Material

Earned Value Management Systems (EVMS) – Residual Material Accountability – Part 4

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Another EVMS  residual material accountability requirement (see part 1, 2 and three) is that an Earned Value Management project must maintain records to show full accountability for material purchased for the contract, including the residual inventory.

What does this mean?  The answer:  Regardless of the size of the contract, the EVMS Guidelines require contractors to maintain accurate records of the materials purchased for a contract, as well as records of performance measurement as the materials are used.  A contractor must show how the material bought for a contract is not only incorporated into the final product, but also how any excess materials are disposed to offset some of the costs to the customer.

How does a contractor do this?  The easier part of material traceability is keeping track of the material that ends up in the final products.  The “as-built” bill of materials (BOM) lists what and how many material items were included in the delivered items.  The more difficult part of traceability is tracking:

  1. The material that did not get into the final product (excess material)
  2. How many units of any one material item it took to deliver one unit of the final product (material attrition)

There are a number of BOMs that a contractor creates as part of the maturity of a contract or project.  While they may have different names, they generally fall in these categories:

  1. As Estimated.  A complexity-based “similar-to” BOM to get an approximate cost
  2. As Designed.  A BOM created as part of the engineering/development phase
  3. As Planned.  The original baseline BOM at contract award for the negotiated configuration(s)
  4. As Modified.  As requirements and/or configurations change, so does the BOM(s)
  5. As Built.  The final BOM that details how the product/configuration was actually built

With the first two categories, material for the build is not yet purchased (not committed), but sets the stage for the subsequent categories.  The “as planned” BOM is the one that is in place at contract award and is used to begin making material purchases.  As changes occur, the BOM changes, and some of the materials already purchased for the contract become obsolete or “designed out” of the product.

These materials become what is known as residual or excess materials that are still actual costs on the books for the contract.  Subject to the customer’s contractual dispositioning instructions, the contractor will:

  • Deliver the material to the customer
  • Seek other purchasers for the material
  • Scrap the material for the best price that can be obtained·

Whatever amount the contractor gets is to be used to offset the actual costs charged to the customer.Excess materials can also result from other project occurrences, such as:

  • Minimum Buys.  For example, the project needs 8 material items, but the vendor only sells packs of 12
  • Material Attrition.  Breakage experienced during the assembly or manufacturing process.  Note there are two types of attrition:
    • Lower than expected attrition – results in higher than expected amounts of material left over
    • Higher than expected attrition – more units required to build the product results in higher unit cost and possibly additional excess materials

Since materials bought to a project belong to the customer, it is the contractor’s responsibility to accurately account for what is being spent to build the product.  This is done by reporting accurate costs for each unit produced, offset by the amount of excess materials disposed of to the best advantage (highest cost recovery possible) for the customer.

Do you need an independent review of your Earned Value Management System Description to ensure you are providing the necessary material accountability guidance to your projects?  H&A has years of experience and EVM experts to assess your current material accountability approach.

Contact us to discuss your current and future EVM project needs.

Earned Value Management Systems (EVMS) – Residual Material Accountability – Part 4 Read Post »

EVM Material Earned Value – Price vs. Usage Variance Analysis – Part 3

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EVM (Earned Value Management) control account managers (CAMs) with material cost elements are required to conduct price vs. usage material cost variance analysis as a normal part of their root cause analysis for their control accounts.  This analysis is the material counterpart to conducting a labor rate versus hours (efficiency) cost variance analysis.

Material price/usage analysis looks at the two components of a material cost variance:

  • Price.  How much of the cost variance was caused by the unit price paid for the material item differing from the earned value unit price for the material?
  • Usage.  How much of the cost variance was caused by the earned value for the quantity of the material differing from the actual quantity of the material?

A common question is “How can we do this when we have thousands of material items to account for on a project?”

The answer:  Not all material items have to be tracked discretely to conduct an adequate price/usage analysis, with the general rule of thumb of discretely tracking about 80% of the material dollars.

Some contractors set a policy where material will be tracked discretely if it breaks a specific dollar value (for example, anything above a $5,000 unit price).  Other contractors conduct what is called an “80/20” analysis of their estimated bill of material (BOM).  The concept here is that on most programs, approximately 20% of the material items (larger dollar items) represent about 80% of the material dollars on the program, with the other 80% of the BOM being the smaller dollar items that total about 20% of the material dollars.  In this case, the discretely measured items are any of the items in the top 20% of the BOM.

Some contractors do this segregation by the unit price of each material item.  Others make the division based on the extended price (unit price times the number of units to purchase), sometimes placing a high volume/low price item on the discretely tracked 20% list.  Either method is acceptable.

Even with this discrete material segregation, the price/usage analysis still needs to be performed.  The difference is discrete items are tracked separately (e.g., a $250,000 radar antenna dish) from a commodity grouping (such as all connecting bolts – average planned price of $10 per pound).

The variance analysis method is the same for discretely measured items and for the homogeneous groupings of material items where:

Price Variance = (BCWP Unit Price – ACWP Unit Price) x ACWP Quantity

Usage Variance = (BCWP Quantity – ACWP Quantity) x BCWP Unit Price

Another common question is “Where do I get this sort of information?”

Most material departments or supply chain management teams maintain detailed listings of all materials the company receives as well as what particular projects receive.  While these listings are generally used to identify material deliveries, late deliveries, material availability for transfers or borrow-paybacks, etc., they generally have the unit price and quantity purchased information necessary for the CAMs (or at least the material department) to perform the price/usage analysis required.  It may require special runs, or sorts, of the BOMs or inventories that are maintained, but the information is usually available.

The CAMs can take these runs and conduct their algorithms to do the price/usage calculations described above.  Generally, these systems contain enough information to discretely measure every part number to the lowest unit price item on the project.  Earned value management, however, does not require reporting price and usage analysis on “connecting bolt #123 with a price of $0.0000134 per unit.”

Humphreys & Associates is available for EVM consulting, CAM certification and additional information on this topic. Contact us today.

View the other posts in the EVM Material Series

EVM Material Earned Value – Price vs. Usage Variance Analysis – Part 3 Read Post »

Earning Value for Material – The Correct Approach – Part 2

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Recall from our blog in early October about earning value for material, in which Guideline 21 in the EIA-748 Standard for Earned Value Management Systems (EVMS) states that earned value is measured “…at the point in time most suitable for the category of material involved, but no earlier than the time of actual receipt of material.”

In that earlier blog, two high-level types of material categories were discussed for illustration purposes. A common follow on question is “When Guideline 21 mentions category of material (highlighted above), are there pre-set categories of material that companies should use?”

The answer: Material categories are unique to each company, though companies may have general similarities to others in the same line of business. It is also dependent on whether a company has non-production or production type contracts (or both). In the previous blog topic, Engineering Material and Production Material were used as generic examples for material categories assuming a company has some level of production activity.

Even if a company is not a production (or manufacturing) facility, if they have material that sits in inventory for an extended length of time (generally longer than two months), the earned value point should be different from that of engineering (or receipt) type material. Some companies describe their material categories as “receipt type material” and “inventory type material.”

A company’s Earned Value Management (EVM) System Description should describe the various categories of materials that are typical in their line of business. For example, many contractors include subcontractors, staff augmentation subcontractors, temporary services, office supplies, etc. as material categories that are planned and earned differently.

When dealing strictly with materials used for engineering and/or production related effort, a number of EV approaches may be needed. This is based on the products a company typically builds for their government customer. This could include bar stock, sheet stock, wire or cable reels, nuts and bolts, various types of subassemblies, purchased parts, or consumables such as lubricants, gases, coatings, paints, acids, etc. Various materials could also have different handling requirements, including bonded stores, with different rules for use, issue, transfer, borrow/payback and so forth. As a result, the various types of materials may have different methods for planning and use and could all use different earned value techniques.

Another consideration when determining the appropriate earned value techniques for production environments is the approach used to determine high dollar value and low dollar value material.

  • High dollar value material should be planned and earned using discrete earned value techniques
  • Low dollar value material may be planned and earned as apportioned effort or as level of effort (LOE), as well as being discretely measured
  • Low dollar material may be planned as items in aggregate, or in homogeneous groupings (e.g., lubricants, fastening hardware, bar stock, coatings, etc.).

H&A recommends ensuring your EVM System Description provides the appropriate guidance to projects on how to properly plan for the various material categories and acceptable earned value techniques that should be used as well as the appropriate earned value points (receipt or issue) for the category of material involved.

Do you need an independent review your EVM System Description to ensure you are providing the necessary guidance to your projects? Humphreys & Associates has the earned value management experts to assess your EVM System Description. Contact us today.

Earning Value for Material – The Correct Approach – Part 2 Read Post »

Earning Value for Material – The Correct Approach – Part 1

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Earning Value for Material

A common question that H&A Consultants are asked is “What is the most common point to claim earned value (the budgeted cost for work performed or BCWP) for material?”

The answer? There is not one point for earning value for material in all categories.

Guideline 21 in the EIA-748 Standard for Earned Value Management Systems (EVMS) says, “…earned value is measured and at the point in time most suitable for the category of material involved….”.  Notice the highlight on “suitable for the category of material.”

Let’s look at the two most common high-level types of material categories for discussion: Engineering and Manufacturing.  Engineering material earned value (EV) is typically claimed at receipt. Manufacturing material EV is typically claimed when issued from inventory.  The most common acceptable points for claiming earned value for the various material categories are illustrated below.

EVM - Cost Exposure Span
With the advent of MRP/ERP systems and the tendency for companies not to want to keep large stores for materials, many have gone to a “just in time” approach where they order delivery of their materials to be staggered over time to arrive just in time for their need dates.  Large production or manufacturing facilities will still need to have inventories to ensure their lines continue in operation.

What happens in some facilities, however, is that contractors have placed the emphasis on the next part of Guideline 21 that says “…but no earlier than the time of actual receipt of material” as their authority to earn value for all material at point of receipt.  These contractors are asking for trouble with this misinterpretation.  Contractors should base their plans and EV on the category of material involved.

Whenever contractors earn value at the point of receipt for material they plan to maintain in their inventory bins for several months, they open themselves to have DCMA write Discrepancy Reports (DRs) or Corrective Action Requests (CARs) for using inappropriate points in time to earn value for material.

  • Rationale for this is – When you claim EV, you are telling the customer you are a certain percent complete with the program.  For example, if materials represent 70 percent of your contract, earning value for all the material (or a large part of it) up front says (in the Contract Performance Report CPR to the customer) “I am 70% done with your program”. The customer tends to think in terms of “7 of my 10 airplanes are completed” when in fact none are completed.
  • The result – A very unhappy customer because you indicated incorrectly (in the CPR) you are ahead of schedule. This false lead erodes away until you are late delivering the planes, helicopters, ships, tanks, or other contracted items to the customer.
  • Bottom line – A number of contractors are incorrect in thinking they can earn value for all material at the point of receipt. The EIA-748 Guidelines – even back in the day when it was the Cost/Schedule Control Systems Criteria (C/SCSC) checklist – have always required the distinction by material category (there are always more than just the two categories discussed above).  DoD and DCMA have always stated there is no one point for claiming material earned value.

Need help determining the appropriate earned value techniques to use for material?  Humphreys & Associates can assist you with all your EVMS needs. Contact us today.

Earning Value for Material – The Correct Approach – Part 1 Read Post »

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