The Use of Earned Value As Trend Analysis Tool for Construction Projects in South Africa

1R(0 ve-R,T THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA By MICHAEL VERTENTEN

A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE MAGISTER PHILOSOPHY (ENGINEERING MANAGEMENT) IN THE

FACULTY OF ENGINEERING AND THE BUILT ENVIRIONMENT

OF THE

UNIVERSITY OF JOHANNESBURG

SUPERVISOR: PROF. J.H.C. PRETORIUS CO-SUPERVISOR: PROF. L. PRETORIUS

NOVEMBER 2008

MICI 'AFL VERTENTEN NOVEMBER 2008

THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

ABSTRACT

The foundation of Earned Value Performance Management (EVPM) was the Cost/Schedule Control Systems Criteria originally defined in the USA in 1967. Earned Value Performance Management has traditionally been used in Defense projects with budgets in excess of R100M. Private industry is now implementing EVPM for major projects, which are large, complex or geographically dispersed. It is the objective of this dissertation to determine whether the Earned Value concept as developed over the years to the form it is in today is being used in the South African construction industry or not. As part of this dissertation the author devised and distributed a questionnaire to a limited and targeted demographic of Project Management practitioners. The results found that the concept of Earned value is being used in some form or other in selected few companies within the South African Construction industry. While it has been recognized, it's benefits are not being fully utilized. The benefit of the Earned Value concept contributing to the successful completion of a project is being acknowledged and more and more construction companies are slowly making Earned Value an intricate part of their Project Management system

NIICHAEL VERIENTEN NOVEMBER 2008 11 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

TABLE OF CONTENTS

ABSTRACT II

TABLE OF CONTENTS IIY

LIST OF FIGURES V

LIST OF TABLES V

LIST OF ACRONYMS AND ABBREVIATION V

APPENDIX VI

CHAPTER 1: INTRODUCTION 1 1.1 PROLOGUE 1 1.2 THE PROBLEM 2 1.3 RESEARCH OBJECTIVES 3 1.4 RESEARCH DESIGN 3 1.5 CONCLUSION 4

CHAPTER 2 : CONSTRUCTION INDUSTRY 5 2.1 INTRODUCTION 5 2.2 MEASURING PERFORMANCE 5 2.3 PROJECT IMPLEMENTATION 7 2.4 PROJECT PRODUCTIVITY 9 2.5 CONCLUSION Error! Bookmark not defined.

CHAPTER 3 : PROJECT MANAGEMENT AND PROJECT CONTROLS 13 3.1 INTRODUCTION 13 3.2 PROJECT MANAGEMENT 14 3.3 PROJECT CONTROLS 16 3.4 BASIC COST AND SCHEDULE CONTROL SYSTEM 17 3.5 PROJECT CONTROL ORGANIZATION 17 3.6 PROJECT MANAGEMENT CONTROL SYSTEM (PMCS) 18 3.7 CONCLUSION 20

CHAPTER 4 : EARNED VALUE 21 4.1 INRODUCTION 21 4.2 HISTORY 22 4.3 WHAT IS EARNED VALUE 22 4.4 USING EARNED VALUE 24 4.5 HOW DO WE USE EARNED VALUE? 25 4.6 PRIMARY MEASURES 32 4.7 CONCLUSION 33

CHAPTER 5: RESEARCH QUESTIONNAIRE 36 5.1 INTRODUCTION 36

MICHAEL VERTENTEN NOVEMBER 2008 III THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

5.2 QUESTIONNAIRE SAMPLE 37 5.3 RESULTS 37 5.4 DISCUSSION ON RESULTS 40 5.5 CONCLUSION 41

CHAPTER 6 : CONCLUSION 42 6.1 SUMMARY 42 6.2 CONCLUSION 42 6.3 RECOMMENDATION FOR FUTURE WORK 43

REFERENCES 44

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LIST OF FIGURES

FIGURE 1 - WORK BREAKDOWN STRUCTURE 26

FIGURE 2 - RESOURCE LOADING THE ACTIVITIES 28

FIGURE 3 - TRADITIONAL COST ANALYSIS 31

FIGURE 4 - EARNED VALUE ELEMENT 31

LIST OF TABLES

Results of Earned Value Questionnaire 44

LIST OF ACRONYMS AND ABBREVIATION

ACWP Actual Cost of Work Performed BAC Budget at Completion BCWP Budgeted Cost of Work Performed BCWS Budget Cost of Work Scheduled C/SCSC Cost/Schedule Control Systems Criteria CBP Center for Business Practices CBP Center for Business Practices CPI Cost Performance Index CV Cost Variance DETR Department of the Environment, Transport, and the Regions DPW Department of Public Works EAC Estimate at Complete ETC Estimate to Complete EVM Earned Value Management EVMS Earned Value Management System EVPM Earned Value Performance Management

MICHAEL VERTENTEN NOVEMBER 2008 V THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

OBS Organizational Breakdown Structure PERT Program Evaluation and Review Technique PIP Productivity Improvement Processes PMCS Project Management Control System PMI Project Management Institute PMP® Project Management Professional QMS Quality Management Systems SAFCEC South African Federation of Civil Engineering Consultants SPI Schedule Performance Index SV Schedule Variance NVB S Work Breakdown Structure

APPENDIX

Appendix A — Example of Questionnaire

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CHAPTER 1: INTRODUCTION

1.1 PROLOGUE

Earned Value Performance Management (EVPM) is designed to give senior management an accurate overview of Programme/Project performance. It builds on information provided by traditional scheduling techniques to plan and measure the overall productivity of a system or project. On an industry wide basis, there are many "project management" successes reported. Unfortunately, most serious studies indicate there are significantly more failures than successes. Some industries such as software, electronics and administration experience project failure rates as high as 90% with projects completed late and/or over budget or failing to meet client expectations or requirements. So the answer is a resounding NO — most projects don't succeed. EVPM is used to facilitate responsible decision-making by providing a valid, timely and auditable control system, which is capable of: reporting work progress; properly relating cost, schedule and technical accomplishments; supplying managers with practical summary information; establishing management systems and procedures, which effectively meet requirements and control performance; providing a basis for continuous improvement in management control systems leading to better internal operations. There are three reasons to use EVPM. Firstly, when there is a need to improve the quality of the project management process. Secondly, to establish accountability for project completion and ensure progress requirements are being achieved. Thirdly, to open up the project information flow so that all parties know what is happening. The construction industry is a very competitive and highly project orientated environment where time and money is of the essence and the challenge of getting every project within schedule and budget is of great importance. A project sponsors and stakeholders main aim is to see that a project is completed within time and budget, therefore Project Control is of great importance and any tool available to achieve greater control should be used. Traditionally a form of Earned Value is being used in the construction industry in the form of the old Cost/Schedule Control Systems Criteria (C/SCSC) originally defined in the USA in 1967.

MICHAEL VERTENTEN NOVEMBER 2008 "ITIE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

Earned Value Management (EVM) is a proven process that has become widely recognized and accepted for managing projects. It provides early insight into developing trends, indicative of both problems and opportunities within a project and allows Project Managers to focus attention where it is needed and to develop corrective action where necessary. [2] There have been many misconceptions about Earned Value, namely: "Earned Value is useful only on large government-funded contracts." "Earned Value is useful only on cost-reimbursable type projects." "Earned Value has no utility in the management of lump-sum or firm fixed-price work." "Earned Value does nothing for construction projects." The basic utility of Earned Value is to contain the cost risks associated with projects. Bad news never gets better with time. The earlier one knows that there is a problem on a project, the better chance there will be to mitigate that problem. [1] Although the concept of Earned Value has been around for many years, the application thereof here in South Africa has not been widely implemented. Companies are becoming more aware of its capabilities in determining early warning signs to problems on projects and are therefore insisting more and more on the use of EVM on projects. Although it is being used by Management and Engineers to control projects, Contractors seem to be shying away from using it because of the time needed to set it up properly and also because not very many contractors are aware of the concept of Earned Value. 1.2 THE PROBLEM

A project has a beginning and an end and every Project Manager wants his project to come in on time and within budget but very often the projects falter by either coming in over time or over budget, the trick is to be able to control the project effectively. Every Project Manger believes they have put into place the best controls methods but yet their projects still fail - enter Earned value Management. Many Construction Project Manager's do not recognize the benefit of using Earned Value to pinpoint the problem areas at an early stage in the life of the project. An interesting phenomenon exists in the construction industry. The industry probably uses parts of Earned Value management about as well as any industry, but what makes it interesting is that in construction work, the term "Earned Value" is rarely used. Often, they do not even realize that they are in fact using a form of Earned Value. Anytime a construction cost engineer puts a project baseline plan in place, this is Earned Value in its purest form. But ask cost engineers if they use Earned Value management and often you will get a negative response. The practice today for Project Managers is to manage Cost Control in a Microsoft Excel spreadsheet format or to use some Cost Control software package for managing project cost and to use the Gantt

MICHAEL VERTENTEN NOVEMBER 2008 2 IE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

Chart via a Scheduling software package for managing schedule performance. Seemingly, they are managed as separate, independent, depaitnients and entities. It is a known fact that project cost and schedule are interrelated, but we have no facility to make direct connection between the two. [3]

1.3 RESEARCH OBJECTIVES

The most important aspect of this research is to determine whether the concept of Earned Value, as it is known today, is being used within the South African construction industry or not. A questionnaire was developed and circulated to Project Managers and those involved in Project Controls within the industry with the aim of the questionnaire being to determine whether or not the concept of Earned Value is used in determining the status of projects and if it is used for reporting purposes or not. This dissertation is a combination of research based on various websites and publications, case studies of problems experienced on projects (highlighted during discussions with Project Managers, Project Control Managers, Cost Engineers and Schedulers involved in the Engineering, Building and Mining Construction and Consulting industry) and 15 years experience in the consulting and construction industry of which 8 are involved with Project Controls. It is the objective of this dissertation not to criticize the manner in which the construction industry manages projects and it is not to say that the construction industry does not use the Earned Value concept but to merely determine whether the concept of Earned Value is being used properly within the construction industry. 1.4 RESEARCH DESIGN

In order to fulfill the needs of a research proposal, one has to follow a structured research design plan. This plan usually constitutes the different phases of the research and how it should be implemented. In chapter one the research proposal and the introduction to the dissertation are discussed. Chapter two discusses the construction industry, the way the industry has developed and the future of the industry. This chapter also discuses the way the construction industry controls and manages its projects. Chapter three discusses Project Management and Project Control. A brief history of Project Management and its importance in managing projects as well as the effects and importance of a well defined and managed Project control system. Chapter four will discuss the concept of Earned Value. A brief history of how it evolved, its use in effectively controlling projects and its concept. Chapter five will discuss the results of the research to this dissertation, the questionnaire put out to the various Project personnel and the results of those questionnaires received back. Chapter six will discuss the conclusion to the dissertation and will determine whether or not the concept

MICHAEL VERT{ IVTEN NOVEMBER 2008 3 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA of Earned Value as determined in Chapter four is being used in the construction industry or not. 1.5 CONCLUSION

This dissertation will mainly focus on the concept of Earned Value and its importance in controlling a project within the South African construction industry. It focuses mainly on the construction industry to determine whether the Earned Value concept is being used to effectively control projects and to point out the importance of using the Earned Value concept in controlling projects. In the next chapter, the construction industry will be discussed and how the construction industry controls its projects. Various references to literature will be made in order to establish what the current norm is when it comes to project control.

MICHAEL VERTENTEN NOVEMBER 2008 4 CI IE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

CHAPTER 2: CONSTRUCTION INDUSTRY

2.1 INTRODUCTION

Construction covers the preparation of sites and the construction of buildings and civil engineering structures, including heavy infrastructure and essential services. The construction sector spans a wide range of activities, from the building of a single domestic unit to the construction of a highway, dam or harbour silo. Site preparation includes the demolition of buildings or structures, and excavating, leveling or test drilling or new structures. Building covers the erection of family housing and residential buildings, as well as office blocks, shopping complexes, schools, hospitals and industrial buildings. Civil engineering works include steel, mechanical and electrical construction needed in the development of transport infrastructure, water storage, reticulation and sewage systems, power lines, fuel tanks, mine headgears and bins, bunkers or silos. Economic and population growth are the most important indicators of construction patterns. They point both to a country's increasing needs and to its ability to provide for those needs. The construction economy has short cyclical fluctuations from peak to peak, as well as long "waves." Comparative studies of developing economies show that construction works represent a steadily growing share of gross domestic expenditure over time, and as levels of development improve. However development patterns can be disturbed by specific factors. Studies in South Africa, for example, have identified four key drivers of future construction activity: economic growth, savings, government economic policies and institutional health - namely the degree to which organizations and state institutions function and are able to implement state policies and spend allocated state expenditure budgets. In addition, state policy in South Africa is to promote the emergence of new contracting and consulting capacity, with the result that many large construction projects are split into numerous small contracts and awarded to select emerging firms. Work in Latin America has identified unsustainable macro-economic policies and bureaucratic or institutional deficiencies as the main reasons for the failure of developing economies — and difficulties in the construction sector. Construction companies increasingly seek international opportunities when local economies contract. [4] 2.2 MEASURING PERFORMANCE

With increasing higher users' requirements, higher customers' requirements, environmental awareness and limited or merger resources on one side, and high competition for construction business marketplace on the other side, contractors have to be capable of continuously improving their performance. However, effective and efficient management of contractors' organizational performance requires commitment to

MICFIAEL VERTENTEN NOVEMBER 2008 5 '11-1E USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA effective performance measurement, effective in the sense that it should enable organizations to evaluate, control, and improve their performance today and in the future. In order to do this, up-to-date (i.e. relating to corporate strategy, cheap, easy to understand, foster continuous improvement, relevant to practice and dynamic) performance indicators must be in place. [23] The Department of Public Works (DPW) [19] state that official statistics and other independent research indicate that productivity and output quality in the South African construction industry have fallen significantly since the early 1970s, while health and safety (H&S) conditions showed little improvement. The DPW further says it is essential that both the performance and capacity of the industry should be enhanced. According to the Department of the Environment, Transport, and the Regions (DETR) (1998) there is deep concern in the United Kingdom (UK) industry and among its clients that the construction industry is under-achieving. The industry has a low and unreliable rate of profitability, margins are characteristically very low, it invests very little in research and development and in capital, there is a crisis in training, and too many clients are undiscriminating and still equate price with cost, selecting designers and contractors almost exclusively on the base of lowest price. Projects are unpredictable in terms of delivery on time, within budget and to the required quality standards [19] It is universally recognized that the industry must improve its performance. There is the need for the industry to simultaneously deliver better value for money and become more profitable. [32] The DPW cites the following as constraints to improved performance in the South African construction industry:

Unregulated labour-only subcontracting;

The lack of best-practice standards;

The divide between design and construction, which has consequences for H&S, productivity and quality;

The adversarial relationships between principal contractor and subcontractors, and between employers and workforce;

The lack of an agency capable of coordinating the development and implementation of measures to promote best practice, and

The ineffective enforcement of compliance with minimum standards According to the DPW enhancing the performance of the South African construction industry is founded on the following principles:

Improvements in the work processes of contractors in cooperation with clients and designers;

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Promotion of best-practice standards for, inter alia, H&S, productivity and quality, which standards contractors can aspire to;

A shift towards a partnering approach between clients and contractors, which includes design build and design-build-operate-transfer procurement systems.

Introduction of H&S programmes, Productivity Improvement Processes (PIP) and Quality Management Systems (QMS). Initial costs are likely to be offset by the benefits of the resultant improvement in efficiency;

Integrated, as opposed to piecemeal implementation of work-process improvement techniques to enhance the likely success of such implementation due to the synergy between H&S, productivity and quality;

Incremental implementation of best-practice due to the debilitated condition of much of the industry;

Reinforcement of measures intended to protect the environment, workforce and public i.e. H&S. Given the potential to improve performance in general, the non-traditional project parameters of the environment and H&S should be afforded status equal to that afforded to cost, quality and schedule. Given the identification of education and training, skills development and human resource development in general, a further possible parameter in the form of development should be included. The industry should also endeavor to:

Integrate design and construction;

Use appropriate procurement systems and contract documentation;

Engender a partnering approach;

Implement QMS and improvement processes;

Implement IT in a pervasive manner;

Benchmark performance relative to a range of indicators and measures;

Increase the amount of research and development, and

Realize 100% education and training. [32]

2.3 PROJECT IMPLEMENTATION

How do companies compete, build and maintain viable businesses in a rapidly changing global marketplace and business environment? A major part of the answer is "a commitment to creating and retaining satisfied customers" [33] In the construction industry, to create and retain satisfied clients, service providers must meet the

MICHAEL VERTENTEN NOVEMBER 2008 7 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECT'S IN SOUTH AFRICA expectations and requirements of their clients in the delivery of projects. In terms of project development, clients' expectation is chiefly the delivery of the project within time, quality and cost targets [34]. If clients' stated needs (developmental requirements) could sufficiently address the real (latent) needs and objectives for investment, delivering the project within time, quality and cost targets could translate to client's satisfaction, other things being equal. However, achievement of these development objectives proves to be difficult owing to some controllable and uncontrollable constraints. [18] The future of the design community and profession depend on increasing the level of performance of design to produce performing construction, designers focusing on their core competency of design, and having the high level of performance identified by the owner. In the past, designers have tried to do this through control of construction by knowing the owner through personal relationships, forcing contractors to bid low and controlling the situation through their specifications and drawings, by negotiating their design contracts through a perceived qualifications basis (which was previously very difficult to quantify). This control minimized competition and made political influences (factors which do not have construction performance as its objective) very important. The downside to this has been the resulting construction non-performance, the move to transfer the control to contractors, and treat the construction industry (both design and construction) as a commodity (price based with very little risk and need for expertise). These conditions have resulted in the five identified trends:

The use of alternate delivery processes which minimize the control of the designer.

Design work becoming price based.

Global competition further reducing design price and profits.

Design function being absorbed as a part of the general contractors function.

The reduction in the number of design firms. The increased competitive pressure will lower design fees and increase pressure on architectural and engineering firms to complete design work in shorter and shorter time-periods. Complete and accurate design drawings/specifications reduce project uncertainty and construction risk (performance), and benefit both the Owner and the Contractor. Construction performance requires higher quality design. To improve the quality of design over time, the following must be achieved:

Recognition of quality design work,

Motivation by design firms to do quality work,

Motivation by designers to improve their expertise, and

Proper compensation for design expertise.

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2.4 PROJECT PRODUCTIVITY

Productivity is one of the most important factors affecting the overall performance of any organization, large or small. At the micro-level, improved productivity decreases unit costs and serves as an indicator of project performance. At the macro-level, improved productivity is a vital tool in countering inflationary effects and determining wage policies. Improved productivity is thus always counted among the basic means of solving economic problems. It is increasingly recognized that capital alone is an inadequate means of producing more wealth or for starting a business in developing countries.. [23] Improved productivity is also required; if all production inputs are well utilized, capital improvements and enhanced productivity go hand in hand. In other words, increased productivity enhances investments without any burden to governments. In addition to the advantages at this fundamental level, the advantages of productivity improvement can be summarized as follows:

Decreased total cost and duration of production;

Improved quality;

Growth in market share of product;

Increased employment and wages without inflationary pressures;

Enhanced purchasing capacities among employees, employers, and customers. Change has always been a fact of life. However what is happening now is much more than that; it is accelerating change. And of course the construction industry has to be right in the centre of this accelerating change. [23] The analogy between the lawyer and the engineer is that the lawyer is steeped in the past, studying case law, while the engineer looks into the future seeing a new and better built environment. The construction industry looks forward to building the future. It helps create the infrastructure in our world that will in turn shape the future. The challenge now being faced is how best to orientate the industry and the companies to be able to profit from this future. There are four important forces that will be shaping the world in years ahead namely: Globalization Political autonomy does not exist e.g. apartheid. The 11 September tragedy will accelerate this as 90% of the world is now united against a common enemy. \Vhat Hollywood did for culture, the internet is doing for language. Rapidly the world is becoming one market place with a single pool of skills. Growing competition As the world becomes a unified market, standards, specifications and other barriers disappear and it becomes a "free for all." An example of this is the construction market in Singapore. Information flows

MICHAEL VERTENTEN NOVEMBER 2008 9 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA freely — no secrets about the job or indeed about the reputation of the construction company wanting to do the job! Increasing complexity One has to smile when hearing older colleagues hanker back to the time when things were simple — you just climbed in and did the job. No employment equity plan or empowerment considerations (by no means unique to South Africa), no great fuss about the environment - whoever heard of not being allowed to tender because of a poor safety record? Ambiguity is now part of our lives. No longer can we hide behind either — or. Now we must make good returns for our shareholders and be responsible corporate citizens at the same time. We used to have the "Bottom Line". Now we have the "Triple Bottom Line" (Scope, Quality, and Time). Talking about complexity — try the latest capital gains legislation in a joint venture construction environment with its impact on deferred tax etc. The rapid changes in technology add further to complexity. Changing the way we think For starters there is a subtle but important mind set difference between survive and thrive. The first is defensive, the second offensive. It takes the changing environment, shakes it by the throat and turns it to profit. It faces change boldly and with eager anticipation. In change it sees enormous opportunity. We also need to change the way we think about our market. If globalization is here to stay then, we must think of the world as our market. Last years 29 of the world's top 225 contractors were active in one way or another in South Africa. They are coming into our market even if we are not going to theirs. . [22] We used to think about being nationally competitive — we now need to think "globally competitive" Grinaker-LTA might claim to be #1 in South Africa — but that is irrelevant today. What is relevant is that it is #89 in the world (as per the ENR Global Contractors list) Consider risk management. As contractors we know that this is the only game in town. We live or die based on our ability to understand and manage the risks associated with our business. It maybe tough in a national context but tries an international one with all its political, cultural and tax pitfalls. Superimpose rapid change on that and there is a recipe for disaster. Strategic affiances with companies that have proved their ability to handle risks in a particular technical / engineering or geographical area becomes vitally important. It's a lot easier, having 100% of a project and being masters of your own destiny — but if one thinks risk, there will probably be a different conclusion. And of course, top drawer people that are totally committed, well trained and broadly experienced become doubly important.[22] As a final example take Organizational Structure. In construction small is beautiful — the family/entrepreneurial culture is well suited to handling the need for rapid decision-making and

MICHAEL VERTENTEN NOVEMBER 2008 10 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL. FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA decentralized control. However, clients are increasingly demanding a more rounded packaged or turnkey service — forcing contractors to move up the food chain, and in so doing, take a larger proportion of the risk. Guarantees and the balance sheet start assuming greater importance. A job we were tendering on recently required an international BBB+ credit rating, not very different to the A-rating of the South African State. The successful international construction players are very large companies. Even with its R1Obn turnover, Aveng is less than 10% of the size of these large international construction companies. Therefore South African construction companies have to find a way to be big and small at the same time. Big to be able to win international work, and small to be able to execute it efficiently. Our core disciplines must be world class:

No short cuts on quality. ISO 9000 Series quality accreditation is a given.

Safety record — particularly in oil and gas and in mining.

Environmental — ISO 14000 is assuming increasing importance and will become a given one of these days

Operational excellence 2.5 CONCLUSION

Nobody can be an expert on everything. If the South African construction industry spreads themselves too thinly, they will not have the time to get to understand the risks of a particular sector adequately. Because the South African construction industry now operates in the larger world market they can afford to specialize more than was possible in the past. The South African construction industry have to be world class at what they do outside of South Africa and increasingly so inside the country as well. It's not possible to be world class across too many fronts unless you have access to enormous resources. Clear vision / strategy / objective / business plan help achieve focus. The South African construction industry must understand where their strengths are relative to the competition and exploit these./21 .] The South African construction industry's clients are also having to focus — hence the outsourcing opportunities in mining and infrastructure. Miners are beginning to understand that their core business is securing the ore body and marketing the end product. Slowly public authorities have been allowing the private sector to construct, design, maintain, operate and finally own the road, bridge or whatever. Unlike most other businesses the South African construction industry clients are spread all over the place

— often with poor access and communication and always at the mercy of the elements. Most of the South African construction industry centres of operation are of a temporary nature. The industry needs:

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Rock Solid company values — rules of the game on "How we do things around here". Integrity of our managers and supervisors is absolutely vital An enthusiastic commitment born out of a clear understanding of where the company is going and a deep seated pride in being part of that future. Good corporate governance and tight financial controls. Emphasis on selecting the best people and then putting an enormous amount of effort and money into developing them. While the construction industry has to be world class and 'go out there and get them', they must never underplay the importance of the South African market. The macro-economic trends in our industry over the past 20 years have not been encouraging. Construction and building expenditure as a percentage of

GDP has declined from 7% to 2.5%. [21] There have been declines in gross capital formation. SA capital expenditure as a percentage of GDP has held steady at about 11°/o for the private sector but has halved from 11% to below 5% for government and public corporations. Employment levels have shown similar declines with employment in the steel and associated industries halving from 460 000 to 230 000 employees. There has been recognition by government of the importance of delivery and a realization that this will only come through hard work. The important multiplication effect of spending on infrastructure is being recognized. SAFCEC estimate that an Rlbn investment in infrastructure development will generate 16 000 jobs, add R440m to GDP and return R175m in additional taxes. There is talk of a changing environment and that's happening right here in South Africa. The newly constituted construction industry development board hopes to make a contribution towards rebuilding the industry and thereby create jobs and strengthen the economy. Remember the purpose is not simply to survive — it is to thrive as a country and as an industry. Everyone has an important part to play in achieving that objective.[23]

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CHAPTER 3: PROJECT MANAGEMENT AND PROJECT CONTROLS

3.1 INTRODUCTION

During the past forty years, the engineering and construction industry in South Africa has become very large and complex. As a result of this complexity, and also of the rising cost structure, the responsibilities of management in the control of technical projects have become very important and, incidentally, more difficult. As a discipline, project management has evolved from numerous diverse fields, including engineering, construction, military projects, etc. If one has to mark the date of identification for this management system then one need to start before the industrial revolution, as this revolution sprouted a complex need of organizational management and interaction. The need of budget management, workforce utilization, demand and supply scaling, compels to develop the management system that was methodological and goal oriented. [25] The development of project management capabilities in organizations, simultaneously with the application of information management systems, allow enterprise teams to work in partnership in defining plans and managing take-to-market projects by synchronizing team-oriented tasks, schedules, and resource allocations. This allows cross-functional teams to create and share project information. However, this is not sufficient, information management systems have the potential to allow project management practices to take place in a real-time environment. As a consequence of this potential project management proficiency, locally, nationally or globally dispersed users are able to concurrently view and interact with the same updated project information immediately, including project schedules, threaded discussions, and other relevant documentation. In this scenario the term dispersed user takes on a wider meaning. It not only includes the cross-functional management teams but also experts drawn from the Organization's supply chain, and business partners. In 1969, the Project Management Institute (www.pmi.org ) was formed to professionalize and modernize through formalizing project management tools and techniques. In addition, today with rapid technological advancement, thriving IT industries, and globalization, project management solutions are in demand throughout the world as a fundamental force to complete projects within a defined scope, time, and within cost constraints. [26] Management tasks, where few individuals use to manage and memorize before; now require advance systems and methodological approaches for organization decision-making and planning implementation. At present ultra modem project management systems deliver innovative solutions and its management

;MICHAEL vERTENTEN NOVEMBER 2008 13 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCnON PROJECTS IN SOUTH AFRICA process possesses the latest tools and techniques, systems and schemes with scientific evidences and statistical explanations. There is no doubt that Organizations today face more aggressive competition than in the past and the business environment they operate in is a highly turbulent one. This scenario has increased the need for Organizational accountability for the private and public sectors, leading to a greater focus and demand for operational effectiveness and efficiency. [23] Effectiveness and efficiency may be facilitated through the introduction of best practices that are able to optimize the management of Organizational resources. It has been shown that operations and projects are dissimilar with each requiring different management techniques. Hence, in a project environment, project management can: (a) support the achievement of project and Organizational goals; and (b) provide a greater assurance to stakeholders that resources are being managed effectively. 123]

3.2 PROJECT MANAGEMENT

The PMI A Guide to the Project Management Body of Knowledge, (PMBOK® Guide), Third Edition defines project management as: "Project management is the application of knowledge, skills, tools and techniques to project activities to meet project requirements. Project management is accomplished through the application and integration of the project management processes of initiating, planning, executing, monitoring and controlling, and closing. The project manager is the person responsible for accomplishing the project objectives." Managing a project includes: Identifying requirements Establishing clear and achievable objectives Balancing the competing demands for quality, scope, time and cost Adapting the specifications, plans, and approach to the different concerns and expectations of the various stakeholders. Project managers often talk of a 'triple-constraint' (project scope; time; and cost) in managing competing project requirements. Project quality is affected by balancing these three factors. High quality projects deliver the required product, service or result within scope, on time, and within budget. The relationship among these factors is such that if any one of the three factors changes, at least one other factor is likely to be affected. Project managers also manage projects in response to uncertainty. Project risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on at least one project objective. The project management team has a professional responsibility to its stakeholders including customers, the performing organization, and the public. PMI members adhere to a 'Code of Ethics' and those with

MICI-L\EL VERTENTEN NOVEMBER 2008 14 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTI I AFRICA the Project Management Professional (PMP®) certification adhere to a 'Code of Professional Conduct.' Project team members who are PAM members and/or PIMP are obligated to adhere to the current versions of these codes.[261 It is important to note that many of the processes within project management are iterative because of the existence of, and necessity for, progressive elaboration in a project throughout the project's life cycle. That is, as a project management team learns more about a project, the team can then manage to a greater level of detail. The term 'project management' is sometimes used to describe an organizational or managerial approach to the management of projects and some ongoing operations, which can be redefined as projects that is also referred to as 'management by projects.' An organization that adopts this approach defines its activities as projects in a way that is consistent with the definition of a project. There has been a tendency in recent years to manage more activities in more application areas using project management. More organizations are using 'management by project.' This is not to say that all operations can or should be organized into projects. The adoption of 'management by project' is also related to the adoption of an organizational culture that is close to the project management culture. Although, an understanding of project management is critical to an organization that is using 'management by projects,' a detailed discussion of the approach itself is outside the scope of this dissertation. The project knowledge management theory covers crucial issues in project management and divides those issues into nine consecutive elements. They are derived from best practice in project study cases and can be considered as the most important elements in project management. Although each element consists of a number of processes, some differences in the detail of the project knowledge elements across various project types can be found, e.g., success criteria, requirements management, information management, performance measurement. Below are the nine elements and their processes as adopted from Project Management Body of Knowledge . [38]

Project Integration Management project plan development project plan execution and integrated change control.

Project Scope Management scope planning, scope definition, create Work Breakdown Structure (WBS), scope verification and scope control.

Project Time Management activity definition, activity sequencing, activity resource estimating, activity duration estimating, schedule development, and schedule control.

Project Cost Management cost estimating, cost budgeting, and cost control.

Project Quality Management quality planning, quality assurance, and quality control.

MICHAEL VEWIT:NTI•N NOVEMBER 2008 15 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

Project Human Resources Management human resource plan, human resource acquisition, human resource development, and human resource management. Project Communications Management communications planning, information distribution, performance reporting, and stakeholder management. Project Risk Management risk management planning, risk identification, qualitative risk analysis, quantitative risk analysis, risk response planning, and risk monitoring and control. Project Procurement Management plan purchases and acquisitions, plan contracting, request seller responses, select sellers, contract administration, and contract closure. 3.3 PROJECT CONTROLS

A Project Control team (PC team) is evolving on major projects, consisting of a project controls manager, cost engineers, scheduling engineers, technicians, trend engineers, specialists, and estimators. Moreover, document control and management information systems are being added to the task list of PC team duties. The PC team involvement on projects can now include planning and scheduling, estimating, value engineering, constructability reviews, cost control, change management, trending, earned value, information systems, reporting, document control, dispute resolution, and financial management. However, the primary project controls mission still remains the same—the PC team must be able to put in place the software, systems, and processes necessary to enable project completion within the approved budget and schedule. [25] A PC team can be a major project commitment, one that requires total management support to ensure successful implementation. The "no surprises" philosophy is key to earning the trust of management. Thus, the PC team's main concern is avoidance of cost and schedule surprises. To make this happen, the right people and systems must be in place to empower the PC team to alert management early enough to make informed decisions. The PC team is now being asked to do more, and must determine what tools are needed to support the project controls mission. This dissertation will discuss the renaissance of the project control team while reviewing "back to basic" ideas and requirements for setting up a project control system. An overview of basic project control elements will be presented with recommendations for organizations, cost-scheduling systems, and tools that can be used on small and large projects. Imagine yourself on a new assignment as the project controls manager. Where do you begin? Note: due to the author's background, the topics covered may be slanted toward program and construction management practices on competitively bid projects. Project control is that function of the project management team that controls the performance of the elements producing the final product, via engineering and design, procurement, and construction. This

MICHAEL VERTENTEN NOVEMBER 2008 16 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

function is generally applied by the planning and cost engineering disciplines. Project control can be defined as the process that forecasts and evaluates potential problem areas prior to their occurrence so that preventive action can be taken, reviews trends or situations so that their impact can be analyzed and, if possible, an action proposed to alleviate the situation, provides constant surveillance of project conditions so that a 'no-surprise' situation is created effectively and economically. There is a long-stated opinion that control is exercised only by project management, where the right of decision is vested; that a planning/cost engineer provides only information and has no exercise of control. However, a key element for effective control is timely evaluation of potential cost and planning hazards and their presentation, with recommended solutions, to project management. 125] This means that the control engineer must be a skilled technician and must also be able to communicate effectively to management level. 3.4 BASIC COST AND SCHEDULE CONTROL SYSTEM

The first major step in setting up a project control system is establishing a well-thought-out project management plan. Followed by detailed planning and development of the project's work breakdown structure (WBS), cost code of accounts, preliminary estimate, summary cost report, and a project master schedule. A good starting approach is to create a manual cost system and then move it an integrated project management control system (PMCS). The basic cost and scheduling control system should include these items. Project management plan. Work breakdown structure. Cost code of accounts. Preliminary estimate. Work packages/control accounts. Summary cost report. Project master schedule. 3.5 PROJECT CONTROL ORGANIZATION

The size of the PC team and the corresponding PMCS depend on the magnitude of the project, the budget, and the commitment of management to the cost and scheduling process. What organization is required for a small, medium, or large project? There are key "must have" organizational components and then there are the support options. Small projects are run very lean, with project controls staff covering more than one function. Small projects can usually get by with one person responsible for cost, scheduling

MICI-IAEL VERTENTEN NOVEMBER 2008 17 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA and reporting. Medium-sized projects add a project controls manager, cost engineer, scheduler, and part- time estimating support. Large projects maintain a centralized PC team (core group) supporting multiple area project control engineers with other technical staff being added as needed

3.6 PROJECT MANAGEMENT CONTROL SYSTEM (PMCS)

An effective PMCS comes from a thorough knowledge of the scope of work; project controls fundamentals, a balanced set of procedures, and the appropriate use of the best available tools. The project control manager must have a good understanding of the contract documents and available tools before any discussions with the project manager about the proposed PMCS. The initial PMCS requirements should be as simple as possible to deploy while still meeting the project's requirements. Project control emphasis should be placed on early warning techniques to spot deviations in the planned work. The project control system must have the ability to alert project management about problems early enough so corrective action can be taken, thereby saving time and money. Moreover, the system should not overload the PC team to the point of becoming overcommitted and losing effectiveness. [13] The PC team can run the risk of promising too much, getting behind, and falling into the trap of just reporting or reacting to "fire drills." Most important, the PC team must be in position to constantly look forward and determine the estimated cost to complete while also monitoring the schedule's critical path. Staying with a "back to basics" approach in setting up PMCS will help staff focus on what is currently needed, while providing time to identify options to be added as the project control system matures. The PMCS must be simple to maintain and be able to do the following. Manage cost and schedule requirements. Capture all components of cost from day one. Forecast cost to complete on a routine basis. Involve entire project community in the project control process. Use cost commitments (not just actual payments) measuring performance. Link with the project accounting and finance system. Identify potential cost/schedule issues early. Report cost and schedule variances. Compare indirect costs to actual work performed on a continual basis. Manage project contingency. Measure budget and schedule performance. Report cost, status, and progress at different management levels.

MICHAEL VERTENTEN NOVEMBER 2008 18 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

Process changes to the budget in a timely manner. During his research the author found the following survey done by the Centre for Business Practices in Pennsylvania in the United States of America on Project Control Functions. Managing issue, risk and change control processes are particularly troublesome. These conclusions are among the results of a survey of fifty-four project management practitioners by the Center for Business Practices (CBP)(www.cbponline.com ), the research arm of the consulting and training organization, PM Solutions. The CBP surveyed senior practitioners with knowledge of their organizations' project management practices and business results. The survey, Project Controls Functions: A Benchmark of Current Business Practices (www.pmsolutions.com ) was designed to investigate best practices in the performance of project control functions in organizations. [35] Project control functions include: Educating the Project Team on Proper Project Management Processes Facilitating/Overseeing Project Planning/Control Sessions Developing the Project Schedule and Work Breakdown Structure Managing the Critical Path to Ensure Schedules are Being Met Estimating Project Costs Tracking and Analyzing Project Costs Managing the Process of Issue, Risk and Change Control Documenting and Delivering Project Status Information The survey results revealed that half of the organizations responding performed project control functions average to poorly. Three functions in particular were cited for needed improvement: managing the process of issue, risk and change control; educating the project team on proper project management processes; and estimating project costs. Organizations are best at documenting and delivering project status information They also showed that most organizations do not recognize project controls as a specific job role. Project control functions are typically performed by project managers, who either report to a centralized project office or to specific departments within their organization. Other observations and conclusions drawn from the study include: About half of the organizations responding have one role in their organization performing project control functions. In the majority of those organizations, that function is performed by project managers, and a number of those organizations have specific project control specialists (19.4%).

MICHAEL VERTENTEN NOVEMBER 2008 19 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTI-I AFRICA

In most organizations (83%), project control functions are performed by multiple roles, although most are project managers (64.8%) or project coordinators (38.9%). [35] A majority of those performing project control functions report to either a centralized project office (33.3%) or to decentralized departments within their organization (37.0%).[35] More than half of the organizations responding use or plan to use augmented services (consulting, staffing, and outsourcing) to perform project control functions. Sarbanes-Oxley and other government mandates have had little effect on organization's project control processes. Tracking actuals, improving project management software tools, creating a strong project management governance structure, and educating on the benefits of using project controls were cited as means to improve the organization's project controls. 3.7 CONCLUSION

Project management should be viewed as a tool that helps Organizations to execute designated projects effectively and efficiently. The use of this tool does not automatically guarantee project success. However, the author would like you to think about the distinction between project success and project management success. This distinction will provide further insight to the questions: Why are some projects perceived as failures when they have met all the traditional standards of success, namely, completed on time, completed within budget, and meeting all the technical specifications? Why are some projects perceived to be successful when they have failed to meet two important criteria that are traditionally associated with success, namely, not completed on time and not completed within budget? In these inflationary times, the forecasting and identification of cost escalation are of paramount importance. Of equal importance is the planning of a project so that the planned completion dates can be achieved. Any delays and late changes can have drastic effects on the viability of a project. These effects are not only more noticeable, but also more difficult to predict in long-term projects (taking more than two years). For this reason, thorough conceptual design and planning are vital to a successful project. To make project control really effective, it must be properly conceived, professionally produced, and executed in a timely manner. The results achieved are well worth the effort required in terms of a project produced on time and within the budget.

M I CFIA EI , V ERTENTEN NOVEMBER 2008 20 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

CHAPTER 4 : EARNED VALUE

4.1 INRODUCTION

The term "Earned Value" is gaining in popularity around project management circles as if it is some wonderful new concept to be embraced. Yet, it has been in use since the 1960s when the United States Department of Defense adopted it as a standard method of measuring project performance. The concept was actually developed as early as the 1800s when it became desirable to measure performance on the factory floor. Today, it is both embraced and shunned, often in response to prior experience or stories told "in the hallway." The opponents will generally cite the cost and effort to make it work, and the limited benefit derived from its implementation. The proponents will cite the cost savings to the project overall, the improved analysis, communication and control derived from its implementation. No doubt, the two camps have vastly different experiences to formulate their perceptions. Current performance is the best indicator of future performance and therefore using trend data it is possible to forecast cost or schedule overruns at quite an early stage in a project. The most comprehensive trend analysis technique is the Earned Value method. In a nutshell Earned Value is an approach where one can monitor the project plan, actual work and work- completed value to see if a project is on track. Earned Value indicates how much of the budget and time should have been spent, with regards to the amount of work done to date. [37] The project manager needs to agree the project scope, create a Work Breakdown Structure [1] (WBS) and assign budget to each work package [2], the lowest level of the WBS. Next he/she will create a schedule showing the calendar time it will take to complete the work. This overall plan is baselined (this is the planned value) and used to measure performance throughout the project. As each work package is completed (earned) it is compared with planned value, showing the work achieved against plan. A variance to the plan is recorded as a time or schedule deviation. Earned Value provides the project manager with an objective way of measuring performance and predicting future outcomes. This can enable him/her to report progress with greater confidence and highlight any overrun earlier. This in turn enables the management team to make cost and time allocation decisions earlier than would otherwise be the case. Unlike commercial enterprises, whose success or failure is a function of the bottom line and customer satisfaction, United States United States Department of Defense acquisition programs face a more complicated equation. Competition with other programs may lead to overly optimistic promises for performance, delivery and cost. By the time problems in those areas become visible, the significant

MICHAEL VERTENTEN NOVEMBER 2008 21 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA amount of sunken investment cost militates against program cancellation. The resulting dilemma — to add time and money or cut production quantities, or both — has played out repeatedly throughout defense acquisition history. Programs continued because the systems were needed, sometimes at costs dramatically greater than originally estimated and at quantities less than desired. Also unlike most commercial projects, defense programs frequently are called on to do things that have never been done before. The United States Department of Defense recognized as early as the 1950s that their increasingly complex weapon systems development contracts demanded more sophisticated management techniques than were generally used in industry. Early attempts to solve the defense management problem led to development of new tools based on PERT, the Program Evaluation and Review Technique. [37] The Department was leading the way in developing modern project management techniques. On the other hand, the uncoordinated initiatives resulted in industry anxiety at the proliferation of different contract requirements and the "how to manage" nature of those requirements. Those conditions — increasing program complexity, inadequate industrial management techniques and industry concern — eventually led to EVM. 4.2 HISTORY

Earned value metrics were established to remove the guesswork from determining where you are currently in relation to a baseline. In theory, this concept is elegant and interesting. Earned value hasn't been around for hundreds of years; however, you can actually trace its beginning to the late 1800s and early 1900s, when managers attempted to make the factory floor and the production line as efficient as possible. The drive for efficiency required a foundation in metrics, and earned value was a way to gain additional data. In the 1960s, the U.S. United States Department of Defense began to mandate the use of earned value on defense-related projects. As you might expect, if the government is contracting out projects worth billions of Rands, it wants project progress updates that consist of more then "we seem to be on target." Unfortunately, many business leaders believe that the standards laid out by the Defense Department are much too cumbersome and rigid, and that many of the earned value reporting requirements provide only incremental value, if any. This has taken what could be a valuable project management tool and turned it into a project burden. This perception of earned value as a burden may be one of the reasons that it has never taken off in private industry.

4.3 WHAT IS EARNED VALUE

Earned Value is defined as 'The value of the useful work done at any given point in a project Note: the budget may be expressed in cost or labour hours.' [3 7]

MICHAEL VERTENTEN NOVEMBER 2008 22 THE. USE OF EARNED viu.HE AS TREND ANALYSIS TOOL FOR CONSTRUCHON PROJECTS IN SOUTH AFRICA

Project Management Institute (PMI) defines Earned value as 'EV is the value of completed work expressed in terms of the approved budget assigned to that work for a scheduled activity or work breakdown structure component. The cumulative EV is the sum of the approved budgets for activities completed during a given period.' Earned Value Management is a way to measure a project's performance against the project baseline. An earned value analysis can clue the project manager into trending deviations from the project's cost and schedule plans. Earned Value Management integrates cost, time, and scope completed. It is very useful in forecasting future performance. [10] So one can see there are various definitions of Earned value but at the root of earned value analysis are three fundamental values calculated for each task (task: An activity that has a beginning and an end. Project plans are made up of tasks.): The budgeted cost of tasks as scheduled in the project plan, based on the costs of resources (resources: The people, equipment, and material that are used to complete tasks in a project.) assigned to those tasks, plus any fixed costs (fixed cost: A set cost for a task that remains constant regardless of the task duration or the work performed by a resource.) associated with the tasks. Called "the budgeted cost of work scheduled," BCWS (BCWS: The earned value field that shows how much of the budget should have been spent, in view of the baseline cost of the task, assignment, or resource. BCWS is calculated as the cumulative time-phased baseline costs up to the status date or today's date.) is the baseline cost (baseline cost: The original project, resource, and assignment cost as shown in the baseline plan and is a snapshot of the cost at the time when the baseline plan was saved.) up to the status date (status date: A date that you set [rather than the current date] for reporting the time, cost, or performance condition of a project.) you choose. For example, the total planned budget for a 4-day task is R100 and it starts on a Monday. If the status date is set to the following Wednesday, the BCWS is R75. [12] The actual cost (actual cost: The cost that has actually been incurred to date for a task, resource, or assignment. For example, if the only resource assigned to a task gets paid R20 per hour and has worked for two hours, the actual cost to date for the task is R40.) required to complete all or some portion of the tasks, up to the status date. This is the actual cost of work (work: For tasks, the total labor required to complete a task. For assignments, the amount of work to which a resource is assigned. For resources, the total amount of work to which a resource is assigned for all tasks. Work is different from task duration.) performed (ACWP). For example, if the 4-day task actually incurs a total cost of R35 during each of the first 2 days, the ACWP for this period is R70 (but the BCWS is still R75). [12] The value of the work performed by the status date, measured in currency. This is literally the value earned by the work performed and is called the budgeted cost of work performed (BCWP). For example,

MICHAEL V ERTENTEN NOVEMBER 2008 23 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTFI AFRICA if after 2 days 60% percent of the work on a task has been completed, you might expect to have spent 60% of the total task budget, or R60. Earned value analysis is always specific to a status date you choose. You may select the current date, a date in the past, or a date in the future. Most of the time, you'll set the status date to the date you last updated project progress. For example, if the current day is Tuesday, 9/12, but the project was last updated with progress on Friday, 9/8, you'd set the status date to Friday, 9/8. An earned value management system (EVMS) provides a method to measure budget and schedule performance by determining the value of work actually accomplished. Cost and schedule performance are tracked against the approved baseline and the resulting variances are measured. Earned value provides the PC team with another performance measurement and forecasting tool. However, earned value is still a backward-looking tool based on past performance using derived historical data and should be combined with forward-looking techniques such as trending. The work package/control account is where earned value performance is measured. The cost system tracks actual expenditures and commitments by control accounts and the CPM schedule reports "physical" percent complete by work packages. Earned value cost and schedule performance indices can then be used to calculate estimated total cost at completion [11] . Key considerations for preparing an EVMS include these items. Use established WBS, code of accounts, and organizational breakdown structure. Define individual work packages/control accounts. Recast the project estimate into work packages/control accounts. Define schedule activities and milestones supporting work packages/control accounts. Assign work package/control accounts to responsible managers. 4.4 USING EARNED VALUE

Project management is challenging. Whether in construction, information technology, or software development, odds are high that project success will be jeopardized. Consider that cost overruns of 25-33 percent are not unusual in the construction industry. The same industry also has seen substantial growth in projects ending in either dispute or litigation [29]. In the information technology industry, "at-risk" projects have been commonplace in the public sector. Moreover, 18 percent of projects in the software industry are prematurely canceled. Further still, 53 percent of software projects will exceed their cost, schedule, or scope constraints. [29] There is no shortage of data about under-performing projects, and even more frequent stories in the workplace about troubled and—worse still—failed projects. Therefore, project managers need effective tools and techniques to meet the challenges of their profession. One such method believed to be effective

MICHAEL VERTE,NTEN NOVEMBER 2008 24

THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN soum AFRICA is Earned Value Management (EVM). EVM is a comprehensive methodology used to manage projectised efforts. The methodology addresses many project management areas, including project organization, planning, scheduling and budgeting, accounting, analysis, reporting, and change control/12/ EVM also incorporates specific mechanics to include the use of the work breakdown structure (WBS), performance curves (S-curves), as well as a defined set of performance metrics. EVM is among the first project management methodologies to be codified by national standards setting organizations/12/ A distinguishing characteristic of EVM is its unique metrics. EVM integrates a project's scope, schedule, and cost into a unified set of prescribed metrics for the purpose of monitoring and forecasting project performance. The building blocks of all EVM metrics are the following three elements: Budgeted Cost of Work Performed (BCWP) = Earned Value (EV1) Actual Cost of Work Performed (ACWP) = Actual Cost (AC) Budgeted Cost of Work Scheduled (BCWS) = Planned Value (PV) [12] 4.5 HOW IS EARNED VALUE USED?

At this point we come to the practical part of actually seeing how Earned Value is applied on any project. There are 5 steps in setting up the Earned Value system on a project, and 4 steps in using it. These steps are described generically but they are the same for all projects.

Step 1: Establish the WBS

The WBS is the roadmap for analyzing the project progress and performance. It provides a multi-level structure for analyzing the project at varying degrees of detail. A properly defined WBS also provides that each element of the structure at each level is the responsibility of an individual who has management authority over that element and all the elements that roll up into that element. Furthermore, the WBS must contain the full scope of the project. Otherwise, the information generated will not represent the total project. The WBS is generally a hierarchical structure in which each lower level element rolls into one and only one element at the level above it. The bottom level of the WBS should be the activities of the project. Figure 1 illustrates this.

MICHAEL. VERTENTEN NOVEMBER 2008 25 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCHON PROJECTS IN SOUTH AFRICA

Contract Work Breakdown Structure

Contra

Engine I Training

Functional Organization Breakdown Structure Dual Spool Compressor

Case Assy Rotor Assy .... 1.2 25 ...... Cost Account

Cost Account

FIGURE 1— WORK BREAKDOWN STRUCTURE 1111

The key here is that each element has a responsible individual identified with it and each element represents a part of the project that someone or more people are interested in monitoring. While this personal responsibility might bring to mind an Organizational Breakdown Structure (OBS), the WBS should not be confused with an OBS. Either structure can function as the framework for analyzing the project performance. However, an OBS is generally employed in a matrix organization where the functional management of the organization wants to analyze the performance of their functional unit on the project. The WBS is organized along the component lines of the project. For example, the project team member who is responsible for the Fan Assembly in Figure 1, has components (cost accounts and activities) in several engineering disciplines within the OBS. On the other hand, the Mechanical Design Manager in the OBS is interested in all the mechanical elements of all project components. [11]

Step 2: Identify the Activities

The second step is to identify the activities of the project. The WBS provides the framework for identifying the project components. As illustrated in Figure 1, each activity should be assigned to one

MICHAEL VERTENTEN NOVEMBER 2008 26 THE USE OF EARNED VALUE AS TREND ANALYSIS Tool, FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA element in the WBS. The completion of this step will produce the project schedule of activities, typically in a CPM network. [14]

Step 3: Allocate the Costs

The third step is to identify and allocate the costs to be expended for each activity. Since an activity represents a finite effort within the project, it has duration of time and it requires the expenditure of some resources. The practitioner needs to decide whether to use labor resources only, such as work hours, or to use Rands and load all project costs into the schedule. The allocation of resources (costs) requires a choice of the degree of detail with which one will allocate the resources. These options include linear spread across the duration of the activity or use of a curve to approximate the expected expenditure during the activity's execution. These curves have an unlimited variety of shapes, the most common ones being symmetrical bell shape, front loaded triangle, back loaded triangle, equal triangle, lump sum at the beginning or end of the activity. However, detailed discussion of the application of resource curves is beyond the scope of this dissertation. [14]

Step 4: Schedule the Activities

The fourth step is to calculate the schedule of the activities. This step generally provides the spread of the resources over the entire time duration of the project. It generates the traditional S-curve of the project plan or baseline, also called the BCWS Curve.

Step 5: Tabulate, Plot and Analyze

The final step is to tabulate and plot the information that was loaded and then to analyze this information. The purpose is to assure that the allocation of resources is properly planned. This includes analysis of individual resources to see if the maximum requirement during any time period is available. It also includes review of cash flows, if Rands are entered, to see if the financing plan for the project supports the schedule. Third, it provides a review to see that all project resources and costs that are budgeted are entered into the program. Of course, correction of any anomalies discovered during this step is implied to be a part of this step. Figure 2 represents a very simple illustration of this process. It also illustrates with this very simple example, that the result is the traditional S-curve. [14]

MICHAEL VERTENTEN NOVEMBER 2008 27 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCHON PROJECT'S IN SOUTH AFRICA

COST/SCHEDULE INTEGRATION

DATA DATA DATE DATE 1000

MMNIC

x:xx:xxxx. "NN.73:0;4:*:44iN 4,.:5:4;i44:4:itg4415:54Z ialigtkkkt xxINIc=xmzvcr=4 ow* ...:44ge:44:ts:zivaastr4rAtgvtga: 10

203

0 500

10

300

4 8 3 10 SCHEDULE RESOURCES

FIGURE 2 — RESOURCE LOADING THE ACTIVITIES [141

Once these five steps are completed, the project team will have the basis for conducting periodic analysis of the project progress and performance. That process is explained in the next four steps.

Step 6: Update the Schedule

The first step in the periodic process is to update the schedule with the period progress. This is generally done whether Earned Value is used or not. The project schedule activities are reported as started, completed or with a remaining duration, as appropriate. The per cent complete of unfinished activities should also be reported. Here is where the practitioner should avoid subjectivity. For physical work it may be easy to determine the per cent complete. If 1000 cubic yards of concrete are planned to be poured and 300 yards have been done to date, then the activity is 30% complete. For efforts that are not so easily measured, special earning rules might have to be employed. [14] Full discussion of earning rules is also beyond the scope of this dissertation. Two examples are presented to illustrate the point. One common rule is to report percent complete according to completed milestones within the activity. For example, if the activity is the creation of a design drawing, progress might be

MICHAEL VERTENTEN NOVEMBER 2008 28 THE USE OF EARNED VALUE AS TREND ANALYSIS Toot. FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA reported as follows: 10% when the preliminary research and background study are completed, 20% when the drawing draft is completed and passed on to drafting, 40 0/0 when the first draft is printed, 50% when the first draft is reviewed, 60% when the second draft is completed, 75% when the client review is completed, 90% when the final draft is completed and 100% when the drawing is issued for construction. The key in defining this kind of rule is that each "milestone" is discrete, and its achievement is easily recognized by such evidence as transmittal memos. A second common rule that is quite effective when the project has several thousand activities is to use the 50-50 rule. In this rule, each activity is considered 50% complete when its start date is reported and it is 100% complete when the activity finish date is reported. Reporting progress provides the basis for the Earned Value calculations[12]

Step 7: Enter the Actual Costs

The second step in the periodic process is to enter the actual costs into the schedule. This information comes from the time sheets and invoices to the project. Whether the data is entered manually or electronically is a matter of choice, depending on the degree of integration between the company's financial accounting system and the project control systems. In any case, it is necessary to determine which costs are to be allocated to which activity. By proper integration of the financial and project accounting systems, this process is facilitated to the point of total automation. However, human analysis of the actual data is recommended to assure that improper data doesn't inadvertently enter the system. [12]

Step 8: Calculate, Print and Plot

The next step in the periodic process is to calculate the Earned Value and to print reports and plot charts for analysis. The Earned Value is simply the per cent complete of an activity times its budget. This provides the key value in the Earned Value process. Other calculations include the schedule and cost variances, performance indices, estimates at completion and per cent complete of the upper elements of the WBS. Referring to step 9 and Figure 4 below will aid in understanding the following calculation discussion. Schedule Variance (SV) is the Earned Value minus the planned budget for the completed work (BCWP- BCWS). Cost Variance (CV) is the Earned Value minus the actual cost (BCWP-ACWP). Performance indices are merely ratio expressions of the SV and CV. The Schedule Performance Index (SPI) is the Earned Value divided by the planned value (BCWP/BCWS). The Cost Performance Index (CPI) is the Earned Value divided by the actual cost (BCWP/ACWP).

NI CHA EL VERTENTEN NOVEMBER 2008 29 THE USE OF EARNED VALUE AS TREND ANALYSIS 'FOOL FOR CONSTRUCTION PROJECTS IN SOUTI-I AFRICA

The Estimate At Completion (EAC) is a number of great interests each update cycle. It indicates where the project cost is heading. Calculating a new EAC is one of the great benefits of Earned Value. However, the actual formula to use for this calculation is a matter of much discussion. For the purpose of this dissertation, the author will look at the basic impact of cost performance on the EAC. The intent is to show that Earned Value is a key forecasting tool for managing a project.[12] Let one assume a project is having some trouble meeting its cost goals. At the data date, the actual cost is greater than the planned cost for the completed work (ACWP > BCWP). If performance continues at the same trend, we can easily see that at completion the actual cost (EAC) far exceeds the budget (BAC). The simplest formula for arriving at the RAC at the time of the data date is:

(BAC-BCWP)/CPI = EAC + ACWP

This formula determines the unfinished or unearned work (BAC —BCWP) and divides it by the CPI. To that is added the sunk cost, or the cost of the completed work (ACWP). From this we can see that poor cost performance. a CPI less than 1, would result in an EAC that is greater than the BAC. More complex formulas are used which factor the CPI to give it more or less influence on the EAC. One more calculation is noteworthy since it is specifically made possible by the use of Earned Value. That is the percent complete at the upper levels of the \VBS. While progress is typically recorded at the activity level of detail (the bottom of the WBS), those responsible for the project at higher levels of the WBS want to know the same kind of information as the "activity managers." The process involves rolling up the data through the WBS. Budgets and actual costs are easy to roll up; simply add the values of the lower elements to get the value of the parent element. However, how does one roll up per cent complete? The answer is, of course, Earned Value. Since Earned Value is directly related to per cent complete, one can simply add the Earned Value of the lower elements to get the value of the parent element. Then, one can use this information at the upper levels to back calculate the per cent complete of the upper elements. Just as Earned Value equals the BAC times the per cent complete at the lower levels, so does per cent complete equal BAC divided by Earned Value for any element in the WBS. [14]

Step 9: Analyze and Report

The final step in the Earned Value process is to analyze the data and the report the result of that analysis. Earned Value provides the basis for cost performance analysis. If you want to know what's happening to the cost of your project BEFORE it is completed, you need to know what the planned cost at any time was and also what the cost of the completed work is. Referring to Figure 3, should this project manager be

MICHAEL VERTENTEN NOVEMBER 2008 30 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA happy or concerned? It seems that the actual costs are considerably below the planned cost. This appears to be good news. However, unless you look at the planned cost of the completed work, you don't really know if this is good news or not. That is exactly the missing information that Earned Value provides.

IS THIS ANY GOOD?

PLANNED COST

COST TO DATE

GarlOIBAY3

FIGURE 3 - TRADITIONAL COST ANALYSIS [14]

In order to understand Earned Value thoroughly, one must become familiar with all the elements of the Earned Value method. Figure 4 provides an overview of these elements. While many people shy away from the acronyms used to label the elements, they quite accurately describe the elements. [14]

PERFORMANCE MEASUREMENT DATA ELEMENTS

EAC

PROJECTION OF COST I BCWS1 VARIANCE AT COMPLETION

TARGET SCHEDUL PROJECTION OF SCHEDULE DELAY AT COMPLETION FTG

CURRENT SCHEDULE TO-DATE SCHEDULE VAR LANCE IL- U TO-DATE LEGEND COST VARIANCE

IACWPI (BOWS = BUDGETED COST OF WORK SCHEDULED I BCVVP = BUDGETED COST OF WORK PERFORMED ACWP = ACTUAL COST OF WORK PERFORMED [FCST = FORECAST OF REMAINING WORK BAC = BUDGET AT COMPLETION 1BCVVP I EAC = ESTIMATE AT COMPLETION DATA DATE FTG = ESTIMATE TO GO

TIME

FIGURE 4 - EARNED VALUE ELEMENT 1141 MICHAEL VERTENIEN NOVEMBER 2008 31 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

The BCWS is the Budgeted Cost of Work Scheduled. Quite literally, it represents the budgets of the activities that are planned or scheduled to be completed. The ACWP is the Actual Cost of Work Performed. Again, quite literally, it represents the actual cost charged against the activities that were completed. The BCWP is the Budgeted Cost of Work Performed. This is the traditional Earned Value that we speak of. It represents the planned or schedule cost of the activities that are completed. The distinction between the BCWS and the BCWP is that the former represents the budget of the activities that were planed to be completed and the latter represents the budget of the activities that actually were completed. These are the three major components of Earned Value. At any point in time, one has to have the planned work, the actual work and the cost of the actual work. This allows one to make the full analysis of the project progress and performance. Some of the other, related terms shown in Figure 4, include the Budget At Completion (BAC), the Estimate At Completion (EAC), the Schedule Variance (SV) and the Cost Variance (CV). /10] 4.6 PRIMARY MEASURES

EVM requires 3 dimensional measurements:

Planned Value

Earned Value

Actual Costs From the three primary measures it is possible to derive measures that can be used to accurately assess the status of the project and predict its future state.

Cost Variance (CV) — The numerical difference between the earned value (BCWP) and the actual cost (ACWP). CV = BCWP — ACWP. (Another way of thinking of this is the difference between the planned and actual costs of work completed.)

Schedule Variance (SV) - An indicator of how much a program is ahead of or behind schedule. SV = BCWP — BCWS. (Another way of thinking of this: earned value — planned budget, or the difference between the value of work accomplished for a given period and the value of the work planned). Schedule variance is presented well in chart format.

Cost Performance Index (CPI) — The cost efficiency factor representing the relationship between the actual cost expended and the earned value. CPI = BCWP/ACWP. A CPI 1 suggests a relatively efficient cost factor, while a CPI <1 may be cause for concern.

MICHAEL VERTENTEN NOVEMBER 2008 32 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

Schedule Performance Index (SPI) — The planned schedule efficiency factor representing the relationship between the earned value and the initial planned schedule. SPI = BCWP/BCWS. A SPI > 1 is good. SPI < 1 suggests actual work is falling behind the planned schedule.

Budget at Completion (BAC) — sum total of the time-phased budget. Synonymous with "Performance Measurement Baseline".

Estimate to Complete (ETC) — A calculated value, in Rands or hours, that represents the cost of work required to complete remaining project tasks. ETC = BAC — BCWP.

Estimate at Complete (EAC) — A calculated value, in Rands or hours, that represents the projected total final costs of work when completed. EAC = ACWP + ETC.

Budget Cost of Work Scheduled (BCWS) — the spending plan; the Rands (or hours) planned for the effort. The cumulative planned expenditures would equal the total Rands budgeted for the effort for the specified time period. With EVM, the spending plan serves as a performance baseline for making predictions about cost and schedule variance and estimates of completion.

Actual Cost of Work Performed (ACWP) — actual spending; the cumulative actual expenditures on the effort viewed at regular intervals within the project duration. Budgeted Cost of Work Performed (BCWP) — earned value, the measure of technical accomplishment; the cumulative budgeted value (Rands or hours) of work actually completed. It may be calculated as the sum of the values budgeted for the work packages actually completed, or calculated as the percent work complete multiplied by the planned cost of the project In looking at the list of important measures earned value (BCWP) is one of the three basic measures from which the other measures are derived. Without it, the other measures are not possible. Earned value credit should be binary, with 0 percent being given before task completion and 100 percent given when completion of each work unit is validated. Establishing specific measurable exit criteria for each task makes it easier to track task completion, and thus credit the earned value of the task to the project so that the earned value of the project at any given point in time is obtained by "simple math" rather than by subjective assessment. [12]

4.7 CONCLUSION

In Chapter 3 the concept of Project Management and Project Controls was discussed and how essential these disciplines are in controlling projects to finish on time and within budget. Earned value management (EVM) is an integrated part of Project Management and Project Control that enables a Contractor and their customer to monitor the progress of a project in terms of integrated cost, schedule, and technical performance measures. The Contractor/developer owns the process but the Acquirer/customer has full

(ICI-IA VERTENTEN NOVEMBER 2008 33 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN sourn AFRICA and timely visibility of the information contained within it. This represents a recent migration in focus from acquirers using EV for inspection and oversight to developers using EV for project management. Traditional project management practice tends to compare actual costs with planned expenditures, and confuses actual costs with actual progress. EVM provides a third reference point that is an objective view of the status of the effort, i.e., the value to the end goal of the work completed to date. [10] Tracking earned value is of little value if the estimating and analysis capability that it provides is not used to manage the project. Although originally required for reporting project status to the acquirer, in recent years there has been a migration of focus. EVM is now viewed as a project management technique, as well. Its usefulness is broader than simply reporting project status up the management chain. There are some important reasons to communicate the project status (represented in terms of earned value) to all stakeholders. It is important to note that earned value relies on the accuracy of initial estimates. However, as is the case with any software development, high accuracy planning is not possible in the early stages of any project. Software projects do not have a predictive lifecycle and this must be recognized during the planning and development processes. Earned value therefore should not be used as an absolute measure, particularly during the early stages of a project. However, through a process of re-estimation during the project lifecycle, greater accuracy of estimates for project completion will be possible and therefore earned value will yield more accurate results. The earned value project management concept as a part of the more formal C/SCSC or EVM has been demonstrated to be an effective technique in the management of major projects. Unfortunately, most of the experience with the concept has been restricted to those applications where the U.S. government has imposed the technique on major new systems acquisitions for which it retains the risk of cost growth. However, the best opportunities for earned-value employment may well lie in the management of thousands of smaller projects that are being directed by people who may well be unaware of earned value. We believe the concept should be considered any time the risk of cost growth resides with a project manager, any time a lump sum or fixed price contract is used, and on all in-house funded developmental projects where a firm commitment is made to management. It should be considered any time a project manager could benefit from receiving an early warning cost signal in time to alter the ultimate direction of a project. Software projects can especially benefit from the employment of a simple earned-value approach EVM is an excellent tool, but if it isn't utilized, or is used irregularly, then it does not benefit the project. In many companies financial personnel are responsible for implementing EVM. However, though EVM utilizes financial information, it is a project management tool. As the leader of the project, it is imperative

MICHAEL VERTENTEN NOVEMBER 2008 34 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA that the Project Manager understands how the data is calculated, where the numbers come from, and what events lead to the current state of the project. That way, the information can be interpreted correctly and actions can be taken to ensure project success. /11] Using the right tool for the right job is important. In EVM, this means using the correct Earned Value Methods for each task. Earned Value Method is a way of taking credit for the work done on a task. Different methods are better suited for different types of tasks; using the correct one will increase the accuracy of the project's status. Using incorrect methods will not only lead to inaccuracy, but can be seriously detrimental to the project. It may inaccurately give you more credit for work that was actually not completed and, by the time you realized the shortfall, it may be too late to take corrective action. On the other hand, by taking too little deserved credit you may end up spending needless resources to correct a problem that does not actually exist. Project status and Earned Value information is reported by tasks managers and Cost Account Managers (CAMs), and that is why it is important that the Project Manager maintain a safe environment in which they can report the true accomplishments. It is human nature to want to look one's best to a supervisor, so if the project culture makes it difficult to report the true state, especially when there is a problem, the tendency will be to delay reporting the bad news. This will only compound the problems and make it more difficult to make course corrections. In conclusion, to assure the success of EVM, you must see to it that the Project Manager not only has a firm knowledge and experience in EVM, but believes in EVM and uses it as one of his most valuable tools. The EVM team, including Tasks Managers and Cost Account Managers, should be trained in Earned Value Methodologies and their proper applications. Remembering that EVM is an excellent tool for tracking and communicating project status, Management should take the necessary steps to create a reporting environment that will nurture the open and honest reporting necessary to ensure any timely course corrections required to bring the project to completion on-time and within budget. [10]

MICHAEL VERTENTEN NOVEMBER 2008 35 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR coNsmucnON PROJECPS IN SOUTH AFRICA

CHAPTER 5: RESEARCH QUESTIONNAIRE

5.1 INTRODUCTION

As part of this survey the author devised and distributed a questionnaire to a limited and targeted demographic of Project Management practitioners.

The research methodology used is purposive sampling using a structured survey (refer Appendix A). In that the research is to test actual EVM usage with respect to project success, respondents must have had direct experience using EVM on one or more projects. Two specific groups were targeted because of their unique focus on EVM and high likelihood of having experience practitioners as members. The audience to which the questionnaire was targeted was members of the Project Management Institute South African Chapter and the Cost Engineering Association of South Africa. A total of 800 questionnaires' were sent out via e-mail to each member.

Survey questions were created by presenting affirmative declarations and asking respondents to select an answer that best reflects their level of agreement with the statements as it applies to their specific project. Each of these declarations were followed by an identical (7) point Likert-scale anchored on the far left with `Strongly Disagree' and on the far right with 'Strongly Agree". A 'Neutral point was included in the centre scale. The seven possible selections were designed to correspond to an interval level measurement scale (1-7) required for statistical analysis of continuous data.

Nita-IA EL VERTENTEN NOVEMBER 2008 36 THE USE OF EARNED VALUE.: AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTI I AFRICA

5.2 QUESTIONNAIRE SAMPLE

An example of the questionnaire sent out can be found under Annexure A

5.3 RESULTS

Unfortunately only a limited number of questionnaires were returned — 25 out of a total of 180 sent out, of the questionnaires returned, the following results were obtained.

ree ree

ree ree l

isag ree isag Ag tra Ag ree D ly D ly ly isag ly Ag ht Neu D ht ig ig Sl Sl Strong Strong crl o

) Is CA c I N) 0 All work scope was planned for the project to completion.

75%

25% All work scope was broken into finite pieces and assigned to either individuals or organizations to control.

75%

Project work scope, schedule and cost baselines were integrated into a single performance baseline plan against which 25% accomplishments were measured. Changes to baseline were controlled

so% so%

Actual costs incurred were used in measuring work accomplished

so% 25% 25% Accomplishments were objectively assessed at the work performance level

33% 33% 33% When variances from the plan occurred, impacts were forecasted and estimates at completions were prepared

50% 25% 25% EVM information from the project is used in the company's management processes

MICHAEL VERTENTEN NOVEMBER 2008 37 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

ree ree

ree ree

ee e r To. Ag Ag re Disag ' ly Disag ly

ly w isag ly z ht D ht ig Sl Strong Strong

Ag

I l Slig l N o, N 0 N e ii, e EVM's WORK BREAKDOWN STRUCTURE contributed to contract scope development

25% 25% 25% 25% EVM's WORK BREAKDOWN STRUCTURE contributed to contract risk assessment

50% 25% 25% EVM's WORK BREAKDOWN STRUCTURE contributed to the development of contract should-cost estimates

50% 25% 25% EVM's WORK BREAKDOWN STRUCTURE contributed to contract schedule planning.

75%

25% EVM's WORK BREAKDOWN STRUCTURE contributed to contract payment planning

50% 25% 25% EVM's WORK BREAKDOWN STRUCTURE contributed to evaluating bids and negotiating with bidders

50% 25% 25% EVM's WORK BREAKDOWN STRUCTURE contributed to awarding a fair contract.

50%

25% 25% EVM's INTEGRATED 'S' CURVE BASELINE utility contributed to monitoring contract work:

MICHAEL VERTENTEN NOVEMBER 2008 38 THE USE OF I7,ARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN sou-n-1 AFRICA

e

re ree

ree l ree Agree isag Ag

tra

Disag D ly

ly 6 ly ly ht ng t Neu Disag o h Slig lig Str S Strong

U. 0

cn 25% EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to controlling the contract schedule.

50%

25% 25% EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to controlling the contract scope:

50%

25% 25% EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to controlling the contract cost.

67%

33% EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to evaluating and processing change orders:

50%

25% 25% EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to evaluating and processing payment requests:

50% 50%

EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to evaluating and analyzing delays:

25% 25% 25% 25% EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to evaluating and analyzing claims:

MICHAEL VERTENTEN NOVEMBER 2008 39 Tim USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

ree ee

r ree

l

ee Ag r

tra Disag ree Ag

ly Disag ly t ly ly Agree h Neu Disag ht lig S Strong Slig Strong

EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to acceptance of completed work.

50% 25% 25% EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to contract close out.

50% 50%

EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to post-project audits.

50% 25% 25% The project satisfied schedule and budget constraints.

50% 50%

The project satisfied the functional requirements and technical specifications of the client organization.

75%

25% The project satisfied the desired business results of the client organization.

75%

The project contributed to the performing organizations future by either developing new 25% business opportunities; increasing core competencies and/or the realization of return on investment objectives.

5.4 DISCUSSION ON RESULTS

A majority of the respondents agreed that all scope was broken down into a Work breakdown Schedule (WBS) (50-75%) to enable them to properly use Earned Value A majority did not think that actual's had anything to do with Earned Value (<50%) On the question of whether the WBS had any benefit towards bids and evaluating contracts 50% did not agree with this

MICHAEL VERTENTEN NOVEMBER 2008 40 USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCI1ON PROJECTS IN soum AFRICA

Less than 25% did not agree that EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to evaluating and analyzing claims Surprisingly on 50% agreed that EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to controlling the contract cost Only 33% agreed that when variances from the plan occurred, impacts were forecasted and estimates at completions were prepared. Only 35% agreed that EVM information from the project is used in the company's management processes Only 50% agreed that EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to controlling the contract schedule. 5.5 CONCLUSION

In Chapters 4 the concept of Earned Value was discussed and how it can be used as a trend analysis tool to effectively control a project. In Chapter 3 the concept of Project Management and Project Controls was discussed and in Chapter 4 the link between Earned Value and Project control was discussed. In this chapter a questionnaire was circulated to see if the South African construction industry was in fact using the concept of earned value as a trend analysis tool to control projects. From the results obtained from the questionnaire it can be seen that many of the respondence did not fully understand the concept of Earned Value due to the fact they believe that Earned Value had very little to do with the schedule, that it was not necessary to be included in management reports and process and that it did not contribute to controlling contract costs. One of the vital things about Earned Value is it enables you to control costs and schedule to determine how a project is performing, a lot of the responance did not see that Earned Value is necessary for controlling project performance. Although through the survey one can see that the concept of Earned Value was understood by most of the respondance a majority felt it was not necessary to control performance of a project.

M1CI IAEL VERTENTEN NOVEMBER 2008 41 TI IU, USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR coNsTRucnoN PROJECTS IN SOUTH AFRICA

CHAPTER 6 : CONCLUSION

6.1 SUMMARY

The control systems required on construction projects fall into five categories of time, cost, quality, function and conflict. Indeed, although this is a novel definition of control systems for construction projects, the documentation found on most projects actually addresses all five control needs. Time control is documented in the programmes, cost in the bills or financial statements, quality in the specifications, function in the brief and conflict in the contracts and conditions of engagement. Clearly, then, it is not the actual control systems used in practice which are wrong, merely the established theories that surround them. Most of the data for using Earned Value is already in place on most construction projects. Only the performance efficiency factors and forecasting methods are typically not generated in construction work. But they certainly could be. Likely, many project managers may believe that they do not need to have their performance closely monitored, particularly when they are performing under a fixed-price or lump-sum arrangement. However, the risks of cost increases (called overruns) and potential project failures ultimately rest with the project's owner, and sometimes also with the surety companies underwriting construction performance bonds. Owners and sureties may well have different thoughts on the benefits of using Earned Value management to monitor construction project performance. Earned Value Management should have an important place in the management of any type of construction project. In contrast, the South Africa approach to construction industry development [4] has much more emphasis on the basic resources of materials, plant, finance, institutional infrastructure, and human resource education & training. At the same time there is much less regard paid to a culture of thinking the best and behaving the best, together with a learning culture. This again illustrates and reinforces the different emphasis, which developed countries, and developing countries have for the future of their respective industries. This contrast is by no means a black and white difference; rather it is various shades of grey.

6.2 CONCLUSION

In these inflationary times, the forecasting and identification of cost escalation are of paramount importance. Of equal importance is the planning of a project so that the planned completion dates can be achieved. Any delays and late changes can have drastic effects on the viability of a project. These effects are not only more noticeable, but also more difficult to predict in long-term projects (taking more than two years). For this reason, thorough conceptual design and planning are vital to a successful project. To make project control really effective, it must be properly conceived, professionally produced, and timorously executed. The results

MICHAEL VERTENTEN NOVEMBER 2008 42 II USE OF EARNED VALUE. AS TREND ANALYSIS TOOL FOR CONMUCDON PROJECTS IN SOUTH AFRICA achieved are then worth the effort required in terms of a project produced on time and within the budget. Based upon further discussion with various Project Managers and Project Controls Managers during the research conducted for this dissertation, the concept of Earned value is being used in some form or other in selected few companies within the South African Construction industry. While it has been recognized, its benefits are not being fully utilized. The benefit of the Earned Value concept contributing to the successful completion of a project is being acknowledged and more and more construction companies are slowly making Earned Value an intricate part of their Project Management system. During the author's research it was found that the Earned Value concept is still not been fully used and recognized within the South African Design Engineering companies, but that is not part of this dissertation and subject to further research.

6.3 RECOMMENDATION FOR FUTURE WORK.

While this dissertation covered the concept of Earned Value as a trend analysis within the South African construction the author found that the concept of Earned Value is not fully accepted and acknowledged within any other industry where Earned Value could be of use and help. The engineering design industry also fails to fully utilize the concept of Earned Value. The author feels that further research into the concept of Earned Value within other industries is worth researching as well as the benefits of Earned Value as a performance measuring tool.

NIICI -IAEL V ERTENTEN NOVEMBER 2008 43 Iii USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

REFERENCES

1 What is a Competitive Advantage in the Construction Industry? Authors: A. Ngowi, & P.D. Rwelamila The International Journal of Cost Estimation, Cost/Schedule Control, and Project Management (1999)

2 Appropriate or Default Project Procurement Systems? Authors: P.D. Rwelamila, & C. Meyer, The International Journal of Cost Estimation, Cost/Schedule Control and Project Management (1999)

3 Tracing the African Project Failure Syndrome: the Significance of 'Ubuntu' Authors: P.D. Rwelamila, A.D. Talukhaba, A.B. Ngowi Engineering, Construction and Architectural Management.(1999).

4 The State of the Construction Industry in South Africa. Author: A. Merrifield Council for Scientific and Industrial Research, Pretoria (1994)

5 Two Years after the "Miracle": Prospects for the South African Construction Industry. Author: A. Merrifield South African Institute of Building (1996). Report on a Study into the Longer-Term Future of the Civil Engineering Industry.

6 The Relationships: Labour and Equipment Costs, Employment, Output, Profits and Productivity in Civil Engineering Author: H. Langenhoven, Executive Director SAFCEC South African Federation of Civil Engineering Contractors 1998

7 The Changing Environment in the Construction Industry — Guidelines for Survival and Growth Author: C. Grim Dissertation presented at BER Building & Construction Conference, Rosebank, Johannesburg - Oct 2001

8 Causes of, and Solutions to Client Dissatisfaction in the South African Building Industry: The Clients Perspective. Authors: R.N. Nkado1, J.I.C. Mbachu 10th International Symposium on the Organization and Management of Construction, Cincinnati, USA, 24-26 September 2002.

9 Construction and the Environment — General Contractor (GC) Perceptions and Practices Author: J.J. Smallwood (Department of Construction Management, University of Port Elizabeth) CIB W107 1 st International Conference: Creating a sustainable construction industry in developing countries - 11 to 13 November 2000, Stellenbosch, South Africa

10 Earned Value Management Explained Author: Umesh Dwivedi, PMP Article published on Projectsmart.website — March 2008

MICHAEL VER1ENTEN NOVU,MBER 2008 44 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

11 Earned Value for the Masses a Practical Approach. Authors: Quentin W. Fleming, Fleming Management Consultancy, and Joel M. Koppelman, Primavera Systems, Inc. WhitePaper published 27 November 2006.

12 Earned Value, Clear and Simple Authors: Tammo T. Wilkens, Los Angeles County Metropolitan Transportation Authority April 1, 1999

13 Effective Control of Construction Projects Authors: W.P. Hughes, University of Reading, UK Dissertation presented at 7th Annual ARCOM conference, University of Bath Sept 1991.

14 Earned Value Management Mitigating the Risks Associated with Construction Projects Authors: Quentin W. Fleming, Fleming Management Consultancy, and Joel M. Koppelman, Article published in Project Management Institute monthly magazine : March-April 2002

15 Earned Value Management Mitigating the Risks Associated with Construction Projects Authors: Quentin W. Fleming, Fleming Management Consultancy, and Joel M. Koppelman, Article published in Program Manager magazine I Date: March 1, 2002

16 Using the Earned Value Cost Management Report to Evaluate the Contractor's estimate at Completion Authors: David S. Christensen, Ph.D. Published in Acquisition Review Quarterly 1999

17 Evolving Project Control Practices Authors: Scott R. Longworth CCC 2002 AACE International Transactions

18 Factors Constraining Successful Building Project Implementation in the South African Building Industry: Construction Project Managers' Perspectives Authors: R.N. Nkado, J.I.C. Mbachu Article appeared in the South African Association of Construction Project Managers (ACPM) journal Volume 26 - 2008

19 The Identification and Measurement of Performance Indicators for the South African Construction Industry Authors: S. van Huyssteen, L. van Heerden, P. Perkins, 0. Gyimah Article appeared in the South African Association of Construction Project Managers (ACPM) journal Volume 26 - 2008

20 The Impact on the Changing Construction Industry on Architectural & Engineering Design Services Authors: D. Kashiwagi, K.A. Johnson Article published in Building Research & Information, Volume 31, Issue February 2000

21 Key Factors in the Future Development of the Construction Industry Authors: P. Fox, M. Skitmore Article published in Building Research & Information, Volume 27, Issue 6 November 1999

22 Motivation as a Tool to Improve Productivity on the Construction Site Authors: Wellington Didibhuku Thwala, Lydia Nthabiseng Monese International Conference on Construction in the 21st Century, 2002

MICHAEL VERTENTEN NOVEMBER 2008 45 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCHON PROJECTS IN SOUTH AFRICA

23 Performance Improvement in South African Construction Author: J.J. Smallwood (Department of Construction Management, University of Port Elizabeth) March - Chartered Builder, 1992

24 Development of Construction Contractors Performance Measurement Framework Authors: M. Samson, N.M. Lema Construction Management and Economics, 2008

25 Project Control - an Overview Authors: R. J. Knott, and E. R. Davis Published in the June 1982 Journal of The South African Institute Of Mining And Metallurgy

26 Project Management: History and Evolution Author: Bharat Bista. Handbook of Strategy and Management, 2002

27 A Memetic Paradigm of Project Management Author: Stephen Jonathan Whitty International Journal of Project Management (2005)

28 Factors Constraining Successful Building Project Implementation in the South African Building Industry: Construction Project Managers' Perspectives Authors: R.N. Nkado, J.I.C. Mbachu Construction Management and Economics (1995)

29 The Contribution of Earned Value Management to Project Success on Contracted EffortsAuthor: Robert A. Marshall Published in the Journal of Contract Management - 2007

30 Construction Variations: A Scourge or A Necessity? Authors: J.K. Ssegawa, K.M. Mfolwe, B. Makuke, B. Kutua Journal of Engineering, Design and Technology (2007)

31 "If EVM is so Good...Why Isn't it used on all Projects?" Authors: Quentin W. Fleming and Joel M. Koppelman Primavera Systems, Inc. (Published by the Project Management Institute's College of Performance Management, "The Measurable News" Spring 2004)

32 Rethinking Construction and Innovation. London: Department of Trade and Industry. Authors: Fairclough, J. 2002.

33 Marketing Management: Analysis, Planning, Implementation and Controls. Authors: Kotler, P. (1997)

34 "The Speed and Style of the Broadgate Development".. Author: Luder, 0. (1986).

35 Organizations Struggle with Project Controls, Research from. PM Solutions Shows Author and survey conducted by: Megan Maguire Kelly from Center of Business Practices (www.cbponline.com)

MICHAEL VERTENTEN NOVEMBER 2008 46 THE USE OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECT'S IN soum AFRICA

36 Earned Value, Clear and Simple Authors: Tammo T. Wilkens, Los Angeles County Metropolitan Transportation Authority April 1, 1999

37 What is Earned Value Author: Duncan Haughey (www.projectsmart.co.uk) (2008)

38 Project management Book of Knowledge (PMBOK) Author: Project Management Institute United States of America (www.pmi.org) (Third edition 2006)

MICHAEL VERTENTEN NOVEMBER 2008 47 THE USE.: OF EARNED VALUE AS TREND ANALYSIS TOOL FOR CONSTRUCTION PROJECTS IN SOUTH AFRICA

APPENDIX A

QUESTIONNARE

MICHAEL VERTENTEN NOVEMBER 2008 48 Thank you for downloading this questionnaire and for taking the time and effort in completing it. Your input is critical to the success of this survey. The purpose of this survey is to record your direct eperience using Earned Value Management (EVM) on one or more eternal projects (performed by an organization outside of your own) under a formal contract arrangement. The survey will cover various attributes of EVM in relation to contract activities as well as the general success of your project(s). For the survey to be valid, all of your answers must relate to the same project or project(s).

Please carefully read each question and pick the answer that best fits your eperience and judgment. Don't forget to answer all questions. Answering all questions is important to the validity of the study.

If you need assistance or have questions while taking this survey, please contact: Michael Vertenten vertenterafnbisp.co.za

ABREVIATIONS

EVM = Earned Value Management EV = Earned Value SV = Schedule Variance CV = Cost Variance SPI = Schedule Performance Inde CPI = Cost Performance Inde EAC = Estimate At Completion

The following Information is Optional: Name and Surname: Company : Contact Details :

Construction Construction Construction Information Mining Government Other (Civil) (Mechanical) (Electical) - technology

1.What best describes the industry you work in: (Please State)

Project Construction Cost Project Engineer Consultant Other Manager Manager Engineer Controller

What best describes your position title:

How many projects are you typically responsible for at the same time?

Your years of project management eperience

Are you using the Earned Value Principle on your Projects and is it benefiting the project?

If you are not using Earned Value, what are the reasons for not using EV?

Instructions:

Reflecting on your direct eperience using Earned Value Management on a specific project under contract, please select the best answer.

Strongly Disagree Disagree Slightly Disagree Neutral Slightly Agree Agree Strongly Agree

All work scope was planned for the project to completion.

All work scope was broken into finite pieces and assigned to either individuals or organizations to control. Project work scope, schedule and cost baselines were integrated into a single performance baseline plan against which accomplishments were measured. Changes to baseline were controlled Actual costs incurred were used in measuring work accomplished

Accomplishments were objectively assessed at the work performance level

When variances from the plan occurred, impacts were forecasted and estimates at completions were prepared

based on performance to date and work to be performed

EVM information from the project is used in the company's management processes

EVM's WORK BREAKDOWN STRUCTURE contributed to contract scope development

EVivfs WORK BREAKDOWN STRUCTURE contributed to contract risk assessment

EVM's WORK BREAKDOWN STRUCTURE contributed to the development of contract should cost estimates

EVM's WORK BREAKDOWN STRUCTURE contributed to contract schedule planning.

EVM's WORK BREAKDOWN STRUCTURE contributed to contract payment planning

EVM's WORK BREAKDOWN STRUCTURE contributed to evaluating bids and negotiating With bidders

EVM's WORK BREAKDOWN STRUCTURE contributed to awarding a fair contract. Instructions:

Continuing to reflect on your eperlence with the same project as above, please select the answer that best describes your eperience applying EVM's Integrated baseline ("S - Curve") utility

Strongly Disagree Disagree Slightly Disagree Neutral Slightly Agree Agree Strongly Agret

21. EVM's INTEGRATED 'S' CURVE BASELINE utility contributed to monitoring contract work:

Instructions:

Continuing to reflect on your eperlence with the same project as above, please select the answer that best describes your eperlence applying EVM's performance metrics utility

Strongly Disagree Disagree Slightly Disagree Neutral Slightly Agree Agree Strongly Agree

EVMs performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to controlling the contract schedule. EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to controlling the contract scope: EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to controlling the contract cost. EVMs performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to evaluating and processing change orders: EVMs performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to evaluating and processing payment requests: EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to evaluating and analyzing delays: EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to evaluating and analyzing claims:

EVM's performance Indices (EV, SV, CV, SPI, CPI, EAC), contributed to acceptance of completed work.

EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to contract close out.

EVM's performance indices (EV, SV, CV, SPI, CPI, EAC), contributed to post-project audits.

Instructions;

Continuing to reflect on the same project as above, please select the answer that best describes your project.

Fled Price Cost Prue Other (Reese Sate)

What contract type best describes your specific eternal project when EVM was used:

Number .

How many separate contractors had a role in your project?

How long was your project initially scheduled to last? Other (Please PERT CPM Critical Chain GANTT None specify below) Please select each project management techniques/tool was used simultaneously with EVM on your project (select all that apply):

At what point in the project process was the decision made to implement EVM on your project: Inseption (Please indicate which phase of the Project)

Instructions*,

Continuing to reflect on the same project as above, please select the answer that best fits your eperlence on the project.

Strongly Disagree Disagree Slightly Disagree Neutral Slightly Agree Agree Strongly Agree

The project satisfied schedule and budget constraints.

The project satisfied the functional requirements and technical specifications of the client organization.

The project satisfied the desired business results of the client organization.

The project contributed to the performing organizations future by either developing new business opportunities; increasing core competencies and/or the realization of return on investment objectives.

Any comments you would like to make regarding Earned Value. mctioning system.

Thank you very much for taking the time to complete this Questionnaire about Earned Value Management, your time and effort Is much appreciated. IMOVE f.SOTY OF JOO-ARIRIESE ;UF G UNOVERSOTEDT VA JOD-04MIES URG AUCKLAND PARK KINGSWAY CAMPUS / KAMPUS POSBUS 524 BOX 524 AUCKLAND PARK 2006 Tel: 011 559-2165

0419 -10. 1 I

U N ] V 1E RS DI-Y ------, OF ------JOHAN, N ES R G

This item must be returned on or before the last date stamped. A renewal for a further period may be granted provided the book is not in demand. Fines are charged on overdue items.