Sage X3 Construction – Earned Value Management

Sage lets project managers manage risks in real-time.

There is an old saying in project management that the faster you recognize a risk the less it will cost, and the faster you recognize a benefit the more you can profit. Earned Value Management (EVM) was developed in the 1960s to allow construction companies to do just that, but the method has only just begun to gain momentum in the industry as the software to capture the necessary data has become more prevalent.

EVM helps project managers measure project performance. It is an ideal control system that is used to find variances in projects based on the comparison of work performed and work planned. “What EVM tries to provide is a quantified method of calculating progress in as close to real-time as possible,” {SAW} Software Mill Project Manager Abel Lineberger explains.

Despite being in existence for more than 60 years, the biggest problem construction companies have faced with implementing EVM has been capturing all the necessary data in a timely manner to quantify progress. “We have a time phased schedule of how we plan to spend our money and this has been true of construction well before the spreadsheet came about,” Lineberger says. “We have relied on the finance department to come back with actual costs of material and labor, and at some point, the finance department will get invoices and tell us how much we actually spent, which is usually some point after we have received or used the labor and materials.”

Two problems arise from this method. The first is the lag time between recognizing what was planned to be spent and how much was actually spent. “The longer the lag time is out there, the more dangerous it gets,” Lineberger notes. “You think you’re on budget until the finance department says you are 20 percent over budget because the actual costs are too high.”

The second problem is that most budgets are based on qualification rather than quantification. “I think we are relying on expert knowledge and that’s really a gut check,” Lineberger says. “Instead of that, what we want to look more towards is quantifying our actual performance. There are a lot of methods around how you count, including third-party inspectors. Whenever you submit a payment application and a bank is involved, for example, they send someone out to inspect and say you are along so far on the project, but even that is a qualification rather than quantification of progress.”

If EVM is a method of standardizing how progress is calculated on a project, it needs to know where a construction company planned progress to be today, what has actually been done up to today, how much it was expected to cost to get to today and how much it actually cost. “The faster we can get all data points into alignment the faster we can see exactly where we are,” Lineberger says.

Eliminating Delays in Actuals 

One of the two most important components of EVM is the actual cost, and the awareness of that cost is often delayed. “There is a lag between when construction plans to spend and when the actual costs come in,” Lineberger explains. “It was really the creation of the Economic Resource Planning system (ERP) that led to this faster recognition of actual cost and more accurate allocation of accurate cost. One of the key things that an integrated EVM system should do is integrate the same sources of data from the finance team and the construction team so that as soon as the data is available it’s properly quantified and dated.”

Integrating EVM with an ERP system like Sage Business Cloud Enterprise Management, which provides faster, more intuitive and tailored business management solutions than conventional ERP, will allow construction companies to capture data quickly for analysis. “They will know where the variances are and bring those to the attention of the appropriate parties so they are aware and can move the ball as necessary,” Lineberger says. “EVM is like a medical chart. It tells us where we should be against the baseline and then tells you mathematically how far we are off and by how much.”

EVM is an analysis of the data inputted into Enterprise Management Construction, which delivers a data-driven, unified experience built on the proven Enterprise Management platform. “You could spend hours looking at all the different data points, but EVM shows you what’s going on by hiding the noise and presenting it graphically,” Lineberger explains. “It takes all that data, all the different actual costs and planned budgets and time points and pulls it together so you can say, ‘OK, I see where we are going wrong and this is where we need to focus our attention.’”

Enterprise Management Construction offers core capabilities for complete construction lifecycle management including: project management, contract and subcontract management, project financial and cash flow management, project document management, timesheet support and project visualization and analytics. “Because we have an integrated project system, each transaction related to the project is automatically recorded in the EVM calculations with no manual activity required,” Wiener says. “With all that information, there are hundreds of thousands of transactions and events that are well beyond the capabilities of humans to manage in real-time.”

Without the integration of EVM with ERP, construction and the finance teams are only getting together every two weeks or so to do these calculations. By the time they realize the variances, the barn is already burnt, so to speak. “The faster you smell the smoke the faster you can address the problem, but if you’re only sniffing for smoke every two weeks, the barn will already be burnt to the ground before you realize it,” {SAW} Software Mill CEO Chris Wiener says.

EVM is already embedded in Enterprise Management Construction and performs in near real-time for every project. “Instead of every two weeks when you have some guy in the corner figuring out calculations, the system just does it and you can look at it daily or hourly to see how you are tracking against your plan,” Wiener adds. “It’s about bringing the project manager’s attention to where the variances are happening that day.”

The Benefits

EVM is agnostic to projects. “It doesn’t care what type of project you are doing or how you structure your work,” Wiener says. “It’s taking what you structured and applying a method of evaluating it, eliminating that 30-, 60- or 90-day window of becoming aware of something good or bad. We are talking about being aware of the job site within hours of the activity taking place. That transforms projects.”

EVM is becoming the standard among government agencies as the way to quantify progress moving forward across all projects. “There’s a reason; it’s more efficient and reliable in determining where you are in the build,” Lineberger says. “The value is that EVM is very difficult to fudge and provides a highly transparent calculation of what’s really going on in the project. Because it’s a statistical analysis it is becoming widely accepted, trustworthy and comparable project to project.”

In addition, EVM applies a discipline to the work and understand the work at a more granular level. “Companies that aspire to become bigger and better will have the capability to achieve that goal if they do their analysis this way because at the end of the day, the tighter you run projects and bids, the more frequently you will win bids and it spills over into the whole process,” Wiener says. “The better you succeed in your working execution of the project the better you can be in the bidding of the project and therefore, you are likely to win the project.”

EVM looks for repeatability of effort to drive cost savings or risk mitigation. “If I’m installing 3,000 fire alarm sounders throughout a hospital and recognize after the first 10 that I could save 20 minutes per iteration if we all did it this way, that’s 20 minutes of time saved for each of the remaining 2,990 activities,” Lineberger explains. “Does this apply to homebuilders? No. Commercial construction? Absolutely. We have a client working with oil and gas facilities building a refinery. Think about how many welds take place. If by the 10th weld, or even the 100th weld, you realize you’re spending 10 percent more time than you planned and you have 9,990 of them to go, being aware of this gives you the opportunity to mitigate that expense through work process re-engineering, value engineering, or any of a dozen other methods – but you have to know about the problem first.”

Leveraging the Power of ERP and EVM

Recognizing the power of the Sage Enterprise Management, Dynamic Cloud and Al Rushaid Construction Company (ARCC) signed a software agreement in February to deploy the software. ARCC is a subsidiary of the Al Rushaid Group and is a leading contracting company in Saudi Arabia with more than 7,000 employees servicing large corporations such as Saudi Aramco, SABIC, SAMREF, SASREF, SATORP, Sadara and Petrrabigh.

“It is vital we employ the latest technological solutions to streamline our operations and improve efficiency,” ARCC General Manager Simon Elmer D. San Miguel says. “We also wanted to choose a reliable digital solutions partner with tools that can assist in our growth as well as give us the right platform to integrate to advanced technologies.”

Sage Enterprise Management’s intuitive and easy to manage design will enable ARCC’s processes and functions to be optimized and improved further to maximize productivity and efficiency while delivering real-time insights into operations. “Enterprise Management Construction increases one’s ability to execute through the collection, aggregation, analysis, reporting, and managing of the activities associated with the construction process to streamline the execution, improve efficiency, support the expansion of capital leverage positions, thereby allowing companies to expand their operation while reducing the risk exposure,” Wiener says.

A Sage Platinum Partner, Dynamic Cloud acts as an enabler for enterprises in digital transformation and Industrial Revolution (IR) 4.0 technologies. With robust local market presence, combined with strong insights and focus on Business Management Solutions, Internet of Things, Digital Twin and Cloud Computing, Dynamic Cloud aspires to be at the forefront offering bespoke digital solutions for enterprise. “At Dynamic Cloud, we are proud to serve and support ARCC and Al Rushaid Group on this project,” President Ali Al Qaraawi says. “The incorporation of the Sage system will undoubtedly eliminate any complexities, help automate back-office functions and further optimize business processes.”

For additional information on application of Earned Value Management best practices, review the material published by the National Defense Institute and ANSI under standard NDIA EIA-748-D and other international standards such as AS 4817-2006 from Australia, and the ISO 21508:2018 Earned value management in project and program management standard for the UK/EU market.

In future articles, {SAW} Software Mill will discuss the practical application of EVM through the decomposition of BOQ and BOM elements into planning and work packages, and the benefits of a fully scheduled Bill of Quantities for both planning and control purposes.