3 No 1, March 2002

and/or overrun) due to unreliable work flow. Exhibit 3 shows two different situations and
performance factors in terms of the earned value method.
For Case 2, current control systems would red flag B, which may lead the manager to
penalize or modify the planning of Trade B. However, the bad performance of B results not
from B but from A. Earned value control systems do not reveal that A is causing the
problem of unreliable workflow.

Case 1 As of 31 May
Schedule Performance
Trade
Starting Finishing Weekly Output BCWS BCWP ACWP SV(%) CV(%) EVM says
A 1-May 31-May 50/50/50/50 $100 $100 $95 0% 5% Green Signal
B 7-May 7-June

Case 2
Schedule Performance
Trade
Starting Finishing Weekly Output BCWS BCWP ACWP SV(%) CV(%) EVM says
A 1-May 31-May 30/80/35/55 $100 $100 $99 0% 1% Green Signal
B 7-May 7-June

Exhibit 3. Example of EVM

Another issue is matching outputs with downstream demands8. The above example needs to
be modified since it assumes all output of trade A is equivalent to trade B. In other words,
trade B can use any output of trade A. The problem illustrated is simply one of quantities of
work released each week. However, the situation can be different when the outputs of trade
A are not equivalent. Suppose that Trade A produces 25 units for area I, 25 units for area II,
25 units for area III, and 25 units for area IV. Even though sequence is determined by a
contract or master schedule, priority of output of Trade A can be different during the
implementation stage depending on the demand of the downstream trade(s). Suppose the
best sequencing to produce output of Trade A does not match the demand of downstream
trade(s). Producing what the downstream trade does not need only increases the amount of
buffer in-between Trades. However, current control system gives equivalent BCWP to
Trade A without regard to mismatch with downstream demand.
Table 4-2 shows a simple example. In case 1, Trade A produces as sequenced in
contract or original schedule without regard for downstream demand. It can be said that
trade A’s sequence in case 1 is best only for its own productivity. In case 2, on the other
hand, Trade A’s work sequence reflects downstream demand. Matching its sequence with
downstream demand can bring about negative impact in some cases on its schedule as seen
in Table 4-2. However, it makes downstream more reliable than case 1, which results in
higher throughput. Value is generated if producing what downstream trades need when they

8 See an example in Tommelein (1998).

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Journal of Construction Research, Vol 3 No 1, March 2002

need it. EVM does not differentiate between a value generating operation and a non-value
generating one since BCWP is calculated based only on what was done, without regard to
downstream demand.
Looking at work flow in terms of customer-supplier relationships tells us that work has
value only if the customer is ready to process the work released by the supplier. There is no
value if the customer does not need it.

Case 1 As of May 14
Schedule Performance
Trade
Starting Finishing Weekly Output BCWS BCWP ACWP SV (%) CV (%) EVM says
Green
A 1-May 31-May 25(I*)/25(II*) $50 $50 $45 0% 10%
Signal
B 7-May 7-June $50 0 0 Problem

Case 2
Schedule Performance
Trade
Starting Finishing Weekly Output BCWS BCWP ACWP SV (%) CV (%) EVM says

25(IV*)/20(I*) Problem in
A 1-May 31-May $50 $40 $40 -20% 0%
by B's demand Schedule
B 7-May 7-June $50 $50 $45 0% 10%

Note: I*, II*, III*, and IV* are the name of areas within the project.
Exhibit 4. Example of EVM (Matching Problem)

QUALITY ASSIGNMENT

A schedule variance (SV) is the difference between BCWP (Budgeted Cost of Work
Performed) and BCWS (Budgeted Cost of Work Scheduled) [SV = BCWP – BCWS] as
discussed. If schedule variance is shown as a negative value for a specific cost account on
the reporting date, the manager of the organization in charge of the “red-flagged” cost
account will be in trouble. Therefore the only way to prevent his own cost account from
being behind schedule is to increase BCWP as much as possible as of the reporting date.
Cost accounts or work packages, on the other hand, tend to be different from work tasks
assigned to the field. Since detailed work procedure or sequence is usually at the manager’s
discretion, managers can manipulate work sequences or release work assignments in order
to make their performance appear better, without regard to work flow uncertainty and its
negative impact on performance downstream.

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Journal of Construction Research, Vol 3 No 1, March 2002

If budget/cost on each cost account is the main criteria for the decision on releasing
work assignments rather than five quality criteria 9 , work flow can be unreliable, which
results in longer duration and higher costs than necessary, and possibly schedule and cost
overruns relative to budget.

LACK OF FLOW AND VALUE CONCEPTS

According to Koskela (1999), production systems have three goals: 1) To do what is

necessary, 2) To do as little of what is unnecessary as possible, and 3) To generate value for
customers and stakeholders. Production systems can be conceived in three different ways,
corresponding to those three goals; i.e., as a transformation of inputs into outputs, as a flow
of materials or information among specialists, and as a value generating process.
Traditional cost control systems, including earned value, break a project into sub-
projects and monitor what should be done and what has been done in terms of progress and
cost. It is based on a transformation view in that the needed tasks are identified and
progress is monitored to get them done within budgetary constraints. This is a limited view
because it lacks the concepts of flow and value generation. Controlling work flow is vital to
project control, necessarily involves definition of value in customer terms, and requires
equal attention.

CUSTOMER EARNED VALUE (CEV)

The value in EVM is from the producer’s perspective because it counts all outputs
regardless of downstream demands. What is needed is to measure the value from the
customer’s perspective in the internal supply chain in order to control work flow instead of
point efficiency10.
The value from the customer’s perspective regarding the performer’s work is how much
of what is received can be used. The producer releases, but only some of what is released
may be of value to the customer. This research suggests the requirements for CEV as
follows:
 Quality: Work, counted as CEV, should conform to quality criteria specified in
project specifications and approved drawings. The work should also meet customer
requirements that may not be included in specs and drawings; e.g.,’ Stop at a door
opening so we can start with a full sheet of plywood.’
 Size11: The amount of work should be consistent with what the trade contractors and
general contractor agreed in preplanning or ‘work structuring’12.
 Pull: Work, counted as CEV, should be matched with the work the customer trade
is ready to include in its workable backlog13.

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Definition, Size, Soundness, Sequence, and Learning (Ballard and Howell 1994)
10
Point efficiency refers to productivity or cost variance of each activity.
11
Size is part of what is included in specifying the batch or chunk of work to be released. Other aspects might
be composition, location, etc.
12
See Glossary of Terms at www.leanconstruction.org.

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Journal of Construction Research, Vol 3 No 1, March 2002

CEV can be calculated as follows for work done in conformance to the CEV requirements:

CEV = [Quantity of Hand-off]i x [Unit Cost]i

The difference between EV and CEV is that EV measures work quantity from the
performer’s perspective whereas CEV measures from the customer’s perspective.

EV Increase CEV Increase

Indicates Progress Increase Hand-off in Quality Assignments Increase
Exhibit 5. EV and CEV

The relationships between EV and CEV are shown in Exhibit 5 and Exhibit 6.

EV = CEV + ε

[If ‘ε’ = 0, then EV = CEV]

Exhibit 6. Relations between EV and CEV

CEV only counts as a contribution to project progress the work that is handed-off in
conformance with CEV requirements. In the above formula, ‘ε’ indicates the work that is
performed but has no value to the customer. Any difference between EV and CEV is the
waste of overproduction; i.e., it does not release downstream work. Lean Construction
pursues zero inventory between trades, just as lean manufacturing pursues zero WIP
(Work-In-Process) between work stations.

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Workable backlog is defined as assignments that have met all quality criteria, except that some must yet
satisfy the sequence criterion by prior execution of prerequisite work already scheduled. Other backlog
assignments may be performed within a range of time without interfering with other tasks. Example:
Those spare parts lists don’t have to be completed for 3 months, but it won’t harm anything if they are
produced earlier, so use them as fallback or fill-in work when needed. See Glossary of Terms at
www.leanconstruction.org.

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Journal of Construction Research, Vol 3 No 1, March 2002

EXAMPLE OF CEV-REVISITING THE PIPE SPOOL EXAMPLE

It is found in the above discussion that EVM (Earned Value Method) does not differentiate
between value generating work done in accordance with the demands of downstream
trade(s) and non-value-generating work which only increases inventories between trades.
CEV (Customer Earned Value) quantifies how much value is generated from the
customer’s perspective.

Case 1 As of July 14
Schedule Performance
Trade
Starting Finishing Weekly Output BCWS EV (BCWP) CEV EVM says

A 1-Jul 31-Jul 25(I*)/25(II*) $50 $50 $0 Green Signal

Case 2
Schedule Performance
Trade
Starting Finishing Weekly Output BCWS EV (BCWP) CEV EVM says

25(IV*)/20(I*) Problem in
A 1-Jul 31-Jul $50 $40 $32
by B's demand Schedule

Note: A unit rate for area I, II is $1 and the unit rate for area III, IV is $0.8
Exhibit 7. Pipe Spool Example Progress Report Using CEV

It is found that CEV in case 2 (Exhibit 7) is higher than CEV in case 1, whereas EV in case
1 is higher than EV in case 2. The inventory between trades can be measured by
quantifying ‘ε’, as can progress towards its reduction. If work flow between trades is
perfectly coordinated, A always produces just what B needs, B always produces just what C
needs, etc. Consequently, the degree of coordination is also measured by ‘ε’.

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Journal of Construction Research, Vol 3 No 1, March 2002

CONCLUSION
The earned value method has been developed for integrating schedule and cost. However,
prevailing project control, including the earned value method, is an effective tool only
under the limiting assumption that every activity (or cost account) is independent. It lacks
flow and value generation concepts, according to which value is created only if what a
customer needs is provided when the customer needs it. The example showed that EVM
does not differentiate between value generating work (work that generates value to the
internal customer) and non-value-generating work 14 . On the other hand, CEV does
differentiate them. With CEV, managers can get information on inventories and
coordination between trades. CEV motivates trades to consider their immediate customer’s
needs, thereby it can contribute to improved work flow.
The next step in this research is to develop a methodology for implementation of CEV.
This will be done initially through exploratory case studies to develop and refine a
methodology and to measure practical benefits. Subsequently, the refined methodology will
be applied in additional case studies to demonstrate its readiness for broad industry
deployment.

REFERENCES

Alarcon, L.F. and Ashley, D.B. (1999). “Playing Games: Evaluating the Impact of Lean
Production Strategies on Project Cost and Schedule.” Proceedings of the 7th Annual
Conference of the International Group for Lean Construction, Tommelein, I. D. (editor),
Berkeley CA.,263-274.
Alarcon, L.F. (ed.)(1997). Lean Construction. A.A. Balkema, Rotterdam, The Nethelands,
497pp.
Ballard, G. and Howell, G. (1994 b). “Stabilizing Work Flow.” Proceedings of 2nd
International Seminar on Lean Construction, 1994, Pontificia Univ. Catolica de Chile,
Santiago, http://www.vtt.fi/rte/lean/santiago.htm, reprinted in Alarcon (1997).
Carr, R. I. (1991). “Integration of cost and schedule control.” Preceding for construction in
the 21st century (Proc. Construction. Congress ’91), L.M.Chang, ed., ASCE, 687-692.
Halpin, D. W. (1985). Financial & cost concepts for construction management, John Wiley
& Sons, New York, NY, 415pp.
Howell, G. and Ballard, G. (1996). “Can Project Controls Do Its Job? “ Proceedings of the
4th Annual Conference of the International Group for Lean Construction, Birmingham,
England, http://www.vtt.fi/rte/lean/santiago.htm, reprinted in Alarcon (1997).

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It appears to be widely believed in the construction industry that doing every bit of work as soon as possible
completes projects as quickly as possible, which is only true under the extreme assumption that every bit
of work is independent of every other. The more plausible belief might be that projects complete most
quickly when the least work is done that does not release other work. Consequently, we argue that
customer value is ultimately not restricted to the internal customer. But that is perhaps a topic for future
demonstration.

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Journal of Construction Research, Vol 3 No 1, March 2002

Kim, Y. and Ballard, G. (2000). “Is Earned-Value Method an Enemy of Work Flow?”
Proceedings of the 8th Annual Conference of the International Group for Lean
Construction, Brighton, England.
Koskela, L. (1999). “Management of Production in Construction: Theoretical View.”
Proceedings of the 7th Annual Conference of the International Group for Lean
Construction, Berkeley, CA, 241-252.
McConnel, D.R. (1985). ”Earned-Value Technique for Performance Measurement.”
Journal of Management in Engineering, ASCE, 79-94.
PMI (1996). A Guide to the Project Management Body of Knowledge, Project Management
Institute, Upper Darby, PA, 176pp.
Tommelein, I. (1998). “Pull-driven Scheduling for Pipe spool installation.” Journal of
Construction Engineering and Management, ASCE, 124 (4) 279-288.
Tommelein, I. and Ballard, G. (1997). “Coordinating Specialists.” 2nd International
Seminar on Lean Constr., 20-21 October 1997, San Paulo, Brazil.

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