Cost versus Earnings

You will often hear the term “cost-loaded schedule.” This is almost always a misnomer since you would not know the actual cost of work performed when you create the schedule and you would never want to provide other team members your estimated cost of work. The reason that cost-loaded schedule terminology has become so widely mis-used is likely because the cost that is being discussed is the owner’s cost. Of course owner’s cost is not really a cost to them either is the contractor’s earnings.

While we will never change the industry’s use of this unfortunate terminology the most important thing for you is to understand the difference between what people think they mean and what is being said. Armed with this information you can clarify, exactly, what is meant when you are faced with a “cost-loaded” schedule.

Separating Time and Earnings

As noted elsewhere in the CPM tutor one of the most critical concepts to build into your schedule is separating progress in time and progress in earnings. Unless you separate these two issues you will only be able to effectively model activities that have consistent earnings per day profile. Many activities, especially those related to equipment installation realize earnings as soon as the equipment comes to the site, before any time progress can be practically measured on the activity. And of course we have activities that may have zero days remaining duration, but earnings are retained to cover punch list items.

Critical Role of the Bid Item Code

When considering how to decompose work items into schedule activities it is critical that you consider the impact of activity coding on schedule activities. Effective activity coding will assist communication with the owner about earnings; this allows the schedule to become a directly usable tool of communication about earnings between you and the owner. For the owner, bid items are like special cost accounts. When charging the project back to the accounting system, the owner must be very careful to ensure that funds from different cost accounts don’t cross. As a result, the accounts must be individually managed. Making it simple for the owner to track between your schedule, and your earned value, and their cost accounts, using a bid item code is good practice since it will help you get paid without getting bogged down into the world of a large owner’s accounting nightmares.

Bid item coding can also directly assist you to justify changes in the schedule due to changed conditions and also to show specific activities impacted by change orders. The analysis of potential delay is accomplished by making a copy of your schedule and then changing the schedule as needed to reflect the changed condition. Such a schedule is often called a “what-if” schedule. Activities that are added or updated by the changed condition can be coded, using the bid item code, with your “Request for Information” number or other designator. Thus by a simple sort of activities showing the bid item you can clearly justify any changes to the schedule that are caused by the changed condition. Comparing the results of these added or changed activities from the what-if schedule with the current state of the schedule make take a bit of time, but if the work is done well there will be little argument from the owner about your analysis. Furthermore, if the issue results in claims at the end of the project, the capture of this information will be an invaluable resource for your team.

Once the issue is formally resolved through the issuance of a contract modification or change order, the activities that have been agreed to should be coded with the number of the modification in the bid item code. This will allow the owner to track the fiscal completion of each of these tasks, since they are likely to be identified as if they are a separate contract bid item from the owners’ point of view.

No Multiple Bid Items on One Activity

Occasionally owners will award contracts with multiple bid items that are typically combined in a single construction process. Often large infrastructure projects will have such bid items. If you were only considering the activity breakdown based on the construction process you would typically combine these bid items into single activities. Given that one of the objectives of earned value analysis is to make it easy for the owner to keep track of their accounts, you will generally need to split these activities and not combine multiple bid items into a single activity. While this may seem like a pain at first, there is no technical barrier to modeling projects in this way and the result should be better communication when it comes time to assessing monthly earned value.

Cost Loading Rules of Thumb

  1. Every activity that has a non-zero expected earned value must have a bid item code.
  2. Every activity may only contain work for a single bid item.
  3. If needed break a multi-bid item activity into parallel single bid item activities.