EVMS

EVMS Guidelines 2 – Five Sections of Organizational Guidelines

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Video Contents

The EVMS Guidelines are Grouped in five major categories which address these five sections:

0:12 – Organization
0:32 – Planning, Scheduling, and Budgeting
0:46 – Accounting Considerations
0:56 – Analysis and Management Reports
1:15 – Revisions and Data Maintenance

More EVMS Training

If you liked this video you can purchase the entire course below. This video is an excerpt from the Department of Defense (DOD) version of this eLearning module. We also offer the same course customized for the Department of Energy’s (DOE) specific Earned Value Management (EVM) implementation/requirements, as well as a version of the course customized for NASA’s EVM implementation/requirements.  

— Purchase This Course —
EVMS DOD Virtual Learning Lab

— Purchase the DOE Version of this Course —
EVMS DOE Virtual Learning Lab

— Purchase the NASA Version of this Course —
EVMS NASA Virtual Learning Lab

EVMS Document Matrix

EVMS Document Matrix

Not sure what the different requirements are between the DOE and NASA? Can’t remember if Cost and Software Data Reporting (CSDR) is required for an NSA contract? Check out our easy to read Earned Value Management Systems Document Matrix

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All Online Courses Available from Humphreys & Associates

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Determining Responsibility for Indirect Cost Variance Analysis – Part 1

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About Indirect Costs

The debate that has continued since the inception of the earned value concepts in the 1960s has been: “Who should report on and analyze the cost variances attributable to indirect costs?”

This blog is the first in the series of blogs to help answer this question.  This blog covers a few fundamentals about how indirect cost rates are established to set the stage.  Part 2 will discuss how indirect rates are applied and how project personnel display indirect costs for internal or performance reporting.  Part 3 will conclude the discussion on the indirect cost variance analysis process.  It covers what the EIA-748 Standard for Earned Value Management Systems (EVMS) and related government agency guides have to say on the subject as well as discussing options for determining who is responsible for indirect cost variance analysis. 

We are frequently asked by our clients who should be responsible for indirect cost variance analysis – and with good reason.  When you consider indirect costs (or overheads) are often 100% or more of a project’s direct costs, that means over 50% of in-house work effort is attributable to indirect costs.  That’s a major contributor to a project’s total cost, as illustrated in Figure 1. 

Breakout of Direct and Indirect Costs
Figure 1: Example of how indirect costs often contribute over 50% of in-house project’s total cost

It also matters to executive management, the customer, project managers, and control account managers (CAMs) when indirect rate changes impact variances to date and estimates at completion (EACs), potentially causing a significant variance at completion or VAC (the VAC is equal to the budget at completion (BAC) minus EAC).  While indirect pool managers plan and control indirect costs, project managers and potentially CAMs are required to monitor and control all project costs, whether direct or indirect.  They need to understand the root cause of the cost variances to date so they can develop corrective action plans to minimize impacts caused by indirect rate changes and prevent unpleasant surprises. 

Because indirect cost pools are so large, a small percentage increase in an indirect cost pool can result in a significant project cost variance that impacts the project’s EAC.  For example, a 1% unfavorable indirect cost variance might seem low – certainly not breaking a variance threshold on a particular project because variance percentages are typically established at a level where all costs (direct and indirect) are added together.  On a project with $100M in indirect costs, however, that 1% equates to $1M.  An unfavorable variance definitely matters to executive management because it impacts a company’s profit margins.  It matters to the customer – they may need to modify the project’s scope of work or funding profile when an increase in indirect costs is significant.  It also impacts the project manager and the CAMs.  When the to-date and forecasted indirect rate increase is significant, they may need to make adjustments at the detail level to reduce their direct cost estimate to complete (ETC) to stay within the project’s contract target cost (CTC).  

Who establishes and maintains the indirect cost rates?

Finance or accounting is usually responsible for establishing and maintaining the contractor’s direct and indirect rates.  Indirect rates are established for the different “pools” of shared indirect costs applied to the project direct costs, as Figure 1 illustrates. 

Indirect costs typically include labor and material overheads, general and administrative (G&A) overheads, and sometimes cost of money (COM).  The accounting structure determines the categories of indirect cost applied to the project direct cost elements such as labor, material, subcontract, and other direct costs (ODCs).  The pool structure determines how those indirect costs are summarized or displayed for analysis and reporting.  These structures are unique to each contractor and how they have set up their accounting system. 

Finance and accounting, with the help of executive or functional managers, typically prepare a budget plan for the pools of indirect costs that reflect the contractor’s firm and potential direct business base.  This includes the current fiscal year and a set time frame for upcoming fiscal years such as the next three to five years. 

Finance or accounting requests the firm and potential business base forecasts from the project offices and business development personnel as part of this indirect cost budget planning process.  Proposals with a high probability of winning the contract are incorporated into this calculation.  There is often a vice president or functional manager responsible for establishing the indirect pool budget and managing the resources that incur costs related to the pool. 

Finance or accounting then produces a Forward Pricing Rate Proposal (FPRP), and eventually a Forward Pricing Rate Agreement (FPRA) is achieved with the appropriate US Government agent.  This process of establishing the indirect rates is described in a Cost Accounting Standards Board (CASB) Disclosure Statement or similar accounting procedure.  These rates are applied at a very detailed level to the appropriate direct cost elements per the CASB Disclosure Statement.  The detailed resource cost elements are summarized into the usual direct cost element categories of labor, material, subcontract, and ODCs for performance analysis and reporting.

Finance or accounting provides the current approved direct and indirect rates to proposal managers for pricing their cost estimates as well as to project managers for establishing Performance Measurement Baselines (PMBs) for any new projects, and for developing project EACs.  These current rates are likely to change over time. The current rate is also applied to actual direct costs incurred so as to reflect current cost conditions.  These current rates are recorded in the official books of record in the accounting system.

Maintaining and Forecasting the Indirect Cost Rates

Finance or accounting, with the help of executive or functional managers responsible for the indirect pools, perform routine corporate level indirect cost analysis comparing their indirect cost budget plan to the actual costs.  As part of this assessment, they determine whether the current indirect rates are under or over running and require adjustment for the current or upcoming fiscal years.  An example of a monthly pool manager’s variance analysis report is illustrated in Figure 2.

Z-Best Indirect Cost Variance Analysis Report
Figure 2: Example of a monthly Indirect Cost Variance Analysis Report

The direct and indirect rates are updated on a regular basis, at a minimum annually, sometimes twice a year, or quarterly depending on the contractor.  There are a multitude of factors finance and accounting consider when they are assessing whether the rates need to be adjusted.  For example:

  • Is the business base (or volume) increasing or decreasing?  This can impact the percentage of carried indirect costs the projects incur.  The business base consists of the existing projects and the sales forecast for new contracts or likely follow-on work effort from existing contracts.  An increase or decrease in the business base/volume has a direct impact on when the different types of resources are required as well as on the skill mix of labor resources.  As a result of their analysis, executive management may direct human resources (HR) to take specific actions to hire or layoff personnel.  Similarly, they may direct procurement to issue purchase orders to suppliers or issue stop work orders to subcontractors. 
  • Actual costs being incurred in the various indirect cost pools.  For example, the company may be experiencing a spike in shipping costs or raw materials.  Perhaps employee health care costs or property insurance premiums have increased.  Perhaps new pension regulations mean they need to make a one-time adjustment for that set-aside.  Executive management may direct the indirect pool managers to take specific actions to mitigate the indirect cost increases. 
  • Executive and indirect pool management decisions that impact the indirect cost pools.  These are in addition to responding to the financial/accounting indirect cost variance analysis.  For example, they may decide to sell or purchase a new facility.  They may decide to sell off a portion of the business, or acquire another company to pursue additional business.  Or, they could direct all employees to cease all nonessential business travel for the current fiscal year. 

Any time corporate management adjusts the indirect rates up or down, there is some level of impact to projects.  This is conveyed to the project managers in some form, usually with a memorandum of the coming change to the rates that should be used for proposal pricing or project ETCs.  The revised rates may also be applied to budget values when the scope of work for future work effort is modified. 

Other Posts In This Series

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Quality Cost Estimates

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Quality Cost Estimates

The Foundation for a Realistic Performance Measurement Baseline (PMB)

If you have been involved in an Integrated Baseline Review (IBR), you can appreciate why a clear understanding of the project’s contractual scope of work and technical requirements is so important.  Without that understanding, it is impossible to create an executable Performance Measurement Baseline (PMB).  The intent of the IBR is to demonstrate to your customer you have created a realistic schedule and cost baseline plan that reflects a shared understanding of the work scope requirements as well as identified technical, schedule, cost, or resource risks that may impact the ability to execute the work as planned.

So, how do you demonstrate to your customer that your schedule and cost baseline plan is realistic for the agreed upon scope of work?  That’s where the quality of the cost estimate and related basis of estimate (BOE) information come into play.  The quality of the PMB is a direct reflection of how the project control team arrived at their cost estimate for the work scope along with documented BOE details that clearly communicates their rationale and assumptions.  The project control team needs this foundation to define the project’s sequence of activities, durations, and resources to do the work that reflects the known requirements and identified risks.

What are the characteristics of a quality cost estimate?

A quality cost estimate:

  • Reflects a shared understanding of the scope of work and technical requirements. This is often the root cause of an unrealistic cost estimate.  The IBR is a perfect opportunity for all parties to confirm the customer’s requirements and expectations.
  • Is data driven. That means the proposal or project control team has access to relevant historical actual costs for analogous tasks, parametric data, or other documented and substantiated basis for the cost estimate.  The source data for the cost estimate can be traced back to the system of record, internal standards for completing common repeatable tasks, or published industry standards.  Where possible, the use of engineering judgement cost estimating methods is minimized because they introduce a level of unknowns.  The risk of cost growth increases because objective facts and data aren’t available for other people to verify the cost estimate rationale or assumptions are reasonable.
  • Includes useful documented rationale with risk/opportunity assessment. The BOE should capture what source data was used for the cost estimate, why it was relevant, assumptions, what factors or other calculations were used to arrive at the cost estimate, what is included or excluded, identification and evaluation of likely risks and opportunities, and other details useful for explaining the cost estimate.  This is invaluable information the project control team needs to create a realistic schedule and cost baseline.  This rationale, or clearly documented rationale someone else can follow, is frequently the missing piece.  Lack of useful documented rationale can handicap the project control team during the planning phase right after contract award – and for the duration of the project.

How do quality cost estimates help improve the PMB?

The project control team, project manager, and the customer need quality cost estimates and useful documented rationale so they can verify:

  • The integrated master schedule (IMS) sequence of activities, resource assignments, and skill mix reflect how the project teams intend to do the work as well as handle identified risks and opportunities.
  • Sequence of schedule activities and resource assignments are the foundation for the time phased budget.
  • The appropriate level of schedule margin and management reserve are established for the project.
  • Useful earned value techniques are selected for the activities and work packages. In addition to technical requirements, the BOE documentation can often provide additional details that can help the project control team define accomplishment criteria or quantifiable backup data so it is easier to objectively measure completed work.

These cost estimates and documented rationale are also invaluable for:

  • Variance analysis and identifying why significant deviations from the baseline plan occurred – whether in work performance or actual costs incurred to do the work. Did an unexpected event occur?  Perhaps the risk assessment process needs a revisit.  Were the assumptions incorrect?  Why did that happen and what could be done differently to either capture or clearly communicate those assumptions?
  • When the project control team needs to process a baseline change request. They can review the source data, rationale, and assumptions to identify what was different from what actually occurred.  Or, in the case where there is a change in the scope of work, the project control team can identify the cost estimate and BOE factors they need to update to reflect the revised scope of work.  It provides a fact-based foundation to explain why the change was required and to determine what updates need to be made to the schedule activities, resource assignments, and time phased budget.
  • Providing fact-based information useful for maintaining a credible estimate to complete so it more accurately reflects the likely completion date and estimate at completion whether for interim deliverables or the entire project.
  • Rolling wave planning. As more becomes known about the future work requirements, the cost estimate and BOE can be refined to reflect the agreed upon statement of work, assumptions, risk and opportunity assessments, and other details needed to adequately plan, budget, and manage the work.

Cost estimate quality improves with each project. 

A realistic PMB reduces the likelihood of schedule and cost growth “surprises” that negatively impact a company’s bottom line or the customer’s program budget.  As work is completed, the performance and actual cost data become useful historical source data for the next proposal or project.  Each cycle improves the quality of the source data proposal or project control teams can use to substantiate their cost estimates and produce useful BOE documentation for the next project’s PMB.

Need help with preparing for an IBR or standardizing your process for producing cost estimates and BOE rationale? Contact us today.

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Who We Are

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Humphreys & Associates, Inc. has advocated and promoted the integration of technical, schedule, and cost components to achieve the full benefit of using performance measurement. We have a long tradition of leadership in the industry and providing innovative EVMS processes to apply to project management challenges. We are committed to providing exceptional EVMS consulting services to every client.

H&A is proud of the many veterans who are associates in our company. 50% of our staff, including our founder, are military veterans with a strong work ethic and a “get it done” attitude.

Our Industry Experience

If it flies, swims, goes deep under the water, hovers, blasts out of a tube, or goes into orbit, our associates have been on many of the projects that yielded those capabilities.

H&A’s deep industry experience and knowledge base spans aerospace and defense, engineering, construction, utilities, energy, scientific research, and cutting edge technology in design, development, and production environments. Our consultants have worked with all branches of the US Department of Defense, Department of Energy, NASA, and many other US government agencies. We have supported over 900 companies and government agencies and provided training for nearly 900,000 individuals.

Consulting Services

Humphreys & Associates offers a complete range of EVMS consulting services for the entire project life cycle. From proposal preparation and management, system gap analysis, to mock compliance reviews or third party validations, Humphreys & Associates is the authority on EVMS.

Professional EVMS Evaluation

H&A can evaluate the systems, processes, procedures, practices, and reports currently in place.

H&A can provide the support and expertise to assist you throughout the EVMS Design and Documentation Process, and the EVMS Implementation process.

H&A can provide in-house support to assist your team, on cost, schedule, and risk management to assist contractors to develop, enhance, or maintain an integrated master schedule, performance measurement baseline, or estimate to complete.

H&A can provide our proven training throughout the process.

Conclusion

Whether you are just getting started with earned value management or are ready to shift in high gear, we can be your partner to plan and execute complex projects. Contact us today.

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