Actual Cost of Work Performed (ACWP) Archives - Page 2 of 2

Using the Same Rate for BCWS and BCWP

By Humphreys & Associates / November 6, 2014 / ANSI, BAC, BCWP, BCWS, EVM, EVMS, NDIA

There is often an EVMS project managers debate regarding which rates to use for common budget costing EVMS data elements. For Actual Cost of Work Performed (ACWP), it is fairly obvious as the most recently approved actual rates are applied. A planning rate is generally used for BCWS and BCWP, but many in the EVM project management industry use incorrect rate application for the BCWP calculation. In some cases EVM contractors use a weighted average rate; the percent complete in hours multiplied by the dollarized BAC to derive the BCWP in dollars. This method is noncompliant with the EIA-748 Guideline 22 which states that if work is planned on a measured basis, then the BCWP must be calculated on a measured basis using the same rates and values. In other words, the rate and methods used to calculate BCWS and BCWP must be the same. As shown in Example #1, it can be seen that work planned in hours (BCWS) was performed as scheduled (BCWP) each month. Each hour was planned at a rate of $100/hour until the end of the calendar year when the rate increased to $105/hour. In this example, the rates used to calculate BCWS and BCWP are the same.

Example #2 below illustrates a very common scenario. In this example work that was planned in November and December was not completed until the next year. In January, the rate increased from $100 to $105. What should the BCWP in dollars be for both January and February?

For both January and February, the original 10 hours planned was earned at $105/hour equaling $1,050. The work that was planned in November and December, but completed late in January and February, was earned at its planned rate of $100/hour resulting in $1,000 of BCWP. The sum ($1,050 + $1,000) equals the BCWP of $2,050 in each month. See the Example #3 graphic below:

Even though the rate was escalated in the new year, the BCWP that should have been earned in the prior year is calculated using the rate that was originally planned. The same approach would be logical if the work planned at $105 per hour were performed ahead of schedule in let us say, December of the prior year. It would be earned at $105 per hour even though it was performed in a time frame where the planning rate is $100 per hour. In some instances, business systems are programmed to earn as a percent of the entire Budget at Completion (BAC). This could result in an inaccurate BCWP dollar value. As an example, let us assume 10 hours are earned in September. If those 10 hours were 1/8 of the total BAC, then the BCWP dollars associated with this 10 hours would be $102.50 per hour and the contractor would be earning too much for those 10 hours. They must earn at the planned $100 per hour! Thus the rate used for BCWP is the same as for BCWS and is compliant with Guideline 22; one earns in the same manner as they plan to earn.

In summary, EVM concepts require that in order for the work to be complete, cumulative values of BCWS and BCWP must equal the BAC. So, from a common-sense standpoint, if BCWP is earned at a different rate than that used for planning the BCWS, the Control Account (or even the Contract) cannot be closed properly. Examples:

If BCWP earns at a lower rate, the BCWP would be, say, 98% of the BAC when the actual work is done.
Likewise, if BCWP earns at a higher rate, the BCWP would be, say, 105% of the BAC when the actual work is concluded.

Both of these scenarios violate the EVM concepts.

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Ensuring CPI to TCPI Comparisons are Valid at the Total Contract Level

By Humphreys & Associates / August 29, 2014

Have you been in a meeting when presenters show differing To-Complete Performance Index (TCPI) values at the total contract level for the same contract? In these situations, the presenters have made different assumptions about the inclusion of Undistributed Budget and Management Reserve (MR) in the TCPI calculations. So let’s use some sample values and show different ways the TCPI can be calculated at the total contract level.

As a reminder, this is the formula for TCPI:

Consider the following extract from the lower right portion of Format 1 of the Integrated Program Management Report (IPMR) (Contract Performance Report (CPR)).

When comparing the TCPI to the CPI at the total contract level, the most realistic approach is to calculate the TCPI at the level of the Distributed Budgets. Stated differently, the TCPI should be calculated without Undistributed Budget and Management Reserve. The Cost Performance Index (CPI), BCWP divided by ACWP, represents the cost efficiency for the work performed to date. Notice in the above table that the BCWP and ACWP values in the rows for “Distributed Budgets by WBS”, “Subtotal”, and “Total” are the same; therefore, the CPI calculation will be the same for any of these data levels. The TCPI represents the cost efficiency necessary to achieve the reported EAC. The “Distributed Budgets by WBS” contain approved budgets as well as performance data against those budgets. The CPI and TCPI compared at this level of data certainly provide a valid comparison of past performance to projected performance. The CPI for the above data is 0.73 while the TCPI is .92.

Since the difference between the CPI and TCPI is greater than 0.10, the control account managers (CAMs) and the analysts should research the reasons that the future performance indicates improvement and provide EAC rationale.

Calculating the TCPI at the Performance Measurement Baseline level (i.e. including Undistributed Budget in the BAC and EAC) yields a different TCPI than at the Distributed Budget level. Mathemati-cally, the TCPI will be the same for the Distributed Budgets and PMB only if the value of the Estimate to Complete (EAC – ACWP) equals the budgeted value of the remaining work (BAC – BCWP). In that case, the TCPI will be 1.0. If the contract has an unfavorable cost variance and projects an overrun on future work, the TCPI at the PMB level (includes UB) will be higher than the TCPI calculated at the Distributed Budget level (does not include UB).

For the data in the above table, the Distributed Budget TCPI = 0.92 but increases to 0.94 if Undistributed Budget is included in the calculation. The Undistributed Budget, with the same value added to both BAC and EAC, represents a portion of the Estimate to Complete (ETC) that will be performed at an efficiency of 1.0. In an overrun situation at the distributed budget level, the disparity between the CPI and TCPI increases when Undistributed Budget is included in the TCPI because more work must be accomplished at a better efficiency to achieve the EAC. In the above data, the disparity between CPI and TCPI increased from 0.19 to 0.21.

Calculating the TCPI at the total contract level with Undistributed Budget and Management Reserve in both the BAC and EAC yields TCPI values very close to TCPI values calculated at the distributed PMB level. The UB and MR values included in the BAC and EAC increase the proportion of the remain-ing work that is forecast to be completed at an efficiency of 1.0 and push the TCPI toward the 1.0 val-ue. The larger the values of UB and MR, the more the TCPI will diverge from the TCPI calculated at the Distributed Budgets level. Using this approach for the sample data above, the CPI is 0.73 and the TCPI is 0.94.

Calculating the TCPI at the total contract level, but not including Management Reserve in the EAC, creates a significant disparity between the CPI and TCPI. This situation represents the classic “apples to oranges” comparison: the work remaining in the formula includes MR, but the funds estimated do not. Obviously, with a higher numerator, the TCPI would be higher than any of the other approaches discussed above. Using this approach for the sample data above, the CPI is 0.73 and the TCPI is 1.06. While situations arise where exclusion of MR from the EAC makes sense, it is still important to review the project manager’s rationale with respect to MR application. Most situations assume that MR will be depleted during contract performance; consequently, it should be added to the EAC at the PMB level.

In summary, be sure you understand what is included in the TCPI calculation before you make comparisons to the CPI at the total contract level. The following table summarizes the CPI and TCPI for the sample data in this article and highlights the differences in the TCPI when calculated at the various data summary levels.

To ask about this topic or if you have questions, feel free to contact Humphreys & Associates.

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Is it OTB/OTS Time or Just Address the Variances?

By Humphreys & Associates / August 1, 2014 / EVM, EVM Analysis

EVM, EVM Analysis

No project manager and project team ever wants to go through an Over Target Baseline (OTB) or Over Target Schedule (OTS). The idea of formally reprogramming the remaining work and adjusting variances at the lowest level can be daunting and extremely time consuming. As painful as an OTB/OTS is, a project manager must first determine if the reprogramming is necessary. Several factors should be considered before an OTB/OTS is declared and implemented.

NOTE: This paper addresses a Formal reprogramming as including both an OTB and an OTS. If the Contract Performance Report is the CDRL Requirement, an OTS is not a part of a Formal Reprogramming. It is a separate action.

Performance Data

Projected successful execution of the remaining effort is the leading indicator of whether an OTB/OTS is needed. Significant projected cost overruns or the inability to meet scheduled milestones play a major role in determining the need for an OTB/OTS as these indicators can provide a clear determination that the baseline is no longer achievable.

Leading indicators also include significant differences between the Estimate to Complete (ETC) and the Budgeted Cost of Work Remaining (BCWR). This is also demonstrated by major differences between the Cost Performance Index (CPI) and the To Complete Performance Index (TCPI). These differences are evidence that the projected cost performance required to meet the Estimate at Completion is not achievable, and may also indicate that the estimated completion costs do not include all risk considerations. Excessive use of Management Reserve (MR) early in the project could also be an indicator.

Schedule indicators include increased concurrency amongst remaining tasks, high amounts of negative float, and significant slips in the critical path, questionable activity durations and inadequate schedule margin for remaining work scope. Any of these conditions may indicate that an OTB/OTS is necessary.

Quantified Factors

Various significant indicators in both cost and schedule can provide a clear picture that an OTB/OTS is warranted. The term “significant” can be seen as extremely subjective and vary from project to project. For further evidence, other more quantified indicators can be used to supplement what has already been discussed.

Industry guidelines (such as the Over Target Baseline and Over Target Schedule Guide by the Performance Assessments and Root Cause Analyses (PARCA) Office) suggest the contract should be more than 20% complete before considering an OTB/OTS. However, the same guidance also recommends against an OTB/OTS if the forecasted remaining duration is less than 18 months. Other indicators include comparing the Estimate to Complete with the remaining work to determine projected growth by using the following equation:

Projected Future Cost Overrun (%) = ([(EACPMB-ACWP) / (BACPMB-BCWP) – 1)] X 100

If the Projected Future Cost Overrun percentage were greater than 15%, then an OTB/OTS might be considered. Certainly the dollar magnitude must be considered as well.

Conclusion

There is no exact way to determine if an OTB/OTS is needed, and the project personnel must adequately assess all factors to make the determination. Going through an OTB/OTS is very time consuming, and the decision regarding that implementation should not be taken lightly.

After all factors are adequately analyzed, the project manager may ultimately deem it unnecessary and just manage to the variances being reported. This may be more cost effective and practical than initiating a formal reprogramming action.

If you have any questions about this article contact Humphrey’s & Associates. Comments welcome.

We offer a workshop on this topic: EVMS and Project Management Training Over Target Baseline (OTB) and Over Target Schedule (OTS) Implementation.

Is it OTB/OTS Time or Just Address the Variances? Read Post »

EVMS – Using Estimated Actual Cost of Work Performed (ACWP)

By Humphreys & Associates / September 12, 2012 / ACWP

ACWP

Estimated Actual Cost of Work Performed

The use of estimated actual cost of work performed (ACWP) for material and subcontractors is something the Defense Contract Management Agency (DCMA) review teams expect to see in Earned Value Management Systems (EVMS).

The review teams know:

Many contractors earn value for a large amount of material at receipt
Suppliers or subcontractors do not always invoice at the same time
Contractors do not pay at the same time

VAR Narratives

DCMA increasingly sees variance analysis report (VAR) narratives for material with such statements as “My $1 million cost variance is caused by late receipt of the invoice from the vendor” or “is caused by the company not paying their invoice this month.”

These are misleading and needless variances because these drastic, temporary variances go away, or are minimized, once the invoice is paid and the actual costs in the accounting system catch up with the budgeted cost for work performed (BCWP) claimed. The intent for using estimated ACWP is to ensure that the ACWP recorded closely follows when the BCWP is claimed in the EVMS.

Real Cost Problem

When the estimated ACWP is “reversed” at the end of a month and replaced with the true actual costs, there should not be a significant cost variance, unless there is a real cost problem in which case more information is required to describe the situation. Replacing the estimated ACWP with the true actual costs is considered a routine accounting adjustment.

Note that the term “estimated ACWP” and not “estimated actual costs” is being used. The intent is to align when ACWP and BCWP are claimed in the EVMS to prevent unnecessary variances. The estimated ACWP is not the actual cost recorded in the accounting system.

Examples

That said the estimated ACWP must be based on documented, verifiable information. What are some examples of sources for the estimated ACWP?

Materials

For large, discretely tracked items, use the purchase order (PO) value for the parts earned
For small value items that may not be discretely tracked, one could use:

1. PO value (may be cumbersome)
2. Priced bill of material (BOM) for items received in the month (sorted by receipt dates). This can be actual prices or average prices for similar parts groupings (best estimate, without going to an excruciatingly painful amount of work to get it)
3. Homogeneous groupings of material based on units of measure (pounds, reels, feet, tons, gallons, etc.) times the average price for that grouping (e.g., various sized washers: “received 3,000 pounds of various washers at approximately $4.00 per pound” instead of trying to track each washer at $0.000023 per washer)

Subcontractors

The estimated ACWP can vary depending on type of subcontracts involved. It could reflect:

The CPR/IPMR/IMPDAR value for ACWP (yes, this is an estimated ACWP until the invoice is paid)
Other cost report values for ACWP or subcontractor actual costs
Earned value claimed by the subcontractor (what it was supposed to cost). If history shows poor or good performance, the control account manager (CAM) can modify the estimate for ACWP accordingly
Work performed reported by the subcontractor. The CAM should have a “valuation” of all the deliverables or anticipated receipts based on the subcontractor’s billing plan or delivery schedule

Labor Subcontractors

Usually, these staff augmentation subcontractors are working with the contractor’s employees. The estimated ACWP could reflect:

Hours performed, priced out at the contract rate (this does not account for overtime, premiums, etc.)
Months or weeks of support priced out labor at the planned rate, contract rate, or known actual rates

Clearly Identified Invoices

For all of the above cases, the supplier or subcontractor invoice should clearly identify:

What was sent or what services were provided
The actual costs for each of those items (subject to contract terms)

Disciplined Direction

Using estimated ACWP does require direction on how to implement it in a disciplined manner. It is important to identify who is responsible for entering the estimated ACWP in the EVMS and the process used to replace the estimated ACWP with the recorded actual costs from the accounting system.

The CAMs may need assistance from their financial/materials/accounting departments to ensure they have the right information needed for the estimated ACWP and that the true actual costs are captured in the EVMS as soon as the data are available.

Have questions about using estimated ACWP in your EVMS? Humphreys & Associates is available for consulting on this topic and all stages of your EVMS implementation or ongoing projects. Feel free to contact H&A.

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