USING EARNED VALUE MANAGEMENT IN GOVERNMENT CONTRACTING

0

1000

2000

3000

4000

5000

6000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Presented by

Stephen J. Yuter, CPCM, CFCM, PMP

Overview

Definition & Principles of EVM EVM Process & Key Questions Traditional Management Systems vs. EVM Performance Measurements FAR & Agency EVM Requirements Contractor’s Requirements for EVM Contracting Officer’s Responsibilities for

EVM

Why Is There a Need for EVM?

Need for accurate and consistent status information

Numerous complex (and interrelated) projects

70% of projects are over budget and behind schedule

52% of all projects finish at 189% of their initial budget

What is EVM? Earned value is the value of the work that has been

completed – it represents the amount of the overall project budget that has been “earned” based on the percentage of the work that has been accomplished

EVM enables both the government and the contractor to have clear visibility into technical, cost and schedule planning, performance, and progress on their contracts

EVM… requires that each element of work be budgeted as each element is completed with clearly defined

deliverables, its budgeted costs are earned by placing a cost value on status, a project's

performance can be evaluated and communicated

What is EVM? (cont’d.) Proper use of EVM can provide early warning (forecasting) of

impending problems, leaving ample time for corrective action

EVM DOES NOT determine a course of action; instead, it simply isolates the cause of project problems or confirms that tasks are progressing as planned

EVM is normally not appropriate for contracts that are not performance-based (e.g. FFP or T&M) or where the nature of the work is not measurable (e.g. level of effort, and/or in steady state operations and support); optimal for services contracts providing development & integration

Applying EVM principles properly can provide for better control of program/project performance, along with greater accountability and a reduction in risk

Basic Principles of EVM Break down the work scope into discrete, measurable

elements and assign responsibility

Plan and integrate the scope, schedule, and cost into a time-phased plan and control changes to the plan

Objectively assess progress and accomplishments

Use actual costs

Analyze variances from the plan

Use the information to manage

Key Attributes of EVM

The Earned Value Process

Work the Plan

ExternalChanges

Collect Results

Analyze Deviations

Measure Performance

Change Control

Plan the Work

Define the Work

Take Corrective Action

Why Use Earned Value Management?

Ensures a clear definition of work prior to beginning that work

Presents a logical plan for accomplishing the work Provides an objective measure of accomplishments Early and accurate identification of trends and problems Accurate picture of contract status

cost, schedule, and technical Basis for course correction Supports mutual goals of contractor and customer

bring project in on schedule and cost

EVM Measures Progress

to measure progress, there must be a standard against which the movement may be compared

EVM establishes that standard as the Performance Measurement Baseline and measures progress against that baseline

Progress = movement towards a goal

What Do We Measure Progress Against?

Performance measurement baseline: integrates three key measurements budget is spread over . . . time, to accomplish the scope of work against which progress can be measured compares the PLANNED amount of work with what has

actually been COMPLETED, to determine if COST, SCHEDULE, and WORK ACCOMPLISHED are progressing as planned

work is “earned” or credited as it is completed (expressed in dollar or hours); the value earned is the WBS budgeted cost of the activity completed to date

Key Questions EVM AnswersWe analyze past performance………to help us control the future

PAST PRESENT FUTURE

Are we on schedule?Are we on cost?What are the significant variances? Why do we have variances?Who is responsible?What is the trend to date?

Are we on schedule?Are we on cost?What are the significant variances? Why do we have variances?Who is responsible?What is the trend to date?

When will we finish?What will it cost at the end?How can we control the trend?

When will we finish?What will it cost at the end?How can we control the trend?

The Two Key Questions

1. Did we get what we wanted for what we spent?

2. At the end of the project, is it likely that the cost will be less than or equal to the original estimate?

Ways of Earning Value

Should be quantitative and discrete whenever possible Discrete = tangible end product e.g. delivery of a specification, vendor parts contract

awarded, foundation completed

Should be integrated with success criteria or technical measures e.g., successful completion of clean-up, a specific

test, reliability growth curve

Traditional Management Systems

In these systems, you budget work and then record actual expenditures.

Example: I budget 5 widgets at 100 hrs per widget.At the end of the month 400 hrs had been expended.

GREAT! I'm 100hrsunder budget

But what does this mean? Is this really the true status of work?

What did I accomplish?

Budget vs. Actual Variance

500 400 100=

Management Systems Measurement of Expenditures

Well, I’ve spent 400 hrs,does that mean I’ve

accomplished 400 hrs of work?

Actual Cost is not an indication of work progress, only an indication of hours/money spent.

Management Using Earned Value Earned Value is an objective measure of how much work has been

accomplished

Example: I plan to build 5 widgets this month Each widget should take 100hrs I will measure Earned Value based on # widgets completed

At Month End...1

2

3

Budget Plan Earned Value Actual 500 300 400

(3 Widgets * 100 hrs)

Earned Value Adds a New Dimension to Traditional Tracking Systems

Budget Plan Earned Value Actual500hrs 300hrs 400hrs

Schedule Cost Variance Variance

(200) (100)

I better figure out what is going on. I’ve got 200 hours worth of work to

catch up on, and I’ve already overspent by 100 hours.

Using Performance Data for Decision-Making Behind Schedule

How critical is schedule? Can I afford to work overtime to recover? Can I do tasks concurrently? Are there technical innovations which could speed up the

process? Am I “gold plating” instead of just meeting requirements? Should I do a schedule risk assessment to project impact

to program?

Over Cost Can I reschedule tasks? (time phasing) Is there a less costly facility I can use? Are there tasks which can be deleted? Should the element be added to my risk management

profile?

Five Basic Performance Questions & Answers in EVM

Question Answer Acronym

How much work did we plan to do?

Budgeted Cost for Work Scheduled

BCWS = PV

How much work got done?

Budgeted Cost for Work Performed

BCWP = EV

How much did the completed work cost?

Actual Cost of Work Performed ACWP = AC

What was the total job supposed to cost?

Budget at Completion BAC

What do we now expect the total job to cost?

Estimate At Completion EAC

Variance Calculations in EVM Schedule Variance (SV) = EV – PV

the difference between Earned Value (EV) and Planned Value (PV)

Schedule Performance Index (SPI) = EV/PV SPI<1 means project is behind schedule

Cost Variance (CV) = EV - AC the difference between EV and Actual Cost (AC)

Cost Performance Index (CPI) = EV/AC CPI<1 means project is over budget

Making Projections with EVM Cost Schedule Index (CSI) = CPI x SPI

the further CSI is from 1.0, the less likely project recovery becomes

Once a project is 10% complete, the overrun at completion will not be less than the current overrun

Once a project is 20% complete, the CPI does not vary from its current value by more than 10%

The CPI and SPI are statistically accurate indicators of final cost results

Using Performance Data To Validate Estimates

New EACs take on more meaning when you employ performance information the EAC can be “predicted” by the performance index

Why do we need accurate EACs?

Variance at Completion vs. Contractor Loss

Positive VAC: EAC < BAC underrun contractor gain

Negative VAC: EAC > BAC share area contractor partial loss EAC > ceiling overrun contractor loss

Government develops top-level EAC for comparison: Government should limit progress payments if EAC is greater than

contract ceiling Government needs accurate forecast of fund requirements

Earned Value Problem Indicators GOAL: to verify that effective variance analysis processes

are applied to identify, correct, and report problems

Potential Problem Indicators:

Zero variances

Monthly trends turning negative or downward

Schedule variances generally indicate cost will follow

Actuals > Latest Revised Estimates (LRE)

BCWP increases with no increase in ACWP

Negative data elements

Statutes Related to EVM The requirement for EVM as it is practiced today can be traced

to three public laws:

Government Performance and Results Act of 1993 (GPRA)

Establish performance standards for Federal budget

Federal Acquisition Streamlining Act, Title V of 1994 (FASA V)

Report cost, schedule, and performance goals and evaluate progress

Information Technology Management Reform Act of 1996/ Clinger-Cohen Act (ITMRA/Clinger-Cohen)

Report performance information systems acquisition

EVM Requirements OMB Circular A-11, Part 7 requires the use of EVM in the performance

management of major investments and major systems in development, modernization, or enhancement (DME) or in mixed life-cycle

"Agencies must use a performance-based acquisition management system to measure the achievement of cost, schedule, and performance goals, and achieve (on average), 90% of those goals”

Contractors’ Earned Value Management System (EVMS) must comply with the guidelines set forth in the American National Standards Institute (ANSI)/Electronic Industries Alliance (EIA)-748 Standard

FAR 52.234-2 (Pre-IRB), 52.234-3 (Post-IRB), and 52.234-4 (EVMS)

Federal agencies requires its use on major programs (i.e. IT and non-IT investments $100M or greater) and on their associated contracts with a contract price of $20M or greater; continued surveillance to ensure compliance

EVM Requirements (cont’d.)Contract

Total ValueEVM

ComplianceCWBS & IMS CPR (monthly) CFSR

(quarterly)

$50M and greater

Required Required Required Required

$20M and greater but less than $50M

Required Required Required Required

Less than $20M

Optional (at discretion of PM)

Required if PM requires EVM

Required if PM requires EVM

Required

Integrated Baseline Review (IBR) Determines that the Performance Measurement

Baseline is responsive to the scope of work required

Joint assessment of Coverage of SOW Scheduling of work Resource allocation Earned Value methodologies Technical content of PMB Realism and Risks

Should be conducted pre-award but no later than 180 days post-award

The Contractor’s EVMS Describes system in sufficient detail to determine compliance

Includes prior Certification/Acceptance

If no EVMS is in place, Contractor must submit a comprehensive plan for compliance System description Necessary modifications Compliance map Process descriptions Recent evaluation or self-assessment results

Identify major subcontracts for application of criteria Verify baseline integrity is maintained

Contains plan and procedures for surveillance and self assessment

The Contractor’s EVMS (cont’d.) Surveillance Plan

Methods and techniques Inclusion of new scope Customer coordination Schedule Analysis Ensure that reliable and timely cost, schedule, and

technical performance information is generated Baseline Budget Control Accounts Baseline Schedule Work Measurement by Control Account

Work-hours, dollars, units, etc.

EVMS Is Important to Effective Contract Administration EVMS gives early warning of potential problems

As a Contract Specialist or Contracting Officer, you are a member of the Integrated Project Team (IPT)

It is your job as the CS/CO to protect the Government’s rights if performance does not show satisfactory progress!

You must work with the other IPT members and the Contractor to avoid or mitigate performance problems

What Are the CO’s Responsibilities Regarding EVMS? Contracting Officer’s Pre-Award Responsibilities as a

Member of the IPT: Identify application of the Earned Value

Management System in acquisition plans, solicitations and contracts

Define reporting and electronic submission requirements

Define evaluation criteria for source selections

Factor EVMS into contract management planning

What Are the CO’s Responsibilities Regarding EVMS? (cont’d.) Contracting Officer’s Post-Award Responsibilities as a

Member of the IPT: Integrate performance monitoring with EVMS into

Award/Incentive plans

Monitor performance with IPT using the EVMS

Act when performance is at risk (communication with contractor, show cause and cure notices, etc.)

Evaluate the Contractor’s EVMS implementation plan

Evaluate the Contractor’s EVM systems for compliance with the standard

Conduct Integrated Baseline Reviews to ensure all the work scope is included in the baseline

EVM Impact on Mission By utilizing EVM properly, an agency can…

improve its ability to track and report on investment cost, schedule, and performance variances (agency projects must stay within a 10% variance)

allow PMs and project team members to optimize resources and deliver capital investment projects on-time, on-budget, and within scope

operate by tracking its programs’ health beyond pure financials

ensure its customers’ requirements are satisfied

Summary EVM helps reduce the guesswork in:

measuring performance forecasting

Aids in getting beyond misleading measures of progress - provides a common denominator for work scope, schedule, and resources

Reasons to use EVM: Good project management practices OMB/FAR requirement

Should be incorporated into contracts for major acquisitions (cost-reimbursement)

Q & A