Technical Note

Implementation of Earned Value Management

in Unit-Price Payment Contracts
Miguel Picornell 1; Eugenio Pellicer, M.ASCE 2; Cristina Torres-Machí 3; and Monty Sutrisna 4

Abstract: The earned value management (EVM) method is internationally considered a standard tool in the project management field,
enabling professionals to plan and control cost and schedule in an integrated manner. However, evidence indicates that EVM is not typically
implemented by contractors when the payment agreement is based on unit-prices. In this payment approach, the owner pays the quantities
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actually executed according to the preagreed rate established in the contract for each unit or task; the income received by the contractor from
the owner (generally named production) is neither proportional to costs nor fixed a priori, as in cost-reimbursable and lump sum contracts,
respectively. Therefore, contractors have to control not only cost but also production. The current formulation of EVM does not allow
controlling production; an additional baseline is needed. In response, this paper presents a proposal for adapting EVM to contractors when
using the unit-prices payment agreement. Using a case study to illustrate, an additional baseline to account for production and profitability, as
well as new indicators, is applied to allow contractors using EVM with this payment approach; this is the contribution of this paper to the body
of knowledge. The proposed EVM formulation provides information not only in terms of cost (as in the traditional EVM approach) but also in
terms of production. DOI: 10.1061/(ASCE)ME.1943-5479.0000500. © 2016 American Society of Civil Engineers.
Author keywords: Contractor; Control; Cost; Earned value; Production; Unit-price.

Introduction tor may not look at cost control as an essential part of management
of the project.
Contract Payment Approaches Lump-sum or fixed-price approaches are those in which the
contractor is paid a preset price by the owner in spite of the actual
In any contract, the party (owner or contractor) taking more risks expenses incurred (PMI 2013). Here, the party that has more at
will be understandably the one more interested in the best ways of stake is the contractor, who will likely be the one more interested
planning and controlling the project; these risks depend highly on in planning and controlling the project (Fleming and Koppelman
the contractual payment approach (Fleming and Koppelman 1997, 2002; Christensen-Day 2010; Hanna 2012). The total price of
2010; Christensen-Day 2010). The most common contract payment the project is fixed and it will not vary from the contractual budget
approaches are cost-reimbursable, lump-sum, and unit-price (Ibbs (unless the contract is modified). Therefore, the contractor will be
et al. 2003; PMI 2013). Cost-reimbursement requires that a contrac- interested in planning the costs as accurately as possible and con-
tor be paid by the owner for all legitimate actual costs incurred plus trolling the deviation of planned costs versus actual costs as much
an additional fee (PMI 2013). In this case, the party who takes more as possible. Any additional cost overrun decreases the profitability
risks is the owner. All actual costs incurred by the contractor are of the contractor because the contractual price (lump sum) is fixed.
paid by the owner. Therefore, the owner needs to control actual The profit is computed easily by the contractor as fixed price minus
costs regarding its planned cost. For the contractor, the profit is actual costs.
going to be the fee, or part of this fee if the overhead is also in- Finally, unit-price is a contract payment agreement where the
cluded in it; therefore, this profit is either proportional to the cost owner pays the contractor periodically according to preset (contrac-
or fixed (or any combination of both), but it is always easy to com- tual) unit rates that are applied to the actual measured quantities. In
pute by the contractor. With this open-book approach, the contrac- addition to the estimated cost of the product/service, these unit rates
include overhead and profit. This is a hybrid payment approach that
encompasses features of lump-sum and cost-reimbursable ap-
1 proaches (PMI 2013). In the unit-price approach, the risk is more
Program Manager, Nommon Solutions and Technologies S.L.,
C/ Cañas 8, 28043 Madrid, Spain. E-mail: [email protected] balanced between both parties; the quantities may vary during de-
2
Associate Professor, School of Civil Engineering, Universitat velopment of the contract depending on the actual work (PMI
Politècnica de València, Camino de Vera s/n, 46022 Valencia, Spain 2013), but the unit price rates are fixed from the start. In this type
(corresponding author). E-mail: [email protected] of contract, both parties bear some risks; therefore, both contractor
3
Assistant Professor, School of Civil Engineering, Universitat and owner can benefit from applying planning and control proce-
Politècnica de València, Camino de Vera s/n, 46022 Valencia, Spain. dures (Valderrama and Guadalupe 2010). From the point of view of
E-mail: [email protected] the owner, the contractual budget is the one bid by the contractor
4
Associate Professor and Head of Department, Dept. of Construction and awarded by the owner, distributed in periodic payments
Management, Curtin Univ., Kent St., Bentley, WA 6102, Australia. E-mail:
throughout the life of the project. However, this budget is not a
[email protected]
Note. This manuscript was submitted on March 17, 2016; approved on
constant figure, as in the fixed-price agreement, but can vary de-
September 15, 2016; published online on November 18, 2016. Discussion pending on measurement of actual quantities (Missbauer and
period open until April 18, 2017; separate discussions must be submitted Hauber 2006); for the owner, the difference between planned cost
for individual papers. This technical note is part of the Journal of Manage- and actual payment to the contractor will provide the deviation
ment in Engineering, © ASCE, ISSN 0742-597X. in costs.

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 From the point of view of the contractor, two concepts have to can be effectively implemented by contractors in unit-price con-
be considered. First, the contractor needs to control actual costs tracts? After introducing the basics of EVM in the second section,
against planned costs, as in lump-sum contracts. Second, the con- the third section of the paper aims to provide an answer to this
tractor needs to forecast the payment or income received from the question by proposing some additional indicators regarding pro-
owner due to the execution of tasks according to contract terms; this duction to enhance the current EVM formulation. To follow up,
is generally acknowledged as “production” (Missbauer and Hauber a case study highlights the differences between this proposal
2006). Both cost control and production control are different con- and the traditional approach and demonstrates EVM implementa-
cepts in unit-price contracts from the point of view of the contractor tion. Finally, conclusions are drawn highlighting the potential
because the owner pays the quantities actually executed (if they advantages of the proposal and acknowledging the limitation of
conform to specifications and plans) according to the preagreed rate this research.
(established in the contract for each unit or task). The ratio between
preset (contractual) rate and actual cost can vary for each unit or
task, as well as the actual quantities; therefore, an overall ratio for EVM Indicators
the entire project cannot be computed (as in cost-reimbursement
approaches) until completion of the project. The income received
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EVM defines three main indicators to evaluate project performance

by the contractor from the owner (production) is thus neither pro- (PMI 2013; Kim 2015; Chen 2014): planned value (PV), actual
portional to costs nor fixed a priori, as in cost-reimbursable and cost (AC), and earned value (EV). The PV is the authorized budget
lump-sum contracts, respectively. planned for accomplishing an activity, which is determined during
the planning phase of the project; cumulative PV at the scheduled
Earned Value Management end represents the budget at completion (BAC). The AC is the total
cost actually incurred and recorded in accomplishing an activity;
Earned value management (EVM henceforth), long used as a plan- it is measured during work execution. These two indicators (PV
ning and control tool (Fleming and Koppelman 1997; PMI 2013), is and AC) are typically considered in traditional cost management
considered one of the most appropriate methodologies to control (Fleming and Koppelman 1997, 2010; PMI 2013). To take into ac-
project cost and time while providing early warning signals of count the amount of work accomplished, EVM introduces the EV
potential problems, leading to effective project management indicator, which measures work performed during execution ex-
(McConnell 1985; Fleming and Koppelman 2010; Ponz-Tienda pressed in terms of the approved budget for that work (Fleming
et al. 2012; Chen 2014). and Koppelman 1997, 2010; PMI 2013; Chen 2014). The relation-
Depending on the payment agreement between the owner of the ship between EV and traditional PV and AC allows for both cost
project and the contractor, not only the manner in which EVM is control and time control using a set of integrated metrics (Anbari
applied but also the parties who use it can significantly vary. EVM 2003; Fleming and Koppelman 2010; PMI 2013). Nevertheless,
was first designed for, and applied in, cost-reimbursable payment EVM schedule indicators use monetary values as the proxy of time,
approaches (Fleming and Koppelman 1997; Anbari 2003); public
and therefore they are not perceived by practitioners to be as reli-
agencies also recommended its use for this type of contract (DoD
able as the cost indicators (Pajares and López-Paredes 2011; de
2003; Kwak and Anbari 2012; NASA 2013; DoD 2015). Further
Marco and Narbaev 2013; Kim 2015); because of the limitations
research demonstrated its usefulness in lump-sum contracts also
of EVM schedule indicators, which are not considered in the last
(Fleming and Koppelman 2002; Christensen-Day 2010; Hanna
version of the Project Management Body of Knowledge (PMBOK)
2012). For cost-reimbursable and lump-sum approaches, EVM for-
either (PMI 2013), this research is focused only on cost-related
mulation is straightforward (Fleming and Koppelman 2002, 2010).
However, formulation and application of EVM in unit-prices indicators, as listed in Table 1.
contracts is basically overlooked both by the scientific literature Regarding the implementation of cost-reimbursable contracts,
(Fleming and Koppelman 1997, 2002, 2010) and by official pro- EVM is very straightforward: PV is defined as the planned costs
cedures (DoD 2003; NASA 2013). Kim and Ballard (2010) pointed prepared and approved by the owner before the contract commen-
out that EVM is not properly adapted to the variability and uncer- ces; AC is the actual cost incurred by the contractor; and EV is the
tainty of some projects, such as those in construction. De Marco expected cost according to the work performed. In lump-sum con-
and Narbaev (2013) recognized the difficulties of applying EVM tracts, PV is defined as planned costs forecasted by the contractor at
to unit-price approaches without proposing any specific solutions. the beginning of the project; providing that the final actual cost
Xu (2009) and Valderrama and Guadalupe (2010) presented partial (AC) is lower than the fixed price, the contractor will make a profit.
attempts to apply EVM to unit-prices contracts using the standard For cost-reimbursable and lump-sum contracts, the three EVM
formulation; however, they failed to consider the contractor’s need indicators and the metrics obtained from them work perfectly well
to control production independently from costs (Missbauer and for the party who bears more risk, and they have been thoroughly
Hauber 2006). This scarcity of contributions highlight the room analyzed in the literature previously cited. Finally, for unit-price
for research in this topic, considering that unit-price approaches contracts, the cost control dimension can be computed as in
are widely used in public and private procurement all over the lump-sum contracts; however, there is no way to control production
world (Ewerhart and Fieseler 2003; Oviedo-Haito et al. 2014) and without introducing an additional dimension and indicators in the
in different industries, including construction (Kim and Ballard formulation, as detailed in the next section.
2010; Kim et al. 2016), defense (Fleming and Koppelman 2010),
design (Chang 2001), publishing (Ewerhart and Fieseler 2003), and
timber (Athey and Levin 2001), among many others. Table 1. Calculations of Variances, Performance, and Forecasting Indices
Indices Calculation
Research Question Cost variance (CV) CV ¼ EV − AC
Given this knowledge gap, the research question is stated as fol- Cost performance index (CPI) CPI ¼ EV=AC
Cost estimation at completion (EAC) EAC ¼ AC þ ðBAC − EVÞ=CPI
lows: How can the current EVM formulation be enhanced so it

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 Table 2. Proposed EVM Indicators for Contractor Cost Management in these new indicators with the standard EVM indicators, additional
Unit-Price Approaches information related to contractor profitability can be generated.
Type Indicator Description Thus, three new indicators are proposed: PB (planned profitabil-
P ity), AB (actual profitability), and PPI (production performance
Planning indicators PV ¼ P pq × up Planned value
PP ¼ pq × pc Planned production indicator). PB provides the planned economic benefit as the differ-
PB ¼PPV–PP Planned profitability ence between PV and PP. AB is the economic benefit calculated
Main indicators EV ¼ P aq × up Earned value as the difference between AP and AC. Finally, PPI is calculated as
AC ¼ P aq × ac Actual cost AC divided by AP. Regarding the standard EVM variance and
AP ¼ aq × pc Actual production performance indicators, those related to cost (i.e., CV and CPI)
Variation indicators CV ¼ EV–AC Cost variance are consider appropriate. Table 2 summarizes all of the proposed
AB ¼ AP–AC Actual profitability indicators.
Performance indicators CPI ¼ EV=AC Cost performance
PPI ¼ AP=AC Production performance
Note: ac = actual cost; aq = actual quantity of executed units; pc = Case Study
contractor’s planned rate; pq = planned quantity of units to execute;
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up = agreed unit rate.

Definition and Scenarios
A case study is used to analyze the capability of the proposed EVM
Proposed EVM for Contractors approach. It simplifies a real project involving the construction
in Unit-Price Approaches of a concrete retaining wall. Fig. 1 shows the work units with their
corresponding unit price and quantity; it additionally provides in-
Some modifications in EVM formulation are necessary in order to formation about the Gantt diagram and the scheduled quantities to
meet the contractor’s requirements and improve communication be executed each month. From the contractor’s point of view and
between contractor and owner. The proposal presented here aims considering the formulation proposed in Table 2, the planned pro-
to keep EVM formulation as close as possible to standard EVM, duction at completion (PPAC) is €1,117,100.
but adds new indicators that respond to the contractor’s needs. As Scenario simulations are often used in project management re-
stated previously, the classical indicators for cost control—PV, EV, search to check the feasibility of a proposal (Kim and Ballard 2010;
and AC—are used (PMI 2013; Kim 2015; Chen 2014) and are de- Pajares and López-Paredes 2011; Kim 2016; Kim et al. 2016). In
scribed as follows. PV is defined as the sum of the multiplication of this paper, a simplified project is used as a case study where a set of
the planned quantities of the units to execute (pq) and the unit rate scenarios is analyzed. These scenarios simulate different perfor-
agreed to with the owner (up). The unit rate is also known as the mances of the project during its execution, accounting for possible
budgeted unit price (DoD 2015). The cumulative PV at the end of scenarios faced by the contractor. Table 3 summarizes these scenar-
the contract schedule represents the budget at completion (BAC). ios, in which different combinations between planned and real unit
AC is defined as the sum of the multiplication of the actual quan- cost and quantities are explored. To better explain these scenarios,
tities executed (aq) and the unit actual cost (ac). The cumulative Table 3 shows the relation between the unit rate agreed to with the
value of AC at the end of the project corresponds to the actual cost owner and actual unit cost (up versus ac) and quantities (pq versus
at completion (ACAC). Finally, EV is defined as the sum of the aq) considered in each one.
multiplication of the actual quantities executed (aq) and the agreed Scenario 0 reflects a project in which actual costs and quantities
unit rate (up). equal values agreed to with the owner (up ¼ ac and pq ¼ aq).
To monitor production, two main indicators are proposed: PP Similarly, Scenario 1 accounts for a scenario in which actual costs
(planned production) and AP (actual production). The PP is de- equal values agreed to with the owner (up ¼ ac) but with differ-
fined as the sum of the multiplication of the planned quantities ences between planned and actual quantities (pq ≠ aq). Two var-
(pq) and the contractor’s planned rate (pc). From the contractor’s iants of this scenario are explored (Scenarios 1A and 1B). In the
point of view, the cumulative PP at the end of the project represents first variant (1A), actual cost at completion is lower than planned
the planned production at completion (PPAC). Actual production cost at completion (BAC > ACAC), resulting in a profitable project
(AP) is defined as the sum of the multiplication of the actual quan- for the contractor. The second variant (1B) represents an unprofit-
tities (aq) and the contractor’s planned rate (pc). By combining able project for the contractor because ACAC is higher than BAC.

Fig. 1. Contractor’s planned budget and progress

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 Table 3. Scenarios Explored in the Case Study
Identifier Unit rates (up versus ac) Quantities (pq versus aq) Variant Cost at completion
0 up ¼ ac pq ¼ aq 0 BAC ¼ ACAC
1 up ¼ ac pq ≠ aq 1A BAC > ACAC
1B BAC < ACAC
2 up ≠ ac pq ¼ aq 2A BAC > ACAC
2B BAC < ACAC
3 up ≠ ac pq ≠ aq 3A BAC > ACAC
3B BAC < ACAC
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Fig. 2. Scenario 3B—contractor actual performance and progress

Scenarios 2 and 3, each with variants (2A, 2B, 3A, and 3B), cover Scenario 3B are described in detail in Fig. 2. It is important that the
the rest of the possible combinations of unit cost and quantities. deviation in quantities in Scenario 3B does not lead to variations in
project duration; this is because both planned and actual project
duration is five months (Figs. 1 and 2), respectively. The project
Results and Discussion is completed on time and, for the reasons stated previously, sched-
This section shows the results obtained by the proposed formu- ule control is not analyzed in this paper.
lation in the case study. Space allows only one of these scenarios Considering traditional EVM indicators (PV, AC, and EV), it
to be described in detail, Scenario 3, which reflects the general can be concluded that Scenario 3B corresponds to good project per-
scenario in which all possible deviations (in terms of both unit cost formance in terms of cost: earned value is higher than actual cost
and quantities) affect project performance. Specifically, Variant 3B (EV > AC in Fig. 3) and cost performance is therefore higher than
(where ACAC is higher than BAC) is analyzed because it is the most planned (CPI > 1 in Fig. 4). With respect to Fig. 3, it is important
unfavorable scenario for the contractor. to realize that PV and EV at the end of the project do not have the
As described in Table 3, Scenario 3B has deviations in both unit same value, as would be expected in a typical application of EVM
costs and quantities. For instance, the actual volume of earth to be in a project like this with no delay. This difference between PV and
removed is 73,500 m3 , which is higher than the originally esti- EV is explained by quantity variations in some work units
mated 70,000 m3 . In terms of cost, the actual cost (€4.73=m3 ) (pq ≠ aq), which is usually the case in unit-price approaches
also exceeds the planned value (€4.50=m3 ). Similar deviations have but not considered in the traditional EVM approach. By relying
been simulated for the other tasks, considering a variance of 10%. solely on traditional EVM indicators, the contractor would thus
In addition to deviations between planned and actual costs and/or conclude that project performance in terms of cost can be consid-
quantities, deviations between planned costs and unit prices may ered “good,” although this is not the case for this project as is ex-
also exist. In this regard, the case study considers units in which plained later.
the contractor’s planned rate (pc in Fig. 1) differs from the unit There is some additional information for the contractor that tra-
rate agreed to with the owner (up in Fig. 2). From the contractor’s ditional EVM does not process. Indeed, although EV is higher than
point of view, these deviations may be both positive (the steel unit AC, the contractor needs to know whether this project is profitable
in Figs. 1 and 2) or negative (the concrete unit in Figs. 1 and 2), or not and whether actual profitability is higher or lower than
reflecting the competitiveness of the company in completing planned profitability. To cover this gap, the proposed EVM formu-
production tasks. In global terms the planned profitability of the lation provides information not only in terms of cost (as the tradi-
project, from the contractor’s point of view, will be determined tional EVM approach does) but also in terms of production and
by the difference between planned production and budget at com- profitability. Indeed, information related to production and profit-
pletion (PPAC and BAC). Similarly, the actual profitability of the ability is the cornerstone for the contractor in dealing with the
project will be provided by the difference between actual cost at project as a business enterprise.
completion and budget at completion (ACAC and BAC). As stated before, traditional EVM does not alert the contractor
Overall, deviations considered in this case study lead to an un- because the project cost performance in Scenario 3B seems to
favorable scenario for the contractor because ACAC is higher than display an optimistic situation (EV > AC in Fig. 3 and CPI > 1
BAC. Contractor planning and actual performance and progress in in Fig. 4). However, this information may be misleading because

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Fig. 3. Scenario 3B—traditional EVM indicators and proposed indicators

Fig. 4. Scenario 3B—production and cost performance indicators

in terms of production the project is not profitable to the contractor cost performance identified using traditional EVM does not alert
yet. Indeed, actual cost at completion (ACAC) exceeds planned the contractor (CPI > 1 in Fig. 4), the proposed indicators inform
budget at completion (BAC). This poor performance, which cannot the contractor of a problem with project profitability (PPI < 1 in
be tracked using traditional EVM indicators, has been present Fig. 4). The contractor planned to earn €78,950 at the end of the
during the entire project duration (as AC > AP in Fig. 3). project out of the difference between PP and PV at completion
In fact, actual production is lower than actual cost (AC > AP in (Fig. 5). Nevertheless, because of “poor” project performance in
Fig. 3 and, therefore, PPI < 1 in Fig. 4). Therefore, whereas the terms of profitability, the contractor is not gaining as much as

Fig. 5. Scenario 3B—planned production and value

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 expected even though project cost appears to be acceptable when Acknowledgments
traditional EVM indicators are considered.
The proposed formulation enables a more accurate analysis of This research was supported by the Universitat Politècnica de
project performance in terms of profitability by keeping the con- València, which funded a visiting scholarship for Dr. Monty
tractor constantly informed about project profitability. The addition Sutrisna (Action 19701344).
of the proposed indicators to traditional EVM indicators provides
contractors working under unit-price contracts with additional
information that enhances management of the project. As this References
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