Earned Value Management – A Simple Explanation

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Earned Value Management – A Simple ExplanationEarned value management or EVM in short is a strategy used by top management personnel to keep track of costs and schedules. Designed in the 1960’s by the US Department of Defense, the system was initially used to screen and acquire defense contracts. The criteria for cost and schedule control systems have been recently revamped, bringing it to 32 criteria to be considered in the latest earned value management system by EIA-748 standards.

Earned value management systems can be applied in projects of every cost and size although it is more commonly used for complex projects with tight schedules and huge budgets. The EVM system has been refined and developed over the years and today, it is used by big organizations such as NASA and the Project Management Institute and Acquisition Management in the UK. Its usage is also widespread in private sectors across different fields and industries. There are many advantages of using the EVM system.

Firstly, EVM provides accurate performance tracking. Under this system, primary and derived data are used to keep track of project performance. Using actual figures, the system generates trends that can be used by project managers to compare what was achieved against what was originally planned. The data set obtained will assist the project manager in deciding whether or not the project is on track. Also, he can use the data to accurately forecast problems such as scheduling delays, budgeting and whether the projected profits are met.

Secondly, EVM helps project and control account managers gauge the progress of a project accurately by comparing the planned against actual work accomplished. Project risk and its appropriate response can be identified earlier and proactive actions can be taken to reducenegative impact. If an overrun is forecast, the problem can be presented to stakeholders at an earlier time.

Lastly, the implementation of EVM system reduce risks. Risk reduction facilitates a more effective communication with stakeholders, especially when additional funding is required.

In short, the EVM system is an effective tool in a project manager’s arsenal. When used correctly, the system can accurately track the performance of a project and reduce project risks.

For a more in-depth explanation of the basics of Earned Value Management, see our EVMS Education Center or call our corporate office to obtain a copy of our EVM  pocket booklet pictured above on how to do Project Management with EVM.

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Rolling Wave Planning for Earned Value Management Systems

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If someone were to ask you: “Can you please give me a detailed explanation of what you will be doing on this date three years from now?” you would probably look at that person as though he or she were crazy.  It would probably be difficult to provide a detailed schedule of events for a date one week from now – although that might be more likely since you know a lot more about what might be taking place next week than what might be happening three years out.

In the early days of earned value management, contractors were expected to detail plan the entire length of a program to establish a “good performance measurement baseline.”  For a year-long development program this expectation might be okay, but for a 10 to 12 year shipbuilding program it might be unreasonable and probably a monumental waste of time.  The program will no doubt change several times before its completion – maybe several times in the first year alone.  With industry’s “help” the government soon realized requiring detail plans on lengthy programs was not always possible – or even meaningful – especially when program requirements are often fluid.

The government and industry agreed that contractors could provide an overall (general, straight-line, “average”, etc.) plan for accomplishing a program very much like what is already done in preparing a proposal, and then provide more details on an incremental basis as more became known about the work to be performed.  The government is not keen on having contractors do detail planning whenever they felt the urge, so they sought to put reasonable rigor into the incremental planning process.  All the work that existed beyond the detail planned work was considered by the government to be general “planning packages”, although contractors were still permitted to detail plan as much of the future work as they wanted.

The government also expected the contractors to identify the planning increments and frequency of planning to ensure there was not a time when the detail planned work was completed and there was no more future work detail planned.  The expectation soon became that contractors were to expand a detail plan from those planning packages into detail planned work packages with enough frequency to ensure there was always a minimum number of months of detail plans in place when the next detail planning event took place.   It also became evident that more months of detail (often called a “planning horizon”) could be provided on production or manufacturing type work vs. for development type effort.

As this “straight-line” plan was converted into detailed work package plans, the straight line became more curved (such as bell curve or skewed bell curves), with more “waves” rolling in as it became time to detail plan.  This type of planning became known as “rolling wave planning”.  Some companies call their process “incremental”, “accordion”, or “inchworm” planning process – the name does not matter, so long as the application of the process results in a minimum amount of detail planned work packages always being in place on a program.

A production program might have, for example, a 9 month planning horizon with a quarterly frequency.  In this scenario, the program starts with 9 months of detail planning in place.  Three months later, the Control Account Manager (CAM) is to look at the next 9 months (6 already detail planned and 3 new months) to make sure the existing detail planning is still good and to plan out in detail those new tasks that should be starting in the new three months of the planning horizon.

A development program however, is likely to use a different planning horizon.  Because of program volatility, it often has a shorter horizon and a higher frequency, such as 4 months of detail planning in place, with a one or two month frequency.

An example for a production program is illustrated below.  The program manager determines production can do detail planning for nine months and then every quarter review the next nine months for:

  • New work scheduled to commence in the next three months of the planning horizon and
  • Five of the six months already detail planned in the prior incremental assessment (depending on the company’s “freeze period”) – WP No. 3 and beyond can be re-plannedRolling Wave Planning

3 Months later: Rolling Wave Planning

Rolling Wave Planning for long term projects is a common area where control account project managers need help.  Humphreys & Associates earned value management experts can provide the guidance you need for your unique production or development project.  Contact us for more information.

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Earned Value Management Systems (EVMS) – Residual Material Accountability – Part 4

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Another EVMS  residual material accountability requirement (see part 1, 2 and three) is that an Earned Value Management project must maintain records to show full accountability for material purchased for the contract, including the residual inventory.

What does this mean?  The answer:  Regardless of the size of the contract, the EVMS Guidelines require contractors to maintain accurate records of the materials purchased for a contract, as well as records of performance measurement as the materials are used.  A contractor must show how the material bought for a contract is not only incorporated into the final product, but also how any excess materials are disposed to offset some of the costs to the customer.

How does a contractor do this?  The easier part of material traceability is keeping track of the material that ends up in the final products.  The “as-built” bill of materials (BOM) lists what and how many material items were included in the delivered items.  The more difficult part of traceability is tracking:

  1. The material that did not get into the final product (excess material)
  2. How many units of any one material item it took to deliver one unit of the final product (material attrition)

There are a number of BOMs that a contractor creates as part of the maturity of a contract or project.  While they may have different names, they generally fall in these categories:

  1. As Estimated.  A complexity-based “similar-to” BOM to get an approximate cost
  2. As Designed.  A BOM created as part of the engineering/development phase
  3. As Planned.  The original baseline BOM at contract award for the negotiated configuration(s)
  4. As Modified.  As requirements and/or configurations change, so does the BOM(s)
  5. As Built.  The final BOM that details how the product/configuration was actually built

With the first two categories, material for the build is not yet purchased (not committed), but sets the stage for the subsequent categories.  The “as planned” BOM is the one that is in place at contract award and is used to begin making material purchases.  As changes occur, the BOM changes, and some of the materials already purchased for the contract become obsolete or “designed out” of the product.

These materials become what is known as residual or excess materials that are still actual costs on the books for the contract.  Subject to the customer’s contractual dispositioning instructions, the contractor will:

  • Deliver the material to the customer
  • Seek other purchasers for the material
  • Scrap the material for the best price that can be obtained·

Whatever amount the contractor gets is to be used to offset the actual costs charged to the customer.Excess materials can also result from other project occurrences, such as:

  • Minimum Buys.  For example, the project needs 8 material items, but the vendor only sells packs of 12
  • Material Attrition.  Breakage experienced during the assembly or manufacturing process.  Note there are two types of attrition:
    • Lower than expected attrition – results in higher than expected amounts of material left over
    • Higher than expected attrition – more units required to build the product results in higher unit cost and possibly additional excess materials

Since materials bought to a project belong to the customer, it is the contractor’s responsibility to accurately account for what is being spent to build the product.  This is done by reporting accurate costs for each unit produced, offset by the amount of excess materials disposed of to the best advantage (highest cost recovery possible) for the customer.

Do you need an independent review of your Earned Value Management System Description to ensure you are providing the necessary material accountability guidance to your projects?  H&A has years of experience and EVM experts to assess your current material accountability approach.

Contact us to discuss your current and future EVM project needs.

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EVM Material Earned Value – Price vs. Usage Variance Analysis – Part 3

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EVM (Earned Value Management) control account managers (CAMs) with material cost elements are required to conduct price vs. usage material cost variance analysis as a normal part of their root cause analysis for their control accounts.  This analysis is the material counterpart to conducting a labor rate versus hours (efficiency) cost variance analysis.

Material price/usage analysis looks at the two components of a material cost variance:

  • Price.  How much of the cost variance was caused by the unit price paid for the material item differing from the earned value unit price for the material?
  • Usage.  How much of the cost variance was caused by the earned value for the quantity of the material differing from the actual quantity of the material?

A common question is “How can we do this when we have thousands of material items to account for on a project?”

The answer:  Not all material items have to be tracked discretely to conduct an adequate price/usage analysis, with the general rule of thumb of discretely tracking about 80% of the material dollars.

Some contractors set a policy where material will be tracked discretely if it breaks a specific dollar value (for example, anything above a $5,000 unit price).  Other contractors conduct what is called an “80/20” analysis of their estimated bill of material (BOM).  The concept here is that on most programs, approximately 20% of the material items (larger dollar items) represent about 80% of the material dollars on the program, with the other 80% of the BOM being the smaller dollar items that total about 20% of the material dollars.  In this case, the discretely measured items are any of the items in the top 20% of the BOM.

Some contractors do this segregation by the unit price of each material item.  Others make the division based on the extended price (unit price times the number of units to purchase), sometimes placing a high volume/low price item on the discretely tracked 20% list.  Either method is acceptable.

Even with this discrete material segregation, the price/usage analysis still needs to be performed.  The difference is discrete items are tracked separately (e.g., a $250,000 radar antenna dish) from a commodity grouping (such as all connecting bolts – average planned price of $10 per pound).

The variance analysis method is the same for discretely measured items and for the homogeneous groupings of material items where:

Price Variance = (BCWP Unit Price – ACWP Unit Price) x ACWP Quantity

Usage Variance = (BCWP Quantity – ACWP Quantity) x BCWP Unit Price

Another common question is “Where do I get this sort of information?”

Most material departments or supply chain management teams maintain detailed listings of all materials the company receives as well as what particular projects receive.  While these listings are generally used to identify material deliveries, late deliveries, material availability for transfers or borrow-paybacks, etc., they generally have the unit price and quantity purchased information necessary for the CAMs (or at least the material department) to perform the price/usage analysis required.  It may require special runs, or sorts, of the BOMs or inventories that are maintained, but the information is usually available.

The CAMs can take these runs and conduct their algorithms to do the price/usage calculations described above.  Generally, these systems contain enough information to discretely measure every part number to the lowest unit price item on the project.  Earned value management, however, does not require reporting price and usage analysis on “connecting bolt #123 with a price of $0.0000134 per unit.”

Humphreys & Associates is available for EVM consulting, CAM certification and additional information on this topic. Contact us today.

View the other posts in the EVM Material Series

EVM Material Earned Value – Price vs. Usage Variance Analysis – Part 3 Read Post »

How to Avoid Corrective Action Requests Related to Level of Effort

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Has DCMA issued you a Level III Corrective Action Request (CAR) because you have had repeat Level 2 CARs for having “BCWP with no ACWP” (Budgeted Cost for Work Performed vs. Actual Cost of Work Performed) or “ACWP with no BCWP” that has not been corrected?

According to all the EVMS rules, this appears to be a legitimate finding. If left uncorrected, is a valid Level 3 CAR request that can have serious financial implications.

This would certainly be a valid finding for discretely measured tasks. However, what about level of effort (LOE) work? Because LOE earns value with the passage of time it may or may not align with actual accomplishment of the work planned in that LOE task.

This usually is not a problem for general support tasks that span the duration of the project (unless the project slips). The issue more often arises with shorter duration LOE tasks that are planned to support specific discretely measured tasks. Everything is fine if the discrete work task takes place as planned. But what happens when it doesn’t?

If you are not paying attention to the LOE tasks associated with the discrete work effort, e.g. the EVM system is on autopilot, and the associated discrete work starts early or late, the result for the LOE work effort is:

  • ACWP (Actual Cost of Work Performed) without BCWP
  • BCWS (Budgeted Cost for Work Scheduled) and BCWP without ACWP
  • Distortion in the system of when the support work is really happening

The issue is further compounded when contractors attempt to make previous period adjustments (something that should be avoided) for LOE work effort and do not explain to their customer why they made current or prior period adjustments to BCWS, BCWP, and ACWP.

How you do avoid these issues with LOE tasks? It takes proactive planning and management of LOE tasks.

Read our in-depth article on recommended practices for improving the planning and monitoring of LOE activities. The goal is to avoid changing past LOE data when the discrete work does not take place as planned and to avoid those repeat CARs for “BCWP with no ACWP” or “ACWP with no “BCWP”.

Need help with how you are handling LOE work tasks or need to develop guidance on how to use the various earned value techniques? Contact H&A today.

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Earning Value for Material – The Correct Approach – Part 2

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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.

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