USING EARNED VALUE MANAGEMENT IN GOVERNMENT CONTRACTING

1. USING EARNED VALUE MANAGEMENT IN GOVERNMENT CONTRACTING Presented by Stephen J. Yuter, CPCM, CFCM, PMP

2. Overview • Definition & Principles of EVM • EVM Process & Key Questions • Traditional Management Systems vs. EVM • Performance Measurements • FAR & Agency EVM Requirements • Contractor’s Requirements for EVM • Contracting Officer’s Responsibilities for EVM

3. Why Is There a Need for EVM? • Need for accurate and consistent status information • Numerous complex (and interrelated) projects • 70% of projects are over budget and behind schedule • 52% of all projects finish at 189% of their initial budget

4. What is EVM? • Earned value is the value of the work that has been completed – it represents the amount of the overall project budget that has been “earned” based on the percentage of the work that has been accomplished • EVM enables both the government and the contractor to have clear visibility into technical, cost and schedule planning, performance, and progress on their contracts • EVM… • requires that each element of work be budgeted • as each element is completed with clearly defined deliverables, its budgeted costs are earned • by placing a cost value on status, a project's performance can be evaluated and communicated

5. What is EVM? (cont’d.) • Proper use of EVM can provide early warning (forecasting) of impending problems, leaving ample time for corrective action • EVM DOES NOT determine a course of action; instead, it simply isolates the cause of project problems or confirms that tasks are progressing as planned • EVM is normally not appropriate for contracts that are not performance-based (e.g. FFP or T&M) or where the nature of the work is not measurable (e.g. level of effort, and/or in steady state operations and support); optimal for services contracts providing development & integration • Applying EVM principles properly can provide for better control of program/project performance, along with greater accountability and a reduction in risk

6. Basic Principles of EVM • Break down the work scope into discrete, measurable elements and assign responsibility • Plan and integrate the scope, schedule, and cost into a time-phased plan and control changes to the plan • Objectively assess progress and accomplishments • Use actual costs • Analyze variances from the plan • Use the information to manage

7. Key Attributes of EVM

8. The Earned Value Process Define the Work Plan the Work Work the Plan Collect Results Measure Performance Change Control Analyze Deviations Take Corrective Action ExternalChanges

9. Why Use Earned Value Management? • Ensures a clear definition of work prior to beginning that work • Presents a logical plan for accomplishing the work • Provides an objective measure of accomplishments • Early and accurate identification of trends and problems • Accurate picture of contract status • cost, schedule, and technical • Basis for course correction • Supports mutual goals of contractor and customer • bring project in on schedule and cost

10. EVM Measures Progress Progress = movement towards a goal • to measure progress, there must be a standard against which the movement may be compared • EVM establishes that standard as the Performance Measurement Baseline and measures progress against that baseline

11. What Do We Measure Progress Against? • Performance measurement baseline: integrates three key measurements • budget is spread over . . . • time, to accomplish the scope of • workagainst which progress can be measured • compares the PLANNEDamount of work with what has actually beenCOMPLETED, to determine if COST, SCHEDULE, and WORK ACCOMPLISHEDare progressing as planned • work is “earned” or credited as it is completed (expressed in dollar or hours);the value earned is the WBS budgeted cost of the activity completed to date

12. Key Questions EVM Answers We analyze past performance………to help us control the future PAST PRESENT FUTURE Are we on schedule? Are we on cost? What are the significant variances? Why do we have variances? Who is responsible? What is the trend to date? When will we finish? What will it cost at the end? How can we control the trend? The Two Key Questions 1. Did we get what we wanted for what we spent? 2. At the end of the project, is it likely that the cost will be less than or equal to the original estimate?

13. Ways of Earning Value • Should be quantitative and discrete whenever possible • Discrete = tangible end product • e.g. delivery of a specification, vendor parts contract awarded, foundation completed • Should be integrated with success criteria or technical measures • e.g., successful completion of clean-up, a specific test, reliability growth curve

14. Budget vs. Actual Variance = 500 400 100 Traditional Management Systems In these systems, you budget work and then record actual expenditures. Example: I budget 5 widgets at 100 hrs per widget. At the end of the month 400 hrs had been expended. GREAT! I'm 100hrs under budget But what does this mean? Is this really the true status of work? What did I accomplish?

15. Management Systems Measurement of Expenditures Well, I’ve spent 400 hrs, does that mean I’ve accomplished 400 hrs of work? Actual Cost is not an indication of work progress, only an indication of hours/money spent.

16. 3 2 1 Management Using Earned Value • Earned Value is an objective measure of how much work has been accomplished • Example: • I plan to build 5 widgets this month • Each widget should take 100hrs • I will measure Earned Value based on # widgets completed At Month End... Earned Value Actual Budget Plan 300 400 500 (3 Widgets * 100 hrs)

17. Budget Plan Earned Value Actual 500hrs 300hrs 400hrs Schedule Cost Variance Variance (200)(100) Earned Value Adds a New Dimension to Traditional Tracking Systems I better figure out what is going on. I’ve got 200 hours worth of work to catch up on, and I’ve already overspent by 100 hours.

18. Using Performance Data for Decision-Making • Behind Schedule • How critical is schedule? • Can I afford to work overtime to recover? • Can I do tasks concurrently? • Are there technical innovations which could speed up the process? • Am I “gold plating” instead of just meeting requirements? • Should I do a schedule risk assessment to project impact to program? • Over Cost • Can I reschedule tasks? (time phasing) • Is there a less costly facility I can use? • Are there tasks which can be deleted? • Should the element be added to my risk management profile?

19. Five Basic Performance Questions & Answers in EVM

20. Variance Calculations in EVM • Schedule Variance (SV) = EV – PV • the difference between Earned Value (EV) and Planned Value (PV) • Schedule Performance Index (SPI)= EV/PV • SPI<1 means project is behind schedule • Cost Variance (CV) = EV - AC • the difference between EV and Actual Cost (AC) • Cost Performance Index (CPI) = EV/AC • CPI<1 means project is over budget

21. Making Projections with EVM • Cost Schedule Index (CSI) = CPI x SPI • the further CSI is from 1.0, the less likely project recovery becomes • Once a project is 10% complete, the overrun at completion will not be less than the current overrun • Once a project is 20% complete, the CPI does not vary from its current value by more than 10% • The CPI and SPI are statistically accurate indicators of final cost results

22. Using Performance Data To Validate Estimates • New EACs take on more meaning when you employ performance information • the EAC can be “predicted” by the performance index • Why do we need accurate EACs? • Variance at Completion vs. Contractor Loss • Positive VAC: • EAC < BAC underrun contractor gain • Negative VAC: • EAC > BAC share area contractor partial loss • EAC > ceiling overrun contractor loss • Government develops top-level EAC for comparison: • Government should limit progress payments if EAC is greater than contract ceiling • Government needs accurate forecast of fund requirements

23. Earned Value Problem Indicators • GOAL: to verify that effective variance analysis processes are applied to identify, correct, and report problems • Potential Problem Indicators: • Zero variances • Monthly trends turning negative or downward • Schedule variances generally indicate cost will follow • Actuals > Latest Revised Estimates (LRE) • BCWP increases with no increase in ACWP • Negative data elements

24. Statutes Related to EVM • The requirement for EVM as it is practiced today can be traced to three public laws: • Government Performance and Results Act of 1993 (GPRA) • Establish performance standards for Federal budget • Federal Acquisition Streamlining Act, Title V of 1994 (FASA V) • Report cost, schedule, and performance goals and evaluate progress • Information Technology Management Reform Act of 1996/ Clinger-Cohen Act (ITMRA/Clinger-Cohen) • Report performance information systems acquisition

25. EVM Requirements • OMB Circular A-11, Part 7 requires the use of EVM in the performance management of major investments and major systems in development, modernization, or enhancement (DME) or in mixed life-cycle • "Agencies must use a performance-based acquisition management system to measure the achievement of cost, schedule, and performance goals, and achieve (on average), 90% of those goals” • Contractors’ Earned Value Management System (EVMS) must comply with the guidelines set forth in the American National Standards Institute (ANSI)/Electronic Industries Alliance (EIA)-748 Standard • FAR 52.234-2 (Pre-IRB), 52.234-3 (Post-IRB), and 52.234-4 (EVMS) • Federal agencies requires its use on major programs (i.e. IT and non-IT investments $100M or greater) and on their associated contracts with a contract price of $20M or greater; continued surveillance to ensure compliance

26. EVM Requirements (cont’d.)

27. Integrated Baseline Review (IBR) • Determines that the Performance Measurement Baseline is responsive to the scope of work required • Joint assessment of • Coverage of SOW • Scheduling of work • Resource allocation • Earned Value methodologies • Technical content of PMB • Realism and Risks • Should be conducted pre-award but no later than 180 days post-award

28. The Contractor’s EVMS • Describes system in sufficient detail to determine compliance • Includes prior Certification/Acceptance • If no EVMS is in place, Contractor must submit a comprehensive plan for compliance • System description • Necessary modifications • Compliance map • Process descriptions • Recent evaluation or self-assessment results • Identify major subcontracts for application of criteria • Verify baseline integrity is maintained • Contains plan and procedures for surveillance and self assessment

29. The Contractor’s EVMS (cont’d.) • Surveillance Plan • Methods and techniques • Inclusion of new scope • Customer coordination • Schedule • Analysis • Ensure that reliable and timely cost, schedule, and technical performance information is generated • Baseline Budget Control Accounts • Baseline Schedule • Work Measurement by Control Account • Work-hours, dollars, units, etc.

30. EVMS Is Important to Effective Contract Administration • EVMS gives early warning of potential problems • As a Contract Specialist or Contracting Officer, you are a member of the Integrated Project Team (IPT) • It is your job as the CS/CO to protect the Government’s rights if performance does not show satisfactory progress! • You must work with the other IPT members and the Contractor to avoid or mitigate performance problems

31. What Are the CO’s Responsibilities Regarding EVMS? • Contracting Officer’s Pre-Award Responsibilities as a Member of the IPT: • Identify application of the Earned Value Management System in acquisition plans, solicitations and contracts • Define reporting and electronic submission requirements • Define evaluation criteria for source selections • Factor EVMS into contract management planning

32. What Are the CO’s Responsibilities Regarding EVMS? (cont’d.) • Contracting Officer’s Post-Award Responsibilities as a Member of the IPT: • Integrate performance monitoring with EVMS into Award/Incentive plans • Monitor performance with IPT using the EVMS • Act when performance is at risk (communication with contractor, show cause and cure notices, etc.) • Evaluate the Contractor’s EVMS implementation plan • Evaluate the Contractor’s EVM systems for compliance with the standard • Conduct Integrated Baseline Reviews to ensure all the work scope is included in the baseline

33. EVM Impact on Mission • By utilizing EVM properly, an agency can… • improve its ability to track and report on investment cost, schedule, and performance variances (agency projects must stay within a 10% variance) • allow PMs and project team members to optimize resources and deliver capital investment projects on-time, on-budget, and within scope • operate by tracking its programs’ health beyond pure financials • ensure its customers’ requirements are satisfied

34. Summary • EVM helps reduce the guesswork in: • measuring performance • forecasting • Aids in getting beyond misleading measures of progress - provides a common denominator for work scope, schedule, and resources • Reasons to use EVM: • Good project management practices • OMB/FAR requirement • Should be incorporated into contracts for major acquisitions (cost-reimbursement)

35. Q & A