Budgeted Cost of Work Performed (BCWP) Archives - Page 2 of 2

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

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.

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Factoring Subcontractor Data

By Humphreys & Associates / March 14, 2014

If you are a prime contractor Control Account Manager (CAM), how do you plan Budgeted Cost for Work Scheduled (BCWS) and claim Budgeted Cost for Work Performed (BCWP) when the negotiated subcontract value you are assigned to manage differs from your control account budget?

First, let’s understand the facts. You are assigned to manage a deliverable hardware subsystem reporting element in the contract work breakdown structure that will also be reported in the Integrated Program Management Report (IPMR). The history of your subcontract is:

The subcontractor proposed a total price of $110M (Cost $102M and Fixed Fee $8M).
For various reasons, your program manager believed that the final subcontract could be negotiated for 18% less than the proposed price, so your authorized budget is $90M (including fee).
You placed the authorized budget in a planning package until the completion of subcontract negotiations.
The subcontractor will report its IPMR data at the total price level (including fee).
The subcontract was negotiated for a total price of $100M (Cost $95M and Fixed Fee $5M).
You requested that the program manager make up the budget difference from Management Reserve (MR), but the program manager declined.

Factoring the subcontractor’s data is the best approach in this situation. Factoring the subcontractor’s data simply means applying a consistent multiplier to the subcontractor’s budget values: Budgeted Cost for Work Scheduled (BCWS) and Budget at Completion (BAC). The multiplier is developed by dividing the available control account budget by the subcontract price. In the example, the multiplier is .9 and was derived by dividing the CAM’s budget of $90M by the total subcontract value for the hardware system of $100M. This multiplier is applied to the time-phased budget provided by the subcontractor as shown in the table below. This factored budget becomes the prime contractor’s control account budget.

The calculation of the prime contractor’s earned value, also known as the Budgeted Cost for Work Performed (BCWP), simply requires applying the same factor to the subcontractor’s cumulative BCWP each month as shown in the table below. In the example, for the month of March, cumulative subcontractor BCWP of 32 multiplied by the factor of 0.9 yields the prime contractor’s factored BCWP of 29. When calculating the BCWP, the value in the prime contractor’s Earned Value Management System must reflect the same percent complete (BCWP/BAC x 100) as the subcontractor’s reported data; this is illustrated by the highlighted cells in the data example.

Note that factoring does not apply to Actual Cost of Work Performed (ACWP), the Estimate to Complete (ETC) or the Estimate at Completion (EAC) because those values represent actual costs rather than budgeted amounts that must reconcile with the subcontract Target Cost.

Factoring can occur whether the prime contractor’s budgeted amount for the subcontract effort is either greater or less than the subcontract negotiated price. Another instance where factoring is appropriate is when the subcontractor provides IPMR data without fee. The subcontractor’s fee is a cost to the prime contractor and should be included in the prime contractor’s Performance Measurement Baseline (PMB), so factoring is an appropriate technique in this situation.

In summary, remember the following when factoring subcontractor data:

Factoring ensures that the subcontract factored BCWS equals the prime contractor’s budget.
The prime contractor’s factored BCWP must yield a percent complete consistent with the subcontractor’s percent complete.
Factoring does not apply to the ACWP, ETC or the EAC.

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How to Avoid Corrective Action Requests Related to Level of Effort

By Humphreys & Associates / November 20, 2012 / Level of Effort, LOE

Level of Effort, LOE

Has DCMA issued you a Level III Corrective Action Request (CAR) because you have had repeat Level 2 CARs for having “BCWP with no ACWP” (Budgeted Cost for Work Performed vs. Actual Cost of Work Performed) or “ACWP with no BCWP” that has not been corrected?

According to all the EVMS rules, this appears to be a legitimate finding. If left uncorrected, is a valid Level 3 CAR request that can have serious financial implications.

This would certainly be a valid finding for discretely measured tasks. However, what about level of effort (LOE) work? Because LOE earns value with the passage of time it may or may not align with actual accomplishment of the work planned in that LOE task.

This usually is not a problem for general support tasks that span the duration of the project (unless the project slips). The issue more often arises with shorter duration LOE tasks that are planned to support specific discretely measured tasks. Everything is fine if the discrete work task takes place as planned. But what happens when it doesn’t?

If you are not paying attention to the LOE tasks associated with the discrete work effort, e.g. the EVM system is on autopilot, and the associated discrete work starts early or late, the result for the LOE work effort is:

ACWP (Actual Cost of Work Performed) without BCWP
BCWS (Budgeted Cost for Work Scheduled) and BCWP without ACWP
Distortion in the system of when the support work is really happening

The issue is further compounded when contractors attempt to make previous period adjustments (something that should be avoided) for LOE work effort and do not explain to their customer why they made current or prior period adjustments to BCWS, BCWP, and ACWP.

How you do avoid these issues with LOE tasks? It takes proactive planning and management of LOE tasks.

Read our in-depth article on recommended practices for improving the planning and monitoring of LOE activities. The goal is to avoid changing past LOE data when the discrete work does not take place as planned and to avoid those repeat CARs for “BCWP with no ACWP” or “ACWP with no “BCWP”.

Need help with how you are handling LOE work tasks or need to develop guidance on how to use the various earned value techniques? Contact H&A today.

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