October 2024
Construction companies are familiar with the challenges of cost management: exorbitant capital project budgets, fluctuating material prices, slim profit margins and cost overruns that are more the norm than the exception. If anything, these challenges further emphasize the importance of having effective cost-management strategies. Project outcomes, business solvency and reputation can depend on it.
Two approaches have been the go-tos: traditional cost management and earned value management (EVM). Although their end goal is the same, there are notable differences between them.
The Familiar Approach: Traditional Cost Management
Traditional cost management focuses on tracking and comparing actual spending against the budget. Many construction professionals are accustomed to this approach.
The basic steps typically include estimation and forecasting, budgeting, managing variances, change order management and reporting. Its reliance on spreadsheets, reports and simple variance analysis is fairly straightforward, making it easy to understand and use.
Traditional cost management has been popular for a long time, but it has some fundamental limitations, especially for large, dynamic projects. Its focus on the variance between actual and planned costs doesn’t consider factors such as schedule and scope and their impact on expenditures. While this method works well for basic cost control, predicting future spending or performance is difficult—making it a more reactive approach.
All this makes traditional cost management a good fit for smaller, lower-risk projects with a fixed scope rather than large-scale, dynamic ones.
The Comprehensive Approach: Earned Value Management
EVM is very much about data—and lots of it. It goes beyond traditional cost management by constantly collecting cost, schedule and scope data to monitor and calculate real-time progress and performance. This involves tracking key values like planned value (PV), actual cost (AC) and earned value (EV), which show how much work was planned, what has been spent and how much work has been accomplished.
From these values come simple but essential metrics—such as cost and schedule performance indexes (CPI, SPI) and cost and schedule variances (CV, SV)—showing how well the project is doing now and how it’s projected to perform in the future.
Think of these metrics as creating a holistic view of what’s happening behind those numbers while providing managers with data-driven context for planning and decision-making. By flagging emerging risks and more accurately predicting cost overruns, delays and scope creep, EVM metrics empower managers to improve forecasting and risk management for greater project certainty.
Comparing the Two Approaches
When deciding between the two, it may be helpful to compare them side by side to add some clarity. So, let’s look at how these approaches stack up against one another.
| Traditional Cost Management | EVM | |
|---|---|---|
| Data Sources: | • Actual costs • Planned costs | • Costs • Schedule • Scope |
| Approach: | • Reactive | • Proactive |
| What it Measures: | • Actual costs • Variance between actual and planned costs | • Project progress (cost and schedule variances) • Project performance (cost and schedule performance indexes) |
| Best Suited for: | • Projects with low risk, straightforward scope, set budget | • Complex, dynamic capital projects • Projects requiring detailed reporting and control |
| Types of Questions it Answers: | • How much have we spent so far? • How much budget is left? | • How far ahead/behind are we on cost/schedule? • What is the likely cost for work to be done and the whole project? • How efficiently are we using time and resources? |
| Benefits / Strengths: | • Widely used and understood • Basic financial control | • Usable insights into project progress and performance • Early detection of risks, deviations and trends allows adjustments to be made • Better-informed decisions |
| Challenges / Limitations: | • Lacks predictability • Doesn't account for schedule or scope impact on costs • Doesn't measure work done • Struggles to forecast costs | • Effectiveness requires more timely data and analysis • Accuracy of metrics relies on accuracy of data in initial plan • Perceived to be too complicated to understand and implement |
Which Approach Is Right for Your Capital Projects?
Modern capital projects have certainly evolved over time, requiring more money, time, technology and data than ever before. This has prompted cost management practices to evolve along with them.
For large, capital-intensive projects, EVM has the edge. Through the actionable insights EVM metrics deliver, construction companies can use them to their strategic advantage to meet expectations of enhanced capital project performance and profitability.
This becomes more achievable with advanced cost management software that streamlines EVM processes. From data capture and automatic calculations to progress/performance tracking and reporting, the software you choose to optimize EVM’s benefits should reflect the functionalities you most need.
A solution like Contruent Enterprise may have what your projects need to better manage costs through the project lifecycle while helping you achieve outcomes faster and more efficiently. Find out more or request a demo today.