Earned Value vs. Cost to Complete
Many contractors in the construction industry rely on Cost to Complete (CTC) forecasts in order to gauge the financial health of their projects. A seemingly less prevalent, and possibly less understood, alternative is to use Earned Value (EV). While CTC relies on forecasts, typically performed by the Project Manager responsible for the job, the EV approach is a picture of the financial performance of the job at a given point in time.
EV is a calculation of the costs that were budgeted for the work that has actually been completed at a given point in time. This value is compared to the Actual Costs (AC) incurred at the same point in time. EV minus AC is equal to the Cost Variance (CV). Clearly, a negative CV means you are underperforming while a positive value suggests you are overperforming. While EV and CV can be calculated at the project level, it can also be used at the individual cost code level providing greater insight into how individual cost items are performing.
So, which is a better means of gauging financial health of a project?
The answer depends greatly on the accuracy of your CTC forecasts. Certainly, the final outcome of a project is more important than how the project is performing on an interim basis. However, CTC forecasts are simply a projection to the future that can often be skewed by lack of relevant information or overly optimistic individuals performing the forecast. The accuracy of the forecast can depend greatly on the amount of effort and detailed data used to create it. The use of actual labor productivity figures, adequate understanding of the impact of change orders, experience of the project manager performing the forecast and other project specific idiosyncrasies all come into play in creating an accurate CTC forecast.
On the other hand, EV gives you a clear picture of where the project stands financially at a given point in time. It can be used as an early indicator to identify those items that are exceeding the budget, alerting you to the need to intervene while there is still time to impact the job. Calculating EV requires that you identify the budgeted costs for the work that has been performed. This can be a tedious task, unless you use a software such as BlackVector which automates this process for you, providing a detailed EV calculation without creating additional work or inputting additional data. It utilizes the information from you estimate, along with progress report data, to calculate EV and compare it to AC providing insightful tables and graphs which serve to detect items that need further attention early in the job while there is still time to act.
Ultimately, a combination of both approaches might be the best solution. Simplifying the EV calculation with BlackVector Software will give you a valuable early detection tool that also helps identify those project specific idiosyncrasies which can greatly help create more reliable CTC forecasts.