Management Reserve (MR)

Management Reserve (MR) is an amount of the contract budget set aside by the project manager at the beginning of a project. The sum of the Performance Measurement Baseline (PMB) and MR equals the Contract Budget Base (CBB). By definition, Management Reserve does not have a specific scope of work and therefore it is not part of the PMB. Management Reserve is established to provide budget for known-unknowns that are within the scope of the contract but out of scope to any control account.

Full Definition of Management Reserve

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.

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

7 Principles of Earned Value Management Tier 2 System Implementation | EVM Analysis

Earned value analysis, EVM Analysis, VAR, Variance Analysis

Updated: Watch our review video of 7 Principles of Earned Value Management Tier 2 System Implementation Intent Guide

The Assistant Secretary for Preparedness and Response (ASPR) issued the “7 Principles of Earned Value Management Tier 2 System Implementation Intent Guide,” 21 December 2011. Since most of BARDA acquisitions are unique in that they are not Information Technology (IT) projects or Construction projects, they developed a tiered approach to applying EVMS. Tier 1 are construction and IT contracts and will require full ANSI/EIA-748 compliance. Tier 2 contracts are defined as countermeasure research and development contracts that have a total acquisition cost greater than $25 million and have a Technical Readiness Level of less than 7. Tier 2 contracts will apply EVM principles that comply with the 7 Principles of EVM Implementation. Tier 3 are countermeasure research and development contracts between $10 million and $25 million and will require EVM implementation that is consistent with the 7 Principles approach. The focus of this implementation guide is on the Tier 2 contracts.

The Intent Guide contains explanations for each Principle, a Glossary of Terms, a Supplemental EVM Implementation Guideline, and Sample EVM Documents. The Supplemental EVM Implementation Guideline contains recommendations regarding EVM process flows, tools, the necessity to integrate the EVM engine with the accounting system, basic documentation requirements, ranges of implementation costs, recommendations on requirements for support personnel, and use of the 7 Principles on Tier 3 programs.

The Intent Guide defines Tier 2 as: “For countermeasure research and development contracts that have total acquisition costs greater than or equal to $25 million and have a Technical Readiness Level (TRL) of less than 7 will apply EVM principles for tracking cost, schedule and technical performance that comply with the 7 Principles of EVM Implementation.”

The 7 Principles of Earned Value Management

1. Plan all work scope to completion.

This Principle includes development of a Work Breakdown Structure (WBS) and WBS Dictionary that includes all of the work scope. It is also recommended that detailed scope definition be accomplished at the work package level.

2. Break down the program work scope into finite pieces that can be assigned to a responsible person or organization for control of technical, schedule and cost objectives.

This Principle defines the schedule requirements. Most scheduling functions are required including network scheduling, horizontal and vertical traceability, forecasting schedule start and complete dates, and critical path analysis. The contract milestones must also be included in the schedule.

This Principle also discusses the organizational requirements. The Control Account Manager must be identified but there is no requirement for the costs to roll up through organizational elements; this, and development of an Organization Breakdown Structure (OBS) is recommended if it can be done in a cost effective manner.

3. Integrate program work scope, schedule, and cost objectives into a performance measurement baseline plan against which accomplishments can be measured. Control changes to the baseline.

This Principle is discussed in the Intent Guide in two parts. The first, 3a, regards integration of scope, schedule, and cost objectives into a performance measurement baseline. The schedule can be either resource loaded or the budgets loaded into a cost tool and a time-phased control account plan generated. The cost tool must be linked to the schedule tool to ensure baseline integration. The planning includes both direct and indirect dollars.

This Principle also defines the use of undistributed budget and management reserve.

The second part of this Principle, 3b, is the requirement to control changes to the baseline. This requires that contractual changes be incorporated to the baseline in a timely manner.

Budget logs are to be used to track both external and internal changes. All changes are to have documentation that explains the rational/justification for the change and the scope, schedule and budget for that change.

4. Use actual costs incurred and recorded in accomplishing the work performed.

This Principle requires that actual costs be accumulated in a formal accounting system consistent with the way the work was planned and budgeted. A work order or job order coding system must be used to identify costs to the control account and allow summarization through higher levels of the Work Breakdown Structure. The use of estimated actuals is also required for material and subcontractors to ensure that earned value data is not skewed.

5. Objectively assess accomplishments at the work performance level.

This Principle requires that schedule status and earned value assessment must occur at least monthly. The allowable earned value techniques are discussed as well as the requirements of for the use of each.

6. Analyze significant variances from the plan, forecast impacts, and prepare an estimate at completion based on performance to date and work to be performed.

This principle is also divided into two parts. The first, 6a, regards the analysis of variances from the plan. The earned value system must be able to calculate cost and schedule variances, at least cumulatively, on a monthly basis. The system should also be able to provide the Cost Performance Index (CPI), the Schedule Performance Index (SPI), and the use of the To-Complete Performance Index (TCPI) is also encouraged. Variances that exceed the contract variance thresholds must be explained in terms of the cause, impact and corrective action. Although this Principle does not discuss the preparation of a Variance Analysis Report (<abbr=”Variance Analysis Report”>VAR) by the CAM, Principle 7 does require that Program Managers hold their CAMs accountable to write a proper Variance Analysis Report (Earned Value Management Analysis).

The second part of this Principle, 6b, requires that an Estimate at Completion (EAC) be prepared based on performance to date and the work remaining to be performed.

7. Use earned value information in the company’s management processes.

This Principle regards Program Management use of the earned value data to manage the program’s technical, schedule and cost issues and how that data is used in the decision making process.

Although much of the language in the Intent Guide is similar to that of typical guidance documents for the EVMS requirements, it must be remembered that the EVMS Guidelines are not being implemented, only the 7 Principles. The Principles define an approach to managing programs with the basic requirements of Earned Value; such that the cost of the system is minimized, but only those elements necessary to manage these types of programs are necessary. This allows for further system flexibility and reduces the documentation needed. For instance, in Principle 1, the requirements of the WBS Dictionary could be expanded to contain the information that would normally be included on the Work Authorization Document. If this were done, Work Authorization Documents are not necessary because the WAD content normally contained would be embodied in the WBS dictionary; and the associated cost is reduced over the life of the program.

With the 7 Principles there is no need for an EVM compliance review. An Integrated Baseline Review (IBR), also known as a Performance Measurement Baseline Review (PMBR), could be required.

The 7 Principles Comparison to the EIA-748 32 Guidelines

For those who are more accustomed to the EVMS Guidelines as described in the EIA Standard, EIA-748, in the table below the 7 Principles are loosely identified to the 32 Guidelines and Guideline areas. This does not mean that all of the requirements must be met with the 7 Principles only that they can be cross-referenced. Several of the Guidelines are not specifically identified but could be considered as incorporated by reference. The indirect cost requirements are incorporated by planning the work with both direct and indirect dollars; therefore, it is implied that budget, earned value, and actual costs would also include both direct and indirect costs.

The appendix also contains the requirement that the EVM Engine needs to be integrated with the company’s accounting system. Further, some programs may also be required to be compliant with the Cost Accounting Standards. Guideline 20, “Identify unit costs, equivalent units costs, or lot costs when needed” is not included; this more than likely would not be a requirement for HHS or BARDA programs.


7 Principles of EVM Tier 2 System Implementation Cross-Reference to the EVMS Guidelines
Principle Number	Principle Title	EVMS Guidelines	Guidelines not Specifically Indentified	ANSI/EIA-748 Areas
Principle 1	Plan all Work Scope	1		Organization
Principle 2	Break Work into Finite Pieces and Define Person/Organization Responsible for Work	2, 5, 6	4	Organization
Principle 3a	Integrate Scope, Schedule and Budget into a Performance Baseline	3, 7, 8, 9, 10, 11, 14	13	Planning & Budgeting
Principle 3b	Control Changes to the Baseline	15, 28, 29, 30, 31, 32		Revision & Data Maintenance
Principle 4	Use Actual Costs Incurred and Recorded in Accomplishing the Work Performed	16, 17, 18, 21	19, 20	Accounting Considerations
Principle 5	Objectively Assess Accomplishments of the Work Performance “Level	12, 22		EVM Analysis & Management Reports
Principle 6a	Analyze Significant Variances fomr the Plan	23, 25	24
Principle 6b	Prepare and Estimate at Completion based on Performance to-data and Workd to be Performed	27
Principle 7	Use EVM information in the Company’s Management Processes	26

Recommendations for Enhancement to the Intent Guide

The 7 Principles Intent Guide was issued in December 2011. In June 2012 the requirements for the Integrated Program Management Report (IPMR) was issued; this will replace the Contract Performance Report (CPR) for contracts issued after June 2012. When a revision to the Intent Guide is issued, the IPMR should be included.

The Intent Guide is a “what to do” document and contains little on “how to do it”. Internal procedural documents should be required to define how a company will implement the Guide requirements.

Principle 6a requires that the cost and schedule variances be calculated at least on a cumulative basis and only recommends calculation of the current month. The current month calculation should be a requirement since both the CPR and the IPMR require current month reporting.

Summary

The “7 Principles of Tier 2 System Implementation Intent Guide” requires the basic elements of earned value and the documentation necessary to demonstrate that earned value is being adequately implemented on Tier 2 programs. H&A personnel understand the requirements and are able to “size” those requirements to meet company and customer needs. Click to request a PDF copy of the Intent Guide.

Humphreys & Associates (H&A) has been providing Earned Value Management training and implementation services for over 35 years. H&A provides self-paced online, classroom and private training courses, as well as training tailored to specific industry needs, and can assist in all aspects of Earned Value Management Implementation.

For more information about EVM training or support, or with questions about your company’s requirements, please contact the Humphreys & Associates corporate office.

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Aligning ACWP with BCWP for Proper EVM | Earned Value Management

By Humphreys & Associates / May 1, 2013 / ACWP, BCWP, EVM, EVMS

ACWP, BCWP, EVM, EVMS

What is estimated Actual Cost of Work Performed (ACWP)?

Estimated ACWP is an adjustment to the Actual Cost of Work Performed (ACWP) in the earned value “engine” to align ACWP with Budgeted Cost for Work Performed (BCWP). Estimated ACWP is synonymous with “estimated actuals.”

Why is Estimated ACWP necessary?

Without Estimated ACWP, timing mismatches between ACWP and Budgeted Cost for Work Performed (BCWP) cause false cost variances to appear in the Integrated Program Management Data Analysis Report (IPMDAR) information reported to the customer. Typically these variances are favorable and can mask other unfavorable variances. Additionally, if these variances exceed reporting thresholds, the explanations clutter Format 5 of the IPMDAR with variance explanations that discuss timing problems of the accounting system rather than actual performance issues.

To what types of cost does Estimated ACWP apply?

Estimated ACWP is most typically required for material costs. When BCWP is claimed upon receipt of the material, the actual cost accrual typically occurs one or more months following material receipt, which creates the timing mismatch between BCWP and ACWP. Other cost element types that may require Estimated ACWP include subcontracts and Other Direct Costs (ODC). Examples of ODCs that may require Estimated ACWP include consultants, purchased labor, and travel.

How does Estimated ACWP function?

Receipt-type material:

First, a determination must be made whether Estimated ACWP is necessary. For some categories of material, when a material item is received, the BCWP is claimed. If actual costs for the materials do not enter the accounting system in the same period that the BCWP was claimed, Estimated ACWP is necessary to ensure ACWP occurs when BCWP occurs.
Second, the Estimated ACWP adjustment is entered into the Earned Value engine as a current period transaction. The amount of the Estimated ACWP is based on the best information available for the material item using the invoice, purchase order, or receiving report.
Third, the Estimated ACWP adjustment transaction is reversed in the EV engine prior to the next month’s update. If actual costs were to come in that month and the transactions were not reversed, the ACWP would be double-counted when the actual cost data from the accounting system gets transferred to the EV engine.
Finally, remember that if the actual data does not occur as expected in the month following material receipt, the Estimated ACWP is re-entered and the reversal process must continue every month until the accounting system receives the cost of the material item. Also, Estimated ACWP transactions should be recorded in a log to maintain traceability.

Production-type (inventory) material:

The transactions described above were for material categories for which Earned Value is claimed at receipt of the material item. For production type materials, or materials that are common to many control accounts or even contracts, that go into inventory, Earned Value is claimed upon issuance from inventory, sometimes several months after receipt of the material and after the incurrence of actual costs in the accounting system. In this case, the opposite condition would exist. The accounting actuals occur before earned value is claimed for material, but EVM rules in Guideline 21 (and common sense) state that ACWP is not to occur until BCWP takes place. Therefore, the accounting actual costs have to be “suppressed” from entering the EVM engine until material Earned Value occurs. Since some companies say they cannot suppress actual costs, they let the actual costs enter the system, but make an off-setting “Negative Estimated ACWP” entry in the EVM system until the material is issued and BCWP can be claimed for the material.

Do you need to implement an Estimated ACWP process in your Earned Value Management System? Humphreys & Associates has the earned value training experts to assess your material management processes and implement the appropriate procedures. Contact us today.

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