PASEG

Integrating Subcontractor Data into an Integrated Master Schedule

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Generating and maintaining a project’s Integrated Master Schedule (IMS) that meets management needs as well as customer requirements is difficult under the best of circumstances. The challenge becomes even more complex when subcontractor work effort must be incorporated. Issuing a subcontract is, in effect, handing off a portion of the work scope to an outside entity that becomes responsible for performing that work and meeting all technical requirements. 

Another consideration for contractors where Earned Value Management System (EVMS) contractual requirements apply is whether the subcontractor is considered a major subcontractor because of the contract value, scope of work, or high risk factors. The EVMS requirements are flowed down to these major subcontractors; they will have the same contractual requirements and challenges as the prime contractor. Most subcontracts do not fall into this category. Many are small, short term, or firm fixed price (FFP) subcontracts. 

Regardless of the category of the subcontractor, the subcontractors and the prime contractor all need an IMS to plan and coordinate work effort as well to measure progress. Using FFP subcontracts on development projects has the potential to increase risk significantly when expectations for scheduling rigor are not clearly defined. 

A Real World Example

H&A EVM consultants supported a multi-billion dollar development project that illustrates the challenges with integrating subcontractor schedules into a prime’s IMS. The prime contractor had two major subcontractors with EVMS flow down requirements. They also had 22 FFP subcontracts without EVMS flow down requirements. 

These FFP subcontracts were also mission-critical. The prime’s first priority was to define the required schedule format and data content in the request for proposal (RFP) to the subcontractors. Standardization was essential, along with specific instructions to ensure the schedule data could easily be incorporated in the prime’s IMS. 

As the basis for a customized project specification, the team selected the Integrated Master Schedule (IMS) Data Item Description (DID) DI-MGMT-81650, an earlier DID that preceded the Integrated Program Management Report (IPMR) and Integrated Program Management Data and Analysis Report (IPMDAR) DIDs. The requirements were simplified and trimmed to selected sections in the DID for the detailed schedules. The document was assigned a specification number within the prime’s document management system so it could be used for future procurements. 

Early Schedule Submittals: A Wake-Up Call

All the subcontractors dutifully proposed and were awarded subcontracts. The FFP subcontractors were required to submit initial schedules using the scheduling tool of their choice at the end of the first month of performance. To ensure compliance, the prime contractor tied the subcontractor’s first payment milestone to the acceptance (receipt, review, and approval) of their first schedule. 

This turned out to be one of the best decisions made during project startup. 

Those first schedules quickly revealed that many of the lower tier subcontractors had no experience developing logic-driven schedules that could comply with the reduced requirements document. They were unable to generate even the most basic project schedule. It was an eye opener to realize that while the first tier companies and most of the second tier companies did know about project scheduling, some of the second tier and all of the lower tier companies lacked that expertise.

The Solution: A Prime-Led Schedule Development Workshop

The prime’s schedule team, largely comprised of H&A schedulers, quickly initiated a week long on-site workshop open to all subcontractors who wanted help building their IMS. Every one of them signed up as they recognized acceptance of their schedule was a prerequisite for payment. 

Prime contractor personnel were assigned to each subcontractor to help them build schedules that met the requirements. Most of the subcontractors were able to produce an acceptable schedule within the first three days. The other subcontractors required the full week.

The workshop approach provided two major benefits.

  1. The subcontractors gained experience in developing a logic-driven schedule that they could maintain and status. They had a better understanding of what the prime contractor expected them to provide. 

  2. The prime’s schedule team gained a better understanding of each subcontractor’s scope of work and execution strategy. They had a better picture of the entire IMS as well as interdependencies. Without this knowledge, the next step of determining the best strategy to incorporate the subcontractor’s schedule data into the prime’s IMS would have failed. 

Strategies for Incorporating Subcontractor Data into the Prime’s IMS

The NDIA Integrated Program Management Division (IPMD) Planning and Scheduling Excellence Guide (PASEG) is a useful source of information on scheduling best practices. The section on External Schedule Integration offers basic guidance on flowing down detailed scheduling requirements to subcontractors. It also provides a short list of things to consider, such as coordinating dates and change control:

“Status dates should be consistent between the prime contractor and supplier schedules. If the subcontractor’s schedule update is to a different point in time, it could potentially affect the IMS analysis results. If it is not possible to have consistent status dates between the various schedule elements then implement a strict process, with support of all parties, to manage the impacts.

Change control procedures are established and understood. The prime contractor should clearly communicate which type of schedule changes will require pre-approval before incorporation and which type will require coordination only or documentation upon submittal. The lack of a disciplined change control process can result in disconnects between the prime contractor and subcontractor’s schedule.”

Remember the prime contractor’s IMS includes a baseline and a current schedule. The complications can be significant when all the variables are considered such as calendars, mix of schedule tools and options, scheduling techniques, resource loading, and custom fields.

That still leaves the question of how to incorporate the schedule data from an external source into the prime’s IMS. The PASEG outlines three approaches.

  1. Full integration where the entire subcontract schedule is incorporated into the prime’s IMS. 

    Pros: Provides maximum visibility into the critical and driving paths as well as forecast completion dates.

    Cons: Often not feasible with a large number of subcontractors. Mix of scheduling tools complicates the process. 

    Use Notes: This option is often reserved for major subcontractors or teaming partners. Works best when the prime and subcontractor are using a common scheduling tool or the subcontractor has direct access to the prime’s IMS scheduling tool to maintain their data. Otherwise, the prime must incorporate additional processes to import the external data into their IMS. There are other complications, as different schedule tools calculate dates differently, that will need to be handled in the integration process. 

  2. Using interface milestones. 

    Pros: Easier to implement and maintain. Yields the best results with less complex or lower risk subcontractors. 

    Cons: Provides less insight into the subcontractor’s current schedule performance. It does not easily support critical path analysis when paths run through subcontract work effort.

    Use Notes: Requires the manual update of each interface milestone to reflect the latest forecasted dates from the subcontractor’s schedule. The prime must ensure their IMS is properly coded. Contractors often use “External Inbound” and External Outbound” codes along with a subcontractor code and any other codes needed to identify who is receiving/giving to whom.

  3. Representative model. This is a middle ground approach between integrating the entire subcontractor’s schedule into the prime’s IMS and using interface milestones. Requires a summarization or representation of the subcontractor’s work to be entered into the prime’s IMS.

    Pros: Provides a summarized version of the subcontractor work effort that retains enough schedule logic for critical and driving path analysis. 

    Cons: IMS content must be carefully entered and maintained to retain the required relationships to the external schedules for accurate critical path analysis. Requires a higher level of schedule discipline and a defined process to ensure the accuracy of the data between the external schedules and the prime’s IMS. 

    Use Notes: It is often beneficial to provide the subcontractor with a copy of their schedule that includes an extra column that identifies the prime’s task ID that is the “parent” of the summarized or consolidated work. In the initial IMS submission from the subcontractor, the prime added a custom field (Prime Parent ID). That IMS file was returned to the subcontractor, and the use of the special field was agreed upon. In each subsequent submission by the subcontractor, the prime team checked for tasks with no “Prime Parent ID” and added one that would allow integration. This kept the two companies’ schedules synchronized. If changes were made by the prime team that changed the field data in the subcontractor’s IMS, the changes were coordinated. A recommended practice is to group and sort the subcontractor schedule by the prime’s IDs to ensure that it is done properly. 

What Worked for the Complex Development Project

In the situation described earlier, the schedule team determined a hybrid approach was the best solution, depending upon the subcontractor’s scope of work.

  • The full integration approach was quickly eliminated; it was impractical. There were too many schedules, and some were too complex. It would have been a logistical nightmare. 
  • Selected simple FFP subcontract work effort was incorporated using the milestone method. The schedule milestones were carefully aligned to the payment plan milestones so that one set of milestones served both purposes.
  • For the subcontracts with EVMS flow down requirements and the other subcontracts, including some FFP subcontracts, the representative model was used. The prime’s control account manager (CAM), responsible for the subcontractor’s scope of work, was required to condense the subcontract schedule into a representative model that made sense to the CAM. The most common ratio turned out to the 10:1, with 10 subcontractor tasks rolling up to 1 prime contractor IMS task, carefully maintaining the prime’s control account and work package structure. With proper coding, the subcontractor schedule could be easily reviewed and analyzed by the CAM as well as other project personnel.

Need help establishing strategies to integrate subcontractor schedule data?

Every project presents unique scheduling challenges, and the approach for integrating subcontractor data often needs to be tailored to fit the situation. H&A earned value consultants and master schedulers have seen and solved them all. With deep experience across diverse industries and project types, our experts deliver the insight and leadership needed to help contractors implement practical, results-driven solutions for integrating subcontractor data. Call us today to get started.  

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Survey of Schedule Acceleration Techniques

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Survey of Schedule Acceleration Techniques - An overview of schedule acceleration techniques discussed in the PASEG

The NDIA Integrated Program Management Division (IPMD) Planning and Scheduling Excellence Guide (PASEG) includes a list of the acceleration techniques that can be applied to reduce project schedule duration. That section of the guide provides the background for project team discussions on accelerating complex integrated master schedules (IMS) in government contracting environments. This blog is intended to increase awareness of the techniques in the guide and provide some additional insight into their application. It relies heavily on the guide’s content. 

An additional purpose of this blog is to promote the use of the NDIA IPMD nomenclature across the defense industry spectrum. In much the same way as the earned value management (EVM) acronyms of BCWS, BCWP, ACWP and others have become standard terminology, it would be beneficial to have a more standard way of discussing schedule acceleration techniques. As the PASEG is an industry guide developed and maintained in collaboration with U.S Government agencies, the PASEG promotes a common understanding of these techniques.

One caution. Modifications like the ones discussed here can introduce additional risk into the schedule and reduces flexibility. Be careful when modifying the schedule. A good practice is to first create a copy of the schedule and assess the effects of your changes before you adopt them. The trade-offs may or may not be acceptable depending upon the objective you want to achieve. If the schedule is the priority, there is likely to be an impact on the work scope or cost. There can also be unintended consequences when potential impacts are overlooked. 

Let’s review the techniques from the PASEG. 

  1. Crashing. 

The guide says “This technique allows for the acceleration of schedule by applying additional resources or more experienced resources to do the work in a shorter period of time. This method assumes that the task can be completed in a shorter amount of time with the increase in resources.”

We probably have all used this method when we are shopping on the internet and we are faced with the choice between receiving the item in 5 days or accelerating that to 3 days or even the next day. We are paying more to get it faster. But what is really happening behind the scenes? Do they pick your order first? Do they pack it first? Do they ship it on faster carrier? Those are the actions you would be considering on your project when you want to accelerate something by crashing the schedule.

Using outside or contract labor is a form of this where we boost our workforce for a period when we need extra effort. A form of this is offloading some work to a subcontractor.

A more detailed example comes from the factory setting where certain orders are “expedited”. What that might mean is that the normal movement process is subverted. The normal process might be as shown in Figure 1 with a queue time while your order waits for the machine. The machine will be torn down and set up for your work when it is most efficient to do so.

Process with wait time
Figure 1: Process with wait time

When you crash this process, you might simply remove the queue time so that as soon as your order arrives the machine is torn down and set up for your job to eliminate the wait time as shown in Figure 2.

Process with wait time eliminated
Figure 2: Process with wait time eliminated

However, using this approach is likely to increase cost and has the potential to introduce other risks to the project. A real-world example comes from the semiconductor industry where the factory was running both standard products and custom products. A normal custom order time of 8 weeks was cut to 2 weeks by using this approach. The cost that was charged to the customer for the rushed custom order was about 10 times the normal cost of an order to repay the factory for lost efficiency. 

  1. Fast-tracking.

The guide tells us “This technique accelerates the plan by performing work in parallel. With this method, extra attention needs to be put on resource de-confliction to ensure resources are not over allocated.”

We have all used this technique and probably had mixed outcomes. It seems simple and attractive. It embodies a “just get it done” mentality. If there are sufficient trained and capable resources then this can work. The resources can be used on both efforts at the same time. If that is not the case, then basically we would have to revert to pushing effort out of the way for another effort. This type of modification can introduce additional risk that may need to be mitigated.

  1. Streamlining.

The guide defines this technique in this way: “This technique depends on the team’s ability to find an alternate and more efficient completion methodology for the task/s. This includes reuse, innovation, and possibly eliminating non-value-added work. With this method, the program has to weigh the level of potential risk involved with these choices. Make sure that this does not drive a “run to fail” mode on the program. Ensure that tasks are meeting the full requirements and scope.”

Here we really need to be careful. In some cases, we might be working with specifications or requirements that demand a certain approach and cannot be changed or waived. Then we need to ask the question, “If there is a better way, why didn’t we assume that in the first place?”

In some cases, we might find this approach fits in with opportunity management. Maybe there is new software or a new machine available that can speed things up and still get things done correctly. We have all been in that situation; just remember the last time you went through a Windows upgrade. Did that go smoothly for you? 

In the area of software in particular, we must be aware of the entire ecosystem of tools we use and consider that any new tool applied in a hurry can result in problems. Case in point: one large contractor shifted from 2D drawings to 3D models to speed up and improve the processes, however not all the key suppliers were able to receive and use 3D models. The supply chain broke. Mom and Pop at the M&P Shop could not understand the new work orders. 

  1. Focused Work.

The guide describes focused work like this: “This technique employs the program management team to help in reducing multitasking and to remove barriers for the personnel on the program that are working critical and near critical program tasks. This method requires the program culture to adapt and “protect the critical/driving path” and to support the people that are working those efforts. This also requires the program manager to perform daily barrier resolution.”

A discussion on multi-tasking might be fun here, but we will assume for this blog that multi-tasking pulls resources away from tasks to do other selected tasks and that is not always the best approach. The big question here is what happens to the other efforts on the project when we focus on certain tasks. This technique can work well but only if we are aware of the impact to the other work and manage that work as well. Risk can be increased by adopting this approach so be alert. If we really are just removing barriers then we can benefit from this method. If we are just pushing aside other efforts to concentrate on this one, we need to know that and handle all the work properly.

  1. Calendar Adjustment.

The guide tells us, “This technique accelerates the plan by changing the amount of working hours available each day or working days available each week. This method is possible only if the resources and task location support working the increased work periods. Attention needs to be put on resource de-confliction to ensure resources are not over allocated.”

This is possibly the most attractive technique. Who has never had to resort to overtime to get something done? It is common to work extra hours, even over some weekends to get back on schedule. To a schedule practitioner, the calendar adjustment wording refers to the calendar in the scheduling tool and how it can be changed to add time in a day or convert non-working days to working days. 

This approach is not free. Overtime costs more than regular time and added shifts bring added costs. You should be aware you need to make a trade-off to determine whether the cost can be justified.

  1. Delay or Descope.

The guide advises, “If other techniques are not a viable option and the resultant schedule delay impact is unacceptable, an option exists to propose delaying or removing the selected scope.”

Notice the use of the word “propose.” Working on a contract may not afford the opportunity to eliminate work or consciously delay work. Coordination with the customer is required. Depending upon the customer’s immediate needs, they may be willing to take a more flexible approach to which work scope items can be delivered in a given time frame when they need to deploy something quickly. 

The PASEG goes on to tells us about things to promote and things to avoid. Those discussions are informative and useful. You are encouraged to obtain a copy of the PASEG and learn more on your own. More than that, you are encouraged to use this terminology and spread the use of it so that adoption spreads. 

Interested in learning more? The H&A Three Day Project Scheduling Workshop includes content on schedule acceleration techniques as well as managing schedule risk. This is a standard public workshop. Many of our clients schedule an in-house workshop that is specific to the scheduling tools they use such as Microsoft Project or Oracle Primavera P6. Call us today to get started.

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Video Release – Assessing Schedule Risk Using Deltek’s Acumen Risk 6.1 | Part 2 of 2

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The conclusion of our review of the foundational elements of performing a schedule risk assessment (SRA) using Acumen Risk 6.1

0:17 – Risk Exposure Chart
1:03 – Tornado Chart
2:14 – Parting Thoughts

Read the blog post at:

Assessing Schedule Risk Using Deltek’s Acumen Risk 6.1 | Part 2 of 2

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Video Release – Assessing Schedule Risk Using Deltek’s Acumen Risk 6.1 | Part 1 of 2

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How confident are you that your project will finish on time? Review the foundational elements of performing a schedule risk assessment (SRA) using Acumen Risk 6.1

2:22 – Schedule Health Diagnostics
4:55 – Duration Uncertainty
6:35 – Risk Events
8:20 – Simulation Process
 
Read the blog post at:

Assessing Schedule Risk Using Deltek’s Acumen Risk 6.1 | Part 1 of 2

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Assessing Schedule Risk Using Deltek’s Acumen Risk 6.1 | Part 1 of 2

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Why Perform Schedule Risk Assessments? EVMS and Agile implementations within the same company or on the same project.

Before a project is ready to be baselined, a typical question the customer asks the project manager is, “How confident are you that the project will finish on time?”

This is a more difficult question than you might think.  In competitive environments, guessing is not an option.  The probability of success on a project must be quantified.  The risks that impact the odds for success must also be quantified.  If the risk is managed, the probability of completing the project on time and under budget is improved.

Customers are not blind to the importance of risk management.  This is evidenced by recent changes in government contracting requirements that call for formal risk assessments of project schedules.  Even if risk management were not a contractual requirement, it would be irresponsible for any project manager to ignore the need for risk management and proceed without identifying and assessing the project’s risks.

Schedule risk exists in every project.  This risk can be quantified, analyzed, and mitigated, or it can be ignored.  However, ignoring schedule risk does not make it go away.  Fortunately, there are advanced software tools, such as Deltek’s Acumen Risk, that can help model the expected impacts of risk in the schedule. Then, the answer to “how confident are you that the project will finish on time?” can be answered with quantifiable information.

In the following sections, a few of the foundational elements of performing a schedule risk assessment (SRA) using Acumen Risk 6.1 will be discussed.  The software was designed with the understanding that not everyone is an expert in schedule risk analysis.  The software provides beginners with an easy to follow path to perform in-depth schedule risk analysis as well as advanced features for experienced risk experts.

Along with quick start guides and help documentation, the menu structure is laid out like a schedule maturity timeline.  From left to right, the menu selections take one from the start-up steps of importing the schedule, to analyzing the schedule, assessing schedule risk, accelerating the schedule, and advanced customization features.

Deltek_Acumen-Top-Level_MenusDeltek Acumen – Top-Level Menus

 

Schedule Health Diagnostics

Before delving into schedule risk assessments, let’s take one minor detour from risk into schedule diagnostics.

Would you trust a broken watch to tell you the correct time?  The same goes for a schedule risk assessment.  A broken schedule network cannot be trusted to yield reliable, and therefore actionable, SRA results.

The National Defense Industrial Association (NDIA) Integrated Program Management Division (IPMD) Planning & Scheduling Excellence Guide (PASEG), is widely regarded as one of the premier references on scheduling best practices.  The PASEG was created by a joint team of both government and industry scheduling experts, thus it has no particular point of view to promote or defend.  One of the scheduling best practices the PASEG discusses is that the integrated master schedule (IMS) should be validated before any SRA is performed.  “Validated” means that the tasks, logic, durations, constraints, and lags in the IMS should be analyzed and corrected as necessary.

Acumen Fuse provides a complete set of schedule diagnostics.  When I first clicked on the “Diagnostics” tab, I saw an initial set of metrics.

EVMS: Acumen Fuse Schedule diagnostics

Each one of these metrics was applied to the project’s timeline that which makes it easy to see both where and when the issues occur.  What I did not notice at first was that these metrics were just one subset; I was only looking at the “Schedule Quality” subset of the diagnostics.  There were similar subsets in the areas of Logic, Duration, Constraints, Float, and the DCMA 14-point Schedule Assessment, just to name a few.  All of these diagnostic tests can be modified to reflect your company or customer’s standards.

Before leaving the topic of schedule health, there are a few words of caution.  No matter how useful a schedule analysis tool may be, there is no substitute for the task managers taking ownership of the IMS and ensuring that it is in good working order.  For example, analysis software can be used to check to determine if a task has a predecessor and a successor, but only someone familiar with the effort can determine if a task has the “correct” predecessor and successor.  Analysis software is becoming more and more sophisticated, but people still control the success or failure of the project.

Duration Uncertainty

Once a sound schedule has been developed, the next foundational elements of an SRA are the duration uncertainty estimates.  There are two widely accepted methods of assigning duration uncertainty.

The preferred and more precise method is to obtain three-point duration estimates (best case, worst case, and most likely) from the task owners.  At a minimum, this should be performed on all critical and near-critical tasks (and driving and near-driving tasks supporting significant events).  For larger schedule networks, it may not be reasonable to gather this type of information for every task.  If custom three-point estimates are not available, templated duration uncertainty could be applied based on the type of work, the task owner, historical performance, or any other applicable task characteristic.

Acumen Risk handles both methods very easily.  Custom three-point estimates can be entered for each task in days (or hours), or as a percentage of the current remaining duration of the task.  Standard duration uncertainty templates are easily applied to a task by selecting the appropriate risk level on the calibration bar.  To streamline the process, by setting the calibration at any summary level, the uncertainty template is cascaded down to all the “children” tasks.

Description. Calibration.

Risk Events

One thing traditional Critical Path Method (CPM) networks do poorly is model unexpected results.  For example, if there is a 90% success rate on fatigue testing, the IMS will generally be constructed to assume the test will be successful, with no disruption to downstream tasks.

EVMS: Critical Path Method

But what happens if the test fails?  While unlikely, there is still a very real possibility that the results will be unfavorable.  If the test does return unfavorable results, there will likely be a significant delay while re-work is performed in the areas of design, build and test.  A traditional CPM network can model a successful test or an unsuccessful test, but not both.  This is not a problem with a schedule risk assessment.  Information from the project’s risk register can be used to model the likelihood of a test failure, as well as the consequence, or delay to downstream tasks resulting from that failure.

EVMS: CPM Risk Events Consequence

Is this an acceptable risk?  An SRA can quantify the risk and provide information on the likelihood of successful deliveries.  Acumen does not stop there though.  One of its newest features is to organize and track all risk events within its built-in risk register, as well as to track the steps being taken to help mitigate that risk.  Or, if your organization already maintains an external risk register in Excel, it can be imported into Acumen to eliminate the duplicate tracking of risk events.  Whether the risk register is imported from Excel or built from scratch within Acumen, a single risk event can then be mapped to one or more activities, or a single activity can be associated with one or more risk events.

EVMS: risk registers 

 

Simulation ProcessEVMS: Simulation Process

A typical SRA uses Monte Carlo techniques to simulate hundreds or thousands of potential project outcomes using the risks and uncertainties that have been supplied.

For most users, simply accepting the default settings and pushing the “Run Risk Analysis” button would be sufficient.  But if terms like “Convergence”, “Correlation Coefficient”, “Central Limits Theorem” and “Seed Value” are part of your normal working environment, Acumen provides a variety of settings that can be customized to tune the SRA to best model your project.

No matter which approach you take, the Acumen toolset provides a quick and easy simulation process.

 

 

 

 

 

 

 

 

 

 

What to Expect in Part 2

Part 2 of this blog will delve into the interpretation of SRA results.

 

Yancy Qualls, PSP

Engagement Director, Schedule Subject Matter Expert (SME)

Humphreys & Associates, Inc.

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Management Reserve; Comparing Earned Value Management (EVM) and Financial Management Views of “Reserves”

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Management Reserve & Earned Value ManagementPerhaps you have witnessed the collision of earned value management’s views on “management reserve” with the Chief Financial Officer (CFO) and the finance department’s views on “balance sheet reserves.” Most companies tend to organize EVM, the function, reporting to either the programs’ organization or to the finance organization. Either will work but either can fail if the two organizations do not understand the interest of the other.

In this article we will outline three areas. The first will be EVM and Management Reserve (MR). The second will be finance and balance sheet “contingencies, loss provisions, or reserves.” The third will compare the two views and identify where they are similar and where they differ.

We will use two terms for both EVM and Financial Management; “in play” and “on the sideline.” “In play” for EVM means that it is in your Performance Measurement Baseline (PMB) and Budget at Completion (BAC). “On the sideline” for EVM means “not in scope” therefore in MR. “In play” for financial management means recorded on the balance sheet (e.g.: current liability; an accrued liability). “On the sideline” for financial management means not recorded on the balance sheet, because it is more likely than not that a liability has been incurred.   If material, however, it will likely be disclosed in the notes to the financial statements, even if it is not recorded on the balance sheet.

 

Earned Value Management and Management Reserve

A program manager and his or her team must deal with – mitigate – risk or be consumed by those risks as they become issues. There are two types of risks, known and unknown. The known risks are entered into a risk register, and their likelihood and consequence are determined. Mitigation for those known risks is done at the activity level in a program’s Integrated Master Schedule (IMS) (Planning and Scheduling Excellence Guide — PASEG page 141, ¶ 10.3.1). Mitigation of known risks is part of the PMB (in the BAC) and is therefore “in play.”

The second type of risk – unknown or unknowable risks – are covered by management reserve if within the Scope of Work (SOW) of the existing contract. If contractor and customer conclude that the realized risk is outside the existing contract, then an Engineering Change Proposal (ECP) would likely be created by the contractor; and a contract modification would be issued by the authorized customer contracting officer if they agreed.   The program manager should ask this question of his team: what work is “at risk” and what work is not “at risk?” Does labor or material present more risk? Management reserve “is an amount of the overall contract budget held for management control purposes and for unplanned events” (Integrated Program Management Report–IPMR DI-MGMT-81861 page 9, ¶ 3.2.4.6). Management reserve is “on the sidelines.” MR has no scope. MR is not earmarked. MR stands in waiting.

 

Earned Value Management Reserve (MR) Compared To Financial Management “Contingency”

Because the audience reading this blog is most likely from the EVM community, I’ll offer a Financial Management example of a company that faces many risks and must manage those risks or be consumed by them. Altria Group, Inc. and Subsidiaries (stock symbol: MO) are in the tobacco, e-Vapor and wine business. Altria’s history clearly shows that the company measures and successfully mitigates the risks they face. Altria faces a blizzard of litigation each year and must protect its shareholders from that risk. So how does Altria manage known risks (mostly from litigation) and how does Altria handle unknown risks?

Altria is a publicly traded company and its annual report (10K) is available on-line to the public. This data is from their 2014 annual report.

I am an MBA, not a CPA, so I’ll stick to Altria’s 2014 balance sheet. For those not familiar with financial statements, a balance sheet has on its left hand side all of a company’s assets – what the company owns and uses in its business (current assets = cash, accounts receivable, inventory; long term assets = property, plant and equipment). The right hand side of a company’s balance sheet shows current and non-current liabilities and shareholders’ equity. The top right hand side of the balance sheet includes current and non-current liabilities (accounts payable, customer advances, current and long-term debt, and accrued liabilities like income taxes, accrued payroll and employee benefits, accrued pension benefits and accrued litigation settlement costs) and the bottom of the right hand side of the balance sheet includes shareholders’ equity consisting of common and preferred stock, paid in capital and retained earnings.

Altria’s 2014 annual report shows under current liabilities; accrued liabilities; settlement charges (for pending litigation Contingency note # 18) a value of $3.5 billion dollars. The 2013 amount was $3.391 billion dollars.

So Altria has “in play” $3.5B for litigation for 2014. In financial terms, Altria has recorded $3.5 billion in expense related to the litigation, probably over several years as it became more likely than not that a liability had been incurred and was reasonably estimable. In EVM terms Altria has $3.5B in their baseline, or earmarked, or in scope for litigation (court cases).

What happens if Altria ultimately has more than $3.5B in litigation settlement costs? What does Altria have waiting on the “sidelines” to cover the unknown risks? Essentially Altria has on its balance sheet waiting “on the sidelines” $3.321 billion in cash and the ability to borrow additional funds or perhaps to sell additional shares of stock to fund the settlement costs. In EVM terms Altria has $3.5B in its baseline (on its balance sheet) to manage the risks associated with litigation. Altria’s market capitalization at the market close on May 17, 2015 was $52.82 billion and its 2014 net revenues were $24.522 billion. It is reasonable to understand that Altria has more than enough MR.

 

Differences Between EVM MR and Financial Management Balance Sheet Reserves

In EVM, MR is only released to cover unplanned or unknown events that are in scope to the contract but out-of-scope to any control account. A cost under-run is never reversed to MR, and a cost over-run is never erased with the release of MR into scope.

In industry in general, and Altria in particular, if the “in play” current liability for settlement charges of $3.5B are not needed (an under-run), then Altria will reverse a portion of the existing accrued liability into income, thereby improving profitability. If Altria’s balance sheet reserve of $3.5B is insufficient, then Altria’s future profits will be reduced as an additional provision will be expensed to increase the existing reserve (an over-run).

[Humphreys & Associates wishes to thank Robert “Too Tall” Kenney for authoring this article.]

Management Reserve; Comparing Earned Value Management (EVM) and Financial Management Views of “Reserves” Read Post »

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