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Improving Integrated Master Schedule (IMS) Task Duration Estimates

By Humphreys & Associates / October 1, 2024 / Earned Value Consulting, earned value training, EVM Training, IMS Scheduling, Integrated Master Schedule (IMS)

Earned Value Consulting, earned value training, EVM Training, IMS Scheduling, Integrated Master Schedule (IMS)

Improving Integrated Master Schedule (IMS) Task Duration Estimates

One of the top reasons projects fail is because of poor task duration estimating for an integrated master schedule (IMS). Without accurate and consistent estimates, project outcomes can become unpredictable, leading to missed deadlines, budget overruns, and overall project failure. A realistic schedule is required to place the necessary resources in the correct timeframe to adequately budget the work as well as to produce credible estimates to complete and to forecast completion dates. While missed deadlines and budget overruns are detrimental for any project, there can be additional business ramifications when producing schedules in an Earned Value Management System (EVMS) contractual environment.

While there are effective methods available to improve task duration estimates, they are often underutilized. A common reason for this oversight is the lack of time allocated to developing the project schedule and determining task durations.

During the proposal phase, initial durations are typically estimated at a more summary level than the detailed execution phase. The proposed work is often defined at a level one to two steps higher than where the actual tasks will be performed. After project initiation, the team’s initial effort is to break the work down into more manageable tasks. This decomposition is crucial for achieving more accurate estimates. It’s no surprise, then, that the initial breakdown efforts often result in duration estimates that don’t align with the proposed durations.

Parkinson’s Law tells us that work expands to fill the time available. If task durations are excessively long, costs will inevitably rise. To counter this, it’s important to require estimators to provide both the estimated effort and the duration needed to accomplish the task. This approach helps to gain a better understanding of the scope of the task and to avoid unrealistic estimates. If you see a task that requires 10,000 hours with a duration of 2 weeks, then you immediately would suspect something is wrong with the estimates.

Techniques for Developing More Accurate Task Duration Estimates

What are your options? H&A earned value consultants and senior master schedulers often employ the following techniques to help a client produce a more realistic IMS.

Establish a Probability Goal. It is essential to set clear expectations for the estimating team. Without guidance, teams may default to estimates with a 50/50 probability of success, which is a recipe for failure. Instead, directing the team to aim for estimates within a 75% to 80% probability range can lead to better outcomes.
Break Down Tasks. Decompose tasks into smaller, more manageable components. The further out the task’s horizon, the greater the variability in estimates. For example, asking someone to estimate the drive time from Washington, DC, to Boston without specifying the vehicle, route, limitations, or conditions introduces unnecessary uncertainty.
Use Professional Judgment. Engage someone with experience in the specific type of work required for the task. A seasoned expert will provide more accurate duration estimates based on their knowledge and experience. Often, we ask the potential task manager to do the estimate, but that person may not be the one with the most related experience or knowledge about the work.
Leverage Historical Data. If the task or a similar one has been done before, use that historical data to inform the estimate. This approach provides a realistic benchmark for future estimates.
Use generative AI. If you have access to an AI capability along with access to historical data, that could be an option to leverage the source data using specific prompts to glean relevant information. As with all AI tools, always verify the generated results to ensure it is a useful basis to substantiate the estimate.
Apply Parametric Estimating. When possible, use parametric analysis to estimate the durations. For example, if it took a specific number of days to clean up a certain amount of toxic waste under similar conditions, this data can be used to estimate the duration of a new but comparable task.
Engage Multiple Estimators. Gathering estimates from more than one person helps to reduce individual biases and provides a more rounded estimate.
Apply the Delphi Method. This technique involves three knowledgeable individuals providing estimates or three-point estimates. The initial estimates are analyzed, and the results are shared with the estimators without attributing specific values to any individual. After discussing the findings, the estimators revise their estimates based on the collective insights, leading to a more refined and accurate duration estimate.
Use Three-Point Estimates. Ask estimators to provide best-case (BC), most likely (ML), and worst-case (WC) durations, along with their reasoning. Applying a formula like the Program Evaluation and Review Technique (PERT) duration formula (1BC+4ML+1WC)/6 can yield an adjusted and realistic estimate. You can vary the best and worst case estimate for risk if you have information on that.

To see how this simple approach can work, walk through this exercise. Ask yourself how long it takes you to drive to work most of the time. Let’s say the answer is 45 minutes. Then ask yourself how long it would take on a Sunday morning in the summer when the roads were dry (the best case). Let’s say your answer is 25 minutes. Then ask yourself how long it would take on a Monday morning in the winter during a moderate snow event (the worst case). You tell yourself 90 minutes. Now you have enough information to calculate the PERT duration.

Best Case = 25 minutes
Most likely = 45 minutes
Worst Case = 90 minutes
PERT Duration = (25 + 180 + 90)/6 = 49 minutes

Finally, let’s say you ask yourself how likely it is that you end up on the high side instead of the low side. If your answer is it is much more likely to encounter conditions that slow you down, you would modify the formula to use one and a half times the worst case (25 + 180 + 135)/6 = 57 minutes. That longer duration shows the impact of your impromptu risk analysis and provides a duration that has a much higher probability of being achievable.

Now think about the same scenario but conducted by you interviewing three people who drive the same route to work. That would approximate the Delphi method.

All or something less. It may not be necessary to analyze every task to the degree suggested. Even if you could do the analysis along the top several critical paths that would be an improvement. If you were to apply numerical factors to the tasks in related portions of the project that would be impactful. For example, all mechanical design tasks or all software development tasks.

What is the best approach?

You will need to analyze your project and determine which approach or approaches would yield useful information at a reasonable cost. If you apply your own thinking on how to improve your duration estimates, you will undoubtedly find a method most suitable for your situation. Depending on a project’s complexity and risk factors, you may also find it useful to take a more formal approach. Conducting a schedule risk assessment (SRA), a probabilistic assessment of a project’s outcome, can help you gain a better understanding of where the duration risk exists in the schedule.

H&A earned value consultants and scheduling subject matter experts often assist clients to establish basic guidance to help scheduling personnel to get into the habit of adequately defining tasks and using techniques to improve duration estimates. This is critical to be able to produce well-constructed and executable schedules to improve the likelihood of achieving project technical, schedule, and cost objectives.

H&A offers a range of project scheduling training workshops that can help schedulers to implement industry best practices. These workshops also cover how to take the next step to implement advanced scheduling techniques such as schedule risk assessments to ensure the schedule is realistic and achievable. H&A earned value consultants and master schedulers often provide one-on-one mentoring using the scheduling tool of choice to help scheduling personnel work through the learning curve of using advanced network scheduling techniques to produce executable schedules.

Call us today at (714) 685-1730 to get started.

Improving Integrated Master Schedule (IMS) Task Duration Estimates Read Post »

EVM Consulting – Modeling & Simulation

By Humphreys & Associates / March 13, 2018 / deterministic model, Earned Value Consulting, EVM, EVM Consulting, EVMS, EVMS Modeling, EVMS Simulation, IMS, Integrated Master Schedule (IMS), Mesure Analyze Act

deterministic model, Earned Value Consulting, EVM, EVM Consulting, EVMS, EVMS Modeling, EVMS Simulation, IMS, Integrated Master Schedule (IMS), Mesure Analyze Act

Forewarned is Forearmed

Forewarned is forearmed. John Farmer, of New Hampshire, said that in a letter in 1685. But that advice is most likely biblical and very much older. No matter the source of the thought, we should take it as divine guidance if we are project managers. Maybe we should have it cut into a stone tablet, so we can share it with our team members.

Most of our work as project managers is spent in the “controlling” phase which is made up of the three steps “measure, analyze, act.” Our EVMS and IMS exist to be able to support this management function. The measuring part is done very well in our EVMS and our IMS; we know where we are and how we got there. The analyzing is equally well handled in the IMS and EVMS. Only the management task of acting is not well supported. Generally, we lack decision making support and tools.

Deterministic Path

No matter how well constructed and how healthy our IMS is, it has a deterministic path forward. The logic links between the activities are there because we expect them to be fulfilled. Indeed, if activity “B” is a finish-to-start successor to activity “A” we fully expect that at some point activity “A” will finish and will provide its output to activity “B”. That is a single path forward and it is a deterministic path. It is also a somewhat simplistic model.

Multiple Outcomes

Our management system asks us to perform root cause analysis followed by corrective action. But what if there is more than one corrective action to be taken. And worse; what if the corrective actions can have multiple outcomes with each enjoying its own probability. That means multiple choices and multiple outcomes. How would we show that in our plan? How would we analyze the multiple possible futures that such a situation presents?

Happily, there are ways to model a future without a set path. And once we have the future model, there are also ways to simulate the outcomes to give the probabilities we need to decide which actions to take. We are talking about probabilistic branching, and we are saying that we can build a probabilistic map of the future to use in making decisions; especially making decisions on corrective actions.

Take a simple example of running a test on the project. The expectation is that eventually we will pass the test. We will keep trying until we do. In the IMS deterministic model the test portion of the IMS might look like this:

Simulation

We can simulate this situation with different expected durations for the test. That is helpful information, but it does not explain or even capture what is going on in those different durations. It looks like we are just taking longer to do the testing but is that really what is happening? What is going on here? We certainly don’t show that.

In the real world, this simple model might have three potential outcomes. There might be three paths we can take to get to the point where we use the product. Each path has a time and money cost. We might run the test and find that we passed. Or we might have to stop the test for issues on the item or the test setup. We might even fail the test and must correct something about the product to improve our chances of passing a rerun. Eventually we will get to a usable product. But what do we put in our estimate and our plan? What do we tell the resources we need? What do we tell the boss? The customer?

Full Future Model

We now have a much better understanding of the future and can explain the situation. We also can simulate the situation to find out the most likely time and cost outcomes, so we can explain the future without any histrionics or arm waving.
If the issue is important enough we can build out the full future model and simulate it.

No matter how far we pursue the model of the future, having a valid model and being able to stand on solid ground are very valuable to us as project managers.

This is not to say that we should model out complex situations as a routine in the IMS. That would be impossible, or at least prohibitively costly. We are saying that when situations arise, we need to be able to use the IMS to help us make decisions.

This type of probabilistic modeling of the future is particularly useful in defining major decision points in our plan. When we reach a decision point the IMS may have multiple branches as successors but that implies we take every branch and that is not valid. Modeling each branch and its probabilities is valid. In the example below, where the milestone represents a decision point, we have shown three possible paths to take. If each were modeled out into the future with time and cost data, we should have the information we need to choose the path we wish to pursue. Without processes and tools like this, we would be flying blind.

Future Blog Posts

This discussion will be continued in future blogs to develop a better foundational understanding of the process and power of probabilistic modeling in our EVMS.

Good information sets the stage for good decisions. The IMS and the EVMS have sufficient information to help us model the pathways ahead of our critical decisions. We just need to learn to take advantage of what we have available to us.

Find out how an experienced Humphreys & Associates EVM Consultant can help you create a full future model and simulation of your most vital EVMS Systems. Contact Humphreys & Associates at (714) 685-1730 or email us.

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Project Management: Earned Value Consulting; Could You Use Some?

By Humphreys & Associates / January 15, 2018 / Earned Value Consultant, Earned Value Consulting, earned value training, EVM Consultant, evm consultants, EVM Training

Earned Value Consultant, Earned Value Consulting, earned value training, EVM Consultant, evm consultants, EVM Training

Failed Projects

A recent article discussed the results of a survey on the reasons that projects failed. The definition of failure was that the project was abandoned. Abandonment does not occur frequently in the world of government projects; especially defense projects where there should be strong “must have” needs driving the project. These projects tend to persist until completed even though the outcomes are not satisfactory. But there is a lot to learn from the list of reasons for failure.

Of the sixteen reasons listed, the top four had to do with changes to the environment that had given rise to the project. For example, changes in the company priorities was the most often cited reason for abandonment. In that same vein were issues with changing objectives and inaccurate definition of requirements. These types of failures are not topics for this blog since they do not immediately involve execution of the project.

Execution Problems

Lower on the list of those environment related reasons for failure were the ones more related to execution problems. These are of significant interest to a project management using an earned value consulting company such as Humphreys & Associates (H&A). These reasons related more to issues of poor project management that could have been corrected. In this area were reasons like “poor change management,” “inaccurate cost estimates,” “inaccurate time estimates,” and “inexperienced project management.”

The answers given in a survey situation depend very much on the mindset of the person responding. Is the reason really “inaccurate cost estimates” or should it have been “failure to execute to the estimate”? How many times have you seen a problem in execution “swept under the carpet” as being an inaccurate estimate or plan? One of these two answers points to the estimating system and process while the other points to project management. The estimates were generated; and, at some point, they were deemed to be sufficiently detailed to launch the project. If a scrubbed and blessed estimate is “inaccurate” that would still be a failure of project management. If the problem were really a failure to execute, then how easy would it be to blame the problem on poor estimates? This blog will discuss the cited failures as if they were execution failures.

Earned Value Management (EVM) Consultant Specialists

There are situations in life where the need for specialized advice is common and well accepted by us all. When your doctor is unsure of the medical issues, the doctor will send you to a specialist. The reason is obvious. The specialist has learned so much more about a specific problem and has so much experience diagnosing and treating the problem that it would be foolish not to secure the services of that specialist. In fact, it might be malpractice. A project management consultant can be thought of much like a medical specialist.

There are similar situations in business where the need for specialized knowledge is critical. Large companies tend to have in-house legal departments to cover the day-to-day legal issues and tasks that are central to their businesses. However, the need to go to outside counsel for large or unusual issues is accepted. Companies do not hesitate to engage the services of outside law firms to help them through troubled times. Project management consultants are like outside counsel.

What if there were a project management or earned value management situation you have never encountered before? A good example would be the times that H&A has been called in to help clients navigate the unhappy circumstances of needing to go over-target. Going through the over-target-baseline (OTB) or over-target-schedule (OTS) process is not a common experience. It is a tense time when careers can be on the line and the company reputation might also be at risk. It takes specialized knowledge to get it right. In some cases, it even takes the objective view of an outsider to help make the right decisions.

Specialized Knowledge

Another example of specialized knowledge being crucial is when the customer has deemed some issue on the project to be deficient. In some situations, a customer’s Corrective Action Request (CAR) can result in cost penalties and damaged reputations; possibly even worse consequences could result. Engaging the services of an EVM consultant with experience in identifying problems, building Corrective Action Plans (CAP)s, and leading or helping implementing the corrective actions is often a valuable and necessary action. Ask yourself how smart it would be to assume that those who were involved in causing the issue would be capable of creating a satisfactory solution.

These scenarios are aligned with the idea of project management consulting being something you only need in a crisis. There are other non-crisis needs for specialized support. Often H&A is engaged simply to help a client prepare a proposal. A proposal situation puts heavy demands on the company staffing levels and can require areas of specialized knowledge not available in the company. What if the company has never created a fully compliant Integrated Master Schedule (IMS) and they could use help the first time? What if there are not enough trained and experienced schedulers to work on the proposal? What if the company does not have a documented project management system?

Make or Break Opportunities

Projects can be huge and risky. They can be make-or-break opportunities to a company. Where so much can depend on good project management, smart companies recognize the need for an outside opinion and outside talent. Just like the internal legal department, the internal project management group sometimes needs to call on outside subject matter experts. While it might be obvious, let’s look at some reasons why this is true.

There are more ordinary everyday reasons to engage a project management consultant. Perhaps an organization just managed to win a new project bigger than any they have won before. In this case, they may not be ready to handle the project in terms of experience, systems, and even just talented headcount. A project management consulting company such as H&A can bring solutions to your earned value woes. It can also provide temporary training staff to get things going until the client is ready to take over.

Poor Communication

Let’s get back to the survey of reasons that projects failed. Are there issues on the list where project management consulting could have made a difference? Imagine an improved project management process and staff after a period of consulting to support creating or improving systems and training personnel?

The fifth most frequent reason for failure is “poor communication.” A good project management system with trained personnel is all about communication. Communication of plans, communication of progress, communication of issues, and communication of corrective actions are all actions required in a project management system. Quite often the problem of “poor change management,” cited as the sixth most common reason for failure, is reduced or eliminated after using the consulting services of a specialist?

What about the twelfth cited problem of “inadequate resource forecasting”? Would a well built and maintained resource-loaded Integrated Master Schedule (IMS) go a long way in providing forecasts of resource needs and the impacts of not having the resources? In fact, a proper IMS would help with several of the cited reasons for failure, such as inaccurate duration estimates. In fact, the application of a process, such as Schedule Risk Analysis (SRA), with the help of an experienced consultant can identify such issues in advance while there is still time to take action.

Earned Value Training

Disregarding the threat of failure as a motivator, the need for constant improvement should be enough reason to consider a project management consultant. We can all laugh at the time-worn clichés of “not-invented-here” or “we’ve never done it that way;” however, these are clichés for a reason. There is resistance to outside help and there is resistance to change. But outside help can be a great logjam breaker. An experienced and knowledgeable consultant can be your voice when you need someone who has, to use another cliché, “been there and done that.”

In fact, our consultants can laugh when they say they have “been there” and they have more than a T-shirt to prove it.

Project Management: Earned Value Consulting; Could You Use Some? Read Post »

Along the IMS Time-Now Line

By Paul Bolinger / August 22, 2017 / EVMS, IMP, IMP Troubleshooting, IMS, IMS - DI-MGMT-81650 (superseded by IPMR DID), IMS Data Date, IMS Scheduling, IMS Status Data, Integrated Master Plan, Integrated Master Schedule, Integrated Master Schedule Monitoring, Time-Now, Time-Now Line

EVMS, IMP, IMP Troubleshooting, IMS, IMS - DI-MGMT-81650 (superseded by IPMR DID), IMS Data Date, IMS Scheduling, IMS Status Data, Integrated Master Plan, Integrated Master Schedule, Integrated Master Schedule Monitoring, Time-Now, Time-Now Line

Recently one of our consultants was instructing a session on the Integrated Master Schedule (IMS) with a group of project personnel from one of our larger clients. The group was a mixture of beginners with no real experience in schedules and some much more experienced practitioners; some with more than 10 years of experience. The mixture made it somewhat difficult, but it also made for some interesting discussions that might have been missed in a more homogenous group. One of those things was the usefulness or importance of the “time-now” line.

When the group was asked about the importance of the time-now line and what information could be easily gained from a look at the line, there was silence. The beginners did not have a clue but also none of the experienced people had any response. What should have been a short discussion with just one “slide” as a visual, turned out to be a longer and more informative session on this topic.

The time-now line has different names in different software tools but it refers to the data date, or status date, of the schedule. That also would be the first day of the remainder of the schedule. When a scheduler sorts tasks by date, the time-now line runs down the screen and forms a highly useful visible reference.

In the small example below [see Figure 1], you can see the time-now line and visually assess the situation. Time-now is shown by a vertical line at the beginning of September, so all remaining effort has been scheduled to after that date. In other words, no work can be forecasted in the past. A walk down the line shows Task 1 has both started and completed. Task 2 started but has not completed. In fact, the remaining work in Task 2 has been pushed out by the time-now line. The start of Tasks 5 and 9 are also being pushed out by the time-now line. In most real project schedules, filters and other techniques may be needed to isolate information like this; but in our small example, we can simply “eyeball” the time-now line and see valuable information. Task 9 starts the critical path shown in red tasks.

Figure 1

A slightly different setup for that same small example [see Figure 2] shows something interesting. The time-now line is still at the beginning of September. But now there is a gap between time-now and work on the critical path. This is an unusual situation and should be investigated for the root cause. It is possible this is an accurate portrayal of the situation, but regardless of the cause, it must be verified and explained.

Figure 2

In yet one more variation [see Figure 3], we see that a broken link results in Task 8 ending up on the time-now line. A task without a predecessor will be rescheduled to start at the earliest possible time (if the task is set to be “As Soon As Possible”). And the earliest possible time is the time-now line; the beginning of September. Just as broken things fall to the floor in real life, “broken things” fall to the time-now line in a schedule. Un-started work can land there. Un-finished work can land there. And un-linked work can land there.

It is further possible to see that Task 2 has had an increase in the remaining duration that has driven it onto the critical path. Task 2 at this moment is the most important task on the entire project. A slip to Task 2 will drive out the end date for the entire project. One question that needs answering is what is holding up Task 2?

If the display had been sorted by increasing total float/slack and the usual cascade by date, then the critical path would be starting at the upper left-hand corner; like the critical path in this example. The action on the project is almost always on the time-now line and the most important action, when sorted as described, will be at the upper left-hand corner.

Figure 3

So, a walk down the time-now line can help us see the critical path action, find broken parts of the schedule, and locate unusual circumstances that need our attention. Our recommendation is to look at the time-now line any time there is data being changed in the IMS. This will help you catch issues early and keep the schedule cleaner.

Along the IMS Time-Now Line Read Post »

Budgeting for Rework | SRR & EVM | Earned Value Management

By Humphreys & Associates / February 22, 2016 / budgeting for rework, CAM, earned value management, EVMS, Integrated Master Schedule, Management Reserve, OTB, Scrap Rework Repair, SLPP, SRR, summary level planning packages

budgeting for rework, CAM, earned value management, EVMS, Integrated Master Schedule, Management Reserve, OTB, Scrap Rework Repair, SLPP, SRR, summary level planning packages

One of the Earned Value Management (EVM) topics that always initiates lively debate is the planning of Scrap, Rework, and Repair (SRR). These debates often become very emotional. So, what makes the topic of planning SRR so emotional? There are two primary factors. First, you are planning for something that is not in alignment with a success oriented plan. In an ideal project there would be no Scrap, Rework, or Repair. Second, we do not know what parts will require SRR or when it will occur. Let’s start with baselining some definitions:

Scrap – Manufactured articles or parts that are rejected or discarded. Waste that either has no economic value or only the value of its basic material content. Examples include a part that was made too small or a part that was damaged and could not be repaired.
Rework – The process of bringing a non-conforming part back into conformance by re-performing a previous process step. An example would be a part with a hole that was drilled undersize that could be re-drilled to the correct size.
Repair – The process of bringing a non-conforming part back into conformance by using a process outside the original process. An example would be a part that was painted and the undersized hole was not discovered until after it was painted. The repair now requires additional process steps, of stripping and re-preparing the material, that were not part of the original process. (Note: for this discussion we will focus on inline repairs. Repairs that arise post acceptance are not included in this discussion.)

Along with these basic definitions, we need to understand how your company defines and handles these costs. Some companies treat these costs as indirect and some treat them as direct costs. When these costs are classified as indirect costs, the company establishes material overhead pool(s) that collect the costs for allocation across the direct material dollars. These pools might be segregated by material type and have different allocation bases. A company’s CASB Disclosure Statement will define the pools and bases. Some companies treat these as direct charge items and will have procedures for the treatment of SRR and non-conforming material costs. RULE 1 – The budgeting of SRR must be consistent with the way costs are collected and charged. Because of the vagueness of knowing what parts will require SRR and when it will occur, the indirect costing approach is the most straight forward method within an Earned Value Management System (EVMS).

Next we need to understand how your company’s shop floor works and how non-conforming material is handled. Most shop floors work with shop orders that are issued to direct how parts are processed and routed through the process. As a part is processed into a higher level part or subassembly the costs are usually collected at that next level part/subassembly. In this way each part’s cost can be established by summarizing all the lower level parts and routing steps. In an EVMS, these shop orders are usually grouped into work packages. Usually the shop floor has procedures in place to identify the cause and corrective action associated with an issue when a part is identified as non-conforming. The corrective action approach will define what will have to be done to resolve the issue. The corrective action can be anything: scrapping and starting over from an earlier process step with an updated procedure, re-procuring, repairing, or reworking. In any corrective action approach, new procurement request(s) and/or shop order(s) will be issued with new direction. The costs are then collected and handled based on how your company has defined the process. Most companies have an additional requirement to segregate these costs to support their Cost of Quality program/system. (We could dive deeper into the processes for each scenario, but that is not the focus of this blog.)

Now that we have some basic understanding of what SRR is, how it is handled on the shop floor, and how it is costed, we can look at how to budget it in an EVM environment. Remember, we do not know what parts will need SRR, and for those that will need SRR, we do not know when it will be needed.

Let’s take the indirect costing approach first. The budget for SRR is established by the overhead factor being applied to the base cost. The value of the overhead rate is determined based on the annual planning process. As a dollar of the base material pool is planned, the SRR rate is applied. An owner is established for each pool that will also be the source for future variance analyses and forecasts.

For the direct costing approach there are several options. The following are the most common planning and budgeting options used:

Control Accounts with Planning Packages
Summary Level Planning Packages
Management Reserve
Unplanned SRR

The first 3 options have an amount of SRR that has been identified either as a factor based on historic data or as part of the Risk Management process. This SRR is usually identified to an assembly, sub-assembly, or part. The fourth option addresses an SRR event that was not planned in the baseline.

The first option is to include SRR in the Scope of Work for the production Control Account(s). The CAM then establishes one or more planning packages for SRR. The planning package(s) are associated with a grouping of parts and/or timing for effort in the future beyond the detailed planning horizon. As SRR is identified, the planning package is detailed planned (partially or in its entirety) into a work package. The procurement directions and/or shop orders that make up the non-conforming corrective action are grouped to make up the work package. In this approach it is possible that the conversion from planning packages to work packages will occur in the current accounting period; note that this approach might be in violation of a company’s defined freeze period procedure. When there is enough insight into the items identified as possible SRR candidates, including the timing of the SRR, a budget will be pulled from the planning package into a work package as part of the normal rolling wave planning cycle. The goal always should be to plan the effort into work packages as early as enough information is available. In this scenario the CAM will assess performance, perform variance analyses, and provide forecasts.

The second option is to budget a Summary Level Planning Package (SLPP) at a WBS level higher than the Control Accounts. This approach is used when SRR is planned for a WBS element but the specific Control Account cannot be identified. This budgeting approach works similar to converting from planning packages to work packages, but there are additional steps to authorize and issue scope and budget from the SLPP to the CA. The Program Manager, Integrated Product Team Lead, or WBS Element Manager will provide forecasts for the SLPP as part of the EAC process.

The third option is for the Program Manager to hold the budget for SRR in Management Reserve (MR). As SRR is identified, the CAM will request MR using the normal change control process. The PM will address the MR when analyzing the program’s overall performance.

The fourth option addresses how to handle unplanned SRR. Often these approaches of creating new Work Packages and making Earned Value adjustments may “violate one or more EVMS rules” but pass the cost/benefit common sense rule. In this option the new procurement direction and/or shop orders are added to the existing work package grouping. There is no new budget allocated and the additional actual costs that are collected are explained as a variance. If that work package had been closed it will need to be re-opened. If cumulative BCWP is now overstated, it may need to be adjusted (de-earned) to reflect that work is still remaining. The ETC/EAC is also updated to reflect the estimated timing and cost for the SRR. If you select this approach, make sure your system description and procedures allow for these exceptions to generally accepted rules. This approach may drive numerous anomalies in the EVM data, which will need to be explained in Format 5 of the Contract Performance Report or Integrated Program Management Report.

If the SRR is a large amount of work and will take a significant amount of time, it might warrant establishing an Over Target Baseline/Schedule (OTB/OTS). If this is the case, be sure to discuss the approach with your customer.

Additional Cautionary Tales and Lessons Learned:

Cost versus Benefit – Make sure that your manufacturing system can support what is described in your EVM System Description. Also, understand the cost impact for the process benefits that you are designing. Sometimes the benefit does not justify the cost.

Understand how your manufacturing and accounting systems handle scrap, rework, and repair. These are the source systems that will drive how you handle SRR for Earned Value Management.

Material and Labor Cost in the Same Work Packages – If the part that requires repair or rework was a buy item, it was budgeted as material. The repair or rework may appear as labor. Some systems restrict the comingling of production material and labor in the same work packages. In the case of SRR that restriction should not apply.

Purchasing Clauses – Ensure that SRR and the associated costs are adequately addressed in purchasing clauses for buy parts. Also, make sure you understand how major subcontractors with an EVMS flowdown requirement handle SRR in their systems.

Fast Tracking increases the risk of SRR – Starting Low Rate Initial Production prior to completing the design and development effort will lead to starting production with a dynamic technical data package. This increase in risk will also increase the amount of SRR that can be expected on a project.

SRR outside the shop floor – There are similar issues that need to be addressed when performing Software, Integration, Spares, Tooling, and Testing efforts.

Make sure your system description reflects how you handle the budgeting, earning, estimating, and costing of SRR.

We only addressed the topic of BUDGETING Scrap, Rework, and Repair at a summary level in this blog. The devil is always in the details. We recommend that you test your approach in your systems prior to implementing to ensure your tools operate as you expect. If your EVMS is validated through the DCMA, or other validating/certifying agencies, you should seek their approval of your procedures prior to implementation. Also, the Integrated Master Schedule (IMS) process and Risk/Opportunity Management System need to address SRR.

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Management Reserve; Comparing Earned Value Management (EVM) and Financial Management Views of “Reserves”

By Humphreys & Associates / October 20, 2015 / Altria, BAC, EVM, EVM Analysis, EVMS, IPMD, management reserves, MR, PASEG, PMSC, SOW

Altria, BAC, EVM, EVM Analysis, EVMS, IPMD, management reserves, MR, PASEG, PMSC, SOW

Management Reserve & Earned Value Management

Perhaps you have witnessed the collision of earned value management’s views on “management reserve” with the Chief Financial Officer (CFO) and the finance department’s views on “balance sheet reserves.” Most companies tend to organize EVM, the function, reporting to either the programs’ organization or to the finance organization. Either will work but either can fail if the two organizations do not understand the interest of the other.

In this article we will outline three areas. The first will be EVM and Management Reserve (MR). The second will be finance and balance sheet “contingencies, loss provisions, or reserves.” The third will compare the two views and identify where they are similar and where they differ.

We will use two terms for both EVM and Financial Management; “in play” and “on the sideline.” “In play” for EVM means that it is in your Performance Measurement Baseline (PMB) and Budget at Completion (BAC). “On the sideline” for EVM means “not in scope” therefore in MR. “In play” for financial management means recorded on the balance sheet (e.g.: current liability; an accrued liability). “On the sideline” for financial management means not recorded on the balance sheet, because it is more likely than not that a liability has been incurred. If material, however, it will likely be disclosed in the notes to the financial statements, even if it is not recorded on the balance sheet.

Earned Value Management and Management Reserve

A program manager and his or her team must deal with – mitigate – risk or be consumed by those risks as they become issues. There are two types of risks, known and unknown. The known risks are entered into a risk register, and their likelihood and consequence are determined. Mitigation for those known risks is done at the activity level in a program’s Integrated Master Schedule (IMS) (Planning and Scheduling Excellence Guide — PASEG page 141, ¶ 10.3.1). Mitigation of known risks is part of the PMB (in the BAC) and is therefore “in play.”

The second type of risk – unknown or unknowable risks – are covered by management reserve if within the Scope of Work (SOW) of the existing contract. If contractor and customer conclude that the realized risk is outside the existing contract, then an Engineering Change Proposal (ECP) would likely be created by the contractor; and a contract modification would be issued by the authorized customer contracting officer if they agreed. The program manager should ask this question of his team: what work is “at risk” and what work is not “at risk?” Does labor or material present more risk? Management reserve “is an amount of the overall contract budget held for management control purposes and for unplanned events” (Integrated Program Management Report–IPMR DI-MGMT-81861 page 9, ¶ 3.2.4.6). Management reserve is “on the sidelines.” MR has no scope. MR is not earmarked. MR stands in waiting.

Earned Value Management Reserve (MR) Compared To Financial Management “Contingency”

Because the audience reading this blog is most likely from the EVM community, I’ll offer a Financial Management example of a company that faces many risks and must manage those risks or be consumed by them. Altria Group, Inc. and Subsidiaries (stock symbol: MO) are in the tobacco, e-Vapor and wine business. Altria’s history clearly shows that the company measures and successfully mitigates the risks they face. Altria faces a blizzard of litigation each year and must protect its shareholders from that risk. So how does Altria manage known risks (mostly from litigation) and how does Altria handle unknown risks?

Altria is a publicly traded company and its annual report (10K) is available on-line to the public. This data is from their 2014 annual report.

I am an MBA, not a CPA, so I’ll stick to Altria’s 2014 balance sheet. For those not familiar with financial statements, a balance sheet has on its left hand side all of a company’s assets – what the company owns and uses in its business (current assets = cash, accounts receivable, inventory; long term assets = property, plant and equipment). The right hand side of a company’s balance sheet shows current and non-current liabilities and shareholders’ equity. The top right hand side of the balance sheet includes current and non-current liabilities (accounts payable, customer advances, current and long-term debt, and accrued liabilities like income taxes, accrued payroll and employee benefits, accrued pension benefits and accrued litigation settlement costs) and the bottom of the right hand side of the balance sheet includes shareholders’ equity consisting of common and preferred stock, paid in capital and retained earnings.

Altria’s 2014 annual report shows under current liabilities; accrued liabilities; settlement charges (for pending litigation Contingency note # 18) a value of $3.5 billion dollars. The 2013 amount was $3.391 billion dollars.

So Altria has “in play” $3.5B for litigation for 2014. In financial terms, Altria has recorded $3.5 billion in expense related to the litigation, probably over several years as it became more likely than not that a liability had been incurred and was reasonably estimable. In EVM terms Altria has $3.5B in their baseline, or earmarked, or in scope for litigation (court cases).

What happens if Altria ultimately has more than $3.5B in litigation settlement costs? What does Altria have waiting on the “sidelines” to cover the unknown risks? Essentially Altria has on its balance sheet waiting “on the sidelines” $3.321 billion in cash and the ability to borrow additional funds or perhaps to sell additional shares of stock to fund the settlement costs. In EVM terms Altria has $3.5B in its baseline (on its balance sheet) to manage the risks associated with litigation. Altria’s market capitalization at the market close on May 17, 2015 was $52.82 billion and its 2014 net revenues were $24.522 billion. It is reasonable to understand that Altria has more than enough MR.

Differences Between EVM MR and Financial Management Balance Sheet Reserves

In EVM, MR is only released to cover unplanned or unknown events that are in scope to the contract but out-of-scope to any control account. A cost under-run is never reversed to MR, and a cost over-run is never erased with the release of MR into scope.

In industry in general, and Altria in particular, if the “in play” current liability for settlement charges of $3.5B are not needed (an under-run), then Altria will reverse a portion of the existing accrued liability into income, thereby improving profitability. If Altria’s balance sheet reserve of $3.5B is insufficient, then Altria’s future profits will be reduced as an additional provision will be expensed to increase the existing reserve (an over-run).

[Humphreys & Associates wishes to thank Robert “Too Tall” Kenney for authoring this article.]

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