EVM Terminology

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Earned Value Management: How Much Is Enough?

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How Much EVMS Is Enough

I took the scenic route to selecting the theme of this blog. First, it was suggested that I write a blog on the benefits and costs of the earned value process as it applies to program management. Next it was suggested that I describe the harm of not using any of the elements of the earned value process.

In the case of the benefits and costs of the earned value management process, it would be difficult to improve upon Dr. Christensen’s 1998 paper on this heading or to attempt to improve other papers and studies done by Wayne Abba, Gary Humphreys, Gary Christle, Coopers & Lybrand and others. So I will not make citations to these past studies. Rather I will leave them undisturbed, as the monuments they have become.

This blog will summarize my observations of how companies have chosen “how much EVM is enough” for them and share my observations of the results of these decisions. Each company has selected an EVM implementation strategy and each company’s strategy falls along a bounded continuum.

I will describe this continuum of company EVM strategies with a left hand and a right hand goal post, and the space between as a cross bar. The “left hand goal post” represents companies that elect to be very poor at EVM or to not use EVM at all. The “right hand goal post” represents companies that have committed to being “best-in-class” practitioners of the EVM process and are the polar opposite of the companies at the left hand goal post. There are few companies at either the left or right hand goal posts. The “cross bar” represents the vast majority of companies that have selected an EVM strategy somewhere between the left and right goal posts.

Two Goal Posts And A Cross Bar; Recalcitrant, Merely Compliant, Efficiently Expert

There are as many strategies to earned value management as there are companies using EVM to manage their programs and projects.

Left Goal Post; The Recalcitrant

I have firsthand experience with a company, that at the time I initially joined them and had decided to ignore earned value management even though it was a requirement in several of its contracts. After many painful years of attempting to maintain this recalcitrant EVM strategy, this company decided that a better strategy would be to become “efficiently expert” at EVM.

Cross Bar; Merely Compliant at EVM

It has been my experience that most companies desire to “become EVM compliant,” which generally means being compliant to the 32 guidelines and not failing those guidelines so as to be de-certified. This is the vast middle ground between the two goal posts. I will now share five observations regarding companies in the “cross bar” majority.

Observation #1: Compliance As A Goal; Golf and EVM

Compliance should be a “given,” or a “pre-condition,” not a “goal.” Remaining merely compliant implies a status quo or static posture.

I will use the game of golf as an analogy. Golf is a game of honor and compliance to well established rules. All PGA professional tour golfers “comply” with the rules that govern golf. Although all PGA tour pro golfers comply with these rules, their performance on tour differs dramatically.

Fifty-three percent of all PGA golf pros, past and present, have no tour wins. That means only 47% of all PGA tour golf pros have won at least a single PGA tour. There are seven players in the history of the PGA that have fifty or more tour wins. If the bar is lowered to forty or more wins, only three players are added to the list. If the bar is lowered yet again to thirty or more tour wins, only eight more players are added to the list. Only 18 golfers have won 30 or more PGA tournaments.

Professional golfers do not confuse compliance with performance, nor do these professionals assume that “being compliant” will improve their performance.

Observation #2: “The Tyranny of The Status Quo”

With apologies to Milton Friedman and his book of the same name, companies that attempt to maintain mere guideline compliance will do no better than the status quo, and more often than not, regress toward non-compliance. Maintaining status quo is a myth – you either improve or regress.

All professionals, companies included, must compete in their markets and selected fields. To succeed in this competition requires constant improvement in areas critical to success. A company, organization, or individual without the means or the desire to improve will eventually fail and perhaps perish.

Observation #3: Blaming The Scoreboard

As a program manager, I considered EVM as my scoreboard. I reacted to the EVM data – the scoreboard – and made decisions based on that data (GL #26).

I recall the 2014 Super Bowl’s final score: Patriots 28, Seahawks 24. Did the scoreboard cause the Seahawks to lose the game or did a poor decision by their coach cause the loss? Imagine a coach that cannot see the scoreboard. That coach does not know the score or how much time remains. That coach cannot react to the realities of the game.

Observation #4: EVM Causes Poor Program Performance

I have witnessed several company leaders assert that the use of EVM on a poorly performing program is the cause of that program’s poor cost and schedule performance. A correlation between two variables, or a sequence of two variables (use of EVM and poor performance), does not imply that one caused the other. This is the logical fallacy known as “X happened, then Y happened, therefore X caused Y.” Night follows day, but day does not cause night. Use of EVM does not cause poor program performance. Not reacting to EVM data and promptly taking corrective action with your program’s cost and schedule performance often leads to poor outcomes.

Observation #5: It Takes More Energy To Be Poor At EVM Than To Be Expert

Returning to the earlier golf analogy, professional golfers make very difficult shots appear easy. I played in one pro/am tournament years ago. The pro I was teamed with took me to the range hours before our tee time. He asked me how many balls I hit before each round. I told him sometimes none and sometimes 50. He hit 1,000 balls before our round. When we finished our round, he was ready for another 18 holes. I was not. Both of us “complied” with the rules of golf. His score was significantly lower than mine. His game was effortless and produced a below par score. My game was labored and produced a poor result.

And so it is with EVM or any other process. The better you are at a skill, the easier it becomes. Experts consume far fewer calories at their craft than ambivalent amateurs.

Right Goal Post; Efficiently Expert At EVM

The polar opposite of a recalcitrant strategy to EVM is a strategy to become “efficiently expert.” As I mentioned earlier, I joined a company that attempted to sustain a recalcitrant EVM strategy. Their recalcitrant EVM strategy led to de-certification, large dollar withholdings, and significant damage to their corporate reputation.

After the most ardent EVM recalcitrants in this company “sought employment elsewhere,” a new strategy was adopted. This company embraced a strategy to become “best-in-class” as expert practitioners of EVM. This company’s goal was EVM perfection. EVM perfection is an impossible ambition, but wiser than “mere compliance.” And as with the PGA tour golf pro, EVM became nearly effortless.

Which EVM strategy will your company choose?

 

Robert “Too Tall” Kenney
H&A Associate

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Clarification on the New Department of Defense Earned Value Management System EVMS Thresholds | DOD & DPAP

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New Department of Defense Earned Value Management System (EVMS) ThresholdsOn September 28, 2015, the Defense Procurement and Acquisition Policy Directorate (<abbr=”Defense Procurement and Acquisition Policy Directorate”>DPAP) released a memorandum entitled “Class Deviation – Earned Value Management System Threshold”. In this memo the DoD changed the threshold for <abbr=”Earned Value Management System”>EVMS application to $100 million for compliance with EIA-748 for cost or incentive contracts and subcontracts. That same memorandum stated that no EVMS surveillance activities will be routinely conducted by the Defense Contract Management Agency (<abbr=”Defense Contract Management Agency”>DCMA) on contracts or subcontracts between $20 million to $100 million. As attachments to this memorandum, there was a reissuance of the Notice of Earned Value Management System <abbr=”Department of Defense Federal Acquisition Regulations”>DFARs clause (252.234-7001) and the Earned Value Management Systems DFARs clause (252.234-7002), with both reflecting the new $100 million threshold.In response to this guidance, a series of questions from both contractors and other government personnel were submitted to Shane Olsen of the DCMA EVM Implementation Division (<abbr=”EVM Implementation Division”>EVMID). Below are the salient points from this communication:

  • There will be no EVMS surveillance of DFARs contracts under $100 million. Contracts without the DFARs clause, such as those under other agencies using the FAR EVM clause, will continue surveillance under their current thresholds.
  • The $100 million threshold is determined on the larger of the contract’s Ceiling Price or Target Price; as reported on the Integrated Program Management Report (IPMR) or Contract Performance Report (CPR) Format 1.
  • The threshold is based on the Contract Value including fee (at Price) as noted above. If there is an approved Over Target Baseline (OTB) which increases the Total Allocated Budget (TAB), this cannot push a contract over the threshold.
  • The new thresholds not only apply to subcontracts, but also Inter-organizational work orders with an EVMS flow-down.
  • Regardless of the circumstances, the DCMA will not conduct surveillance on contracts less than $100 million. However, if there are Earned Value issues that the buying command or other parties believe need to be reviewed, then the DCMA may conduct a Review for Cause (RFC) of the system against potentially affected guidelines.
  • The DCMA Operations EVM Implementation Division (EVMID) will not be conducting Compliance Reviews in FY-2016 unless there is an “emergent need”.
  • If a site is selected for a Compliance Review, only contracts greater than $100 million would be in the initial scope of the Implementation Review (IR). However, if an issue is discovered that requires the team to “open the aperture”, other contracts are not precluded.

The DCMA is still working on a response to the following questions:

  • How do I handle a contract that is currently below $100 million but has options that, in aggregate, would exceed $100 million?
  • How is the contract value determined on:
    • Indefinite Delivery/Indefinite Quantity (ID/IQ) Contracts
    • Non-ID/IQ with Multiple CLIN-Level or Task Order reports?

This blog will be updated and reposted as answers to these questions are given.

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Earned Value Management Implementation Guide (EVMIG) Rescinded

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Earned Value Management Implementation Guide (EVMIG) Rescinded | DFARSThe DoD EVM Implementation Guide (EVMIG, Oct 2006) was rescinded on September 15, 2015 by the Office of Performance Assessments and Root Cause Analysis (PARCA). The EVMIG had provided guidance for understanding Earned Value Management System (EVMS) concepts; detailed procedures for implementing the EIA-748 EVMS Standard, Earned Value Management Systems (EVMS), on government contracts; tailoring guidance for EVMS application and reporting; and post award procedures. Most of the details contained in the EVMIG are also available in other, more recent, publications and the EVMIG is replaced with these other references. EVM System information can be found in the DoD EVM System Interpretation Guide (EVMSIG) which provides overarching DoD interpretation of the 32 EIA-748 EVMS guidelines. Additional information can be found in multiple Defense Contract Management Agency (DCMA) compliance instruction documents.

PARCA identified the following references to replace the contents and guidance found in the EVMIG:

EVM Concepts and Guidelines
EVM Concepts TBD EVM Analysis Guide
Defense Acquisition University (DAU) EVM Community of Practice
PARCA EVM Website
EVM System (EVMS) Concepts EVMSIG
DCMA Surveillance Guide

 

Procedures For Government Use of EVM
Organizational Roles and Responsibilities TBD EVM Application Guide
PARCA EVM Website
Defense Acquisition Guide (DAG)
WBS Development and Use MIL-STD-881C
TBD EVM Application Guide
EVM/EVMS Policy and Application TBD EVM Application Guide
PARCA EVM Website
Cost and Schedule Reporting Integrated Program Management Report (IPMR) Data Item Description (DID) and IPMR Guide
TBD EVM Application Guide
EVMS System Compliance EVMSIG
DCMA Surveillance Guide
Integrated Baseline Review (IBR) Program Manager’s Guide to the Integrated Baseline Review (IBR)
TBD EVM Application Guide
Reprogramming Formal Reprogramming Over Target Baseline (OTB)/Over Target Schedule (OTS) Guide
EVMSIG
Training Defense Acquisition University Website
PARCA EVM Website

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

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Management Reserve & Earned Value ManagementPerhaps 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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Variance Analysis, Corrective Action Plans, Root Cause Analysis

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Variance Analysis “provides EVMS contract management with early insight into the extent of problems and allows corrective actions to be implemented in time to affect the future course of the program.” [NDIA ANSI EIA 748 Intent Guide] Department of Defense Data Item Descriptions: DI-MGMT-81861, Integrated Program Management Report (IPMR) paragraphs 3.6.10xx; DI-MGMT-81466A, Contract Performance Report, paragraph 2.6.3; and DI-MGMT-81650, Integrated Master Schedule (IMS) — paragraph 2.5 — all require analysis for significant variances including cause, impact and corrective action plans.  By comparing the performance against the plan, it is possible to make mid-course corrections which assist completion of the project on time and within the approved budget. The Variance Analysis Report (VAR) is a “living, working document to communicate cause, impact and corrective action”. [See: Chapter 35 Variance Analysis and Corrective Action, Project Management Using Earned Value, Humphreys & Associates, page 707.] Well-written variance analyses should answer the basic questions of why, what and how.

Cause is also known as root cause, nature of the problem, problem statement, issue, or problem definition. Root cause is the fundamental reason for the problem. Root cause is required in order to take preventative corrective action. The explanation of the variance is broken down into each of its components: discuss schedule variances separately from cost variances; discuss labor separately from non-labor; discuss which portion of the variance was caused by efficiency (hours) and which portion was because of dollars (rates) or if the variance was driven by material discuss how much was because of price and how much was because of usage. For more information refer to Humphreys & Associates blog Variance Analysis-Getting Specific.

Once the root cause of the problem has been identified and described, the impact(s) on the project should be addressed. Identify impacts to customers, technical capability, cost, schedule (including when the schedule variance will become zero), other control accounts, program milestones, subcontractors, and the Estimate at Completion, including rationale.

A corrective action (CA) plan should be developed that describes the specific actions being taken, or to be taken, which includes the individual or organization responsible for the action(s). The corrective actions should be directly derived from root cause analysis and related to each identified root cause.   Results from previous corrective action plans should be included.  Occasionally, a successful plan will include interim modifications or fixes in the short term, with long term changes identified as well. When no corrective action for an overrun is possible, an explanation and EAC rationale should be included.  A corrective action log should be used that tracks the actions taken and the status of the corrective plan for each variance analysis cycle.  As was stated in the Humphreys & Associates article:  Corrective Action Response: Planning and Closure – Part 2 of 2  “It is critical that verification methods, objective measures, metrics, artifacts, and evidential products are identified that will verify that the corrective actions are effective.”  Corrective action plans based on clearly a defined root cause facilitates time management action and avoids the occurrence of repetitive problems.

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Earned Value Management | Integrated Program Management Report (IPMR) XML Electronic Submittals

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One of the major changes in the 2012 IPMR Data Item Description (DID) was the requirement to use the DoD-approved XML schemas and guidelines to electronically submit formats 1 through 4, 6, and 7. The DoD-approved XML schemas were developed under the auspices of the United Nations Centre for Trade Facilitation and Electronic Business (UN/CEFACT), a formal international organization for establishing electronic business standards.  The DoD-approved XML guidelines are the Data Exchange Instructions (DEIs) or business rules for using the UN/CEFACT XML schemas to support the data requirements in the IPMR DID.  This XML electronic submittal format replaces the ANSI X12 Electronic Data Interchange (EDI) transaction sets 839 and 806 found in the previous reporting DIDs, the 2005, DI-MGMT-81466A, Contract Performance Report (CPR) and the 2005, DI-MGMT-81650, Integrated Master Schedule (IMS).

The purpose of using a software vendor neutral international standard to submit data to the DoD was to eliminate the need for any specific toolset or proprietary database at either end.  Contractors can use their toolset of choice or internally developed applications to produce the XML instance files and electronically submit the data. For the various DoD end-users, they can use their toolset of choice or internally developed applications to read the XML data for their use and analyses.

The business owner for the DoD IPMR Data Exchange Instructions is the OSD Office of Performance Assessments and Root Cause Analyses (PARCA), Earned Value Management (EVM) Division (https://www.acq.osd.mil/evm). The electronic submittals are designed to support the OSD EVM Central Repository (https://dcarc.cape.osd.mil/EVM/EVMOverview.aspx), a joint effort between the Defense Cost and Resource Center (DCARC) and OUSD/AT&L, managed by PARCA.  The EVM Central Repository provides a secure centralized reporting, data collection and distribution of EVM data environment for the DoD acquisition community.

There are a number of UN/CEFACT XML related resources available to contractors, software vendors, and government users on the DCARC EVM Central Repository web site.

  • Select the UN/CEFACT XML navigation option to download the base UN/CEFACT XML schemas as well as the Data Exchange Instructions for the IPMR formats. There are three primary DEIs. One for Formats 1 through 4 (can include Format 5 data as an option), one for Format 6 (the IMS), and one for Format 7 (time phased historical data). Also on this web page is a link for a digital file signing tool; this works as an outer envelope that contractors can use to digitally sign and secure an XML instance file submission to the EVM Central Repository.
  • Select the EVM Tools navigation option to download the XML instance file IPMR Schema/DEI Checker or XML instance file viewers. The schema/DEI checker can be used to verify a given XML instance file conforms to the basic XML schema requirements as well as the business rules defined in the DEIs.  The XML instance files viewers can be used to read and display the XML data content in a more human friendly format.

A number of the commercial off the shelf (COTS) software vendors have submitted their IPMR outputs for testing to the EVM Central Repository to verify their XML outputs can pass the Central Repository data submission validation process. A number of contractors also tested outputs produced from their internal application systems (no COTS tool was used). This testing was part of the implementation verification process for completing the Data Exchange Instructions. To confirm a software vendor has successfully completed the process to verify their tool-set outputs can be successfully read and uploaded to the Central Repository, send an email to the EVM Contact for PARCA listed on the DCARC EVM Central Repository web site (Contact Us navigation link).

PARCA has also recently taken ownership of the XML schema and DEI Change Control Board (CCB) and related process. The intent is to use the PARCA Issue Resolution process (https://www.acq.osd.mil/evm/ir/index.shtml) for software vendors, contractors, or other end users to submit change requests for the base UN/CEFACT XML schemas or IPMR Data Exchange Instructions.

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