ACWP

actual cost of work performed

EVMS compliance: Material Transfers and Loan/Paybacks

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Earned Value Management System (EVMS) compliance | Material Transfers and Loans/Paybacks

In a high rate production environment, it is not unusual for different Contract Lot Buys to have demands for the same required parts. Circumstances driven by delivery schedules, fee incentives, national priorities, or quality issues will prioritize the demand for these common parts. Companies will be challenged to respond to these dynamics while satisfying contractual requirements and continuing to remain Earned Value Management System (EVMS) compliant. A documented Material Transfer and Borrow and Payback (e.g., TBLP) policy/procedure describing a disciplined, auditable approach is a mandatory prerequisite for EVMS project managers.

Material Management and Accounting System (MMAS)

There are a number of applicable Government documents that come into play but none more important than the Material Management and Accounting System (MMAS). It is a DoD Policy (242.7202) that contractors have a MMAS that:

(1) Reasonably forecasts material requirements
(2) Ensures the cost of purchased and fabricated material charged or allocated to a contract are based on valid time-phased requirements
(3) Maintains a consistent, equitable, and unbiased logic for costing of material transactions.

MMAS Standards 6, 7 and 8 are especially apropos to material transfers and loan/paybacks:

• MMAS Standard 6 (Material Transfers) requires that the contractor’s policies and procedures provide detailed descriptions of circumstances which will result in manual or system generated transfers of parts.
• MMAS Standard 7 (Material Costing) requires that the contractor’s system transfer parts and associated costs within the same billing period or use an ACO approved “Loan/Payback” technique.
• MMAS Standard 8 (Inventory Allocations) requires that the contractor’s system handle allocations of common inventory in such a manner as to preclude improper allocation and costing of allocations.

Material Transfer versus Loan/Payback

For a number of reasons, a material transfer involves the most problematic issues for accommodating changing demands and priorities for common parts:
• Transfer costs are based on labor, material and applicable burdens when originally incurred and not based on the year when they are physically transferred (i.e. 2010 costs vs. 2014 costs). Related funding issues may also surface (requesting 2014 funding to ‘build’ a 2010 requirement in 2014).
• Replacement costs will, in most cases, be at a higher value and there may be a potential schedule impact; both represent negative impacts to the customer.
• Previously reported Budgeted Cost for Work Performed (BCWP) and Actual Cost of Work Performed (ACWP) for work already accomplished will be impacted.
• Potential for inadvertently gaining a cost benefit when transfers are made between a Cost Plus and Fixed Price contract.
A transfer approach should only be considered when there is no replenishment currently in the procurement system. If there is a replenishment currently in the ‘pipeline’ then a loan/payback approach should be used as this will result in no cost transfer.
Under a loan/payback scenario, a part is moved temporarily from the contract but the cost of the part remains on the contract. As noted earlier, contractor procedures for the loan/pay-back technique must be approved by the Administrative Contracting Officer (ACO). Per Defense Contract Audit Agency (DCAA), when the technique is used, the contractor must have controls to ensure that:
• Parts are paid back expeditiously.
• Procedures and controls are in place to correct any over-billing that might occur.
• Monthly, at a minimum, identify the borrowing contract and the date the part was borrowed.
• The cost of the replacement part is charged to the borrowing contract.
Material Management and planning within an EVMS environment is quite challenging. Thankfully, there are a number of Earned Value Management Systems software programs available to assist contractors in meeting and managing this challenge.

Consider Humphreys & Associates to assist you in guiding your efforts in this complex endeavor, to ensure a firm foundation is established that meets or exceeds your material management needs.

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Aligning ACWP with BCWP for Proper EVM | Earned Value Management

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ACWP and BCWP by DAU

What is estimated Actual Cost of Work Performed (ACWP)?

Estimated ACWP is an adjustment to the Actual Cost of Work Performed (ACWP) in the earned value “engine” to align ACWP with Budgeted Cost for Work Performed (BCWP).  Estimated ACWP is synonymous with “estimated actuals.”

Why is Estimated ACWP necessary?

Without Estimated ACWP, timing mismatches between ACWP and Budgeted Cost for Work Performed (BCWP) cause false cost variances to appear in the Integrated Program Management Data Analysis Report (IPMDAR) information reported to the customer.  Typically these variances are favorable and can mask other unfavorable variances.  Additionally, if these variances exceed reporting thresholds, the explanations clutter Format 5 of the IPMDAR with variance explanations that discuss timing problems of the accounting system rather than actual performance issues.

To what types of cost does Estimated ACWP apply?

Estimated ACWP is most typically required for material costs.  When BCWP is claimed upon receipt of the material, the actual cost accrual typically occurs one or more months following material receipt, which creates the timing mismatch between BCWP and ACWP.  Other cost element types that may require Estimated ACWP include subcontracts and Other Direct Costs (ODC).  Examples of ODCs that may require Estimated ACWP include consultants, purchased labor, and travel.

How does Estimated ACWP function?

Receipt-type material:

  1. First, a determination must be made whether Estimated ACWP is necessary.  For some categories of material, when a material item is received, the BCWP is claimed.  If actual costs for the materials do not enter the accounting system in the same period that the BCWP was claimed, Estimated ACWP is necessary to ensure ACWP occurs when BCWP occurs.
  2. Second, the Estimated ACWP adjustment is entered into the Earned Value engine as a current period transaction.  The amount of the Estimated ACWP is based on the best information available for the material item using the invoice, purchase order, or receiving report.
  3. Third, the Estimated ACWP adjustment transaction is reversed in the EV engine prior to the next month’s update.  If actual costs were to come in that month and the transactions were not reversed, the ACWP would be double-counted when the actual cost data from the accounting system gets transferred to the EV engine.
  4. Finally, remember that if the actual data does not occur as expected in the month following material receipt, the Estimated ACWP is re-entered and the reversal process must continue every month until the accounting system receives the cost of the material item.  Also, Estimated ACWP transactions should be recorded in a log to maintain traceability.

Production-type (inventory) material:

The transactions described above were for material categories for which Earned Value is claimed at receipt of the material item.  For production type materials, or materials that are common to many control accounts or even contracts, that go into inventory, Earned Value is claimed upon issuance from inventory, sometimes several months after receipt of the material and after the incurrence of actual costs in the accounting system.  In this case, the opposite condition would exist.  The accounting actuals occur before earned value is claimed for material, but EVM rules in Guideline 21 (and common sense) state that ACWP is not to occur until BCWP takes place.  Therefore, the accounting actual costs have to be “suppressed” from entering the EVM engine until material Earned Value occurs. Since some companies say they cannot suppress actual costs, they let the actual costs enter the system, but make an off-setting “Negative Estimated ACWP” entry in the EVM system until the material is issued and BCWP can be claimed for the material.

Do you need to implement an Estimated ACWP process in your Earned Value Management System?  Humphreys & Associates has the earned value training experts to assess your material management processes and implement the appropriate procedures. 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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