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Consolidate Earned Value Principle with Integrated Cost Management – On Project Budget Control during Construction and Investment Period JIA Hu, CHEN Yu Chao School of Civil Engineering and Architecture Nanyang Normal University, P.R.China, 473061 email@example.comAbstract Considering solitary and hysteretic nature which exist in current change control , an ideaof dynamic change control about integrated cost management change control technology aboutconstruction period and investment is proposed to sove the two problems. The idea regards managementmethod of earned value as research object to seek binding model of construction period and investment.In the end, an example is given to discuss the main content and fundamental procedure of changecontrol about construction period and investment integrated cost management.Key words Construction and investment period, Integrated cost management, Earned value, Changecontrol1 Introduction When construction projects are in the process of implementing, artificial negligence or the changesof construction projects environment usually lead to practical condition of investment and progress notmatch with the plan. It needs to correct deviation or change plans by project alteration. Investment andconstruction period are two target factors which interact and impact each other. During change controlof projects, it is necessary to associate them to optimize control. At present, domestic research in thearea is still very weak. In practice, the effects to construction period or investment are considered underthe control of project change, to the construction period and investment are neglected. Not selecting agood plan from many schemes can cause an unnecessary waste. To solve the problem, the research ofconstruction period and investment integration cost management of change control is put out.2 The concept of change control of integrated cost management aboutconstruction period and investment The general content of integration can be simply summarized as: the main body of integration canunit two or more integrated elements into an organic about behavior, process and results. The integrationis not a simple stack, but the structure and combination according to certain integrated approach. Thepurpose of integration is designed to increase overall functions and to come forth new features. Theso-called change control of integrated cost management change control about construction period andinvestment, regards management method of earned value as research object to seek binding model ofconstruction period and investment. It can take into account the two goals about project schedule and itscost. It can also search for balance among them and achieve predictability and the dynamic control ofproject changes.3 The principle of change control of integrated cost management about constructionperiod and investment3.1 The basic principle of project earned value management Dr. Christensen, who workes in U.S. Earned Value Management Method Research Departmentdefined earned value as follow: Earned Value is a variable designed to measure and compare workamounts which have been completed and plan to complete effectively. Project Earned Value is actuallya intermediate variable, and it can represent the size of plan value of the completed work amounts, 1181
namely budget cost of the completed work amounts in the project. It can be represented by BCWP, andthe formula for calculating the intermediate variables are as follows: BCWP= WP* BC (1) In the formula: WP on behalf of Work Performance, it is the completed operation in the projects. BCon behalf of Budget Cost. It is the Unit Budget of the completed operation in the projects. Nowadays, authoritative departments of academic circles and commercial circles all believe thatearned value management system will be one of leading methods of project management in the 21stcentury. Especially in recent years, a large number of scholars are brought together to ProjectManagement Institute (PMI) in the United States. They are studying on how to use the theory of EarnedValue Management to develop projects integrated management deeply. Now, some acquirement hasbeen obtained. But at present, research results are only be integrated Management of construction periodand projects integrated management.3.2 Utilizing the Earned Value principle to dynamic integrated management of constructionperiod and investment. The intermediate variable (earned value) has no exact economic meaning. But after introducingthis variable, differences of relative and absolute effects of construction period and cost, which is causedby the change of the project operations (construction period or investment) can be analyzed as follows: － CSV= BCWS ACWP (2) From the above: CSV means Cost Schedule Variance; BCWS represents the Budget Cost for Work ；Scheduled ACWP represents the Actual Cost for Work Performed. CSV is caused by the cost of project, which change from the the Budget Cost for Work Scheduledto the Actual Cost for Work Performed. But the schedule change from Work Performed to WorkScheduled. － CV= BCWP ACWP (3) From the above: CV means Cost Variance; BCWP means the Budget Cost for Work Performed;ACWP means the Actual Cost for Work Performed. This index reflects the differences between the Budget Cost for Work Performed and the ActualCost for Work Scheduled. In above formula, positive results represent saving, with negative results forincreasing investment. － SV= BCWP BCWS (4) From the above: SV means Schedule Variance; BCWP means the Budget Cost for WorkPerformed; BCWS means the Budget Cost for Work Scheduled. This index reflects the variance between the Budget Cost for Work Performed and the BudgetCost for Work Scheduled, positive results represent that period is ahead of schedule, and negativerepresent that delay of period. According to the above formula, not only various deviations of construction projects can becalculated, but also deviations caused by poor management or cost management problems of theconstruction projects can be made a clear distinction by an intermediate variable named project earnedvalue (budget cost for work performed). The analysis of such kind of information of deviation is veryimportant to the guidance of construction projects period and dynamic integrated management ofinvestment, thus it can provide accurate information to control the project when it changes. Therefore,project earned value is a fundamental principle of change control technology of construction period andinvestment integrated cost management.4 The basic steps of change control of construction period and integrated costmanagement4.1 How to make a plan about the change control of construction period and integrated costmanagement Before the construction is started, it is necessary to make a plan about construction period and 1182
integrated investment. To achieve the maximum interests of construction projects (that is, the minimuminvestment and construction projects worth the maximum), how to allocate projects investment andproject construction period reasonablyshould be mainly considered. Such an approach can be shown asfollow. Project cost C The second planning scheme The first planning scheme The third planning scheme Construction period T Figure1 Integrated cost management about construction period and investment As is shown in Figure 1, any construction period and integrated plan of investment have threedifferent configurations. The first planning scheme is such an scheme, which can balance betweenconstruction period and projects investment. In general case, the scheme should be the optimum schemebecause it can realize the optimum configuration between them. The second planning scheme providessuch a plan, in which to ensure construction period, even if it will increase the investment. Manyconstruction subjects, such as military engineering and public works, have to apply the planning scheme.When funds are shortage, and the subject allows to prolong the construction period, the third planningscheme should be applied. Certainly, such a scheme is seldom used.4.2 How to implement and monitor a plan about the change control of construction period andintegrated cost management Integrated plan can be implemented after it is audited. Information should be collected, transferred,processed, and analyzed when the plan is implemented. Work performed and integrated plan should becompared and find gap between them. A comprehensive report about schedule and the cost used shouldbe done regularly. When the deviation is occurred, it is necessary to find the causes of the problems, andsome measures should be proposed to correct and improve them. Facing the new situation, theintegrated plan should be adjusted to ensure all works to work according to the plan, until the end of thewhole project.5 Application examples of the change control of construction period andintegrated cost management5.1 The basic data for construction projects A new factory, located in Nanyang eco-industrial park is planned to be built. The entrepreneurplans to invest 80 million yuan, and to complete the subject four years later. The plan investment of thesubject can be seen in curve b in Figure 2, and actual investment is shown in curve a in figure 2. Thesource of the fund is sufficient, and construction period has no special requirements as long as thesubject is completed according to regulation about quota of construction period of the government. Now,calendar of construction period is the end of the first two years, and the actual cost of the project is 60million yuan.5.2 Analysis of the differences By Figure 2 we can find that the actual cost of the project is 60 million yuan, and is 20 million yuan 1183
more than the project budget in the end of the second year. To find the reasons of the change, theprincipal of project earned is introduced. First, the deviation of investment is analysised. If the project construction period is excluded, in theend of the second tear, the actual completion of the actual operating costs is 60 million yuan and theactual completion of the budget cost of operations is 50 million yuan, the difference between the two is10 million yuan, exceeding 20% of the project invest plan, this is a serious construction project costmanagement problems. This may be caused by improper management of the construction project cost orthe cost of construction projects market prices changes. Then the deviation of the construction projects progress is analysised, from Figure 2 we can find thatin the end of the second year, the project operational budget for the cost is 50 million yuan (item earnedvalue), and the actual projects operating budget is 40 million yuan, the difference between the two is 10million yuan. The project has exceeded 25% of the time limit, which is also a serious constructionperiod problem of construction project management, the construction project construction period iscaused by improper management, project implementation or content of the conditions. Figure 2 The integrated relations of construction project cost , construction period and investment In the end of the second year, plans invest is240 million yuan,3and the actual operations year) is 60 0 1 4 Time( costmillion yuan, the difference between the two is 20 million yuan. This is caused by the increased 1invesment of 10 million yuan and the time limit in advance which result in 10 million yuan. This isinduced by the construction project investment and construction period. Through the figure of construction project cost and construction period, the integration betweeninvestment plans, we can draw a clear distinction between poor management of construction projectsand construction project cost deviation caused by management issues, and identify the root causes ofchange.And it will provide the accurate information to a further analysis of the reasons and adopt somemeasures to change the deviation.5.3 The reason of deviation and the solution We can find the reason of deviation according to the method above. The reason is project costs,poor management of the project period, or the change of project environment and conditions.Management problems caused by human can be eliminated or reduced by issue-specific correctivemeasures, and the deviation caused by the objective conditions and changes in the environment needincrease the budget of construction project or extend the period of construction projects to solve. Inmany cases, deviation of construction projects period or investment is caused by two factors mentionedabove. So a corrective measures of time limit construction projects and integrated management is notonly need to be taken to solve the problem of artificial corrective measures, but also need to deal withthe objective by increasing the budget and extending the time limit.5.4 Preliminary making alternative of construction project change and forecast the results After finding the way to solve the problem, the alternative of construction project change must have 1184
substitutable and comparability. Through this way, we can find optimal schem of project change. It is necessary to forecast the consequence of various changes of construction projects after havingthe alternative of construction project change, and the forecasting is based on the difference of projectcost. According to the actual implementation of project time and cost-effective management, the trendsof future project cost can be predicted.5.5 Rational allocation of two elements, making change strategy After having the alternative of construction project change, the most important is the rationalscheme of construction projects time limit and investment. Project 1 in Figure 1 is compatible accordingthe fact of the project. The project cost payout is low under rational time limit for a project. The timelimit is shorter or longer than the rational time limit means the elevating of project cost. Therefore, it isnecessary to deal with time limit for a project and project cost in orde to have a balanced rhythm to carryout construction. This is a dynamic process through repeated practice, the rational alternative ofconstruction project change of time limit for project and project cost can be find.6 Conclusion Integrated management of the project changes is the most important element of a comprehensivemanagement, the method of Earned Value Management is studied. The method of project changecontrol is find according to the analysis of integration of construction period and investment costmanagement and the establishing, optimization and controling of integration of construction period andinvestment plan management. The project change can be controlled timely and predicted appropriatelythrough the way suggest above. References Jun Fang. Construction project change control study [D]. Chongqing: Chongqing University, 2005(inChinese) Guo Xiaoxia. Construction projects on integrated management system [D]. Xian: Xian Universityof Science and Technology, 2005(in Chinese) Dou Yufei of the key construction projects, investment control [J] Building of Economy, 2007, 29(2):18~25 (in Chinese) 1185