Earning Value for Material – The Correct Approach – Part 2

By Humphreys & Associates / October 31, 2012 / earned value management, Material

Last Updated May 22, 2025

Earning Value for Material - The Correct Approach

Recall from the previous blog about earning value for material, in which Guideline 21 in the EIA-748-D Standard¹ for Earned Value Management Systems (EVMS) states that earned value is measured “…at the point in time most suitable for the category of material involved, but no earlier than the time of actual receipt of material…”

In that previous blog, two high-level types of material categories were discussed for illustration purposes. A common follow on question is “When Guideline 21 mentions category of material, are there pre-set categories of material that companies should use?”

The answer: Material categories are unique to each company, though companies may have general similarities to others in the same line of business. It is also dependent on whether a company has non-production or production type contracts (or both). In the previous blog topic, Engineering Material and Production Material were used as generic examples for material categories assuming a company has some level of production activity.

Even if a company is not a production (or manufacturing) facility, if they have material that sits in inventory for an extended length of time (generally longer than two months), the earned value point should be different from that of engineering (or receipt) type material. Some companies describe their material categories as “receipt type material” and “inventory type material.”

A company’s Earned Value Management (EVM) System Description should describe the various categories of materials that are typical in their line of business.

The easiest type of material category to describe is “tangible” material – objects you can physically touch. This includes items used to build the final product, such as ribs, spars, and bulkheads, wiring harnesses, tubing, pumps, switches, actuators, brakes, hinges, and the like. It can also include major assemblies and subcomponents outsourced to suppliers, like wings, control surfaces, canopies, and doors. Engines are material if purchased under the contract; if they are provided as government-furnished equipment (GFE), they are not part of the material element of cost.

Ancillary materials used during the manufacturing process also fall under the material category. These include items such as paint, caulk, glue, nuts, bolts, rivets and similar components.

All the items listed above fall into a category called “recurring” material. These are materials that are purchased repeatedly and are essential to building the final product.

Another important material category – separate from the components used in the final product – is the tools and fixtures used in the factory to build up the product (excluding capital assets). If purchased under the contract, they are considered part of the material element of cost. Unlike recurring materials, these items are typically purchased once and are used to build many finished products. This type of material is referred to as “non-recurring.”

Some contracts include the acquisition of spares to support the finished product after delivery. If spares are purchased, they count as material. If the spares are manufactured in the contractor’s factory alongside the finished product, the constituent materials that go into the spares also fall under material element of cost.

What about major suppliers? If a major supplier provides a tangible product such as a radar or landing gear, the cost of that subcontract is a material cost. However, the cost of a supplier providing non-tangible products (such as engineering services) is usually classified as a labor expense rather than material.

When dealing strictly with materials used for engineering and/or production related effort, a number of approaches to claim earned value may be needed. This is based on the products a company typically builds for their government customer. Various materials could also have different handling requirements, including bonded stores, with different rules for use, issue, transfer, borrow/payback and so forth. As a result, the various types of materials may have different methods for planning and use and could all use different earned value techniques.

Another consideration when determining the appropriate earned value techniques for production environments is the approach used to determine what is classified as high value material, critical material, and low value material.

High value material and critical material should be planned and earned using discrete earned value techniques
Low value material may be planned and earned as apportioned effort or as level of effort (LOE), as well as being discretely measured
Low value material may be planned as items in aggregate, or in homogeneous groupings (e.g., lubricants, fastening hardware, bar stock, coatings, etc.).

H&A recommends ensuring your EVM System Description provides the appropriate guidance to project teams on how to properly plan for the various material categories and acceptable earned value techniques that should be used as well as the appropriate earned value points (such as receipt or issue) for the category of material involved.

Also see these related blogs:

Do you need an independent review your EVM System Description to ensure you are providing the necessary guidance to your project teams? Humphreys & Associates has the earned value management experts to assess your EVM System Description and provide recommendations to improve the content. Contact us today.

EIA-748-D Guideline 21 content maps to the EIA-748-E Guidelines 14 and 16 which streamlined the content in D Guideline 21. EIA-748-E Guideline 14 states in part: “Earned value for material items may not be credited earlier than the actual receipt of the material nor later than the consumption of the item.” ↩︎

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Earning Value for Material – The Correct Approach – Part 1

By Humphreys & Associates / October 1, 2012 / Material

Material

Earning Value for Material

Last Updated May 22, 2025

A common question that H&A earned value consultants are asked is “What is the most common point to claim earned value (the budgeted cost for work performed or BCWP) for material?”

The answer? There is not one point for earning value for all categories of material.

Guideline 21 in the EIA-748-D Standard¹ for Earned Value Management Systems (EVMS) says, “…earned value is measured and at the point in time most suitable for the category of material involved…” Notice the text “suitable for the category of material.”

Let’s look at the two most common high-level types of material categories for discussion: 1) Engineering and 2) Manufacturing.

Engineering material earned value (EV) is typically claimed at receipt. Manufacturing material EV is typically claimed when issued from inventory (usage or disbursement). Point of usage is also useful for planning major assemblies in the integrated master schedule (IMS) rather than a myriad of smaller items that would be needed for the assemblies. Planning and earning only the major assemblies as they go to final assembly can simplify the IMS and the EVMS process. Claiming BCWP when material is taken into inventory or at final distribution are also valid options.

The most common acceptable points for claiming earned value for the various material categories are illustrated below.

For production programs, based on the completion or delivery dates for end products, the M/ERP system creates a detailed set-back schedule for material required within each build station to achieve completion by the required delivery dates to support “just-in-time” processes. Large production or manufacturing facilities maintain inventories of specific materials to ensure their lines continue in operation.

What happens in some facilities, however, is that contractors have placed the emphasis on the next part of Guideline 21 that says “…but no earlier than the time of actual receipt of material” as their authority to earn value for all material at point of receipt. These contractors are asking for trouble with this misinterpretation. Contractors should base their plans and EV on the category of material involved.

Whenever contractors earn value at the point of receipt for material they plan to maintain in their inventory bins for several months, they open themselves to have DCMA write Deficiency Reports (DRs) or Corrective Action Requests (CARs) for using inappropriate points in time to earn value for material.

Rationale. When you claim EV, you are telling the customer you are a certain percent complete with the program. For example, if materials represent 70 percent of your contract, earning value for all the material (or a large part of it) up front says (in the performance report to the customer) “I am 70% done with your program.” The customer tends to think in terms of “7 of my 10 airplanes are completed” when in fact none are completed.
The result? A very unhappy customer because you indicated incorrectly (in the performance report) you are ahead of schedule. This false lead erodes away until you are late delivering the planes, helicopters, ships, tanks, or other contracted items to the customer.
The take away. A number of contractors are incorrect in thinking they can earn value for all material at the point of receipt. The EIA-748 Guidelines have always required the distinction by material category (there are always more than just the two categories discussed above). DoD and DCMA have always stated there is no one point for claiming material earned value.

Also see these related blogs:

Need help determining the appropriate earned value techniques to use for material? H&A can assist you with clearly defining the requirements for the different categories in your business environment. Contact us today.

EIA-748-D Guideline 21 content maps to the EIA-748-E Guidelines 14 and 16 which streamlined the content in D Guideline 21. EIA-748-E Guideline 14 states in part: “Earned value for material items may not be credited earlier than the actual receipt of the material nor later than the consumption of the item.” ↩︎

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

By Humphreys & Associates / September 12, 2012 / ACWP

ACWP

Estimated Actual Cost of Work Performed

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

The review teams know:

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

VAR Narratives

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

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

Real Cost Problem

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

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

Examples

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

Materials

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

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

Subcontractors

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

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

Labor Subcontractors

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

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

Clearly Identified Invoices

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

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

Disciplined Direction

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

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

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

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Authorized Unpriced Work (AUW) and Earned Value Management Systems

By Humphreys & Associates / August 27, 2012 / AUW, EVM, EVMS

AUW, EVM, EVMS

Authorized unpriced work (AUW) is an area that can cause contractors difficulties and when not handled properly, can result in a DCMA EVMS review team writing up a Corrective Action Request (CAR) as we have discussed in previous blogs.

At times, contractors can find themselves in a position where projects are not following commonly used and recommended practices that are described in the EIA-748 Standard for EVMS guidelines as well other guidance such as the NDIA Integrated Program Management Division (IPMD) EIA-748 Intent Guide and the DoD Earned Value Management System Interpretation Guide (EVMSIG).

It is always better to be proactive to ensure project personnel have the proper direction they need. H&A suggests that you review your EVM System Description as well as any related procedures to ensure that they:

Reflect the EIA-748 guidelines (for AUW in particular, see Guidelines 8 and 28) as well as related industry and government implementation guidance.
Are clear and specific on how project personnel are to handle authorized unpriced work.

Humphreys & Associates suggest verifying the following items are discussed in your EVM System Description.

How and when work scope and budget are distributed from undistributed budget (UB) to control accounts and subordinate work packages or planning packages. This includes:
- Describing what controls are placed on the use of UB.
- Stipulating a specific period of time that work scope and budget can be held in UB for fully negotiated work.
- Describing how and when UB is distributed to control accounts when the work scope has not been defined (i.e., the work scope represents AUW).
- The interim budgeting procedure used during the definitization process to distribute the work scope and budget from UB to the work package level for the near term effort (such as three to six months). This interim budgeting procedure should be followed until the AUW scope of work held in UB is definitized and distributed to control account work packages or planning packages.
Incorporating authorized changes in a timely manner. The EVM System Description will need to describe what:
- Constitutes an authorized change.
- Indicates authorized changes have been incorporated.
- Constitutes “timely” incorporation.
The process for establishing internal budgets for authorized but unpriced changes should be based on a resource plan for accomplishing the work. Project managers should have a detailed plan in place for the near term work using cost estimates and resource plans with appropriate direction to notify the customer when spending approaches any not to exceed (NTE) spending limits. It is critical that traceability through all steps of the process can be demonstrated.

For a more in-depth discussion on how to handle authorized unpriced work (AUW), see the article posted on the Humphreys & Associates EVMS Education Center, EVMS Practitioner section.

Humphreys & Associates is available for consulting and information on this topic. Give us a call!

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Interim Work Authorization and Earned Value Management Systems – How to Avoid Corrective Action Requests

By Humphreys & Associates / August 1, 2012 / Control Account Managers, Corrective Action Request

Control Account Managers, Corrective Action Request

Recently, several contractors have been cited – Corrective Action Requests or CARs – for performing work without customer authorization, which should never be done. Every reputable EVM System (EVMS) Description says unauthorized work is not permitted.

How do Earned Value contractors get trapped into these situations?

In many cases, it is well-intentioned. The customer has an urgent requirement that must be started immediately, but they have not yet written the authorization to proceed (ATP). In an effort to be responsive to the customer’s needs, the contractor often starts the initial planning and even commences some of the work with the mutual understanding that a contract modification will be forthcoming.

Unfortunately, this is exactly when “Murphy” (that famous lawyer) shows up with a DCMA surveillance team who finds the major violation of the work authorization related guidelines in the EIA-748 Standards for Earned Value Management Systems.

How can EVM contractors not get trapped?

Of course, the perfect solution is to have the customer issue an immediate authorization for whatever work scope has popped up. This is not always a realistic expectation, especially with the number of changes some programs experience in any given week. Contractors end up doing planning and start-up work without appropriate (or any) external or internal authorization to do so.

Since it is not likely the customers will be able to correct their authorization processes in a timely manner, contractors should still implement an internal authorization process that will keep the onus of this situation off the control account managers (CAMs) shoulders.

Some contractors already have mechanisms in place to resolve these situations, but others do not. Most (if not all) contractors have a pretty well-defined work authorization process in place that covers the CAMs for all definitive changes, and even for routine authorized, unpriced work (AUW) situations. For some reason, though, some systems do not have the flexibility to create an “Interim Authorization Document” that would cover them for these unique situations.

An interim authorization allows the contractor to authorize their CAMs to do advance planning, and even to start initial work. This could be similar to estimating the value for AUW, whereby a Rough Order of Magnitude (ROM) for the initial or start-up effort could be used for a limited scope of work over a short period of performance (1 month, 3 months, 6 months, etc.) until the final work authorization would supersede the interim document. Of course, the program is still at risk of receiving a CAR for authorizing their CAMs to do work that is not yet authorized by the customer, but at least this can be handled by the two Program Offices, instead of appearing to be a CAM level issue.

So how can the Program Office get out of that box they are in of authorizing work to CAMs that the program has not been “authorized” to do yet?

A higher level of “Interim Authorization” would seem to be in order. Some contractors already have mechanisms in place to cover this situation. They simply do not allow work to start without some definitive and documented direction from the customer.

This can take many forms and depends on the company implementing it as well as the flexibility of their software package or existing forms. Some companies have simplified the process by implementing the requirement for something called an “AVO” (Avoid Verbal Orders), or some other term that accomplishes the same result.

The basic concept that works is that whenever the customer wants the contractor to take some action – with formal direction to come later – the contractor will commence the work as long as the two contracting offices “jot down” the basics of the agreement on the “AVO” form that both offices sign prior to going their separate ways. Using the “AVO”, the contractor now has the “official OK” to issue start-up budgets to CAMs to begin their initial efforts. With these authorizations in place, the CAR issue goes away.

We hope this article on how to avoid corrective action requests saves your company time, productivity, and money while keeping your EVMS on track for all projects.

Humphreys & Associates is available for consulting and information on this topic. Contact us for questions you have.

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IPMR DID Change – Office of Secretary of Defense Publishes New Procedure

By Humphreys & Associates / June 27, 2012

Office of Secretary of Defense (OSD) Publishes the Integrated Program Management Report (IPMR) Data Item Description (DID)

This is important, new information for companies with U.S. Department of Defense EVMS contractual requirements.

The Department of Defense Integrated Program Management Report (IPMR), Data Item Description (DID), DI-MGMT-81861, replaces the Contract Performance Report (CPR) DID, DI-MGMT-81466A, and the Integrated Master Schedule (IMS) DID, DI-MGMT-81650.

The IPMR DID can be downloaded from the ASSIST database: IPMR ASSIST document

The IPMR DID will apply to new contracts and may be applied to follow on contracts, subject to negotiation with the government customer.

In summary:

The IPMR DID combines the CPR and IMS DIDs into one. The intent is to emphasize the integration of the schedule and cost data for performance reporting.
CPR Formats 1 to 5 are now the IPMR Formats 1 to 5. There are a few content changes for Formats 1 to 5 which are mostly confined to Format 3. The Baseline Changes (Block 6.b.) row columns have been opened up for change detail content.
The Integrated Master Schedule (IMS) becomes IPMR Format 6. There are additional schedule data elements that are required including specific data coding details.
A new Format 7 has been added for time phased cost data (historical and future time periods). Format 7 is an annual submission.
The electronic data delivery format for the OSD EVM Central Repository is changing from the ANSI X12 standard to the UN/CEFACT XML standard. Additional information about the XML data submittal instructions is available on the OSD EVM Central Repository website.

We highly recommend being prepared to support the new IPMR DID as it will impact existing EVM Systems. It will be necessary to reference the old and new terms and forms. Existing contracts will be against older DID requirements (unless otherwise negotiated with the client) and new contracts will be against the IPMR DID.

Be prepared to update:

Training materials to reflect the updated cost Formats 1 to 5 as well as discuss the new Format 6 and 7.
System Description and Storyboard text as well as example formats and/or artifacts.
Procedures or project directives that specify schedule data coding requirements and related details necessary to produce the required IMS data for submission to the OSD EVM Central Repository.
Desktop instructions for producing the cost IPMR Formats 1 to 5 as well as the new Format 7.
Software toolset outputs and electronic deliverables.
Contractor self-surveillance and subcontractor surveillance materials.

Most cost and schedule software vendors are aware of the IPMR data requirements. You may want to check with your toolset vendor of choice to see when they plan to have software updates available to support the IPMR DID and the UN/CEFACT XML data submissions to the OSD EVM Central Repository.

Humphreys & Associates is available for consulting on this topic. Contact us for more information.

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EVM Terminology