Performance Measurement Baseline (PMB)

Performance Measurement Overview

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In our second video in this series, we present an overview of Performance Measurement in an Earned Value Management System.

Video Contents

You can use the links below to jump to a specific part of the video.
0:05 – Earned Value Management Abbreviations used in Performance Measurement
0:39 – Variances in an Earned Value Management System
1:04 – What is Performance Measurement?
1:33 – Performance Measurement Objective
1:52 – Why is Communication the primary objective of Performance Measurement?
3:00 – The Problem of Too Much Data

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 —
EVMS NASA Virtual Learning Lab

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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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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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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EVM for Biotech and Pharma – Part I Implementation and Training

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Updated December 13, 2017

 

EVM for Biotech and PharmaAs you know, the Earned Value Management System (EVMS) is a management process with characteristics that are absolutely logical to manage projects whether there is an external customer or not. The EVMS is also required by the Federal Government on DOD, DOE, FAA, NSA, DOT, DOJ, NASA, etc. contracts over $20M.

With the phasing in of the Affordable Health Care Act and recent funding for research and preparation in the event of bio-terrorism, other branches of the Government, such as Health and Human Services (HHS) and Biomedical Advanced Research and Development Authority (BARDA), are becoming more involved in the healthcare sector. Implementing and using EVMS is a baseline requirement for biotech and pharmaceutical firms awarded large contracts by the Federal Government.

This will require companies and universities that receive funding to understand and implement Earned Value Management and that key project personnel, including management and executives, will require high quality Earned Value Training.

Why EVM and Government Contracts

Earned Value Management has been used since the 1960’s and has become the standard by which the Government measures and evaluates the management and reporting processes on projects awarded to contractors. Initially, it was implemented on projects; such as the development of satellites, long-range missiles, fighter aircraft, etc., but has become the US Government’s gold standard to manage the technical, schedule and cost progress of projects and to identify and manage risk and opportunities.

In order for defense contractors to be eligible for large contracts, they are required to follow the 32 Guidelines of the EIA-748-C which can entail system design and development and a substantial learning curve. Earned Value Management company-wide training and proper implementation becomes critical for project efficiency, future funding and to meet Government requirements.

Integral to EVM are the uses of the Integrated Master Plan (IMP)/Integrated Master Schedule (IMS) and risk and opportunity management.  The Integrated Master Schedule is the basis for developing the Performance Measurement Baseline (PMB) which in turn, is the basis for measuring performance on a project.   Measurement of progress against the baseline provides early identification of problems and helps to identify and mitigate costs and risks, while also identifying opportunities, by implementation of appropriate corrective actions.

Earned Value Management Systems for Project Management

The basic concept of the Earned Value Management System is more than a unique project management technique.  The EIA-748-C contains 32 Guidelines that define a set of requirements that a contractor’s management system must meet. The objectives of an EVMS are:

  •  Relate time phased budgets to specific contract tasks and/or statements of work
  • Relate technical, schedule and cost performance information
  • Furnish valid, timely and auditable data/information for proactive management action and decision making
  • Provide the basis to capture work progress assessments against the baseline plan to facilitate realistic project costs and completion dates
  • Supply managers with a practical level of summarization for effective decision making

Once a contractor’s EVM System is designed and implemented, there are significant benefits to the contractor and to the customer:

  • Contractor benefits include increased visibility and control to quickly and proactively respond to issues which makes it easier to meet project technical, schedule, and cost objectives
  • Customer benefits include confidence in the contractor’s ability to manage the project, early problem identification, and objective rather than subjective contract cost and schedule status

Earned Value Management Training

Experienced project managers will tell you that understanding the scope, schedule and costs of a project is essential to its success. The primary objective of the EVMS is to ensure that all elements of a project are planned, authorized, managed, and controlled in a consistent and cost-effective manner.  There is an increasing demand for training for organizations beyond the traditional aerospace and defense related construction, software, research and development, and production environment to now include non-defense companies to implement and use the Earned Value Management System.

EVM for Biotech and Pharma

Biotech and Pharma companies are not strangers to dealing with government regulations and requirements. Most have gone through rigorous Food and Drug Administration (FDA) processes to receive approval of compounds and/or devices. Nonetheless, learning how to design and use an EVM system can take a considerable investment of time and money, but is an essential requirement for initial and ongoing funding.

In addition to the EIA-748-C, there are numerous documents that give direction regarding the implementation and use of an EVM system.  Some of these are the National Defense Industrial Association (NDIA) Integrated Program Management Division (IPMD) EIA-748 Intent Guide, Cost Accounting Standards (CAS), Data Item Descriptions (DID), Military Standards (MIL-STD) such as MIL-STD-881, the Earned Value Management System Interpretation Guide (EVMSIG), and many others.  We have helped many organizations to ensure that they do not overkill or underkill based on their desired management system characteristics.  H&A personnel understand the requirements and are able to “size” those requirements to meet company and customer requirements.

Although Biotech and Pharma are relatively recent industries to use EVM, 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, 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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