Earned Value for Construction Project Management Performance Improvement: History
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Contributor:
Esmaeil Nejatyan
,
Hadi Sarvari
,
Seyed Abbas Hosseini
,
Hassan Javanshir

Proper planning and management of construction projects have long been regarded as a necessity. The ability to make sound decisions and solve problems using appropriate performance reports related to the project implementation process are the two most key factors in controlling the performance of construction project management. It is important to identify and examine the influential factors on the performance improvement of construction project management with the value engineering approach based on earned value analysis for the successful evaluation of project performance.

  • earned value
  • construction project management

1. Introduction

The project beneficiaries are the people and organizations involved in the project or factors that are somehow influenced by the project’s activities and have ownership, right, or interest in the project or can claim in this regard [1]. Project implementation success requires identifying the beneficiaries and their demands in the project life cycle. The most fundamental mission of project management in determining how project management works is to establish commitment and responsibility toward the schedule, preventing project delays and related costs [2]. Project division into smaller components and finally activities facilitate its management and control, ultimately preventing project delays but increasing the total cost [3]. In the project management literature, quality, cost, and time are the main factors of successful project performance [4]. Based on the Project Management Body of Knowledge (PMBOK), the project management process includes initiating, planning, executing, monitoring and controlling, and closing, and scope management includes scope, quality, cost, and time objectives [5]. These processes interact, and the successful implementation of each project depends on their balance, i.e., cost management (reasons for increased costs), time management (extending construction time), and quality and resource management (maximum use of project resources) [6]. Hence, it is necessary to devise an effective solution. In the meantime, value engineering is one of the effective tools used”to r’duce costs and improve project performance [7][8]. Due to the implementation complexities in most construction projects, value engineering is an effective method and an efficient economic technique used In cost, time, and quality management [9]. This method eliminates or modifies items that cause unnecessary costs without adversely affecting the basic functions of the plan [10]. The actual costs and time of the activities should be regularly monitored and controlled to achieve the planned goals of the project time, cost, and quality [11]. Hence, the causes of deviation from the predicted values should be identified to control management performance. Mechanisms must be applied to ensure their performance to achieve the project goals and deal with existing limitations. Regarding project objectives, including cost-effectiveness and timeliness, it is necessary to identify and evaluate the discrepancy between the anticipated and actual costs spent and the planned and actual time performed in the predefined periods. Hence, the effects of schedule variance on the whole project are clearly defined. A standard, common and efficient method used to analyze and measure the project’s technical performance is the earned value analysis, which shows the need for possible corrective measures through the analysis of the discrepancies and provision of initial indications of the project performance [12]. For example, putting large projects into operation a few months ahead of schedule will have a decisive effect on project marketing and profitability [6].
Building materials and consumables are considered non-renewable resources in construction projects, which may become more expensive if construction time is delayed. Therefore, a much higher cost than the planned cost must be spent in the construction process of the project due to the inflation rate. Thus, the increase in the inflation rate and high costs of consumption resources leads to the imposition of unforeseen losses to the project [6]. Labor resources, including staff and machinery in construction projects, are considered renewable resources in the project, the costs of which will increase if the construction time is delayed, probably leading to the lack of economic justification for the project [6]. Because engineering projects need money for investment, it is essential to correctly reflect the time value of the money spent when evaluating these projects [13]. Meanwhile, money can be earned through investment in a certain period with a specified interest rate. In other words, money should be turned into utility as soon as possible because as time passes, the amount of money is added due to the interest, which indicates that money makes money [14].
According to engineering economics knowledge, considering the time value of money factor, capital must be charged interest if the project is stopped or delayed because this capital could be spent in another place where it would be guaranteed with an interest rate as a percentage [15].
Thus, considering the initial capital of the project, provided through fundraising or a loan with an annual interest rate, an amount must be added to the initial capital as an additional interest cost for each year the completion of the project is delayed. In addition, a cost should be imposed as a loss to the project due to the time value of money, according to the minimum acceptable attractive rate. It may be assumed that as the construction project is prolonged and its completion is delayed, the final product will become more expensive, adding to the economic value of the project, although this issue does not conflict with the timely completion of the project. The mean delay time in projects is beyond average in developing countries such as Iran, increasing costs considerably. Because the cost items are latent and no cash is paid for them, they may be invisible to the managers, who may not even pay attention to such items. Thus, cost monitoring is required when project management techniques are implemented to improve project management performance [6].
Before starting the project management processes for a construction project, the economic feasibility of the project should be checked concerning the predicted costs and revenues using economic and engineering evaluation techniques such as value engineering. When the project is economically confirmed, it is recommended to plan and control the process of its implementation. Thus, any delay in the project will change the projected costs according to the above factors. Therefore, when a project is delayed, its economic justification should be re-analyzed. In such conditions, its attractive rate may be lower than the minimum acceptable attractive rate, indicating that the project is no longer economically justified [6].
According to the abovementioned, it is important to identify and examine the influential factors on the performance improvement of construction project management with the value engineering approach based on earned value analysis for the successful evaluation of project performance.

2. Factors Influencing Construction Project Management Performance Improvement through Earned Value-Based Value Engineering Strategy

There are many studies on project management and its performance, value engineering, and earned value, highlighting great diversity in the field of value engineering research, despite the obvious difference in the number of methodological steps and the process of solving the value problem. For example, Farati and Nazimi [16] identified and prioritized value engineering factors in road construction projects using the fuzzy Delphi technique. Based on their findings, the factors of compatibility with existing machines, information acquisition, and work experience were the most important engineering factors of the value of road construction projects. In addition, the speed of construction order completion ranked as the least important factor.
Construction is an area of study in which adequately making decisions can mean the difference between success and failure. Moreover, most of the activities belonging to this sector involve considering several conflicting aspects, which hinder their management as a whole. Multi-criteria decision-making analysis arose to model complex problems like these [17]. In another study, Karunasena [18] examined the concept of value planning and its applications, indicating more importance in using the main axes of value methodology considering risk categories and strategic planning when determining the main frameworks and image of the plan compared with other methodological approaches to value. The use of value methodology as creative and systematic teamwork contributed to the optimal use of resources, the development of human resources, and the transformation of population growth from a threat to an opportunity. Success in value engineering and reaching a suitable output requires attention to many points, along with the use of various techniques and tools, turning the value engineering process into a complex process. Thus, there are still many fields of study more than a few decades after the invention and application of value engineering and the progress made [19]. The review of research on earned value management shows that the factors presented in the earned value method are Insufficient and necessitate the design of more effective factors for project planning and control. As a result, researchers have provided new factors to complete this method by examining the factors of the earned value method [20]. For example, Lu [21] introduced a project reliability control model based on quality, cost, process, and safety criteria. In addition, Nejatiyan and Aminzade [22] introduced a model by adding factors of financial and time value, as well as the financial and time status of the project.
Moreover, other similar studies (e.g., [23][24][25]) presented models that made it possible to control the cost and time of the project using statistical analyses. Considering the increasing use of computers and the high speed of computer programs, researchers have also sought to design software to calculate the factors of the earned value method, implement the earned value method in the best way possible, or implement the earned value method in a group of projects of an organization. Some articles have also focused on how to calculate the earned value in existing project management software such as Primavera and Microsoft Project. Nejatian and Aminzadeh [22] presented a new model for the earned value management system, which was implemented in MATLAB software to calculate and report the discrepancies of time and cost compared to the predetermined plan with negligible units. Similarly, Ghanem and Abdelrazig [26] presented a computer-based program for calculating the resulting value method in construction projects. The earned value technique applies to all ongoing projects, regardless of their nature (for instance, some projects may be short-term or long-term, whereas others may have extremely high costs). As a result, some factors of the earned value method are more important for some projects. Project progress reports, which are the main basis for earned value calculations, are often presented in an approximate form, and the work progress information has an uncertain nature in most projects; however, all earned value analysis models presented so far have considered project information definitive. Besides, many value engineering studies in construction projects use verbal and imprecise judgments, necessitating the use of multi-factor decision-making methods with a fuzzy logic approach instead of the usual methods.
As basic principles in engineering economics, the time value of money (the value of money depends on time and changes over time), equivalence (the value of money decreases over time), interest and its rate (the cost of using capital), minimum attractive rate of return (investment value), and the rate of return on investment (the cost of late productivity or lost profit) should be investigated [27][28]. A project is economical if the rate of return on investment is higher than the minimum attractive rate (ROR > MARR) [29][30].
According to the above discussion, the influential components of performance management of construction projects from the viewpoint of value engineering based on earned value analysis can be divided into four main groups, including project management, value engineering, earned value management, and engineering economics.
  • Management is the act of balancing between different firm activities, i.e., reducing or increasing activities, simultaneously eliminating unnecessary activities and establishing regular ones, and doing more work in new fields with fewer resources [31]. Project management is the process of planning, scheduling, and controlling project activities to achieve the time, cost, and performance (qualitative) goals of the project within the defined scope of work and the efficient and effective use of resources [32].
    Cost management is a process to ensure that the project is completed within the expected cost and includes resource planning, cost estimation, budgeting and budget allocation, cash flow, and cost management and control [33][34]. Project cost management includes the processes necessary to ensure that the project team completes the work and activities in a project within its approved budget. Project managers must ensure that their project is well-defined and has adequate time and cost estimates along with a realistic approved budget. One of the duties and skills of the project manager is to keep the project stakeholders satisfied while constantly trying to reduce and control costs. Project cost management covers processes related to planning, estimation, budgeting, financial provision, capital provision, and cost management and control, leading to project completion with approved budgeting [35].
    Time management is a process to ensure that the project is completed within the expected time frame and includes preparation of a list of activities, duration estimation, schedule preparation, and control. Project time management includes the necessary processes to complete the project on time [36]. The exact time of project completion is estimated considering the time performance index, the planned and the achieved duration as the main Input variables, and the predicted and spent time as the output variable [37].
    Scope management of the project comprises the processes necessary to ensure that the work required and only the work necessary for the successful completion of the project are included. Scope management is mainly related to determining and controlling what is included in the project [38].
  • Value engineering represents a creative attitude to optimize the life cycle, save time, increase profits, improve the quality of problem-solving, and ensure optimal use of resources [39].
  • Earned value results from this idea that every deliverable item of a project (value) has a planned cost that is completed and realized with that value, known as “earned value” that is produced by the project [40]. Earned value management systems (EVMS) are practical, comprehensive, and reliable management systems that combine cost, time, and technical performance, making it possible to predict project costs and planning duration by calculating cost and schedule variance. The earned value management method shows the need for potential corrective measures by providing initial indications of project performance [41].
    EVMS is “an organization’s management system for project and program management that integrates a defined set of associated work scopes, schedules, and budgets for effective planning, performance, and management control; it integrates these functions with other business systems such as accounting and human resources among others”, as defined by Aramali and colleagues [42].
    The earned value is illustrated under three main headings: project integration management, project cost management, and project time management [43]. Earned value management in its various forms is a commonly used method of performance measurement, integrating the measurements of project schedule, cost, and scope to enable the project management team to evaluate and measure the progress and performance of the project. Earned value measurement (EVM) is a project management technique that requires the formation of an integrated baseline against which performance can be measured throughout the project. The principles of EVM can be used for all projects and industries [44].
    A change proposal with a value engineering approach (change proposal) is presented by the contractor during the contract period to reduce the costs of implementation, operation, and maintenance and improve efficiency and other interests of the employer while simultaneously conducting the work with a better quality or according to the agreement. Employers will pay a part of the savings to the contractor if the change proposal is accepted [45].
  • Engineering economics is a set of mathematical techniques for economic evaluation and comparison of projects. In simpler terms, engineering economics is a decision-making tool to choose the most economical project [46]. The basic concepts and main symbols in the economic evaluation of projects are explained considering the time value of money. The basic concepts include the time value of money (the value of money depends on time and changes over time), equivalence (the value of money decreases over time), interest and its rate (the cost of using capital), minimum attractive rate of return (investment value), and the rate of return on investment (the cost of late productivity or lost profit) which should be investigated. A project is economical if the rate of return on investment is higher than the minimum attractive rate (ROR > MARR) [29][30].
According to a comprehensive review of the research literature, the identified influential factors on the improvement of performance management in construction projects with a value engineering approach based on the earned value analysis are shown in Table 1.
Table 1. Influential factors on construction projects performance management improvement through earned value-based value engineering strategy.
Project Management Performance Engineering Economics
Cost
Time
Quality
Cost Goal
Time Goal
Quality Goal
Scope Goal		 [5] Time Value of Money
Equivalence
Interest
The Minimum Attractive Rate of Return (MARR)
Interest Rate
The Rate of Return (ROR)
The attractive Rate of Return (ARR)		 [47][48][49][50][51][52]
Value Engineering Approach Earned Value Management
Worth
Value
Use Value
Esteem Value
Exchange Value
Cost Value
Cost
Main Function
Secondary Function		 Unnecessary Function
Methodical Function
Time
Value Index
Cost Objective
The Purpose of Operation
Value Goal		 [9][53] Planned Value
Actual Cost
Earned Value
Cost Variance Percentage
Cost Performance Index
Schedule Variance Percentage
Schedule Performance Index
Schedule %Complete
Performance %Complete		 [33][54][55][56]

This entry is adapted from the peer-reviewed paper 10.3390/buildings13081964

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