What NEC4 requires and what it does not
This guide covers the NEC4 Engineering and Construction Contract (ECC) 2017, as amended in January 2019 and October 2020, Options A to E, from the Contractor's side unless stated. NEC4 does not require earned value management (EVM) and does not name it. Any EVM requirement is written by the Client into the Scope or into Option Z additional conditions.
Three provisions matter. Clause 31.2 says the Contractor's programme shows float and time risk allowances. Under clause 32 the Contractor submits a revised programme at the interval stated in the Contract Data, when the Project Manager instructs one, and whenever the Contractor chooses to. Under clause 50 the Project Manager assesses the amount due at each assessment date, at an interval also set in the Contract Data. None of these asks for a budget, a cost-loaded programme or an earned value figure.
The recognised EVM references are ANSI/EIA-748 (current revision), which sets out 32 guidelines for an EVM system, ISO 21508:2018 Earned value management in project and programme management, and the APM Earned Value Management Handbook. AACE International 11R-88 Required Skills and Knowledge of Cost Engineering is sometimes cited as an EVM standard. It is not one.
Deciding whether to build an EVMS
If the Scope or an Option Z clause asks for an EVMS, build the one it names and follow the standard it cites. Where nothing is specified, SOMA's rule of thumb is four tests. Option: on C, D and E the Client pays cost, so cost against progress matters to both sides. Change: heavy compensation event traffic justifies a version-controlled baseline. Size: a short job with few activities needs only a progress valuation. Funding: a lender or sponsor may want forecast outturn. Two or more yes answers justify a proportionate EVMS.
Why EVM sits awkwardly on NEC4
EVM grew from the US Department of Defense Cost/Schedule Control Systems Criteria of 1967, written mainly for cost-reimbursable and incentive development contracts. NEC4 handles change through compensation events. When one is implemented, the Prices change under A and B, the Prices and so the target change under C and D, and under E there is no target to move; the Prices are the Defined Cost plus the Fee, so only the forecast changes.
The baseline therefore moves when events are implemented, not monthly. The Project Manager can implement an event on their own assessment, so implemented does not always mean agreed. Keep two histories: the Contractor's internal budget baseline, and the contractual Prices or target. They move at different times and by different amounts.
Planned value, earned value and actual cost
Planned value (PV, also BCWS) is the budget for the work scheduled to date. Earned value (EV, BCWP) is the budget for the work done. Actual cost (AC, ACWP) is what the work done has cost. Budget at completion (BAC) is the total budget. The performance measurement baseline (PMB) is the time-phased budget in control accounts, summary-level planning packages and undistributed budget. Management reserve sits outside it.
Cost variance is EV less AC, and CPI is EV divided by AC. Schedule variance is EV less PV, and SPI is EV divided by PV. TCPI is (BAC less EV) divided by (BAC less AC). Because SPI in money terms drifts to 1.0 as work completes, earned schedule gives SPI(t) = ES/AT, where ES is the time at which the baseline PV equalled today's EV and AT is the actual time elapsed. CPI and SPI report the past. EAC and TCPI forecast.
AC comes from the Contractor's cost ledger, including accruals for work done and not yet invoiced. It does not come from the payment mechanism. Certified payment is not actual cost. Under A and B it is price for completed work, including profit, risk and overheads. Under C, D and E it is Defined Cost less Disallowed Cost, plus Fee, assessed with a lag. Feeding payment into AC turns CPI into a ratio of budget to price. Reconcile the ledger to payment each period and explain the difference. On the Client's side payment is the Client's actual spend, so label which system a report belongs to.
Worked example: Option A with one compensation event
Six activities have a budget of £1,000k and Activity Schedule Prices at budget plus 15%, so £1,150k. At the status date: setup (budget £100k) is complete, AC £104k; piling (£200k) is complete, AC £230k; substructure (£250k) is 60% complete, AC £170k; frame (£300k) is 20% complete, AC £70k. Services (£100k) and commissioning (£50k) have not started. The plan called for the first three in full plus 30% of the frame (£90k), so PV is £640k.
EV is £100k + £200k + £150k + £60k = £510k. AC is £574k. CPI is 510/574 = 0.89 and CV is minus £64k. SPI is 510/640 = 0.80 and SV is minus £130k. Certified Price for Work Done to Date counts only completed activities: £115k + £230k = £345k. The Contractor has earned £586.5k of Price (510 x 1.15) but is paid £345k, a gap of £241.5k in substructure and frame. Using payment as AC would give 510/345 = 1.48, an excellent CPI on a job whose work done has cost 12.5% more than its budget. Split long activities so interim completions are paid, for example frame by floor.
An implemented compensation event adds £60k of budget work at the same margin, £69k of Price. BAC becomes £1,060k and Prices £1,219k. Formula EAC is 1,060/0.8885 = £1,193k. For the built-up EAC, forecast remaining cost is substructure £115k, frame £280k, services £100k, commissioning £50k and the new work £60k, £605k in all, so EAC is 574 + 605 = £1,179k. TCPI is 550/486 = 1.13. Forecast margin is 1,219 less 1,179 = £40k, 3.3% of Price.
Worked example: Option C target and pain/gain
Take a target (Total of the Prices) of £2,000k and a 50/50 share (the percentages are set in the Contract Data). If the forecast Price for Work Done to Date, Defined Cost plus Fee, is £2,100k, the difference is £100k and the Contractor bears £50k of pain. At £1,900k it gains £50k. Each £1 of EAC growth costs the Contractor 50p. Disallowed Cost raises the Contractor's cost without raising Defined Cost, so it sits outside the share.
Early warnings and risk-adjusted EAC
Each entry in the Early Warning Register (clause 15) is a candidate for the forecast. Time risk allowances appear in the programme under 31.2. Cost risk allowances are not contractual and sit in the Contractor's forecast or management reserve. Formula EAC assumes past efficiency continues, so compare it with the built-up figure. A quantitative cost and schedule risk analysis of the remaining work (AACE International 57R-09 Integrated Cost and Schedule Risk Analysis Using Risk Drivers and Monte Carlo Simulation of a CPM Model) gives P50 and P80 values around the built-up EAC. On a QSRA or QCRA we test the Contractor's EAC against that range.
Common failures
Spend is reported as progress; spend shows what left the account, earned value what it bought. The PMB is not version-controlled, so scope growth reads as poor performance. Percentage complete is updated by opinion on every activity; where physical progress cannot be measured, use weighted milestones or a fixed formula. Level of effort earns value equal to spend and hides variance, so cap its share of the PMB. Payment and EV are never reconciled. Reports reach nobody who can act on them.