Earned Value Consulting

Earned Value Consulting is support services that an expert in Earned Value Management (EVM) provides to an organization to help them implement an Earned Value Management System (EVMS). EVM consulting services may be offered by organizations that have certified Earned Value professionals on staff, or by service providers who have been trained in EVM and can offer advisory or implementation services.

For a full description of what Earned Value Consulting is and who it is for, see our Knowledge Base article: https://www.humphreys-assoc.com/evms/earned-value-consulting-ta-a-252.html

Effective EVMS Implementation for Government Contracts: Roles and Challenges

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Effective EVMS Implementation for Government Contracts

Embarking on implementing an Earned Value Management System (EVMS) for government contracts is a complex task. With the expert guidance of Humphreys & Associates, leaders in earned value consulting, organizations can effectively navigate this intricate process. This detailed exploration, the second in a three-part series, delves into the best practices, key roles, and common challenges of implementing an EVMS on government projects.

Best Practices for Implementing an EVMS on Government Projects

The implementation of an EVMS for a government project demands team work and strategic planning. Following best practices facilitates the EVMS compliance process and enhances overall project performance.

  1. Begin with a Clear Strategy: Starting with a clear strategy requires a full understanding of the scope of contract requirements and aligning project management processes with the EIA-748 Standard for EVMS Guidelines. This means establishing clear technical, schedule, and cost objectives as well as establishing a performance measurement baseline that are in harmony with contractual obligations.
  2. Use a Phased Approach: A phased approach to EVMS implementation allows for better management of resources and more focused attention on each aspect of the system. By prioritizing critical areas, such as organizing and decomposing the entire contractual scope of work into manageable product-oriented elements that can assigned to responsible managers, organizations can ensure that the foundational elements of an EVMS are solid before expanding to other areas.
  3. Involve All Stakeholders Early: The early involvement of all stakeholders, including project managers, project controls team, finance, procurement, and even suppliers, ensures that everyone understands the EVMS requirements and their role in the implementation. This early buy-in helps to streamline the integration of EVMS into existing processes and encourages collaborative problem-solving.
  4. Ensure Adequate Training: Comprehensive training programs are essential to equip all team members with the necessary knowledge of EVMS principles as well as how to use the schedule and cost tools that support the EVMS. This training should be tailored to the various roles within the team and include practical exercises that reflect the challenges they will face during implementation.
  5. Focus on Data Quality: High-quality data is the cornerstone of an effective EVMS. Ensuring accuracy, timeliness, and reliability of project data involves setting up rigorous data collection and processing systems, continuous data verification, and validation processes.
  6. Continuously Improve: Continuous improvement involves regularly reviewing and refining the EVMS processes based on project performance, self-governance feedback, and lessons learned. It’s about fostering a culture of constant enhancement to adapt to project changes and industry advancements.

Who’s Who in EVMS Development and Deployment

A successful EVMS implementation relies on the collaborative efforts of a dedicated team, each member plays a critical role.

  • Project Managers: They are the linchpins in ensuring that the EVMS is implemented as intended on the project. They coordinate between different teams, manage resources, and ensure that project contractual objectives are being met.
  • Control Account Managers (CAMs): CAMs have a focused role in managing specific project segments of work. They are responsible for the scope of the work, schedule, and budget for their control accounts that are decomposed into detail work packages or planning packages.  They are critical in ensuring work completion, developing and implementing corrective actions when needed, and providing accurate work status information.
  • EVMS Analysts: These specialists monitor and analyze project performance against the established baselines. They provide forecasts, identify variances, and offer insights that guide decision-making and corrective actions.
  • Finance Personnel: The finance team ensures the integrity of project accounting and its alignment with EVMS requirements. They are responsible for cost recording, allocation, and reporting, playing a vital role in the financial aspect of project control.

Common Challenges and Solutions for an EVMS Implementation

While implementing an EVMS, organizations may encounter several challenges, but with the right strategies, these can be mitigated.

  • Promote Organizational Buy-In: Resistance to change is a common barrier. Overcoming this requires demonstrating the value of the EVMS to the stakeholders, highlighting its benefits in terms of improved project visibility and control. Engaging team members by making them part of the implementation process can foster acceptance and support.
  • Maintain Data Integrity: To ensure the accuracy and completeness of data, it’s imperative to establish standard data governance practices. This includes documenting best practices to help project personnel develop and maintain quality schedule and cost data, performing regular data quality assessments, and conducting continuous training.
  • Seek Expert Advice: Leveraging the knowledge and expertise of EVMS consultants like Humphreys & Associates can be invaluable. Consultants can offer guidance, best practices, and training that are tailored to the organization’s specific needs and challenges.

The implementation of an EVMS is a critical step towards achieving project success, especially in the highly regulated government contracting environment. The insights provided here, coupled with the expertise of Humphreys & Associates, can help organizations to navigate the EVMS implementation landscape effectively.

For a deeper dive into this topic, read our full article, “Navigating EVMS Certification: A Step-by-Step Guide to Compliance.” And stay tuned for the final installment in this series, where we will explore strategies for preparing for compliance or surveillance reviews in “Preparing for EVMS Reviews: Strategies for Success with Humphreys & Associates.”

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Incorporating IMS Information Directly into Independent Estimate at Completion (IEAC) Formulas

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Incorporating IMS Information Directly into Independent Estimate at Completion (IEAC) Formulas

“When you need to discuss the schedule, look at the schedule.”

– A Scheduler’s Lament

There are many existing formulas for calculating an Independent Estimate at Complete (IEAC) from earned value data. A recent study of a sample of projects found that the calculated IEACs analyzed at the 25%, 50%, and 75% complete points were not accurate when compared to the final actual cost of work performed (ACWP). The following table lists the thresholds used to assess the accuracy of the IEACs at the different complete points for the sample projects.

Percent CompleteAccuracy Threshold
25%Within +/- 10% of final ACWP
50%Within +/- 7% of final ACWP
75%Within +/- 5% of final ACWP

While working on that study of the accuracy of commonly applied IEAC formulas as well as on a small project as an analyst for a customer, the idea for using data directly from the integrated master schedule (IMS) in conjunction with the cost performance data to create a new IEAC formula emerged.

Using Data Directly from the IMS to Calculate an IEAC

It should be noted that none of the generally used IEAC formulas use data directly from the IMS. The IEAC formulas use data found in the cost performance portion of the earned value monthly reports to customers.

IMS data is only used indirectly in the IEAC formulas. When a task is started and progress updated, the earned value (the budgeted cost for work performed or BCWP) is developed from the progress reported. This is measured against the cost baseline (the budgeted cost for work scheduled or BCWS).

At the same time, in the IMS environment, the schedule analysts are calculating the Baseline Execution Index (BEI) for task completions/finishes. BEI (for finishes) measures how many of the tasks baselined to be completed by the cut-off date were completed. If all the tasks were done (BEI = 1), their value would have been earned. Of course, other tasks could have started, progressed, and maybe even finished. For this example, the Schedule Performance Index (SPI) calculated at that point (BCWP/BCWS) should be at least 1 and potentially higher. The SPI reflects the baseline value of completed tasks plus the in-process claimed baseline value. The in-process claimed value can be subjective in some cases.

The argument, if there were one, might be there is no need to try and include BEI or similar schedule measures in the IEAC formulas since they already include SPI.

However, there is a whole different and unique set of information coming from the IMS that is not currently used in the IEAC formulas. That information is what we chose to call “Duration Performance” and “Realism Ratio.” These are measures of the actual duration for completed tasks and the forecast duration for future tasks.

Calculating Duration Performance

The IMS data includes the baseline number of days assigned to each task as well as the actual number of days to complete each task. If a task is baselined to take 10 days (Baseline Duration = 10) and the task took 15 days to complete (Actual Duration = 15) then it is taking 150% of baseline to do the work.

This is similar to the Cost Performance Index (CPI) that uses the BCWP and the ACWP to determine how efficient the work performance has been. The formula BCWP/ACWP shows how the work accomplished compares to the cost of that work performed.

If we assume, for labor at least, that taking longer to complete a task often leads to costing more than baselined, we can use the Duration Performance to develop an IEAC.

To develop the Duration Performance, we would use the IMS from the month being analyzed to perform the following actions:

  1. Filter out all summary tasks and look only at real work tasks.
  2. Decide what to do with level of effort (LOE) – keep it or ignore it.
  3. Filter for all tasks that are completed (100% complete).
  4. Add up the baseline duration in days for all these completed tasks.
  5. Add up the actual duration days for these same completed tasks.
  6. Compare the actual duration days used to the baseline duration days.

An example would be:

  • 100 completed tasks
  • Total baseline days duration = 1,000
  • Total actual days duration = 1,500
  • Duration Performance = 1,000 / 1,500 = .67

One of the common IEAC formulas is the “SPI times CPI” that is calculated like this: ACWP + Budgeted Cost of Work Remaining (BCWR) / (CPI x SPI) where BCWR = Budget at Completion (BAC) – cumulative to date BCWP.

Now that we have a duration performance factor, we can develop a new IEAC. The Duration Performance IEAC would be done using the CPI from the same month as the IMS where ACWP + BCWR / (CPI x Duration Performance Index).

Using some actual data from a project for a single month we see:

  • Duration Performance Index = .82
  • BEI = .72
  • CPI = .92
  • SPI = .94 (significantly higher than the BEI)
  • ACWP = $9.2M
  • BCWR = $18.3M
  • IEAC using standard formula with CPI x SPI = $9.2 + $18.3 / (.92 x .94) = $30.3M
  • IEAC (Duration Performance) = $9.2 +$18.3 / (.92 x .82) = $33.5M

Assessing the Realism Ratio

When we look at the remaining tasks to be completed, we can use the Realism Ratio to assess how the future forecast durations compare to the performance so far.

The data needed are the baseline duration and the forecasted duration for all tasks that have not been started. This concept excludes in-process tasks. In our example from before, the data we created looked like this:

  • 100 completed tasks
  • Total baseline days duration = 1,000
  • Total actual days duration = 1,500
  • Duration Performance = 1,000 / 1,500 = .67

We would use the same IMS to do this:

  1. Filter out all summary tasks and look only at real work tasks.
  2. Decide what to do with LOE – keep it or ignore it.
  3. Filter for all tasks that are not started.
  4. Add up the baseline duration in days for all these tasks not started.
  5. Add up the forecasted duration days for these same tasks not started.
  6. Compare the forecasted duration days to the baseline duration days.

Let’s say there were 100 tasks not started. If the forecasted days were 1,000 and the baseline days were 1,000 that would yield 100%. When we did the example, the Duration Performance was .67. This means that performance to date was .67 but the future will be 100% or 1. You can see the disconnect. That disconnect we call the Realism Ratio (in this example, .67/1).

Data from the actual project for the same month as discussed earlier shows:

  • Duration Performance = 122% of baseline
  • Future Performance = .86 or 86% of baseline.

This means that the future durations are cut significantly.

We would use this data to develop a factor called a Realism Ratio (86/122 = .70) and that would be used to develop an IEAC using this formula: IEAC (Realism Ratio) = ACWP + BCWR / (CPI x Realism Ratio).

Using the same sample project data from above and adding in an assessment of the forecasted durations for the remaining work, we see:

  • Duration Performance = .82
  • BEI = .72
  • CPI = .92
  • SPI = .94 (significantly higher than the BEI)
  • ACWP = $9.2M
  • BCWR = $18.3M
  • Realism Ratio = .70
  • IEAC using standard formula with CPI x SPI = $9.2 + $18.3 / (.92 x .94) = $30.3M
  • IEAC (Duration Performance) = $9.2 +$18.3 / (.92 x .82) = $33.5M
  • IEAC (Realism Ratio) = $9.2 +$18.3 / (.92 x .70) = $37.6M

The project is not complete, so the final ACWP position is not known. There is a dramatic difference between the three IEACs. The difference between BEI and SPI indicates that in-process tasks and other factors such as LOE are potentially affecting SPI.

What can we learn from this sample project?

In this example, additional investigation is warranted. There are potential issues with the realism of the baseline and current schedule that are signaling a cost growth issue is likely to occur. Relying on just the time-phased cost data for IEAC calculations may not be sufficient to assess whether a contractor’s range of EACs included in their monthly cost performance reports are realistic. For more discussion, see the blog on Maintaining a Credible Estimate to Completion (EAC) and the blog on Using EVM Performance Metrics for Evaluating EACs.

Are there lurking cost growth surprises in your projects? You may want to consider revisiting your estimate to complete (ETC) and EAC process to verify there is an integrated assessment of the schedule and cost data to identify potential disconnects. H&A earned value consultants can provide an independent assessment of the quality of the data as well processes and procedures to help you verify your EACs are realistic. Call us today at (714) 685-1730.

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Introduction to the IPMDAR Data Deliverable – Tips for Producing the Outputs

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Contractors new to earned value management (EVM) often give us a call to help them respond to a government customer request for proposal (RFP) that includes the FAR or DFARS Notice of Earned Value Management System (EVMS) contract clause. Depending on the contract value threshold, the contractor will need to implement an EVMS that can at least produce the contract performance data submittals ($20M or greater) or complete a formal EVMS compliance review ($100M or greater) by a cognizant federal agency (CFA) such as the Defense Contract Management Agency (DCMA). Required data deliverables for a DoD or NASA customer reference the Integrated Program Management and Data Analysis Report (IPMDAR) Data Item Description (DID) as the means to submit monthly performance data. 

What is the objective for placing the IPMDAR on contract?

The government customer wants the monthly source schedule and cost data from the contractor for their own contract performance analysis in a standard format. They need to have reliable schedule and cost data for visibility into current contract performance as well as credible schedule and cost projections for the remaining work. Will the contractor complete the remaining work effort within the contractual schedule and cost targets? The government program manager needs this information for their own planning and budgeting as well as forecasting their funding requirements.

A standard format for collecting the data is important for the government customer so they can perform program portfolio analysis. The DoD established their EVM Central Repository (EVM-CR) to routinely collect contractor data submittals for program portfolio analysis. The data is organized using the MIL-STD-881 (the DoD Standard for Work Breakdown Structures or WBS), as a common basis to organize program data. The IMPDAR DID data submission requirements are defined in the File Format Specifications (FFS) and Data Exchange Instructions (DEI). The FFS and DEI specify the required set of data tables using JSON encoding for the IPMDAR cost and schedule data submissions while narrative text is submitted using Microsoft Word or PDF files so the customer can perform text searches. 

The government program manager can tailor the IPMDAR requirements as defined in the DoD IMPDAR Implementation and Tailoring Guide that complements the DID. For example, they can specify the level of data detail (control account or work package level), whether data can be delivered incrementally, variance analysis options, and requirements for the Performance Narrative Report content.

What is included in the IPMDAR deliverable?

There are three components as outlined below

IPMDAR Components

Notes:

  1. At a minimum, the IPMDAR requires data at the control account level with summary element of cost detail. The contract may specify work package level data.
  2. Inputs from a recent schedule risk assessment (SRA) should be included in the native schedule file submission when available. Depending on the schedule tool, the SRA data may need to be a separate file submission (Word or PDF). Results from the SRA along with other schedule analysis discussions (critical path, driving path, and schedule margin) are required to be included in the Detailed Analysis Report narrative. 
  3. The customer may request the results from a schedule data quality assessment and health metrics be included in the Detail Analysis Report narrative. 

What is required to produce the IPMDAR deliverables? 

For contractors new to EVM, one of their first objectives is to figure out what schedule and cost tools they need to be able to provide the required IPMDAR data and narrative analysis to their customer. H&A earned value consultants are sometimes asked to provide recommendations on commercial off the shelf (COTS) tools for this purpose. Much depends on what the contractor already has in place. 

Common schedule COTS tools such as MSP or Oracle Primavera P6 that have already been implemented will require an add-on to produce the SPD. Keep in mind that the IPMDAR does require SRA data and may require results from performing routine schedule data quality assessments. Some COTS add-ons to MSP or P6 are able to produce the typical schedule data quality metrics as well as produce the SPD. Other COTS scheduling tools such as Deltek Open Plan incorporate the SRA functionality, data quality metrics, and the ability to produce the SPD as part of the core product capabilities.

In most instances, contractors new to EVM do have an accounting/financial system in place to at least capture some level of contract or program/project budget and actual cost data. There may also be some capability to produce ETC data required for EAC financial analysis. The issue is organizing the complete set of time phased cost data (budget, earned value, actual cost, ETC) at the control account and work package level by summary element of cost that aligns with the schedule activity data. A contractor may be able to get by with Excel for a small project, however, it is time and cost prohibitive to create Excel macros to produce the CPD. Most COTS EVM cost tools are able to produce the CPD and have successfully completed the DoD EVM-CR data submission validation checks. This is a better alternative to building an in-house tool.

A data analysis tool such as Encore Analytics Empower is also a good option. Empower can import the time phased cost data from Excel or other COTS EVM tools and produce the CPD output. Empower can also import data from common COTS schedule tools. The benefit to using Empower is the ability to analyze the schedule and cost data in one place to verify alignment, produce interactive dashboards and a variety of analysis data views, and produce the IPMDAR Performance Narrative Executive Summary and Detailed Analysis Report.

Top Three Tips for Implementing Tools to Produce the IPMDAR Outputs

Here are a few tips from H&A’s earned value consultants on implementing tools to support the IPMDAR data submittals. Focus on getting the basics right.

  • Continuously verify the quality of the schedule and cost data. Routinely perform schedule data quality assessment and health checks to proactively resolve schedule construction, status, or data issues. Perform routine cost data validation checks such as earned value and no actual costs for a work package or the cumulative to date earned value exceeds the budget at completion (BAC). Correct all data anomalies before producing the deliverables.
  • Continuously verify the schedule and cost data are in alignment. Consistent schedule and cost data coding is critical to ensure integration and traceability. 
  • Anticipate the scope and level of data detail required. This can impact tool configuration, data structures, and data pulled from other business systems such accounting. For example, be prepared to provide the work package level of detail; actual costs will need to be available at this level. Another example is providing schedule risk assessment inputs; this is usually required at intervals specified in the CDRL.

H&A earned value consultants routinely help clients with constructing the schedule to support the IPMDAR data requirements, setting up the process to do routine data quality checks, integrating the schedule and cost data, and verifying the data before producing the performance reporting data submittals. Another common focus is producing clear and concise variance analysis narrative content. 

We can do the same for you. Call us today at (714) 685-1730 to get started.

Introduction to the IPMDAR Data Deliverable – Tips for Producing the Outputs Read Post »

Maintaining a Credible Estimate at Completion (EAC)

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Issues with a contractor’s estimate at completion (EAC) process is a common Earned Value Management System (EVMS) surveillance finding H&A earned value consultants are frequently asked to help resolve. The EAC process can become a major issue when the government customer lacks confidence in the contractor’s EAC data.

Why does a credible EAC matter? 

EACs are important because they provide a projection of the cost at contract or project completion, which is also an estimate of total funds required by the customer. It matters because EACs represent real money. When the most likely EAC exceeds the negotiated contract cost, the contractor’s profit margins may be at risk. It also creates a problem for the customer when the most likely EAC exceeds the funding limits. The customer may either need to secure additional funding or modify the work scope. No one likes cost growth surprises.

Figure 1 illustrates comparing the funding limits with the range of contractor’s EACs to verify they are within the bounds of the funding available to complete the scope of work.

Graph Showing Contractor’s Management EACs with Funding Profile
Figure 1: Contractor’s Management EACs with Funding Profile

What determines whether an EAC is credible? 

A credible EAC reflects the cumulative to date actual costs of work performed (ACWP) (costs the contractor has already incurred) plus the current estimate to complete (ETC). The ETC must provide a realistic estimate of what is required to complete the remaining authorized work and represents the time phased estimate of future funds required.

EACs should be based on performance to date, actual costs to date, projections of future performance, risks and opportunities, economic escalation, expected direct and indirect rates, and material commitments. As illustrated in Figure 1, a project manager should routinely evaluate their project’s ACWP, ETC, and EAC along with the funding profile to verify amounts expended and committed are within the parameters of available contract funds. 

What project control practices help to ensure EACs are realistic?

Three recommended best practices H&A earned value consultants either help implement or have observed that ensure the EAC data are credible include:

  1. Actively maintain the bottom up ETC data every reporting cycle. This starts with updating the current schedule resource loaded activities based on performance to date and the latest planning (timing and resource requirements) for work in progress as well as upcoming work effort. This becomes the basis for updating the time phased cost estimate for work in progress that is added to the cumulative to date actual costs or the cost estimate for future work/planning packages. The current schedule and time phased cost estimate should be in alignment. When data is routinely maintained, it minimizes the time required to update it and capture useful information. The control account managers (CAMs) have the basis to substantiate their estimates as well as relevant data they can use to analyze and take action to address a significant variance at completion (VAC).
  2. Actively monitor project EACs from the top down. Project managers that actively maintain a range of data driven EACs (best case, most likely, and worst case) are better prepared to verify the bottom up EACs are realistic, handle realized risks, and prepare for emerging risks. They routinely incorporate metrics such as comparing the Cost Performance Index (CPI) to the To Complete Performance Index (TCPI) to test the realism of the EAC. They can demonstrate their EACs are credible with backup data, rationale, and narratives they provide to management as well as the customer. 
  3. Maintain open communications at all levels of management, subcontractors, and the customer. As a result, project personnel can quickly handle issues or project changes. The project manager is often the main conduit to handle impacts to their project’s EAC such as when corporate management changes direct or indirect rates, changes in resource availability, a spike in commodity prices, or the customer modifies the scope of work or funding.

What are some things to avoid?

H&A earned value consultants often observe practices that negate the purpose and value of maintaining the ETC and EAC data. Issues with the EAC process are often captured in the government customer’s EVMS corrective action requests (CARs). The CARs frequently point out ad-hoc processes or corporate culture issues. Examples:

  1. Management provides a target EAC number the CAMs must match. This approach increases the likelihood the ETC data are unrealistic. There may be a valid reason for this directive as a management what-if exercise. When done as a routine management strategy, it diminishes the value of the ETC data to manage the project’s remaining work and prevent financial surprises. The CAMs should be in a position where they can substantiate their schedule timeline, resource requirements, and cost estimate to complete the remaining work. The project manager should be in a position where they can verify the bottom up ETC/EAC data to establish a level of confidence in their project level EACs they provide to management as well as the customer.
  2. Project personnel take the path of least resistance. This is often a result of a lack of direction or an established process. They either do not create the ETC data or maintain it on a routine basis. A typical approach is to set a cost management tool option where the EAC is static; the CAM may manually update the EAC number once a quarter. The ETC data has limited to no value. This usually surfaces as a major issue when the contractor must provide an Integrated Program Management Report (IPMR)  Format 7 (time phased history and forecast data), or the Integrated Program Management Data and Analysis Report (IPMDAR) Contract Performance Dataset (CPD) to the customer. The customer quickly discovers the ETC data is lacking for their own analysis.
  3. Schedule and cost are created/maintained separately. This often occurs when the schedule and cost tools are not integrated for the duration of the project. A good deal of effort may go into ensuring the schedule and cost data are in alignment to establish the performance measurement baseline (PMB). The integrated master schedule (IMS) resource loaded activities may be used as the basis for the time phased budget baseline in the cost tool. However, the ETC data in the current schedule may not exist or actively maintained. Project personnel only maintain the ETC data in the cost tool and fail to verify it aligns with the current schedule activities (timing) and resource requirements. Once again, personnel are often lacking an established best practice EAC process.

Pay Attention to Your EAC Process

The ETC and EAC data are just as important as the PMB budget plan because it represents real money. As discussed in the blog How Integrated Baseline Reviews (IBRs) Contribute to Project Success, the goal of the IBR is to verify an executable PMB has been established for the entire contractual scope of work. Similarly, the goal of maintaining a credible ETC and EAC is to verify an executable plan is being regularly updated to accomplish the remaining scope of work within the contract’s schedule, cost, and funding targets. The customer must have confidence in the contractor’s ability to deliver and meet the remaining contract objectives.

The best way to avoid an EAC process CAR is to ensure you have an established process personnel follow, and they know how to use the schedule and cost tools to consistently maintain quality ETC and EAC data. H&A earned value consultants have worked with numerous clients to design or enhance their EAC process. H&A also offers EVMS training workshops that include content on how to develop a realistic EAC. Regular EVMS training always helps to reinforce best practices. Call us today at (714) 685-1730 to get started.

Maintaining a Credible Estimate at Completion (EAC) Read Post »

Determining Responsibility for Indirect Cost Variance Analysis – Part 3

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Indirect Cost Variance Analysis Process

The debate that has continued since the inception of the earned value concepts in the 1960’s has been: “Who should report on and analyze the cost variances attributable to indirect costs?”

This blog is the third in the series of blogs to help answer this question.  The first blog covered a few fundamentals about how indirect cost rates are established to set the stage.  The second blog discussed how indirect rates are applied and how project personnel display indirect costs for internal or performance reporting.  This blog concludes the discussion on the indirect cost variance analysis process.  It covers what the EIA-748 Standard for Earned Value Management Systems (EVMS) and related government agency guides have to say on the subject as well as discussing the best option for determining who is responsible for indirect cost variance analysis.  

Throughout a project’s execution phase, project managers and control account managers (CAMs) conduct their respective performance analysis at varying levels of detail to identify significant cost and schedule variances as well as variances at completion (VAC).  They use variance thresholds to focus on the work elements where challenges or problems are occurring.  As needed, they identify the root cause of the variance and determine the best path forward to mitigate or otherwise reduce the impact of an unfavorable variance.  

This effort includes performing additional analysis not just by the direct elements of cost (labor, material, subcontract, or other direct costs (ODCs)), but also by the indirect costs applied to those direct cost elements to identify the root cause.  For example, the CAMs check for labor variances (rate or efficiency/volume) and material variances (price or usage) to identify any potential issues.  As a side note, remember the rates used to calculate earned value are the same rates used for budget values.  Likewise, actual costs are collected into the same direct cost elements of cost and indirect cost pools as the budget plan elements of cost.  Those actual rates may vary from the budget/earned value rates.

At the total project level, a project manager performs indirect element of cost analysis.  They need to assess whether indirect costs are contributing to the project’s cost variances and quantify the impact.  Since indirect costs are directly related to the base time phased direct costs, it follows the variances for the element of cost categories are similarly skewed.  Figure 1 shows an example (produced from Encore Analytics Empower) of a contract with the variances attributable to the elements of cost (see previous 3-part blog: Planning and Managing EVM by Elements of Cost (EOC)). The indirect cost variances tend to vary with the changes in the direct costs base and/or indirect elements of cost over time at a pool level.  While not common, these could be different from month to month (the lightest blue shaded boxes in Figure 1) when annual, semi-annual, or quarterly rate adjustments occur (the project manager would be notified when these occur).  

Figure 1: Example Cumulative Variance Analysis by Elements of Cost

The project manager and CAMs are also responsible for completing their variance analysis reports.  These include the Integrated Program Management Report (IPMR) Format 5 (Explanation and Problem Analysis) or Integrated Program Management Data and Analysis Report (IPMDAR) Performance Narrative Report.  As part of this analysis, they need to discuss whether rate changes are impacting the project’s current and cumulative cost and schedule variances, as well as the calculated EAC (cumulative to date actual costs plus ETC). 

Customers often require additional indirect cost detail on the formal performance reports when thresholds are exceeded.  The narrative reports are used to address those indirect cost pool base versus rate variances.  Project managers and CAMs (when indirect costs are displayed as part of their budgets), need base versus rate variance analysis from finance or accounting.  Finance or accounting is responsible for establishing the indirect cost rates to date and forecasting what the indirect rates will be for future fiscal years. 

Who is responsible for the indirect cost variance analysis?

Back to our original question: “Who should report on and analyze the cost variances attributable to indirect costs?”  Can the EIA-748 Standard for Earned Value Management Systems (EVMS) 32 guidelines provide any guidance?  There are also various government agencies that place EVMS requirements on contracts.  Do their policies, compliance business practices, or standard operating procedures provide any guidance?  

The fact is, the EIA-748 Guidelines, dating back to the Cost/Schedule Control Systems Criteria (C/SCSC) in the 1960s, have never specified the level where the management and analysis of indirect costs must occur.  The founders of the earned value concept realized there are several levels of management where indirect rates are applied versus the level at which they are displayed for management.  

The EIA-748 Standard for EVMS (Rev D) Guidelines say the following:

4. Identify the organization or function responsible for controlling overhead (indirect costs).

13. Establish overhead budgets for each significant organizational component of the company for expenses, which will become indirect costs. Reflect in the program budgets, at the appropriate level, the amounts in overhead pools that are planned to be allocated to the program as indirect costs.

19. Record all indirect costs which will be allocated to the program consistent with the overhead budgets.

24. Identify budgeted and applied (or actual) indirect costs at the level and frequency needed by management for effective control, along with the reasons for any significant variances.

The Defense Contract Management Agency (DCMA) Cross Reference Checklist (CRC) sub-questions for these guidelines do not specify any particular level where these actions must occur, and do not even mention the control account level.  For example, for the Guideline 4 sub-questions, they reference “the management position” assigned the responsibility and authority for controlling indirect costs.  For one of the Guideline 24 sub-questions, they ask: “Are the variances between budgeted and actual indirect costs identified and analyzed at the level of assigned responsibility for their control (indirect pool, department, etc.)?”  

Likewise, the Department of Energy’s (DOE) detailed Compliance Review Checklist is equally non-specific on the level of management where these actions occur.  Below are excerpts from that DOE document with text highlighted for reference.

E.1E.1 – Indirect Account Organization Structure 
E.1.1Indirect procedures must clearly identify managers who are assigned responsibility and authority for establishing budgets and controlling indirect costs and who have the authority to approve expenditure of resources.
E.1.3The management process for establishing and controlling indirect cost rates should be documented to ensure responsibility is clear.
E.2E.2 – Indirect Budget Management 
E.2.2The contractor must establish indirect (i.e., overhead, burden, cost of money, and G&A expense) budgets at the appropriate organizational level for each pool and cost sub‐ element.
E.2.3Contractor recurring DOE rate performance reviews should be conducted on a regular basis (i.e. monthly, quarterly, etc.) to ensure effective control and management of the indirect expenses and indirect budgets.
E.3E.3 – Record/Allocate Indirect Costs 
E.3.2Periodically, reviews must be made to assure that indirect costs are being charged to the appropriate indirect pools and by the appropriate incurring organization.
E.3.3If incurred indirect costs vary significantly from budgets, periodic adjustments must be made to prevent the need for a significant year‐end adjustment.
E.4E.4 – Indirect Variance Analysis
E.4.1This guideline requires a monthly documented indirect cost analysis to be performed by those assigned responsibility, comparing indirect budgets to indirect actual costs and explaining the cause of resultant variance(s).
E.4.4The contractor should define thresholds for each budget category and a process for management by exception for indirect performance and analysis.

It is not by accident the Guidelines and supporting questions/attributes do not specify any one way all contractors have to manage, analyze, and report on indirect cost variances.  Indirect costs can be handled in a number of different ways.  The Guidelines have always been designed to give contractors the flexibility to manage their projects within the bounds of those Guidelines.  

So, what is a best answer?

While contractors may choose other viable options, a best practice is for the corporate entity responsible for controlling those indirect costs to do the indirect cost variance analysis at the pool levels.  They control the rates, know the reason for variances, and can forecast what the rates will be over time.    As the first blog in this series pointed out, finance or accounting is responsible for establishing and maintaining the direct and indirect rates based on the contractor’s firm and potential direct business base (or volume).  

The designated higher level management entity should also be responsible for providing the necessary indirect cost variance analysis, rate impacts and narrative details to the project managers.  The project managers need to be aware of corporate actions and potential indirect rate revisions that impact the range of EACs they need to prepare for the IPMR or IMPDAR submittals.  This communication is essential so they have the data and narrative text necessary for managing their project, as well as for producing their performance reports explaining the source and impact of indirect cost variances on the project’s EAC to their customer. 

While not a hard requirement, many contractors elect to include both direct and indirect costs in the CAM control account work authorizations.  This does not make the CAMs responsible for these indirect costs since they have little to no control over the indirect rates – they simply apply the current or forecast rates that accounting provides.  But this format does  provide for the necessary visibility CAMs must have regardless in order to conduct the expected variance analysis, inclusive of an assessment of all cost elements (direct and indirect) and price/usage analysis, in order to explain impacts on performance and on their EACs. (See previous blog: EVMS Variance Analysis — EVMS Analysis and Management Reports.) They then forward these to higher level management to incorporate and to provide the rationale for the variances and to determine any corrective action to mitigate the problems. 

Another important advantage of providing CAMs fully burdened budgets, earned value, and actual cost data broken out by the direct and indirect cost elements includes but is not limited to facilitating “make to buy” and “buy to make” decisions because a CAM has an apples-to-apples cost comparison as noted in the second blog. 

Need help sorting out the best levels for reporting and managing your direct and indirect costs?  Call us today at (714) 685-1730.  

Other Posts from this Series

Determining Responsibility for Indirect Cost Variance Analysis – Part 3 Read Post »

Benefits of Earned Value Management

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This video provides an overview of why Earned Value Management is a benefit to both the company implementing it and their customer.

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0:00 – Introduction
0:12 – EVMS Benefits to Customers
1:01 – EVMS Benefits to Companies
1:54 – Mutual Benefits of Earned Value

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If you liked this video you can purchase the entire course below. This video is an excerpt from the Department of Defense (DOD) version of this eLearning module. We also offer the same course customized for the Department of Energy’s (DOE) specific Earned Value Management (EVM) implementation/requirements, as well as a version of the course customized for NASA’s EVM implementation/requirements.  

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Earned Value Consulting

Earned value consulting is a process by which a consultant can help a company to better understand the financial implications of their projects. This understanding can then be used to make more informed decisions about whether or not to undertake a project, and also to ensure that the project is completed as efficiently as possible. The goal of earned value consulting is always to improve the bottom line for the company.

Looking to improve your company’s bottom line? Earned value consulting can help! Our experienced consultants can analyze your project costs and help you make informed decisions about whether or not to undertake a project. We’ll also help you stay on track during the project’s execution, ensuring that it stays within budget and on schedule. Contact us today to request a free consultation.

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