CONSTRUCTION Accounting ARTICLE -
EVM: Taking the Mystery Out of Job Costing

Target Audience: Construction Industry Professionals, Earned Value Management, Job Costing, Schedulers, Cost Variance Interest, Spending Planners, Project Managers, Contractors

Like most contractors, you likely have a spending plan going into every job, and you probably track every dollar spent once work is underway. Yet, despite these efforts, measuring the true progress of the job may remain a mystery. If so, earned value management (EVM) can help you solve this particular whodunit.

Objective Assessment

EVM is a project management technique that measures job progress in dollars, giving you a common objective assessment of both cost and schedule performance. Granted, you probably know how much you spend as a job progresses, but you may not take into account how much work has been accomplished.

For instance, let’s say you have a $1 million project that’s scheduled to take six months to complete. After four months, you’ve spent $600,000 — much more than you anticipated when you planned the job. With no more information, you’re likely to panic.

Before you call your project manager on the carpet, though, look at how much work has been done. If the project is finished, you’ve delivered it under time and under budget. If the roofers are still waiting for joists to go in, well, go ahead and bring the project manager in.

EVM can provide such insights — improving your cash flow, serving as an early warning system, preventing scope creep and keeping your teams focused.

Planned vs. Earned

Under EVM, every project begins with a detailed plan that identifies the work to be accomplished and, as the job progresses, compares “planned value” with “earned value.”

Planned value is the authorized work combined with the approved budget and authorized timeframe, while earned value is the authorized work completed and its original budget. The difference between the two is schedule variance; and the difference between earned value and actual costs is cost variance.

For example, consider a task budgeted for $1,000. On a given day, you find you’ve spent the $1,000 and are happy to see you’re right on target. But a closer look using EVM reveals that the work is behind schedule and you’ve actually achieved only $750 in earned value. Thus, what appears to be an on-budget task is really a cost overrun.

What’s more, because you know exactly where you are every step of the way, you can reassure owners that they’re being billed for only work that was done in accordance with the contract. Doing so may help speed payments and support additional billing if work is outside the agreed-on scope of the project.

In addition, EVM can help you predict and improve future performance. It allows you to not only calculate the performance needed to stay on budget for a current job, but also use past cost-performance trends to project total costs on future ones.

No Job Too Small

Many contractors believe that EVM is suitable only for very large projects. In fact, you can scale and apply EVM to any job. And if you do, you’ll likely find it a valuable tool for staying ahead of the game and your competition.

Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.

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