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Using the Same Rate for BCWS and BCWP

By Humphreys & Associates / November 6, 2014 / ANSI, BAC, BCWP, BCWS, EVM, EVMS, NDIA

There is often an EVMS project managers debate regarding which rates to use for common budget costing EVMS data elements. For Actual Cost of Work Performed (ACWP), it is fairly obvious as the most recently approved actual rates are applied. A planning rate is generally used for BCWS and BCWP, but many in the EVM project management industry use incorrect rate application for the BCWP calculation. In some cases EVM contractors use a weighted average rate; the percent complete in hours multiplied by the dollarized BAC to derive the BCWP in dollars. This method is noncompliant with the EIA-748 Guideline 22 which states that if work is planned on a measured basis, then the BCWP must be calculated on a measured basis using the same rates and values. In other words, the rate and methods used to calculate BCWS and BCWP must be the same. As shown in Example #1, it can be seen that work planned in hours (BCWS) was performed as scheduled (BCWP) each month. Each hour was planned at a rate of $100/hour until the end of the calendar year when the rate increased to $105/hour. In this example, the rates used to calculate BCWS and BCWP are the same.

Example #2 below illustrates a very common scenario. In this example work that was planned in November and December was not completed until the next year. In January, the rate increased from $100 to $105. What should the BCWP in dollars be for both January and February?

For both January and February, the original 10 hours planned was earned at $105/hour equaling $1,050. The work that was planned in November and December, but completed late in January and February, was earned at its planned rate of $100/hour resulting in $1,000 of BCWP. The sum ($1,050 + $1,000) equals the BCWP of $2,050 in each month. See the Example #3 graphic below:

Even though the rate was escalated in the new year, the BCWP that should have been earned in the prior year is calculated using the rate that was originally planned. The same approach would be logical if the work planned at $105 per hour were performed ahead of schedule in let us say, December of the prior year. It would be earned at $105 per hour even though it was performed in a time frame where the planning rate is $100 per hour. In some instances, business systems are programmed to earn as a percent of the entire Budget at Completion (BAC). This could result in an inaccurate BCWP dollar value. As an example, let us assume 10 hours are earned in September. If those 10 hours were 1/8 of the total BAC, then the BCWP dollars associated with this 10 hours would be $102.50 per hour and the contractor would be earning too much for those 10 hours. They must earn at the planned $100 per hour! Thus the rate used for BCWP is the same as for BCWS and is compliant with Guideline 22; one earns in the same manner as they plan to earn.

In summary, EVM concepts require that in order for the work to be complete, cumulative values of BCWS and BCWP must equal the BAC. So, from a common-sense standpoint, if BCWP is earned at a different rate than that used for planning the BCWS, the Control Account (or even the Contract) cannot be closed properly. Examples:

If BCWP earns at a lower rate, the BCWP would be, say, 98% of the BAC when the actual work is done.
Likewise, if BCWP earns at a higher rate, the BCWP would be, say, 105% of the BAC when the actual work is concluded.

Both of these scenarios violate the EVM concepts.

Using the Same Rate for BCWS and BCWP Read Post »

EIA 748-C Released: EVMS

Are you aware that a revision to Electronics Industry Association (EIA) standard 748 Earned Value Management Systems, has been released? The new revision is EIA 748-C. Officials have been discussing the changes at recent industry conferences.

No changes have been made to the 32 EVMS Guidelines in Sections 2.1-2.5 of the standard. The changes are primarily clarifications of the existing text:

Includes a new section about Budget Element Hierarchy. This section describes the components of Contract Target Price from the highest level to the lowest level of cost elements. It includes the same information that is taught in every basic earned value management seminar.

Emphasizes Risk and Opportunity management. Wording has been inserted in numerous sections of the standard (such as comprehensive planning, schedule, management reserve) to emphasize the consideration of risks and opportunities.

Includes Rate and Usage variance formulas in the standard. Labor rate and efficiency variance formulas are now specifically defined in Section 3.8.2. Similarly, material price and usage variance formulas are now specifically defined in Section 3.8.5.

Clarifies Control Account definition. Revisions to the standard note that the Work Breakdown Structure (WBS) is extended to the level at which control accounts are established and includes additional clarification regarding multiple control accounts existing within a lowest level WBS element.

Clarifies material progress points: Receipt, Stock, Issue. The revised standard states that the acceptable points for claiming earned value are when material is received, when it is entered into inventory, or when it is issued from inventory.

Clarifies OTB/OTS text. The revised standard corrects the terminology to use
“Contract Budget Baseline” instead of the Performance Measurement Baseline regarding Over Target Baselines (OTB), removes language about partial OTBs, and recommends reviewing the contract for implementation requirements prior to executing OTBs or Over Target Schedules (OTS).

Adds a list of suggested references. All NDIA guides related to Earned Value Management Systems are included as suggested references but not requirements.

Includes numerous minor clarifications.

Clarifies that multiple terms are used interchangeably for “scope”
Adds acronyms into the definitions in Section 2.6
Clarifies that Estimates at Completion (EACs) are summarized through the WBS and OBS
Clarifies that the performance measurement baseline must include all authorized changes, including current period changes
Clarifies that the System Description is not required to be a stand-alone document
Clarifies that there is no mandated Rolling Wave cycle
Emphasizes that planning packages must not start in the current period

In summary, EIA 748-C simply clarifies the text of the standard and does not change any of the implementation, reporting, surveillance, or enforcement aspects of Earned Value Management Systems.

Feel free to contact Humphreys & Associates for more information about the EIA 748 revisions or for expertise in implementation of EVMS contractual requirements.