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In construction projects, the profitability of the project is directly dependent upon the ability of the contractor to control project cost and schedule. Earned value management techniques offer useful performance measures that can signal potential problems in cost or schedule control. However, neither project profitability nor the cumulative cost and schedule performance measures of earned value management adequately capture the true risk of the project, namely, the potentially negative cash flow that arises if cumulative costs exceed cumulative revenues at any point during the project. In this article, the authors develop a break-even cost model that incorporates earned value management performance measures and use it to analyze the distribution of cash flow risk between the contractor and customer, based on the type of project contract. The results of the model are used to produce a dynamic graphical display for monitoring project progress and cash flow risk based on performance measures.
INTRODUCTION
The profitability of construction projects is directly dependent upon the ability to control project cost and schedule. Project control is not a trivial matter, even in the construction industry, that enjoys the luxury of having considerable availability of standard cost data. Construction projects are complex endeavors, and as such, have a certain susceptibility to risk. Risk requires special attention as it serves to upset project control and undermine project profitability.
Earned value management techniques offer useful performance measures that can signal potential problems in cost or schedule control. Studies conducted by the US Air Force (USAF) have shown that these measures can accurately predict cost and schedule overruns as early as 15 percent into the project [2]. The earned-value indices describe performance in terms of the relationship between planned, actual, and earned expenditures. These indices relate project performance to profitability.
However, neither project profitability nor the cumulative cost and schedule performance measures of earned value management adequately capture the true risk of the project, namely, the potentially negative cash flow that arises if cumulative costs exceed cumulative revenues at any point during the project. By true risk, we are referring to the ability of the project manager to respond to unscheduled changes in resource expenditures. The basic idea is that an event constitutes a risk when the project manager cannot respond to it,...