Elements of Cost Archives - Humphreys & Associates

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 »

Planning and Managing EVM by Elements of Cost (EOC) – Over-Application of EOCs – Part 2

By Humphreys & Associates / April 1, 2019 / CAR, Corrective Action Requests, earned value training, EIA-748-C, Elements of Cost, EOC, EVM Standard 748, EVM Training

CAR, Corrective Action Requests, earned value training, EIA-748-C, Elements of Cost, EOC, EVM Standard 748, EVM Training

<< Review Part 1

In part one of our series on Elements of Cost (EOC), we explained what EOCs are and gave an analogy of how EOCs would relate to building a patio. We also reviewed how EOCs can be “over thought” and emphasized the importance of properly applying indirect cost rates. This post is going to be focused on the Over-Application of EOCs.

Over-Application of EOCs

During some government reviews, the teams issued Corrective Action Requests (CARs) citing multiple examples of ACWP occurring on “zero-budgeted” Work Packages within Control Accounts. On the surface, this sounds pretty serious, but there were several “over-applications” in play here.

First, the review was being performed at (and in some cases below) the Work Package (WP) level, when the intent of the Guidelines has always been for variance analysis to be performed at the Control Account (CA) Level;
Second, the CAR assumption was that a charge against an Element Of Cost (EOC) equals a charge against a “zero-budgeted WP”.

For the first point we’ll look at Guideline 22 in the EVM Standard 748:

GL 22. At least on a monthly basis, generate the following information at the Control Account and other levels as necessary for management control using actual cost data from, or reconcilable with, the accounting system:

1) Comparison of the amount of planned budget and the amount of budget earned for work accomplished. This comparison provides the schedule variance.

2) Comparison of the amount of the budget earned and the actual direct costs for the same work. This comparison provides the cost variance.

Even the government’s sub-question e. under GL 22 reiterates this requirement:

e. Are the following elements for measuring performance available at the levels selected for control and analysis (at a minimum at the control account level):

1) Budgeted Cost for Work Scheduled (BCWS)?

2) Budgeted Cost for Work Performed (BCWP)?

3) Actual Cost of Work Performed (ACWP)?

While the intent of the words “and other levels” and “at a minimum” was to ensure that contractors did not only perform analysis at some higher, summary level, the government’s choice of those sub-question words also opens up the application of the analysis at lower levels. Be that as it may, the over-application still exists where it should not. Variance Analysis is supposed to be at the CA level and rolled up to higher levels for analysis. The bottom line for each of the CARs written is that BCWS, BCWP, and ACWP existed at the Control Account level, and the EOC visibility was available for variance analysis explanations at the lower levels in the contractors’ systems.

For the second point, let’s look at all the EVM Standard 748 Guidelines, specifically Guideline 16.

There is no Guideline that specifically requires BCWP to be claimed the exact same way BCWS was planned; however, it is intuitive that this has to be true in order for cumulative values for BCWP and BCWS to equal BAC so that the work can be considered complete. [While the government’s sub-question b. under Guideline 22 expects BCWP to be calculated “consistent with the way the work is planned”, GL 22 itself (above) is silent on that inferred expectation.] The Guideline 16 and its sub-question b. also require consistency of the direct costs:

GL 16. Record direct costs in a manner consistent with the budgets in a formal system controlled by the general books of account.

Are elements of direct cost (labor, material, subcontractor, and other direct costs) accumulated within control accounts in a manner consistent with budgets using recognized acceptable costing techniques and controlled by the general books of account?

In the examples noted for the CAR referenced above, the work package task was a specific Element Of Cost (EOC) and was planned and completed in the same period, but no ACWP was accumulated for that specific EOC because the work was accomplished using another resource that fell into another EOC category. When the team looked at that EOC containing the ACWP, they interpreted the finding as a “zero-budgeted Work Package” with ACWP against it. [They also cited the original Work Package itself for having BCWP with no ACWP for the element of cost that was planned and earned.]

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

Planning and Managing EVM by Elements of Cost (EOC) – Over-Application of EOCs – Part 2 Read Post »

Planning and Managing EVM by Elements of Cost (EOC) Example: Building a Backyard Patio – Part 1

By Humphreys & Associates / March 1, 2019 / Control Account, earned value management, earned value training, Elements of Cost, EVM, EVM Training, Planning Package, Work Package

Control Account, earned value management, earned value training, Elements of Cost, EVM, EVM Training, Planning Package, Work Package

What are “Elements of Cost”?

Labor, Materials, Subcontracts, Other Direct Costs, and their Indirect Costs (Overhead including General and Administrative —G&A) are the typical building blocks for any project: personal projects and projects we manage for the customers we support. These items are also what the Earned Value Management System (EVMS) Guidelines call elements of cost (or EOCs). So, when the Guidelines call for us to plan and manage by EOC, it really should not cause us any undue anxiety – it is just the natural way to manage any project.

Example: Outdoor Backyard Patio

Let’s use a simple home project example of building an outdoor backyard patio: What do you have to do to determine how much it will cost for this Backyard Patio Project (BPP if you like acronyms)? Generally, you look at such things as:

How much concrete; lumber for decking; nails, screws, bolts, washers, and other hardware, etc.; and weather-coating and paints/stains you will need (Material Element of Cost – EOC).
Work you cannot do by yourself: electricity for lights and power, and natural gas for the Barbecue/fireplace (Subcontract EOC).
Work you will do yourself (Labor EOC).
Costs unique to this project’s completion, such as: Home Owners Association permits, building code permits, local excavation application fee, etc. (Other Direct Cost EOC).
Costs incurred that do not necessarily go into the final product, such as: cleaning supplies, brooms, solvents, turpentine, weather tarpaulins, lighting and electricity, etc. (Indirect Costs/Overheads).

Unfortunately, when operating under the EVM requirement, often managers tend to overthink, and sometimes over apply the management of EOCs. Let’s look at the overthinking part first.

Overthinking EOCs

Guideline 9 of the EIA Standard 748 (Revision D) for EVM Systems requires:

Establish budgets for authorized work with identification of significant cost elements (labor, material, etc.) as needed for internal management and for control of subcontractors.

Some might propose: “I’ll have one Work Package for the Control Account with all the EOCs in it, and I’ll be okay.” That might meet the intent of that first part of the guideline, but would probably fail the requirement that says “as needed for internal management and control of subcontractors.” For example, what EV technique would you use for a “work package” that had labor, material, and subcontract work in it? The labor occurs as the work is performed, the material might be earned at the point of receipt on the dock, and the subcontract might earn value with the receipt of an Integrated Program Management Data and Analysis Report (IPMDAR) dataset at the end of a month. Since the Control Account (CA) has one total dollar budget, the “identification of significant cost elements” has to occur at the Work Package (WP) and Planning Package (PP) level within the CA, which requires each WP and PP to be identified as one of the EOCs mentioned above.

For Instance

In our example, if we lumped concrete and lumber into one “Material WP” and we incurred a serious overrun in material, how would we identify what caused the overrun: the concrete pour or the lumber portion? These are different categories of material that would “earn value” (be accomplished) in different ways and at different times. In order to determine the “guilty party” in the overrun, we should also have separate WPs for the different significant material categories. Some might call these major, or high value, or critical material items, which should be tracked separately.

On the other hand, for the lower-value materials, it may not be significant enough to management to know that a variance might have been caused by a 1-cent washer or a pint of deck stain. Consequently, a grouping of these low-value material items may be all that is required for visibility. Conversely, Management might actually want to break out categories such as, separating the paints/stains, and weather-coating from the nuts, bolts, washers and other hardware, since they are different categories of low-value material that could also earn value differently.

Indirect Cost Rates Must be Applied Properly

For Indirect Costs, some contractors put the burden of planning and managing these overhead costs on the CAMs, while others apply the indirect rates at a summary level of the Work Breakdown Structure (WBS) or organizational structure. Regardless of how a particular contractor does it, the indirect cost rates must be applied properly to the various direct elements of cost:

Material handling charges applied to material items
Indirect Labor rates applied to the direct labor hours
Subcontract overhead applied to the subcontract direct costs
ODC overheads charged to the ODCs identified.

Applying and managing overheads at the CA level would entail hundreds of applications across the number of Control Accounts on a project, but applying these at a summary level would require only a handful of Overhead lines in reports. Doing so would significantly reduce the number of possible errors in application – which is why many contractors do not require CAMs to “manage” overheads in their Control Accounts. [Our BPP example does not have the above types of Indirect Costs that are related to specific Direct Costs, but it does have its own specific Overheads related to the labor to build the Patio.]

Humphreys & Associates is available for earned value training and consulting. Give us a call!

Planning and Managing EVM by Elements of Cost (EOC) Example: Building a Backyard Patio – Part 1 Read Post »