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

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Last Updated May 22, 2025

Earned Value Management (EVM) 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.  This analysis is the material counterpart to conducting a labor rate versus hours (efficiency or volume) 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 materials (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 use software tools to maintain a database of all materials the company receives as well as what particular projects receive.  While the material management system is 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 use the material management system data and perform 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.”

Also see these related blogs:

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

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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Last Updated May 22, 2025

Earning Value for Material - The Correct Approach

Recall from the previous blog about earning value for material, in which Guideline 21 in the EIA-748-D Standard1 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 previous 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, 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.

The easiest type of material category to describe is “tangible” material – objects you can physically touch. This includes items used to build the final product, such as ribs, spars, and bulkheads, wiring harnesses, tubing, pumps, switches, actuators, brakes, hinges, and the like. It can also include major assemblies and subcomponents outsourced to suppliers, like wings, control surfaces, canopies, and doors. Engines are material if purchased under the contract; if they are provided as government-furnished equipment (GFE), they are not part of the material element of cost.

Ancillary materials used during the manufacturing process also fall under the material category. These include items such as paint, caulk, glue, nuts, bolts, rivets and similar components.

All the items listed above fall into a category called “recurring” material. These are materials that are purchased repeatedly and are essential to building the final product.

Another important material category – separate from the components used in the final product – is the tools and fixtures used in the factory to build up the product (excluding capital assets). If purchased under the contract, they are considered part of the material element of cost. Unlike recurring materials, these items are typically purchased once and are used to build many finished products. This type of material is referred to as “non-recurring.”

Some contracts include the acquisition of spares to support the finished product after delivery. If spares are purchased, they count as material. If the spares are manufactured in the contractor’s factory alongside the finished product, the constituent materials that go into the spares also fall under material element of cost.

What about major suppliers? If a major supplier provides a tangible product such as a radar or landing gear, the cost of that subcontract is a material cost. However, the cost of a supplier providing non-tangible products (such as engineering services) is usually classified as a labor expense rather than material. 

When dealing strictly with materials used for engineering and/or production related effort, a number of approaches to claim earned value may be needed. This is based on the products a company typically builds for their government customer. 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 what is classified as high value material, critical material, and low value material.

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

Also see these related blogs:

Do you need an independent review your EVM System Description to ensure you are providing the necessary guidance to your project teams? Humphreys & Associates has the earned value management experts to assess your EVM System Description and provide recommendations to improve the content. Contact us today.

  1. EIA-748-D Guideline 21 content maps to the EIA-748-E Guidelines 14 and 16 which streamlined the content in D Guideline 21. EIA-748-E Guideline 14 states in part: “Earned value for material items may not be credited earlier than the actual receipt of the material nor later than the consumption of the item.” ↩︎

Earning Value for Material – The Correct Approach – Part 2 Read Post »

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

Last Updated May 22, 2025

A common question that H&A earned value 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 all categories of material.

Guideline 21 in the EIA-748-D Standard1 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 text “suitable for the category of material.”

Let’s look at the two most common high-level types of material categories for discussion: 1) Engineering and 2) Manufacturing.

Engineering material earned value (EV) is typically claimed at receipt. Manufacturing material EV is typically claimed when issued from inventory (usage or disbursement). Point of usage is also useful for planning major assemblies in the integrated master schedule (IMS) rather than a myriad of smaller items that would be needed for the assemblies. Planning and earning only the major assemblies as they go to final assembly can simplify the IMS and the EVMS process. Claiming BCWP when material is taken into inventory or at final distribution are also valid options.

The most common acceptable points for claiming earned value for the various material categories are illustrated below.

EVM - Cost Exposure Span


For production programs, based on the completion or delivery dates for end products, the M/ERP system creates a detailed set-back schedule for material required within each build station to achieve completion by the required delivery dates to support “just-in-time” processes. Large production or manufacturing facilities maintain inventories of specific materials 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 Deficiency Reports (DRs) or Corrective Action Requests (CARs) for using inappropriate points in time to earn value for material.

  • Rationale. 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 performance report 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 performance report) 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.
  • The take away. A number of contractors are incorrect in thinking they can earn value for all material at the point of receipt. The EIA-748 Guidelines 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.

Also see these related blogs:

Need help determining the appropriate earned value techniques to use for material?  H&A can assist you with clearly defining the requirements for the different categories in your business environment. Contact us today.

  1. EIA-748-D Guideline 21 content maps to the EIA-748-E Guidelines 14 and 16 which streamlined the content in D Guideline 21. EIA-748-E Guideline 14 states in part: “Earned value for material items may not be credited earlier than the actual receipt of the material nor later than the consumption of the item.” ↩︎

Earning Value for Material – The Correct Approach – Part 1 Read Post »

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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