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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Control Account Manager – CAM Certification by Humphreys & Associates

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Control Account Manager - CAM certificationControl Account Manager (CAM) Certification. This efficient and intensive certification program is perfect for anyone looking to:

  • Distinguish themselves from their peers with a professional CAM certification
  • Advance his or her earned value management (EVM) expertise

Humphreys & Associates effective and comprehensive certification program is intended to further develop on-the-job skills. It includes wide-ranging course work and concludes with a comprehensive exam requiring the student to establish both analytic and technical Earned Value Management Systems proficiency.

Individuals that complete the Humphreys & Associates CAM Certification program have solid evidence of their ability to execute an EVM System effectively and satisfy job requirements as CAMs in the most challenging project control environments.

The course work spans the five EVMS guideline groupings in the EIA-748 Standard for Earned Value Management Systems including:

  1. Organization
  2. Planning, Scheduling, and Budgeting
  3. Accounting Considerations
  4. Analysis and Management Reports
  5. Revisions and Data Maintenance

Important risk management discussions are part of the course and stress data integrity and trace-ability  Earned Value Management best practices are highlighted to provide insights and to illustrate current methods and approaches. This results in better management and decision-making.

Humphreys & Associates CAM certification uses extensive case studies and exercises that bring the EVM concepts to life and help to refine analytic expertise. Each participant will receive:

  • A binder with all course materials
  • The H&A Project Management Using Earned Value textbook
  • The pocket sized H&A Guide to Project Management Using Earned Value

Humphreys & Associates offer two options for completing the CAM program coursework. Contact us today to learn more about Humphreys & Associates Control Account Manager – CAM Certification program at (714) 685-1730.

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Earning Value for Material – The Correct Approach – Part 1

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Earning Value for Material

A common question that H&A Consultants are asked is “What is the most common point to claim earned value (the budgeted cost for work performed or BCWP) for material?”

The answer? There is not one point for earning value for material in all categories.

Guideline 21 in the EIA-748 Standard for Earned Value Management Systems (EVMS) says, “…earned value is measured and at the point in time most suitable for the category of material involved….”.  Notice the highlight on “suitable for the category of material.”

Let’s look at the two most common high-level types of material categories for discussion: Engineering and Manufacturing.  Engineering material earned value (EV) is typically claimed at receipt. Manufacturing material EV is typically claimed when issued from inventory.  The most common acceptable points for claiming earned value for the various material categories are illustrated below.

EVM - Cost Exposure Span
With the advent of MRP/ERP systems and the tendency for companies not to want to keep large stores for materials, many have gone to a “just in time” approach where they order delivery of their materials to be staggered over time to arrive just in time for their need dates.  Large production or manufacturing facilities will still need to have inventories to ensure their lines continue in operation.

What happens in some facilities, however, is that contractors have placed the emphasis on the next part of Guideline 21 that says “…but no earlier than the time of actual receipt of material” as their authority to earn value for all material at point of receipt.  These contractors are asking for trouble with this misinterpretation.  Contractors should base their plans and EV on the category of material involved.

Whenever contractors earn value at the point of receipt for material they plan to maintain in their inventory bins for several months, they open themselves to have DCMA write Discrepancy Reports (DRs) or Corrective Action Requests (CARs) for using inappropriate points in time to earn value for material.

  • Rationale for this is – When you claim EV, you are telling the customer you are a certain percent complete with the program.  For example, if materials represent 70 percent of your contract, earning value for all the material (or a large part of it) up front says (in the Contract Performance Report CPR to the customer) “I am 70% done with your program”. The customer tends to think in terms of “7 of my 10 airplanes are completed” when in fact none are completed.
  • The result – A very unhappy customer because you indicated incorrectly (in the CPR) you are ahead of schedule. This false lead erodes away until you are late delivering the planes, helicopters, ships, tanks, or other contracted items to the customer.
  • Bottom line – A number of contractors are incorrect in thinking they can earn value for all material at the point of receipt. The EIA-748 Guidelines – even back in the day when it was the Cost/Schedule Control Systems Criteria (C/SCSC) checklist – have always required the distinction by material category (there are always more than just the two categories discussed above).  DoD and DCMA have always stated there is no one point for claiming material earned value.

Need help determining the appropriate earned value techniques to use for material?  Humphreys & Associates can assist you with all your EVMS needs. Contact us today.

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EVMS – Using Estimated Actual Cost of Work Performed (ACWP)

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Using Estimated Actual Cost of Work Performed (ACWP)

Estimated Actual Cost of Work Performed

The use of estimated actual cost of work performed (ACWP) for material and subcontractors is something the Defense Contract Management Agency (DCMA) review teams expect to see in Earned Value Management Systems (EVMS).

The review teams know:

  • Many contractors earn value for a large amount of material at receipt
  • Suppliers or subcontractors do not always invoice at the same time
  • Contractors do not pay at the same time

VAR Narratives

DCMA increasingly sees variance analysis report (VAR) narratives for material with such statements as “My $1 million cost variance is caused by late receipt of the invoice from the vendor” or “is caused by the company not paying their invoice this month.”

These are misleading and needless variances because these drastic, temporary variances go away, or are minimized, once the invoice is paid and the actual costs in the accounting system catch up with the budgeted cost for work performed (BCWP) claimed. The intent for using estimated ACWP is to ensure that the ACWP recorded closely follows when the BCWP is claimed in the EVMS.

Real Cost Problem

When the estimated ACWP is “reversed” at the end of a month and replaced with the true actual costs, there should not be a significant cost variance, unless there is a real cost problem in which case more information is required to describe the situation. Replacing the estimated ACWP with the true actual costs is considered a routine accounting adjustment.

Note that the term “estimated ACWP” and not “estimated actual costs” is being used. The intent is to align when ACWP and BCWP are claimed in the EVMS to prevent unnecessary variances. The estimated ACWP is not the actual cost recorded in the accounting system.

Examples

That said the estimated ACWP must be based on documented, verifiable information. What are some examples of sources for the estimated ACWP?

Materials

  • For large, discretely tracked items, use the purchase order (PO) value for the parts earned
  • For small value items that may not be discretely tracked, one could use:
    1. PO value (may be cumbersome)
    2. Priced bill of material (BOM) for items received in the month (sorted by receipt dates). This can be actual prices or average prices for similar parts groupings (best estimate, without going to an excruciatingly painful amount of work to get it)
    3. Homogeneous groupings of material based on units of measure (pounds, reels, feet, tons, gallons, etc.) times the average price for that grouping (e.g., various sized washers: “received 3,000 pounds of various washers at approximately $4.00 per pound” instead of trying to track each washer at $0.000023 per washer)

Subcontractors

The estimated ACWP can vary depending on type of subcontracts involved. It could reflect:

  • The CPR/IPMR/IMPDAR value for ACWP (yes, this is an estimated ACWP until the invoice is paid)
  • Other cost report values for ACWP or subcontractor actual costs
  • Earned value claimed by the subcontractor (what it was supposed to cost). If history shows poor or good performance, the control account manager (CAM) can modify the estimate for ACWP accordingly
  • Work performed reported by the subcontractor. The CAM should have a “valuation” of all the deliverables or anticipated receipts based on the subcontractor’s billing plan or delivery schedule

Labor Subcontractors

Usually, these staff augmentation subcontractors are working with the contractor’s employees. The estimated ACWP could reflect:

  • Hours performed, priced out at the contract rate (this does not account for overtime, premiums, etc.)
  • Months or weeks of support priced out labor at the planned rate, contract rate, or known actual rates

Clearly Identified Invoices

For all of the above cases, the supplier or subcontractor invoice should clearly identify:

  • What was sent or what services were provided
  • The actual costs for each of those items (subject to contract terms)

Disciplined Direction

Using estimated ACWP does require direction on how to implement it in a disciplined manner. It is important to identify who is responsible for entering the estimated ACWP in the EVMS and the process used to replace the estimated ACWP with the recorded actual costs from the accounting system.

The CAMs may need assistance from their financial/materials/accounting departments to ensure they have the right information needed for the estimated ACWP and that the true actual costs are captured in the EVMS as soon as the data are available.

Have questions about using estimated ACWP in your EVMS? Humphreys & Associates is available for consulting on this topic and all stages of your EVMS implementation or ongoing projects. Feel free to contact H&A.

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Authorized Unpriced Work (AUW) and Earned Value Management Systems

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Authorized Unpriced Work (AUW)

Authorized unpriced work (AUW) is an area that can cause contractors difficulties and when not handled properly, can result in a DCMA EVMS review team writing up a Corrective Action Request (CAR) as we have discussed in previous blogs.

At times, contractors can find themselves in a position where projects are not following commonly used and recommended practices that are described in the EIA-748 Standard for EVMS guidelines as well other guidance such as the NDIA Integrated Program Management Division (IPMD) EIA-748 Intent Guide and the DoD Earned Value Management System Interpretation Guide (EVMSIG).

It is always better to be proactive to ensure project personnel have the proper direction they need. H&A suggests that you review your EVM System Description as well as any related procedures to ensure that they:

  1. Reflect the EIA-748 guidelines (for AUW in particular, see Guidelines 8 and 28) as well as related industry and government implementation guidance.
  2. Are clear and specific on how project personnel are to handle authorized unpriced work.

Humphreys & Associates suggest verifying the following items are discussed in your EVM System Description.

  1. How and when work scope and budget are distributed from undistributed budget (UB) to control accounts and subordinate work packages or planning packages. This includes:
    • Describing what controls are placed on the use of UB.
    • Stipulating a specific period of time that work scope and budget can be held in UB for fully negotiated work.
    • Describing how and when UB is distributed to control accounts when the work scope has not been defined (i.e., the work scope represents AUW).
    • The interim budgeting procedure used during the definitization process to distribute the work scope and budget from UB to the work package level for the near term effort (such as three to six months). This interim budgeting procedure should be followed until the AUW scope of work held in UB is definitized and distributed to control account work packages or planning packages.
  2. Incorporating authorized changes in a timely manner. The EVM System Description will need to describe what:
    • Constitutes an authorized change.
    • Indicates authorized changes have been incorporated.
    • Constitutes “timely” incorporation.
  3. The process for establishing internal budgets for authorized but unpriced changes should be based on a resource plan for accomplishing the work. Project managers should have a detailed plan in place for the near term work using cost estimates and resource plans with appropriate direction to notify the customer when spending approaches any not to exceed (NTE) spending limits. It is critical that traceability through all steps of the process can be demonstrated.

For a more in-depth discussion on how to handle authorized unpriced work (AUW), see the article posted on the Humphreys & Associates EVMS Education Center, EVMS Practitioner section.

Humphreys & Associates is available for consulting and information on this topic. Give us a call!

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