Article #141 Why Contractors Need to Use the Earned Value Method to Monitor, Evaluate

and Report their Project Budget Performance?

In the Middle East and North Africa (MENA) region, having unbalanced bids is not forbidden. Unbalancing a bid will
result in having some bid line items overpriced while others underpriced but ensuring that the overall total bid price
is competitive enough to win the bid. In other words, part of the project’s scope of work will have high profit margin
while others will have very low profit margin if a not a loss. Although this will be of great concern to project owners
as this might encourage fraud when high priced items increase while low priced decrease, nevertheless for a
contractor, this means that the awarded contract priced line items cannot be used to benchmark the project’s
budget performance.

Therefore, it is critical to have a formal process to manage the budget performance. To start with, the contractor
needs to finalize the Budget at Completion (BAC) which was the basis for coming up with the winning bid price. The
BAC excludes contractor’s overhead including finance cost and profit as well as the management reserve (MR) and
will only include the project direct and indirect cost and project contingency. Management reserve is defined as the
cost reserve that is used to manage the unidentified risks or “unknown-unknown” and it is not a part of the budget
at completion baseline, and the contractor’s project manager needs management’s permission to use this reserve.

The indirect cost will include in addition to the profit allocated to the project management team, site overhead cost
which will be captured using timesheets and miscellaneous invoices for other type of overhead expenses. The direct
cost will include all outsourced subcontract and material supply agreements as well as internal company agreements
like for example the agreement between the project and the company batching plant for the supply of concrete.
Similar internal agreements will be made for the supplied material which are usually purchased in bulk by the
contractor for all projects. The actual cost for all those agreements will be captured using interim progress invoices.

Awarded
Contract Price

Home Office Budget at

Management
Overhead and Completion
Reserve
Profit (BAC)

Project
Indirect Cost Direct Cost
Contingency

Project Contractor’s Material and Outsourced/

Contingency
Site Overhead Management Own Scope of Plant Project Subcontracted
Agreement
Team Profit Work Expenses Scope of Work

Interim Interim Interim

Miscellaneous Miscellaneous Invoices as
Timesheets Progress Progress Progress
Invoices Invoices Cosnsumed
Invoices Invoices Invoices

The Project Budget At Completion (BAC) and Planned Values (PV)

Project management information systems (PMIS) like PMWeb provides the organizations with a single integrated
platform to monitor, evaluate and report the project’s earned value performance. The Budget Module and Budget
Request Module will be used to develop the project budget at completion (BAC) which will cover all direct and
indirect cost elements as well as the project contingency. The cost elements can be aligned with the project’s work
breakdown structure (WBS) or the company’s own cost control accounts. Nevertheless, PMWeb budget module
allows assigning the WBS level to each cost element when the cost control accounts are used. In addition, PMWeb
budget module allows creating the planned spending projection curve to each cost item to calculate the planned
budget spending value (PV) for each period. The distribution of the budget projection can be based on one of the
available distribution levels or manually distributed. In addition, PMWeb allows linking the relevant project schedule
activity to capture the planned start and finish date of each cost item.
Actual Cost Against Outsourced and Internal Company Contracts

PMWeb Commitment module will be used to capture the details of all outsourced scope of work contracts to
subcontractors and suppliers as well as internal company contracts. Internal company contracts could be the
contract between the project team and the contractor’s batching plant, plants department among others. Those
commitments will become the basis for capturing the progress invoices for each period which represents the actual
cost (AC).

Site Overhead Cost Using Timesheets

PMWeb Timesheet module will be used to capture the contractor’s site overhead expenses. The timesheets will be
used to capture the actual hours of all labor and equipment resources spent on the project. PMWeb allows defining
different rates for the resource charges to cover normal, overtime, weekend, holiday and other type of pay rates
that the contractor might need to have.
Non-Commitments Actual Costs

PMWeb Miscellaneous Invoices will be used to capture other non-commitment costs including the cost imported
from the contractor’s ERP or accounting system. This module will be also used to capture the cost of permits, tests,
fees and other charges that could be applied against the project.

Managing the Project Contingency

Commitment contracts are not only created from actual contract agreements between the contractor
subcontractors and suppliers but it can be also used to create internal company commitments. For example, a
commitment contract will be created between the Contractor Company and the Contractor Project Manager which
will be created for the project contingency. The commitment invoice module will be used to capture all
consumptions of the of the project contingency.

Importing the Updated Project Schedule and Percent Complete Values

On monthly basis, the updated contractor’s schedule will be imported into PMWeb to capture the approved percent
complete values for the progressed activities. Those percent complete values will be the basis for calculating the
earned value (EV) for each cost item associated with the activity. PMWeb Scheduling module allows importing and
storing the updated project schedule for each period.
Capturing the Earned Value Method Input Values

PMWeb Forecast module will be the module to capture all of the above cost information. For each period, the
forecast module will capture the budget at completion (BAC), planned value (PV), actual cost (AC) and earned value
(EV) for each cost item. The forecast will also include the project schedule activity linked to each cost item along with
the imported percent complete. As an option, the percent complete can be added directly without the schedule
import.

Calculating the Earned Value Metrics

The above PMWeb modules will provide auditable, traceable and trust-worthy values for the four key components
to earned value being Budget At Completion, Planned Value, Earned Value and Actual Cost. The Budget at
Completion (BAC) is the approved budget set by the contractor to deliver the project’s complete scope of work,
Planned Value (PV) is the physical work scheduled or “what the contractors plans to do”, Earned Value (EV) is the
quantification of the “worth” of the work done to date or “what the contractor has physically accomplished” and
Actual Cost (AC) is the cost incurred for executing work on a project or “what the contractor have spent”.
Those values will be the basis for calculating earned value metrics which will include Cost Variance (CV) which is “EV
– AC”, Schedule Variance (SV) which is “EV – PV”, Cost Performance Index (CPI) which is “EV/AC” and Schedule
Performance Index (SPI) which is “EV/PV”.

In addition, those values will be used to calculate the other earned value metrics which include Estimate To
Complete (ETC) which is “BAC – EV” and Estimate At Completion (EAC) which is “ETC + AC” which can be also
considered as the Latest Revised Estimate (LRE) for the project. Further, the Variance at Completion (VAC) will be
calculated which is “BAC – EAC”. The VAC indicates the project’s probable cost underrun or overrun. That is to say a
positive VAC indicates that the project is projecting an “underrun” while a negative VAC indicates that the project is
projecting an “overrun”.

In addition, the To Complete Cost Performance Index (TCPI) can be also calculated which is “(BAC-EV)/(EAC-AC)”. The
TCPI is the cost performance index that the contractor needs to achieve to ensure that there will no variance
between the BAC and EAC.

The Estimate To Complete (ETC) will be adjusted to reflect the past periods performance which will be reflected in
the calculated Cost Performance Index (CPI). If the current variances are seen as atypical and similar variances will
not occur in the future, then ETC will equal (BAC- EV). That is to say, it will not be adjusted.

Nevertheless, if the current cost variances are seen as typical of future variances, then ETC will equal (BAC- EV)/CPI.
In addition, for the case of being seen as typical of future variances, the ETC can be also influenced by factors of 80%
of past cost performance and 20% past schedule performance (ETC = (BAC-EV)/ (0.8 X CPI + 0.2 X SPI)), be influenced
by last 3 months cost performance (ETC = (BAC-EV)/ (CPI1+ CPI2+ CPI3)) or be influenced by past cost and schedule
performance (ETC = (BAC-EV)/ (CPI X SPI)). Of course, there is also the option to calculate the revised ETC by adding
all potential additional cost to commitment contracts to the non-adjusted as well as adjusted ETC.

All those values, variances, indices and other earned value measures will be calculated and captured in PMWeb
Forecast module. In addition to the default metrics included in the Forecast module, PMWeb allows adding ten new
fields with each has its own value calculation formula.
The Earned Value Measures History and Trend

PMWeb Forecast module allows capturing the earned value measures and metrics for each elapsed project period.
This is a must requirement for creating the earned value trend reports which one of the reports commonly
generated when reporting projects’ earned value performance.
Supportive Documents and Formal Approval of All Processes

Similar to all other PMWeb modules, all supportive documents including the updated project schedule report can be
uploaded into PMWeb document management repository and attached to relevant budget, budget adjustment,
commitment, change order, progress invoice, timesheet, miscellaneous invoices, imported project schedule and
forecast period report. In addition, links to the approved progress invoice as well as other PMWeb records and
imported MS Outlook emails can be linked to those forms.

To ensure that above processes are formally reviewed and approved, similar to other PMWeb forms, a workflow will
be assigned to relevant budget, budget adjustment, commitment, change order, progress invoice, timesheet,
miscellaneous invoices, imported project schedule and forecast modules to ensure formal review and approval for
the reported information. The workflow will include all the steps assigned to the relevant project team members to
review and add all necessary comments before it formally approved.

Reporting the Project’s Earned Value Performance

The captured project’s performance data can be designed in different form and format to Fulfill the organization’s
reporting requirement. Nevertheless, the one that is used most is a report that details the earned value method key
values for each period which include the approved budget at completion (BAC), planned budget value for the
current period (PV), earned value for completed works (EV), total actual cost to date (AC), estimated cost to
complete the balance of the works (ETC) and project estimate at completion (EAC).

In addition, the report will display the variances at each period those being the schedule variance (SV), cost variance
(CV) and the estimated cost variance at completion (VAC). Further, the report will display the schedule performance
index (SPI) and cost performance index (CPI) for the same periods. The report will also display the variances and
performance indices trend charts.
In addition, the organization could monitor, evaluate and report on the variances and indices across the
organization’s complete projects portfolio or selected projects that could be part of a program or any other attribute
like location, type, sponsor among others. The organization might display the earned value as a scorecard or link it to
a map that will display the location of the selected projects as well as the performance indices. The size of the
bubble on the map could be used to reflect the project’s approved current budget.
About the Author
Bassam Samman, PMP, PSP, EVP, GPM is a Senior Project Management Consultant
with more than 35-year service record providing project management and controls
services to over 100 projects with a total value in excess of US $5 Billion. Those
projects included Commercial, Residential, Education and Healthcare Buildings and
Infrastructure, Entertainment and Shopping Malls, Oil and Gas Plants and Refineries,
Telecommunication and Information Technology projects. He is thoroughly
experienced in complete project management including project management
control systems, computerized project control software, claims analysis/prevention,
risk analysis/management (contingency planning), design, supervision, training and
business development.

Bassam is a frequent speaker in topics relating to Project Management, Strategic

Project Management and Project Management Personal Skills. Over the past 35 years he has lectured at more than
350 events and courses at different locations in the Middle East, North Africa, Europe and South America. He has
written more than 250 articles on project management and project management information systems that were
featured in international and regional magazines and newspapers. He is a co-founder of the Project Management
Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for more than 6 years. He is a
certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning
and Scheduling Professional (PSP) and Earned Value Professional (EVP) from the American Association of Cost
Engineers (AACE) and Green Project Management (GPM).

Bassam holds a Masters in Engineering Administration (Construction Management) with Faculty Commendation,
George Washington University, Washington, D.C., USA, Bachelor in Civil Engineering – Kuwait University, Kuwait and
has attended many executive management programs at Harvard Business School, Boston, USA and London Business
School, London, UK.