i APPLICABILITY OF EARN VALUE MANAGEMENT IN SRI LANKAN CONSTRUCTION PROJECTS W. M. Tharanga Nimashanie (10/8360) Degree of Master of Business Administration in Project Management Department of Civil Engineering University of Moratuwa Sri Lanka February 2012 I APPLICABILITY OF EARN VALUE MANAGEMENT IN SRI LANKAN CONSTRUCTION PROJECTS Weerasinghe Mohottige Tharanga Nimashanie (10/8360) Dissertation submitted in partial fulfilment of the requirement for the degree of Master of Business Administration in Project Management. Department of Civil Engineering University of Moratuwa Sri Lanka February 2012 II DECLARATION I hereby declare that the research dissertation entitled “Applicability of Earn Value Management in Sri Lankan Construction Projects” submitted by me in partial fulfilment of the requirements for MBA is my own work. Further, it has not previously formed on the basis of any other academic qualification at any institution. Also, I hereby grant to University of Moratuwa the non-exclusive right to reproduce and distribute my dissertation, in whole or in part in print, electronic or other medium. I retain the right to use this content in whole or part in future works (such as articles or books). Signature: Date: W.M.T Nimashanie 10/8360 The above candidate has carried out this research for the Master of Business Administration in Project Management under my supervision. Signature of the supervisor: Date Prof. A. A. D. A. J. Perera Department of Civil Engineering University of Moratuwa III Abstract Earn Value Management is a globally accepted and well established integrated planning and control methodology that combines the measurement of cost, schedule and technical performance. It enables early detection of performance issues and allows corrective actions to be implemented in a timely manner. The objective of this study is to establish the possibility of introducing Earn Value Management as an ICTAD Condition of Contract for Major Contracts for the performance reporting and evaluation. In literature review derived the several important benefits of the EVM as an effective performance measuring technique, the problems in implementing and commonly used practice standards in the globe. The construction industry was an early private industry adopter of EVM. EVM is commonly used in United States of America, United Kingdom, Australia and other European and Asian countries to evaluate construction projects. EVM is a flexible and universally applicable project management technique. However, in Sri Lankan construction industry there is a need of a globally established performance monitoring technique for the development of the industry and better performance. Under these circumstances, it is important to find out the feasibility of introducing EVM as an ICTAD condition for the construction industry. The effectiveness of the ICTAD document to the industry is high. The level of acceptance is significant; the responses show that 64% of respondents accept the Time Schedule as an effective tool and 37.3% submit it on-time for all projects to fulfil the ICTAD requirement. However, Sri Lankan construction industry doesn’t have a proper understanding and knowledge about the use of Time Schedule and its limitations. The lack of knowledge about the technique hinders the getting appropriate use of the technique. However, respondents believe effective performance measuring technique should not have these limitations. The result of this study confirms the possibility of introducing the EVM in Sri Lankan construction industry for performance reporting and evaluation. Further, results highlight that the importance and necessity of Earn Value Management to enhance the efficiency and effectiveness of Sri Lankan construction industry. The majority of respondents believe the most important aspect of the EVM is, it helps projects to be completed within time and cost constraints compared to other benefits. The survey results illustrate that more than 80% of respondents believe Sri Lankan construction industry need EVM concept for effective and accurate performance management. The cost performance management is the primary concern of the Industry. The Industry’s perception on the possibility of EVM implementation is satisfactory. IV ACKNOWLEDGMENT This dissertation is an outcome of a constant effort of a research for nearly six months. During this period I was fortunate to receive assistance, guidance, ideas and encouragement from many who helped me to make this academic venture a success. First and foremost, I would like to express my appreciation and sincere gratitude to my supervisor Prof. Asoka Perera, Senior Lecturer of Department of Civil Engineering, University of Moratuwa for the encouragement, guidance and support throughout the research with great enthusiasm. My deepest gratitude goes to Dr. Rangika Halwatura and Dr. Lesley Ekenayake of Department of Civil Engineering, University of Moratuwa for providing me valuable guidance during the period of the research. I would like to thank the staff of the Civil Engineering Department and the library staff of the University of Moratuwa for their excellent support extended to me. I wish to convey my highest appreciation and gratitude towards the organizations and professionals who contributed to the survey by sacrificing their precious time and energy. I place my grateful gratitude for all my MBA batchmates, friends and many other who whole heartedly supported in my research works. I further extend my gratefulness to the staff of Regional Support Centre (W-S), National Water Supply and Drainage Board, my employers during the research for providing me the support to carry out the research. Last, but definitely not least, My heartfelt gratitude go out to my husband, my parents and parents-in law for their endless patience, support and encouragement given throughout the years for the completion of the MBA and the research. V TABLE OF CONTENTS Page DECLARATION II ABSTRACT III ACKNOWLEDGMENT IV TABLE OF CONTENT V-VI LIST OF FIGURES VII LIST OF TABLES VIII LIST OF ABBREVIATIONS IX-X LIST OF APPENDICES XI 1 INTRODUCTION 1-4 1.1 Background 1 1.2 Problem Statement 1-2 1.3 Scope and Objectives 2 1.4 Methodology 2-3 1.5 Major Findings 3-4 1.6 Arrangement of the Report 4 2 LITERATURE REVIEW 5-23 2.1 History of Earn Value Method 5-6 2.2 Earn Value Method 6-10 2.3 Earn Value Method as a performance measure 10-12 2.4 Problems in Implementing EVM 12-14 2.5 Limitations of Earn Value Analysis 14 2.6 Influence of Characteristics of Construction Projects on EVM 14-17 2.7Standard Practices of Earn Value Management and Comparison of Different Standards 17-20 2.8Existing Provisions in ICTAD Guidelines for Performance Measurement 21-22 2.9 Summary 22-23 3 RESEARCH METHODOLOGY 24-30 3.1 Literature Review 24 VI 3.2 Questionnaire Survey 24 3.3 Framework of Study 24-26 3.4 Sample Selection and Sample Size 27 3.5 Method of Data Collection and Analysis 27 3.6 Operationalization of Variables 28-29 3.7 Limitations to the study 30 3.8 Summary 30 4. ANALYSIS AND DISCUSSION OF RESULTS 31-61 4.1 Introduction 31 4.2 Reliability of Data 31-33 4.3 Understanding the effectiveness of current ICTAD condition on performance measuring (Time Schedule) to the industry. 33-37 4.4 Investigation of Industry’s perspective on existing practice (Time Schedule) 37-43 4.5 Understanding how well Time Schedule is established within the industry as an ICTAD Condition 43-46 4.6 Industry’s awareness on Earn Value Method 46-48 4.7 The necessity of EVM to Sri Lankan construction industry 48-55 4.8 Understanding the possibility of implementing EVM 55-61 5 CONCLUSION AND RECOMMENDATION 62-64 5.1 Conclusion 62-63 5.2 Recommendation 64 5.3 Further Research 64 6 REFERANCES 65-66 APPENDICES Annex 1 – Questionnaire for the research 66-73 VII LIST OF FIGURES Page Figure 1: Basics of Earn Value Management 7 Figure 2: Transforming data into EVM parameters 9 Figure 3: EVM and Project Management 10 Figure 4: Composition of Respondents of the study 31 Figure 5: Reason for usage of Time Schedule 34 Figure 6: Frequency of on-time submission of Time Schedule 34 Figure 7: Reason for not submitting Time Schedule on time 35 Figure 8: Reason for update of original Time Schedule 36 Figure 9: Frequency of review the Time Schedule 36 Figure 10: Frequency of usage of ICTAD document 43 Figure 11: Frequency of usage of Time Schedule 44 Figure 12: Human Resources use to develop the Time Schedule 46 Figure 13: Software use to develop the Time Schedule 46 Figure 14: Industry’s awareness on EVM and related concepts 48 Figure 15: Box Plot for Need of EVM 55 Figure 16: Best path to introduce a new practice to Sri Lankan construction industry 56 Figure 17: Time requirement to change to a new practice in performance measuring 56 VIII LIST OF TABLES Page Table 1: Comparison of EVM Standards 18-20 Table 2: Operationalization of variables 28-29 Table 3: Data Validation for Question no. 4 and Question no. 12 c. 32 Table 4: Data Validation for Question no. 12 f and Question no. 14. 33 Table 5: Questions to investigate the industry’s awareness on limitations of the existing practice (Time Schedule) 37-39 Table 6: Descriptive statics to investigate the industry’s awareness on limitations of the existing practice (Time Schedule) 39 Table 7: Questions to investigate the industry’s perspective on importance of limitations of the Time Schedule 41-42 Table 8: Descriptive statics to investigate the industry’s perspective on importance of limitations of the existing practice (Time Schedule) 42 Table 9: Questions to investigate the importance of usage of the Time Schedule 44-45 Table 10: Descriptive statics to investigate the importance of usage of Time Schedule 45 Table 11: Frequency table for the questions testing the Industry’s awareness on EVM 47 Table 12: Questions to investigate the necessity of EVM to Sri Lankan construction industry 49-53 Table 13: Frequency table for the questions testing the necessity of EVM to the Sri Lankan construction industry 53-54 Table 14: Descriptive statics to investigate the necessity of EVM to Sri Lankan construction industry 54 Table 15: Questions to investigate the possibility of introducing EVM as ICTAD condition 57-58 Table 16: Descriptive statics to investigate the possibility of introducing EVM as an ICTAD condition 59 Table 17: Frequency table for the questions testing the necessity of EVM to the Sri Lankan construction industry 59 IX LIST OF ABBREVIATIONS Abbreviation Description AC Actual Cost ANSI American National Standards Institute AS Australian Standard BAC Budget Cost at Completion CPI Cost performance Index C/SCSC Cost/Schedule Cost Systems Criteria CV Cost Varience ECC Estimated Cost to Completion ETC Estimate to Complete EV Earned Value EVA Earn Value Analysis EVM Earn Value Management EVPM Earn Value Project Management FCC Forecast of Project Completion Cost ICTAD Institute for Construction Training and Development MS Micro Soft NASA National Aeronautics and Space Administration PC Percentage Completed PERT Program Evaluation and Review Technique PMBOK Project Management Body of Knowledge PMI Project Management Institute PV Planned Value SBD Standard Bidding Document SOW Statements of Work SPI Schedule Performance Index SV Schedule Variance X UK United Kingdom US United States USA United States of America WBS Work Breakdown Structure XI LIST OF APPENDICES Appendix Description Page Appendix 1 Questionnaire for the research 65-72