Earning Value for Material – The Correct Approach – Part 2

Recall from our blog in early October about earning value for material, in which Guideline 21 in the EIA-748 Standard 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 earlier 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 (highlighted above), 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. For example, many contractors include subcontractors, staff augmentation subcontractors, temporary services, office supplies, etc. as material categories that are planned and earned differently.

When dealing strictly with materials used for engineering and/or production related effort, a number of EV approaches may be needed. This is based on the products a company typically builds for their government customer. This could include bar stock, sheet stock, wire or cable reels, nuts and bolts, various types of subassemblies, purchased parts, or consumables such as lubricants, gases, coatings, paints, acids, etc. 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 high dollar value and low dollar value material.

• High dollar value material should be planned and earned using discrete earned value techniques
• Low dollar value material may be planned and earned as apportioned effort or as level of effort (LOE), as well as being discretely measured
• Low dollar 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 projects 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 (receipt or issue) for the category of material involved.

Do you need an independent review your EVM System Description to ensure you are providing the necessary guidance to your projects? Humphreys & Associates has the earned value management experts to assess your EVM System Description. Contact us today.