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Apr

How the Earned-Value-Analysis (EVA) for a cost control within investment projects can be used easily and on a scalable basis by anybody

 

Who does not know this: Expensive external services and material costs for whose budgeting you had to put a great effort into and whose compliance are significantly important for the project success. Especially investment projects are considerably demanding when it comes to project content and purpose. At this point, it becomes a key competence for each project leader to completely master the entire repertoire between cost planning, cost control and financing – otherwise cost explosion, underfinancing or a waste of funds are threatening. It does not always have to result in a cost risk à la BER (Berlin Brandenburg Airport). Also, for smaller construction projects, a monetary miss management can quickly result in a disaster. To avoid this, I would like to present a pragmatic and highly effective triad for a cost control in construction projects under consideration of an EVA. Everything you need for reproducing is to read through this blog article carefully and to have a spreadsheet program, such as Microsoft Excel.

The Basics – EVA in a nutshell

The “Earned-Value-Analysis” begins as a planning foundation with defined work packages or trades such as cellar, shell, truss etc. They are all equipped with a planned value that is calculated on the basis of evaluated service specifications or tenders – in our example EUR 150,000 for the cellar. As soon as the cellar is being constructed, the value of the work package can be multiplied by the relation of its completion, which means the progress grade – on a percentage basis. We assume that our cellar is already half-finished and obtain costs of EUR 75,000 (the Earned-Value (actual earned value / originally known as “budgeted costs of work performed”) by multiplying 50% x EUR 150,000. The philosophy behind this calculation: At maximum, a realized result is worth its proportional planned value. Or in other words, what you were willing to pay for it. This actual earned value can be calculated any time for all the already commenced work packages. Through the amount of all earned valued, the total value or total progress of a project is directly perceptible.

Once this is done, a second cost item, the actual costs, can be compared to the realized total value. The actual costs are all costs, which occurred for each current status within realization of the results – in our case EUR 100,000. In order that no distorted picture emerges, it is necessary to synchronize cost incurrence and result evaluation or simply said: it is only allowed to pay for already realized results. Since in our example EUR 20,000 have already been paid in advance to the shell constructor for already ordered material, the work package “shell”, however, has a progress grade of 0%, we ignore this advance payment, since it would otherwise occur as a cost overrun of the cellar.

If you now take the actual earned value of EUR 75,000 and the adjusted actual costs of EUR 80,000, we can begin with the analysis for orderliness and efficiency. Since the actual costs exceed the actual earned value, the implemented service was realized in a much more expensive way than planned. An exceedance of the cost objective is likely. With the help of the (additive) prognosis the expected deviation can be calculated, if the scopes that are still pending are now proceeding according to schedule. The actual earned value of EUR 75,000 (since already realized and already paid) is deducted from the overall projects costs – in our example EUR 850,000 – and the actual costs of EUR 80,000 are added à the result is EUR 850,000 (projected costs at the end of the project).

EVA in three steps – applied in practice

Let us now proceed from the slightly more general theory to the proven practice: In order that EVA works smoothly in our construction project, we need the three following steps:

Step 1

EVA is started with the above-mentioned complete cost planning based on work packages or trades (property, building, garage, exterior area, additional purchase costs etc.). It is important to also include the costs that are not linked to a particular work package or trade, such as financing costs, tax on land acquisition, insurances, notary costs, etc. Ideally, costs are planned in a spreadsheet program e.g. Microsoft Excel. Work packages and trades are planned line-by-line. The columns “progress grade” and “actual earned value” are complemented. However, the latter is the result calculated on the basis of the columns “planned costs” and “progress grade”. Trades which are already (partly) completed, obtain a progress grade between 0 – 100%. The resulting actual earned values can be summed so that a total earned value for the construction project is available as one figure.

Step 2

Furthermore, an account for all deposits (capital resources/borrowed funds, subsidies, grants …) and payments (invoices, fees, interests, taxes …) is necessary. In addition to the funds movements, exportable data such as value date, beneficiary/payer, intended purpose, amount, IBAN) must be possible.

Step 3

The funds movements exported from our construction account into another table spreadsheet (each payment in one line) are respectively qualified in the sense of “who was the payer in case of positive amounts” or “for which trade was the payment”. At least the columns payer and trade must be complemented in the spreadsheet. After the respective payer and the trade have been aligned, substantive analyses can be created by using the spreadsheet formula “SUMMEWENN”. This is the way to immediately calculate for instance the actual costs per trade in one figure and the sum payed by one payer e.g. the financing bank.

By applying these three steps, it is possible to easily calculate the actual earned value, the actual costs and the planned total costs. So it is possible to always answer questions about project-relevant questions for the entire project: Are we (still) on track? What are the total costs that are currently forecasted? What trade has higher actual costs than actual earned value and much else.

Conclusion: EVA – easy and scalable

Sounds easy at first sight, does it? Then – try it! Practice makes perfect! Should you have no running construction project for an immediate application of EVA at the moment, then you could already practice your EVA skills with the following exercise before a successful inauguration.

Send your result for the subsequent formulated problem to training@teamwille.com (keyword EVA) by 15th May 2016:

  • Planned total construction costs EUR 600,000
  • Work package cellar with a planned value of EUR 100,000 | 100% progress grade, work package shell with a planned value of EUR 150,000 | progress grade 80%, work package architecture and building support with EUR 60,000 | progress grade 40%
  • Accrued actual costs on construction account of EUR 265,000 (EUR 120,000,- for cellar and shell, EUR 25,000 for architecture)We draw three different prices among the correct results: 3rd price: a bottle of sparkling wine for the perfect house construction, 2nd price: a TEAMWILLE Scrum-Guide and the 1st price: free participation in a Scrum introduction day of your choice within one of our IMPA Level D qualification trainings.
  • We hope you will enjoy doing this little task. Good Luck!
  • Calculate a) the actual earned value b) the total progress grade and c) the forecasted total costs of the project.

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