Aspects for the Earned Value method

In this section, aspects of control are derived from the literature, and the most important factors that are needed to be able to perform EVM are defined. In Appendix VI, an overview of the EVM aspects can be found, with an overview from which literature the aspects are derived.

An incorporating system

From the theoretical framework, it became clear that in order to be in control of costs, project lead- ers have to record and analyze data, making it possible to take corrective action before costs run out of hand. Kerzner (2001) uses the expression ‘management cost and control system’ to describe the system by which cost control is carried out. This concept may be a bit misleading, because an effec- tive control system monitors schedule and performance as well as costs: measuring expenditures against the budgets that have been set and assuring that these expenditures are right requires also monitoring of performance and schedule (Kerzner, 2001). More importantly, the actual expenditure should not be compared to the scheduled expenditures, but to some measure of the value of work actually done (Turner, 1993). In order to do all this, integrating time, cost, and performance is essen- tial. The control system should provide information that will give an image of the true work progress, by relating cost and schedule performance (Kerzner, 2001).

• A control system incorporates schedule, performance and costs. To control costs the actual expenditure must be compared not to its schedule, but to some measure of the value of work actually done.

WBS

For input of the cost control system, a proper WBS should be in place. It serves as the tool from which performance can be subdivided into (sub)objectives. It provides a way to compare costs, time and performance against a measure of the value of work done, provided by budgets for each level of the WBS (Kerzner, 2001; Turner, 1993). Estimates of costs are also prepared against the WBS. This links the WBS to cost accounts, by coding tasks and work elements. Work order releases can then be used by project management to authorize cost centers to begin charging their time to specific cost reporting elements (Oberlender, 2000; Kerzner, 2001). Finally, the WBS makes reporting easier: re- porting criteria are naturally nested in the WBS, making the control tools simple and friendly (Turner, 1993).

Overall, the WBS helps to establish aspect 1: an incorporated system.

• A proper WBS structure should be in place, providing the input data to the cost control sys- tem.

Estimating

The very first step in cost control is, naturally, estimating the costs. Cost estimates are needed to provide a measure against which to control costs. These estimates may be quite detailed, prepared for a low level of the WBS (Turner, 1993). Estimates can be based on historical costs, best estimates, or industrial engineering standards (Kerzner, 2001). The estimates should be supported by a descrip- tion of the scope of work, referencing to the WBS, an explanation for the basis for the estimate, and

that there is a natural tendency for functional and project managers to estimate costs substantially higher, in order to protect the organization by leaving some margin (Kerzner, 2001).

• Meaningful cost estimates are needed, to provide a measure against which to control costs. These estimates need to be quite detailed, and also explained in terms of work defi- nition, the basis for the estimates and a range of possible outcomes.

Responsibility within project teams

For large projects, the project manager may be supported by a project team in using the cost control system. Cost control has to be performed by all personnel who incur costs, and not just the project managers. In order to do so, each level of management needs accurate and appropriate data for decision making. Centralized authority and control are, however, the responsibility of the project management division. The level of detail in the control system is also specified by the project manag- er, and approved by top management (Kerzner, 2001). Heinze (1996) adds that there should be un- derstanding among project staff of the total flow of financial and cost information: from the produc- tion of cost estimates to the collection of actual costs.

According to Kerzner (2001), a project team should have regular team meetings, with a formalized agenda and action items. At these meeting, reports about project performance may also be dis- cussed. The focus should however be on identifying problems, and who has the responsibility for solving them, but a solution to the problem should not be looked for at meetings, for it will take too much time (Turner, 1993).

• Centralized authority and control over projects are the responsibility of project manage- ment. All personnel in the project team that are responsible for incurring costs, also have to perform cost control, and project staff needs to understand the total financial structure.

• Project teams must have regular team meetings, with a formalized agenda.

Forecasting

An important characteristic of the cost control system should be that it provides for end-value pre- diction, to answer the question: “where will we end up?”. After evaluating where the project is to- day, the estimate at completion (EAC) shows what the total job will cost now. In order to determine the Earned Value, it needs to be assessed what percentage of work is already finished, including work-in-progress (Turner, 1993). The cost variance (based on earned value) to date can then be used as a forecasting variable to predict whether the project will finish over or under budget.

The objectives of the project have to be translated into performance standards to be able to control the project. The actual performance to date can then be compared to the predetermined plans and standards. Comparing actual progress to the scheduled progress will show how well the project is coming along. The BCWS will show how much work should have been done, and the BCWP shows how much work is done in reality. The ACWP will show how much money that work has cost

• The actual performance to date should constantly be compared to the estimated perfor- mance: is there a variance? A forecast of cost at completion can be made by assessing the percentage of work done, including work-in-progress.

Variances and re-estimating

Variances will show major deviations from plan, and are the difference between the estimate and the actual performance. The question ‘where are we today?’ can be answered by calculating cost variances, schedule variances, percentage complete and percent money spent. If there is a large var- iance, the cause of this variance has to be found, as well as its impact on final cost, time and perfor- mance (Kerzner, 2001). Minor deviations from the original plan are normal, but the cause for major deviations that are reported should be determined by project management (Oberlender, 2000). The project manager should take action to correct the problem within the original budget, or a new esti- mate should be justified. However, not all variances require corrective action, so this should be as- sessed as well. According to Turner (1993) variance can be negligible, significant but recoverable, or large. When the variance is large, the estimates need to be revised.

• Periodic re-estimation of time and costs is needed: if there is a variance, it should be as- sessed whether corrective action needs to be taken. There needs to be consensus on when (budget) changes are authorized.

Effective Reporting

It is too late to record accrual and earned value only as invoices are paid. Although it provides a valid comparison, the comparison is made too late to overcome problems. Value should therefore be rec- orded at an earlier time, usually as the cost is committed, so effective action can still be taken. The cost can be committed either when the order is placed or when the work is done (Turner, 1993). This is especially true for material costs, since labor hours are booked when they are accomplished; val- ues for materials can be recorded at various points in time. Materials should therefore be recorded separately from labor hours, for they do not reflect the cost of work completed (Kerzner, 2001). According to Oberlender (2000) reports should be “written in a clear, concise, coherent and legible manner”. Turner (1993) mentions the need for defined criteria: “if people are asked to make ad-hoc reports, they usually tend to report the good news and hide the bad news”. Defined criteria will help to acquire honest reporting about the project, but it is also important that as little time as possible is needed to fill out reports, therefore single-page reporting using the WBS, and simple numeric or yes/no answers are mentioned as two simple and friendly tools to make reporting for project per- sonnel more convenient. Finally, reports should be made at defined intervals, for if people know that both good news and bad news should be reported at defined intervals, they will report more freely than when they are only asked to report things when there is something to discuss. The frequency of reporting depends on the project’s total length, current stage, the risk of the project and the level of reporting (Turner, 1993).

• Value should be recorded as early as possible, all value has to be reported properly. Re- ports on project control are short, use defined criteria and are made at defined intervals.