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Earned Value: Fun with Numbers or Real Management Data – Answers (part 2)

By Humphreys & Associates / February 28, 2014

This is the second in a two part article on Earned Value: Fun with Numbers Part 1 / Answers

Answers: Earned Value terms used in the context of this article

Management Reserve

Correct Answer: N

In the Earned Value Management System (EVMS) vernacular, Management Reserve (MR) is the budget set aside for Known Unknowns – not Unknown Unknowns. This distinction is important, as the budget at complete (BAC) plus MR equals the Contract Budget Base (CBB).
Management reserve is typically used when an identified risk is realized (Known Unknowns). Once a risk has become a reality, such as re-work, re-test, re-make, more lines of software required, etc., the newly identified work required to satisfy the existing contract SOW must be scheduled and resource loaded (BCWS). This additional budget must be distributed to a CAM (or CAMs) via a work authorization document. The source for this budget is MR and not UB, as UB must have previously been logged with a predetermined budget and associated SOW.
While the Unknown Unknowns could be estimated using simulations, models, etc., the project does not have the luxury to have such a budget set aside initially for an Unknown Unknown occurrence. If an Unknown Unknown becomes a Known, thus the newly identified risk becomes reality, the contractor could use the existing MR to budget this newly identified task or tasks to satisfy the contract requirement or prepare a change proposal for their external customer.
When there is no MR, the contractor could implement an Over Target Baseline (OTB) in the event newly identified risks are realized with prior customer approval, as there is usually insufficient MR remaining.

Schedule Variance

Correct Answer: G

Schedule Variance (SV) = BCWP – BCWS

– The resulting answer will identify the schedule position on the program, a negative answer indicates a behind schedule condition some or all of the program tasks. A positive result indicates an ahead of schedule condition for some or all of the program tasks.
– Always use this information to supplement the Program Schedule tools data which uses actual days/week/months to identify the programs schedule position.

Budget At Completion

Correct Answer: D

The total contract value of all the time phased planned work

Contract Budget Base/Contract Target Cost

Correct Answer:M

The total contract value of all the time phased planned work, plus Management Reserve

Budgeted Cost for Work Scheduled

Correct Answer:A

The Budgeted Cost for Work Scheduled, or BCWS, is the time phased value expressed in hours and/or dollars for all of the authorized budgeted work scheduled to be accomplished on a program. This is the time phased baseline from which all work performed is measured.

Schedule Slip

Correct Answer: J

The amount of time/duration that the planned completion dates have been missed by, the total number of days/weeks/months that an activity is behind to the original baseline dates.

Variance At Completion

Correct Answer: I

Variance at Completion (VAC) is the difference between the Budget at Completion (BAC) and the Estimate at Completion (EAC). VAC can be calculated at any level from the control account up to the total contract. It represents the amount of expected overrun (negative VAC) or underrun (positive VAC)
The VAC is computed by subtracting the EAC from the BAC. A negative result is unfavorable indicates the tasks being measured are forecasting an overrun at completion. A positive result is favorable indicates the tasks being measured are forecasting an underrun at completion.

Estimate At Completion

Correct Answer: F

The Earned Value Guidelines define the EAC as the sum of the contracts cumulative to date Actual Cost of Work Performed (ACWP) plus the company project manager’s best estimate of the time-phased resources (funds) required to complete the remaining authorized work, the Estimate to Complete (ETC). This relationship is often expressed by the formula EAC = ACWP + ETC. Thus, the EAC is a forecast of the project’s final cost. The project manager may revise work priorities, replan remaining tasks on the project schedule and/or adjust the technical approach to complete the project’s goals within the estimated remaining resources. The goal is to complete all of the contract work scope within the Contract Budget Base–CBB(cost) and Contract Completion Date–CCD (schedule).

Actual Cost of Work Performed

Correct Answer: B

The costs actually incurred and recorded in accomplishing the work performed on the program. The costs include Labor, Material/ Sub-Contracts, Other Direct Costs (ODC) and the associated Indirect costs applied to each category.

Estimate To Complete

Correct Answer: E

The Estimate to Complete (ETC) is the company project manager’s best estimate of the time-phased resources (funds) required to complete the remaining authorized work.

Cost Variance

Correct Answer: H

Cost variance (CV) which is calculated as BCWP minus ACWP. A result greater than 0 is favorable (an underrun), a result less than 0 is unfavorable (an overrun).

Program Overrun

Correct Answer: O

The difference between the total Budget and the Estimated Costs at Completion, a negative number indicates an overrun to the program. (A positive number indicates an underrun to the program)

Time Now

Correct Answer: L

Time Now is the end of the current (and cumulative to date) period that the data is being measured against.

Budgeted Cost for Work Performed

Correct Answer: C

The Budgeted Cost for Work Performed (BCWP) is the value of work completed based on the value of the BCWS assigned to that work. This is equal to the sum of the budgets for completed work

Forecasted Program Schedule Slip

Correct Answer: K

The total number of days/months that the program is estimating the completion date of all authorized efforts will exceed the planned Contract Completion Date (CCD). Compare the CCD date to the Estimated Completion Date (ECD)

Estimated Completion Date

Correct Answer: P

The estimated date that all authorized efforts will be completed.

Discussion of the displayed data

The Program began in January, the Time Now (L) is June or approximately 6 months into the effort. There are unfavorable Schedule (G) and Cost (H) Variances. The program was planned (BCWS-A) to complete in March. The Current Estimated Completion Date–ECD (P) is June which indicates a 3 month Forecasted Program Schedule Slip (K). The Budget At Completion (D) Was about $39M (including Management Reserve –MR (N), the Estimate At Completion–EAC (F) is about $56M resulting in a Program Overrun (O) of $17M.

As you can see, selecting key measurement data metrics empowers the program manager with the information to estimate the impacts of early trends in the program. Using the data from analytical tools such as “EMPOWER” allows the program manager to evaluate the current status and develop corrective action and mitigation plans to help minimize the impacts to the overall contract and keep all customers aware of possible outcomes.

We hope you found this two part article on Earned Value: Fun with Numbers useful. Feel free to share or call Humphrey’s & Associates for more information.

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Earned Value: Fun with Numbers or Real Management Data? Part 1

By Humphreys & Associates / February 18, 2014

The modern day EVMS engine can provide massive amount of data that often can overwhelm the users. There are some key data points that when developed and reported properly will provide excellent information to the program team so they can focus on the most critical cost/schedule/technical issues.

The most successful EVMS implementations have selected the best data and indices for their programs and use them as a key element in their management tool box.

The following graph depicts a well-balanced selection of Earned Value data that provides key information for making management decisions. How many of the points can you identify and do you know the data each provides? Match each letter with the appropriate terms listed below.

Check back for the next installment in two weeks for the correct terminology and for a brief description on what they mean in managing your programs. Earned Value: Fun with Numbers or Real Management Data – Answers (Part 2)

Earned Value: Fun with Numbers or Real Management Data? Part 1 Read Post »

Earned Value Management for Biotech and Pharma – Part 2 Accounting

By Humphreys & Associates / August 2, 2013

By Ric Brock – Engagement Director, Humphreys & Associates

As a follow up to our article on the Earned Value Management for Biotech and Pharma Industries, this is a quick look at how Biotech and Pharma companies collect and manage costs compared to accounting requirements on federal acquisitions.

The Operating Model for the Biotech and Pharma Industry

The basis of the Biotech and Pharmaceutical operating model is to discover/invent a compound or device to meet a need, validate its safety and efficacy, ensure proper patent protection, market it as quickly as possible, and maximize commercialization while there is still patent protection. In short, it is about speed to market and maximizing the commercial life cycle.

Operating costs are collected and managed from a process costing basis. Internal costs are usually not collected by a cost objective, as they are not managed to that level of detail. Most internal labor is collected by department total headcount and labor dollars. Project or activity based timekeeping is not practiced; i.e. time cards are not used. External costs (materials, contract services, subcontractors, etc.) are collected within the purchasing system and can be tied to specific activities and traced to the originating departments. Most companies do have the ability to set up and track job costs within their capital management system.

Federal Acquisition Regulations (FAR), Cost Accounting Standards (CAS), and Timekeeping

The ability to plan and collect actual costs in a consistent and systematic manner by contract/project is a key to the Earned Value Management System requirement. The costing of items and services purchased by the US Government on a non-firm fixed price basis are covered in the Federal Acquisition Regulations (FAR) and the Cost Accounting Standards (CAS). The ability to collect costs in a consistent and timely manner is an EVMS prerequisite.

Federal Acquisition Regulations

Federal Acquisition Regulations (FAR) are a set of regulations governing the US Government processes of purchasing goods and services. Among the guiding principles are to have an acquisition system that satisfies the customer’s needs in terms of cost, quality, and timeliness; to conduct business with integrity, fairness, and openness; and to fulfill other public policy objectives.

Part 52 of the FAR contains standard contract clauses and solicitation provisions. Many clauses incorporate parts of the FAR into government contracts by reference, thereby imposing FAR rules on contractors.

Part 30 of the FAR describes policies and procedures for applying the Cost Accounting Standards Board (CASB) rules and regulations [48 CFR Chapter 99 (FAR Appendix)] to negotiated contracts and subcontracts. This part does not apply to sealed bid contracts or to any contract with a small business concern [see 48 CFR 9903.201-1(b) (FAR Appendix) for these and other exemptions]. Part 30 also identifies the standard contract clauses and solicitation provisions contained in FAR Part 52 that are to be incorporated when applying the CASB rules and regulations to a contract or subcontract.

When a government agency issues a contract or request for proposal, it will specify a list of FAR clauses that will apply. In order to be awarded the contract, a bidder must either comply with the clauses, demonstrate that it will be able to comply at time of award, and/or claim an exemption from them. A bidder must also ensure that it understands the contractual commitments, as complying with some FAR clauses may require changes to operating processes.

Cost Accounting Standards

Cost Accounting Standards (CAS) are a set of 19 standards and rules (CAS 401 – 420) that the US Government uses in determining the costs on negotiated procurements.

A company may be subject to full CAS coverage (required to follow all 19 standards), modified CAS coverage (required to follow only Standards 401, 402, 405, and 406), or be exempt from coverage.

Full coverage applies only when a company receives either one CAS-covered contract of $50 million or more, or a number of smaller CAS covered contracts totaling $50 million. In addition to complying with the standards, the company must also file a CAS Disclosure Statement (CASB DS-1) which clearly describes the company’s accounting practices (such as what costs are treated as direct contract charges and what costs are treated as part of an overhead expense). There are two versions of the CAS Disclosure Statement: DS-1 applies to commercial companies while DS-2 applies to educational institutions.

Modified coverage applies when a company receives a single contract of $7.5 million or more.

Timekeeping

Despite the significant role timekeeping plays in government contracting, the FAR provides little direction on timekeeping. This lack of guidance has been left to government audit agencies (such as the Defense Contract Audit Agency (DCAA) to establish audit standards. The DCAA uses its Contract Audit Manual (CAM) to provide audit guidance to its auditors. The CAM provides guidance on auditing timekeeping procedures in section 5-909. The audit manual states that timekeeping procedures should be able to “assure that labor hours are accurately recorded and that any corrections to timekeeping records are documented…”.

This timekeeping system should feed a labor distribution system that maintains labor hours and dollars by employee, by project/contract, and type of effort account. This labor distribution should be reconciled to the general ledger labor accounts at least monthly.

Timekeeping is critical. Unlike other contract costs, labor charges are not supported by external documentation. The move by a Biotech/Pharma company to a formal timekeeping system may require extensive cultural change.

Summary

As Biotech and Pharmaceutical companies move to FAR contracting, it will require a transition to a project/job costing basis from a process costing basis. This change may appear straight forward, but any process change requires sound change management.

All aspects of EVMS are critical to ensure the utility of an effective program management tool. In this blog we provided a summary level look at cost accounting data. The ability to collect valid, timely, and auditable cost is the foundation for the Actual Cost of Work Performed (ACWP). Without knowing what we accomplished and what we spent to get to where we are, it is very hard to predict where we are going: the Estimate to Complete (ETC). As a company designs and develops its EVMS, it must make sure actual cost collection and management is also addressed within the FAR and CAS requirements.

For questions or inquires on how to implement Earn Value project management in the biotechnology or pharmaceutical industries, contact one of the experts at Humphreys & Associates.

Mr. Brock has over 30 years of experience in program and project management, operations, and quality assurance in government and commercial environments. He has extensive experience working with all levels of an organization, from top management to performing personnel. Ric has extensive experience supporting Pharmaceutical companies in life cycle management, filing new drug applications, and launching new drugs. He has a wealth of experience with EVM systems across a variety of industries from defense to commercial including biotech/pharma. You can find Ric on LinkedIn

Earned Value Management for Biotech and Pharma – Part 2 Accounting Read Post »

EVM Lite – Part 2: Tailoring approaches to EV Lite

By Humphreys & Associates / June 1, 2013

So, what if there is no EVMS contract requirement, but a company wants to use the EVM principles to measure performance on important work?

Approaches for tailoring EVM Lite (also called EV Lite):

First, the levels of the Work Breakdown Structure (WBS) could be limited to minimal extension. With fewer lowest level WBS elements, fewer control accounts are created which results in a reduction in the overall administrative costs of the system.
Similarly, responsibility can be assigned to managers higher in the Organization Breakdown Structure (OBS), or Integrated Product Teams can be used to combine functions. By having fewer lowest level OBS elements, fewer control accounts will be created. Most contractors are well aware of these implementation tactics and actively engage in them.
Other approaches include the Project Schedule – more distance between the milestones and use of the Percent Complete Technique, providing the validity of the Earned Value (EV) data is unaffected. Also, the Variance Analysis Report Thresholds could be tailored to specific risk areas and made less stringent. The Change Control Process could be tailored to a more streamlined transfer of work and budget involving Stop Work Orders.
With respect to reporting, The Integrated Program Management Report (IPMR) or Contract Performance Report (CPR), Format 2, Organizational Categories, and Format 4, Staffing, could be eliminated.
In some cases, Format 3, Baseline is eliminated. Note: The new IPMR Guidance does not allow tailoring of the Contract Data Requirements Item List (CDRL) to removed reports on contracts that exceed $50 million. None of the bulleted “EVM Lite” items above are even in the realm of the acceptable items for EVMS tailoring. If a company has an EVMS contract requirement, EVM Lite will not receive a favorable reaction from the DCMA.

Some companies use EVM for critical internal Research and Development projects or fixed priced work. Companies need to ask the question “Where do we want to fit in the EVMS Continuum?” Consider the graphic below:

The right hand side of the continuum represents implementation of EVMS to the maximum, and represents the highest cost to operate and maintain an EVMS. The left hand side represents something that looks like EVMS because it contains Earned Value, but none of the discipline necessary to ensure the integrity and traceability of the EVMS data. Most people that talk about EVM Lite want to be closer to the left hand side of the continuum.

Any alternative approaches must consider the trade-off between the steps necessary to maintain good baseline control and system discipline versus implementation/ maintenance costs. If the performance measurement baseline is not adequately controlled, a good basis for measurement does not exist. If the earned value is not reliable and other data integrity issues exist, status reporting is suspect and the data cannot be used with confidence to forecast expected outcomes.

Humphreys & Associates can help a company’s team sort out which methods would work best for its project. H&A EVM experts can help determine which requirements can be relaxed, which ones need to be implemented and still maintain the fundamental EVM principles within each subsystem.

EVM Lite – Part 2: Tailoring approaches to EV Lite Read Post »

Part 1 – Weekly Earned Value: Is It More Trouble Than it’s Worth?

By Humphreys & Associates / March 18, 2013

The notion of implementing weekly Earned Value (EV) causes most Program Managers to cringe. Many companies, however, are now using weekly EV as an internal management process. The business driver for this decision is the benefits that contribute to the overall success of the program.

The discipline of performing weekly EV ensures a more thorough report to the customer at month-end. Many areas of the Joint Strike Fighter (JSF) program are successfully using weekly Earned Value. The V-22, the F/A-18E/F, and the IRS PRIME programs have used weekly EV as a standard business practice.

Why does weekly EV have an appeal? Is weekly just as good as monthly? Do the benefits outweigh the initial costs of implementation? Analyzing weekly EV data is far superior to looking at a performance report on a monthly basis. This can best be described as a “proactive” approach to program management rather than a “reactive” mode. There are new processes and cultural impediments involved when implementing weekly EV, but the benefits outweigh the costs.

In order for weekly EV to be successful:

Planning must be sufficiently detailed to objectively provide status on a weekly basis;
The budget must be time phased on a weekly basis
Accruals of labor and material costs must be done every week.

These three processes, combined with trained and proactive personnel, form the ground work for successful weekly Earned Value Management (EVM). Weekly EV will provide continuous visibility of program performance with real time status.

A successful Earned Value Management System (EVMS) begins with a well-designed schedule. Without an accurate and valid schedule in place, the EVMS is virtually useless. The schedule must be time phased and resource loaded consistent with the work to be accomplished. A proper scheduling tool that can be integrated with the appropriate cost software is essential.

The EVMS scheduling tool must have:

The ability to record and display status
Convert the status to a percent complete
Show milestone completions
Accurately compare that status to costs on a weekly basis

The program’s organizations must be trained in providing schedule status on a weekly basis.

For companies without this existing infrastructure, acquiring a new scheduling will incur some initial costs. Many companies have an adequate scheduling tool deployed, have the schedule status updated weekly and weekly performance assessments. High-risk programs, such as R&D efforts, have work scheduled weekly to maintain tight control over schedule and cost. This makes integration of the schedule into a weekly EVMS nearly painless.

This is the first of a two parts on “Earned Value – Is it Worth It? presented by Humphreys & Associates, Inc.

Part 1 – Weekly Earned Value: Is It More Trouble Than it’s Worth? Read Post »