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Practical Look at How Private Sector Entrepreneurial Contractors Use Earned Value (And what “Lessons Learned” this might offer for State and Federal Governments)

FEATURED PAPER

Dr. Paul Giammalvo, CDT, CCE, MScPM, MRICS 

Jakarta, Indonesia
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The fact remains- for state and federal governments as well as large, private sector owner companies, the track record in producing “successful” projects (defined to be delivered reasonably on time, reasonably within budget;  in substantial conformance to the technical requirements without killing anyone or despoiling the environment has been abysmal. (Whether or not the product of the project failed or succeeded it not the topic of this paper, only whether the project itself was a success in terms of the more traditional time, cost, quality, safety, health and the environment)

In the June, 2013 issue of PM World Journal, http://goo.gl/LorHj I explored whether or not small to medium sized contractors, working under the traditional “design>bid>build” contracting process, complied with ANSI 748, and concluded that yes, we do, but with several very important differences.

In this paper, I pick up where I left off in June and will explore in greater detail exactly how small to medium sized contractors (“entrepreneurial contractors” as opposed to large corporate contractors) apply and use earned value and how, by understanding better how we use earned value, the state and federal governments can modify the relevant laws or regulations to gain full advantage that EVM offers.

To start, the simple facts are:

1)    Contractors, in a normally competitive market are working on single digit EBIT margins. There is no room for mistakes. (In a highly competitive or “tough times” market the EBIT margins may well be zero)

2)    Because of the competitive nature of the design>bid>build contracting, where the “lowest responsive bidder” wins the contract, the market forces us from building in too much contingency into our selling price.

3)    On the other hand, with single digit EBIT margins, if we do make a large enough mistake, or a series of mistakes in estimating our costs then we will quickly and unmercifully be driven into bankruptcy.

Thus the cost estimating and scheduling competencies are a core to any successful contractor.   We can neither be too high or too low. And that range is incredibly small.  Meaning our cost and duration estimates MUST be accurate, reliable and precise.

As I closed out last month’s article, I offered a graphic which I have been using for over 40 years.  It dates back to the early 1970’s and my undergrad days where I was taking a course at Worcester Polytechnic Institute (WPI) taught by Marvin Gates, PE.  This was when Earned Value was first becoming talked about in construction management and I wrote a now long gone paper, which featured this graphic in explaining how Earned Value worked.

This graphic is important because from the contractors perspective, there is clearly a link between work performed and cash flows.  Yet the way Earned Value is used in most government applications, this clear and unambiguous link is missing.  And that is one of the first weaknesses that needs to be corrected IF we want earned value to become more widely used as a project and program management tool.  Both from the owner and contractors perspective, cash flows are important and you cannot divorce work being completed on a project from the cash flow analysis necessary to fund this work.

More…

To read entire paper (click here)

About the Author        

PAUL-GIAMMALVO-bioflag-italyflag-polandflag-usaDr. Paul D. Giammalvo, CDT, CCE, MScPM, MRICS

Jakarta, Indonesia

Dr. Paul D. Giammalvo, CDT, CCE (#1240), MScPM, MRICS, is Senior Technical Advisor (Project Management) to PT Mitratata Citragraha. (PTMC), Jakarta, Indonesia. www.build-project-management-competency.com.

For 20+ years, he has been providing Project Management training and consulting throughout South and Eastern Asia, the Middle East and Europe.  He is also active in the Global Project Management Community, serving as an Advocate for and on behalf of the global practitioner. He does so by playing an active professional role in the Association for the Advancement of Cost Engineering International, (AACE); Construction Specifications Institute (CSI) and the Construction Management Association of America, (CMAA). He also sat on the Board of Directors of the Global Alliance for Project Performance Standards (GAPPS), www.globalpmstandards.org, Sydney, Australia and is active as a regional leader in the International Guild of Project Controls. http://www.planningplanet.com/guild

He has spent 18 of the last 35 years working on large, highly technical international projects, including such prestigious projects as the Alyeska Pipeline and the Distant Early Warning Site (DEW Line) upgrades in Alaska.  Most recently, he worked as a Senior Project Cost and Scheduling Consultant for Caltex Minas Field in Sumatra and Project Manager for the Taman Rasuna Apartment Complex for Bakrie Brothers in Jakarta.  His current client list includes AT&T, Ericsson, Nokia, Lucent, General Motors, Siemens, Chevron, Conoco-Philips, BP, Dames and Moore, SNC Lavalin, Freeport McMoran, Petronas, Pertamina, UN Projects Office, World Bank Institute and many other multi-national companies and NGO organizations.

Dr. Giammalvo holds an undergraduate degree in Construction Management, his Master of Science in Project Management through the George Washington University and was awarded his PhD in Project and Program Management through the Institute Superieur De Gestion Industrielle (ISGI) and Ecole Superieure De Commerce De Lille (ESC-Lille- now SKEMA School of Management) under the supervision of Dr. Christophe Bredillet, CCE, IPMA A Level.  Paul can be contacted at [email protected].