Delivering Profits with EVM Metrics ??
Understanding a few key Earned Value Management (EVM) metrics can be the difference between a profitable job and budget overrun if you're managing construction projects.
Let’s break down some core concepts with a simple example:
1. Planned Value (PV): The budget for work planned to be completed. This is the value you originally bid for the project work—staying within this budget is key to making the profit you expected.
2. Earned Value (EV): The budget for the actual work completed so far. This is also how you get paid—EV represents the value of the work you've accomplished, and it's what you can bill for. Ensuring that your EV aligns with your planned progress is critical to maintaining cash flow and ensuring profitability.
3. Actual Cost (AC): The money spent to complete that work.
4. Cost Performance Index (CPI): A measure of cost efficiency.
5. Cost Variance (CV): The difference between the budgeted value of work performed and the actual cost.
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Here's a quick example that might sound familiar to those on a job site:
?? Project Budget: $100,000
Partway through:
PV: $50,000 (planned budget for this point)
EV: $45,000 (work completed, valued at $45,000)
AC: $55,000 (actual costs incurred so far)
Analysis: CPI = EV / AC = $45,000 / $55,000 = 0.82 (Less than 1 means you’re over budget)
CV = EV - AC = $45,000 - $55,000 = -10,000 (Negative value means cost overrun)
?? What This Means: You’re overspending for the amount of work completed. A CPI of 0.82 indicates inefficiencies, meaning that for every $1 spent, you’re only getting $0.82 worth of work done.
Why It Matters: Monitoring PV, EV, and AC—and understanding CPI and CV—can help you address cost inefficiencies early and keep your projects profitable. The earlier you discover that your project is not forecasted to come within budget, the more time you have to make adjustments and change the outcome. Staying proactive is key to protecting your profit margins.
Forecasting the Estimate at Completion (EAC): Once you have progressed beyond 15% of the project, you can start forecasting the final cost more accurately using the CPI. The Estimate at Completion (EAC) gives you an idea of the total expected cost if current performance trends continue.
EAC can be calculated as:
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Where BAC is the Budget at Completion (total planned budget).
For example, if your BAC is $100,000 and your CPI is 0.82, then:
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This means, if the current cost efficiency trend continues, you’re looking at a total cost of about $121,951, which is significantly over your original budget.
Understanding and forecasting EAC early allows you to take corrective actions to bring the project back on track, ensuring you protect your profit margins and deliver the project successfully.
Stay Tuned for more on this topic, and free Excel templates.
#ProjectManagement #Construction #EVM #CostControl #EarnedValueManagement
