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Planning and Managing EVM by Elements of Cost (EOC) – Use a New EOC – Part 3

By Humphreys & Associates / May 1, 2019 / ACWP, BCWP, CAM, earned value training, Elements of Cost, EOC, EVM Training

ACWP, BCWP, CAM, earned value training, Elements of Cost, EOC, EVM Training

<< Review Part 2

In Part 2 we talked about the over-application of EOCs at or below the Work Package level and how a CAR assuming that a charge against an Element Of Cost (EOC) equals a charge against a “zero-budgeted WP” was inaccurate.

Use a New EOC

Both of the examples from part 2 were over-applications of the EOC requirement. The point here was that the work (it was to design a circuit card), was planned as labor and was also accomplished (earned) in the month it was planned; so the value would be “earned” as planned. In that period, however, it happened that the planned resource was not available, so the work was actually accomplished using a different EOC such as a subcontractor engineer. The contractor’s system properly showed that the design had been completed and the value earned and that the ACWP for that completion was also in the system (i.e. consistent with the BCWP). However, it just happened to be the Subcontract EOC instead of the Labor EOC originally planned, and the CAM addressed the cost difference in the VAR for the Control Account. The team’s comments on the CARs were that the CAM should have replanned the effort using the new EOC instead of the original one. The problem with this is that in many cases the CAM does not know the original resource is not going to be available until the day it happens. There would (1) be no time to process the change and (2) the change would occur in the “freeze period” (actually in the current month), and (3) this could result in unnecessarily large numbers of Change Requests since these types of events commonly occur in the industry.

Noted instances:

Work planned and earned as internal labor (Labor EOC) had to be performed by contract support (subcontract EOC) in that period because of the non-availability of the planned resource.
[Some Contractors consider each labor grade a separate EOC within labor] Work planned and earned for an Engineer 2. However, the period the work was performed used an Engineer 3 (higher cost).
The plan was to build sub-assemblies in-house (Labor EOC), but a machine breakdown necessitated having a vendor provide substitute off-the-shelf assemblies (Material EOC) that month.

In each of these cases, the “EOC ACWP substitution” was temporary, and the work resumed the next period as planned, using the originally planned Element of Cost. The key here is that in each case, the work was performed, and so it was earned; as it should have been. The only difference was that a different EOC was used to accomplish the work – a simple Cost Variance. While it is certainly true that each WP (and PP) should be planned and WPs earned using a single EOC, the misinterpretation here was that every EOC then is a Work package and they are not. In other words, temporarily using a different Engineer category than planned, or using contract support instead of internal labor, or substituting a purchased material item instead of fabricating internally, etc. simply represents a Cost Variances, and should not be cited as a violation of the EVMS Guidelines.

The “consistency” required by the Guideline and the sub-question is that the EOC actually used was expended in the same period in which the work was completed and the Earned Value claimed (i.e. consistent with the BCWP). The variance analysis would show BCWS, BCWP, and ACWP at the CA level with the EOC details at lower levels.

Now for the big “HOWEVER”!

If the switch in use of the alternate EOC is short term, then the differences should be addressed as a Cost Variance (which could be higher or lower than with the planned EOC); HOWEVER, if the change is expected to be permanent or long term, then the CAM should replan the remainder of the work package using the new EOC, and the EAC should be updated, as well, to reflect the new anticipated total cost using that revised EOC.

Note: Some contractors have what is called a “gray badge” environment, whereby a subcontractor charges their labor directly into the Prime contractor’s labor system. Under this arrangement, for this subcontractor, there would be no difference in EOC if the subcontractor performed the work instead of the prime contractor.

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

Planning and Managing EVM by Elements of Cost (EOC) – Use a New EOC – Part 3 Read Post »

EVMS compliance: Material Transfers and Loan/Paybacks

By Humphreys & Associates / March 25, 2015 / ACO, ACWP, BCWP, DCAA, EVMS, Loan, MMAS, payback, TBLP

ACO, ACWP, BCWP, DCAA, EVMS, Loan, MMAS, payback, TBLP

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.

EVMS compliance: Material Transfers and Loan/Paybacks Read Post »

Using the Same Rate for BCWS and BCWP

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

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 »

Aligning ACWP with BCWP for Proper EVM | Earned Value Management

By Humphreys & Associates / May 1, 2013 / ACWP, BCWP, EVM, EVMS

ACWP, BCWP, EVM, EVMS

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:

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.
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.
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.
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.

Aligning ACWP with BCWP for Proper EVM | Earned Value Management Read Post »