August 2024
Capital-intensive projects—nuclear plants, oil and gas facilities, large-scale infrastructure, manufacturing and mining—demand substantial upfront investment and ongoing financial commitment to maintain or expand their operations.
These megaprojects also are cost overrun-prone—averaging $1.2 billion per project, or a staggering 79% of the original budget—accompanied by delays spanning six to 24 months on top of already-lengthy build schedules.
Something must change. The enormous costs and extended timelines plaguing these projects highlight the need for effective project management. Without a structured approach, megaprojects like offshore oil rig construction or infrastructure project expansion are vulnerable to failure. Earned value management (EVM) is a proven solution.
EVM: A Vital Tool for Managing Megaprojects
With megaprojects, everything is magnified: costs, timelines, size and complexity. And so are the risks and consequences.
This puts immense pressure on project managers tasked with delivering a project of such magnitude while staying within tight budgets and schedules, and contractual requirements. EVM can be an indispensable tool that empowers them with the insights, visibility and control they need to meet those expectations.
This industry best practice provides significant benefits in improving project performance, especially when supported by cost or project management software. EVM integrates cost, schedule and scope data within work packages to continually track and calculate real-time performance and progress metrics. Data can come directly from workers on the jobsite and from IoT devices that megaprojects often use to gather information.
These metrics deliver usable insights into project health, enabling project managers to gauge progress against the baseline. They also provide an objective frame of reference for making strategic decisions and modifications that help keep costs and schedules under control throughout execution.
Here’s a quick refresher on EVM:
Budget at completion (BAC): Original total project budget determined before work begins; must be as accurate as possible for EVM calculations going forward.
Planned value (PV) (aka Budgeted Cost of Work Scheduled (BCWS)): A project’s approved budget. Same as the BAC at outset, but evolves to reflect how much work should be done by specific points. Planned % of work to be done x BAC
- Earned value (EV) (aka Budgeted Cost of Work Performed (BCWP)): Monetary value of work done up to a specific point. Actual % of work done x BAC
- Actual cost (AC) (aka Actual Cost of Work Performed (ACWP)): Actual money spent to do the work by a specific point.
- Cost performance index (CPI): Amount of project progress relative to actual cost. CPI = EV / AC. Results meaning: CPI = 1 on budget; CPI > 1 below budget; CPI < 1 over budget
- Schedule performance index (SPI): Amount of project progress relative to planned schedule. SPI = EV / PV. Results meaning: SPI = 1 on time; SPI > 1 ahead of schedule; SPI < 1 behind schedule
- Cost variance (CV): Difference between budgeted amount allocated to do the work and actual amount spent for that work. CV = EV – AC. Results meaning: CV = 0 on track; CV > 0 below budget; CV < 0 over budget
- Schedule variance (SV): Difference between the actual time and the planned time to do the work. SV = EV – PV. Results meaning: SV = 0 on track; SV > 0 ahead of schedule; SV < 0 behind schedule
We’ll explore how EVM benefits capital-intensive projects.
Detects Potential Scope Creep. The larger and more complex a project is, the more likely scope creep will sneak in.
EVM can’t prevent scope creep, but it can help control and mitigate the impact on cost and schedule. For it to be most effective, the project scope must be as completely defined and accurate as possible, so it has an established baseline to compare against. EVM can better detect even minor shifts from the scope in real time. Because EVM is highly responsive, the metrics will react immediately, recalculating as new data is input.
The two metrics to pay attention to are schedule variance (SV) and cost variance (CV). When either is less than zero, it indicates a behind-schedule or over-budget situation. Having a heads-up to developing scope creep gives project managers time to do a root cause analysis into the how and why behind it. They’re then able to take the necessary actions to intervene by identifying and strengthening process weaknesses or change management procedures.
Provides Insights into Resource Allocation. The lack of skilled labor, material and equipment resources is more pronounced with capital-intensive projects. Any shortage or limitation risks project progress, making efficient resource allocation a priority.
Achieving balance in how and where resources are used within each work package can be managed by looking at the SV and CV metrics. A negative SV value can indicate the project is behind schedule due to a bottleneck or needs more resources; a negative CV may signal spending too much on resources (such as overtime) or having more than needed. This presents a chance to explore where and how resources can be reallocated more effectively to bring schedules or costs back into line, so variance values are above or at zero.
Identifies Supply Chain Disruptions Early. Given the sheer amount of specialized and required materials, capital-intensive projects will experience the effects of inefficient or disrupted supply chains more markedly.
Because EVM fluctuates in response to external factors, it can help project managers stay agile amid unpredictable shortages and delays. Unexpected material price upticks, timeline extensions and gaps in planned and actual work will show up in its metrics, which may point to imminent material shortages or hiccups along the supply chain. Think of this as EVM waving a flag, notifying project managers there’s an issue requiring attention. They now have the chance to determine the problem and proactively counteract its impact with resource reallocation, supplier diversification, schedule adjustments or other contingency planning.
Assesses Impact of Change Orders. Change orders are inevitable in any project, but their consequences can be amplified in capital-intensive undertakings, especially if they’re rushed through without going through the proper channels for approval. What might seem a relatively innocuous change can have consequences if not formally reviewed.
Deciding whether to approve a change order requires careful consideration of the associated schedule adjustments and resource implications. When used within a formal change management process, EVM minimizes that impact, providing quantified financial and schedule implications data to inform these decisions. Project managers can more quickly and accurately assess the potential impact by comparing the original project plan (baseline) to the proposed changes.
Upon approval, EVM facilitates updating the baseline to reflect the new cost, schedule and scope parameters. This data-driven approach reduces the negative consequences of change orders, allowing project managers to maintain project control.
Forecasts Outcomes of Potential Risks. Megaprojects have long wrestled with preventable risks—a sign of insufficient risk management. No industry has been immune. Yet these predictable challenges go unaddressed, unnecessarily escalating costs and drawing out timelines. They demand a proactive approach to identifying and addressing them.
Risks must be built into any project’s estimating phase, especially for high-stakes megaprojects. This is where EVM, supported by project management software, plays a predictive role.
When historical project data (or industry benchmarks) is input into the software, EVM processes it to forecast the budget and schedule necessary to complete the project.
That estimate should be risk-adjusted to truly benefit the project. EVM helps forecast the impact of particular risks and their proposed contingency plans on project outcomes.
This process helps answer critical questions: What are the measurable effects of a specific risk factor on cost, schedule and downstream tasks? If individual factors are tweaked—such as a different completion date or alternative materials—how does that change those effects? What industry-specific risks have occurred in past projects, and what was their impact? How well did their contingency plans minimize the effect on outcomes?
Relying on EVM for what-if scenario planning, even for unanticipated risk events occurring during construction, can prevent some situations from derailing megaprojects.
During execution, monitoring the performance and progress variables—CPI, SPI, CV, SV—in real time via software dashboards can spot issues starting to develop. If any of them are accounted for in the estimate, already-prepared contingency plans can be implemented.
Ultimately, EVM is an invaluable risk-management tool, empowering project managers to anticipate and prepare for challenges. It also helps build confidence with stakeholders while setting realistic expectations.
The Power of EVM
Earned value management introduces certainty—of costs, timelines and risks—that has been lacking in these projects. With that certainty, the odds of delivering a project on time and within budget go up. This greatly minimizes the probability of costly overruns and extensive delays. Given the substantial investment that goes into megaprojects, that could translate into preventing millions in costs and many months from being wasted on what would have been blown outcomes.
In the end, the sooner capital-intensive projects are put into service, the sooner their benefits to the economy and society can be realized. With EVM, that becomes more achievable.
Gaining the insights and control that EVM enables can make a measurable difference in capital projects of all sizes and complexity, especially when used with cost management software that streamlines its process.
Contruent Enterprise offers an EVM solution that can help you measure and improve project outcomes. Find out more and schedule a demo.