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About the Author
Charlene S. Budd, PhD, CPA, CMA, CFM, PMP, is Professor Emeritus of Accounting at Baylor University, where she has taught graduate accounting and project management courses. She is active in the American Institute of CPAs, the American Accounting Association, the Financial Executives Institute, and the Project Management Institute.
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The Government Manager's Guide to Earned Value Management
By Charles I. Budd, Charlene S. Budd
Management Concepts PressCopyright © 2014 Management Concepts, Inc.
All rights reserved.
THE FUNDAMENTALS OF EVM
Earned value management (EVM) as we know it today might not exist without the federal government's instigation and support. In the 1960s, the U.S. government commissioned a project reporting system composed of 35 requirements called the cost/schedule control systems criteria (C/SCSC). The objective of that system was to provide a common basis for reporting and decision-making by both the project initiator and the project contractor. That is, the project owner (the federal government) needed information that established a valid relationship among cost, schedule, and technical requirements in a summarized and meaningful format from the people actually performing project work so timely decisions could be made.
After the U.S. government spearheaded the development of objective project reporting, industry groups joined the effort and C/SCSC was modified into today's 32 EVM criteria. The first industry-approved EVM standard, ANSI/EIA 748-A, was published by the Government Electronics and Information Technology Association (GEIA) in 1998 and adopted by the federal government in 1999. In 2007, ANSI/EIA-748-B (the EVM standard) was approved. Through association mergers, GEIA later became a part of TechAmerica. An ANSI-accredited national standards developer, TechAmerica released ANSI/EIA-748-C in March 2013. The ANSI/EIA-748 version in force at the time contracts are signed, as elaborated and interpreted by various government documents, is the version that governs contractor EVM systems.
EARNED VALUE DEFINED
An earned value management system (EVMS) is universally defined as a project management system that, at a minimum, complies with the 32 criteria set forth in ANSI/EIA-748. "Earned value" is the primary metric for reporting progress on a project or program. Work "earned" is the amount of budgeted work scheduled that has been completed.
EVMS is an integrated project management system that includes the planning and execution of a project or program. From a high-level view, as shown in Table 1-1, it seems quite simple.
The Department of Defense (DoD) presents a complete description of EVMS in Part 1, Section 1, of its 2006 Earned Value Management Implementation Guide:
Earned Value Management (EVM) is a program management tool that integrates the technical, cost, and schedule parameters of a contract. During the planning phase, an integrated baseline is developed by time phasing budget resources for defined work. As work is performed and measured against the baseline, the corresponding budget value is "earned." From this earned value metric, cost and schedule variances can be determined and analyzed. From these basic variance measurements, the program manager (PM) can identify significant drivers, forecast future cost and schedule performance, and construct corrective action plans to get the program back on track. EVM therefore encompasses both performance measurement (i.e., what is the program status) and performance management (i.e., what we can do about it). EVM is program management that provides significant benefits to both the Government and the contractor.
U.S. government entities, such as DoD, the National Aeronautics and Space Administration (NASA), the Department of Energy, and the Office of Management and Budget (OMB), as well as international government entities, have set the basic definitions, concepts, and requirements for EVMS through their contract management agencies. Many implementation and intent guides have been published and revised, but the basic EVM requirements (with the exception of some rewording to clarify meaning) have remained unchanged.
Although DoD will continue to review contractors' EVM systems, it encourages contractors and the entire industrial sector to assume growing responsibility for EVM processes. Numerous EVM consulting and training assistance groups stand ready to assist in EVM implementation, execution, reporting, or any other facet.
In April 2013, DoD issued a supplement to the Defense Federal Acquisition Regulation (DFARS) in which Subpart 234.2 further confirmed the system requirements for use of an EVMS. Those requirements include the following:
Optional compliance with ANSI/EIA-748 for cost or incentive contracts and subcontracts valued at less than $20 million, with a decision to comply voluntarily with EVM guidelines documented in the contract file along with a risk-benefit analysis
Compliance with ANSI/EIA-748 for cost or incentive contracts for contracts and subcontracts valued at $20 million or more
"Confirmed" (determined by the cognizant federal agency) compliance with ANSI/EIA-748 for cost or incentive contracts for contracts and subcontracts valued at $50 million or more
Strong discouragement (a waiver is required) of the use of ANSI/EIA-748 for firm-fixed-price contracts for contracts and subcontracts of any value.
Other sections of Subpart 234.2 cover the details of exactly how the contractor's EVMS will be evaluated, how deficiencies are noted for correction, and how a final "accept" or "reject" decision is made. Subpart 234.2 also describes how inspection results at various stages of the investigation must be reported.
Special provision may be made for temporary use of EV systems that are not compliant with ANSI/EIA-748, but cost or incentive contracts valued at $20 million or more must follow the provision at 252.234–7001 (not FAR 52.234-2 and FAR 52.234-3).
THE 32 EVMS CRITERIA SUMMARIZED
The EVMS criteria are usually divided into five sections:
2. Planning and budgeting
3. Accounting considerations
4. Analysis and management reports
5. Revisions and data maintenance.
The 2006 revision of the ANSI/EIA criteria added "scheduling" to the second section; the sections of the 2013 revision remain essentially unchanged.
This five-step division is intended to address basic management concepts, but many of the concepts overlap. The criteria are presented fully in Appendix I with the latest version notations. The following are the key aspects of each criterion.
1. Define the work with a work breakdown structure (WBS).
2. Identify organizational breakdown structures (OBSs) that will do the work specified by the WBS.
3. Provide for integration of company processes and the program structure.
4. Identify the function for controlling overhead.
5. Provide integration that permits performance measurement from the WBS.
Planning and Budgeting
6. Schedule the work with task sequence and appropriate logic linkages between all tasks.
7. Identify indicators of measurable progress.
8. Establish and maintain a time-phased budget baseline at the control account level.
9. Establish budgets with identification of significant cost elements.
10. Identify and establish budgets in discrete work packages within control accounts and identify far-term work in larger planning packages.
11. Ensure that the sum of the work package budgets and planning package budgets within a control account equals the total control account budget.
12. Identify and control any work defined as level of effort.
13. Establish overhead budgets.
14. Identify management reserves and undistributed budget.
15. Ensure that the project's target cost equals the sum of all budgets and reserves.
16. Record direct costs (those costs traceable only to the project/program) in a formal system.
17. Summarize direct costs from control accounts to the WBS elements.
18. Summarize direct costs from control accounts into the contractor's organizational elements.
19. Record all indirect costs.
20. Identify unit costs (if producing multiple physical units).
21. Provide accountability for a material accounting system.
Analysis and Management Reports
22. Generate management control information at the control account level.
23. Identify and explain differences between actual and planned schedule and cost performance.
24. Identify budgeted and applied indirect costs.
25. Summarize data and variances through program organization or work breakdown structures.
26. Implement managerial actions.
27. Revise estimates of cost at completion based on performance to date.
Revisions and Data Maintenance
28. Incorporate authorized changes.
29. Reconcile current budgets to prior budgets.
30. Control retroactive changes to records.
31. Prevent unauthorized revisions to the program budget.
32. Document changes to the performance measurement baseline.
The next chapter introduces the basic EVM metrics. Subsequent chapters provide additional detail about EV implementation, execution, reports, and analyses.CHAPTER 2
The traditional metrics in EVMS were developed from standard cost system measurements. EV compares actual cost, budget estimates, and schedule performance to produce cost and schedule variances in dollar-denominated metrics. It is a way to express performance measures and variances in comparable financial terms in a manner similar to the variance reports of standard costing systems.
A key component of EVMS is the establishment of control accounts. A control account is a portion of the project plan assigned to a specific organizational unit where costs can be budgeted and actual costs tracked so that performance (earned value) can be determined. The accounting department establishes multiple control accounts in the general ledger or in a subsidiary ledger with one controlling account in the general ledger. The sum of all control accounts equals the total cost of the project. Thus, EV information is fully integrated with a contractor's accounting system and is not a stand-alone system.
Four primary EV metrics, introduced below, are used for a program (which can consist of multiple contracts) that has been authorized, planned, and funded and is being executed. The terms given first in the following paragraphs are more popular in industry and are becoming more universally adopted. The second terms were the originally used terms and are often the primary references in government documents.
Total Value (TV) or Budget at Completion (BAC)
A program or project's total value (TV) or budget at completion (BAC) is prepared in the planning stage before the project is begun and represents the program's or project's expected total cost or total allocated budget (TAB). BAC is developed by examining all the work to be accomplished on the project, estimating the cost of each portion of work that must be completed to prepare the project's deliverables, and then summing the individual costs. The budget and the project schedule then become the baseline against which project progress is measured.
Importantly, this metric is established before work is begun. Having all required information prior to beginning work greatly reduces rework when program requirements are not fully understood. Of course, many details of a program requirement may not be known prior to beginning a project and revisions can be authorized. Nonetheless, an initial total project budget must be in place before any reasonable measurements of progress can be made.
As work progresses on the project, EVMS requires periodic status reports. At each status point, typically monthly, three periodic measures are used to report the project status and to derive other report metrics. The first two are budgeted (estimated) costs and the third is actual costs. Another distinction is that the first metric represents the value of scheduled work that should have been completed by this point in time and the next two are for results achieved for the same time period:
Budgeted cost of the work scheduled [BCWS, or planned value (PV)] to have been completed by the status report date
Budgeted cost of the work actually performed (BCWP, or EV) by the report date
Actual cost of the work performed (ACWP, or AC) by the report date.
These metrics are described more fully below.
Planned Value (PV) or Budgeted Cost of Work Scheduled (BCWS)
At each reporting date, a status is taken of the portion of the project's PV or BAC corresponding to the elapsed time from the beginning of the project to the status date. The data detail both the work (tasks or activities) that should have been completed and the costs that should have been incurred. DoD calls this subset of BAC the budgeted cost of work scheduled (BCWS); others refer to it as planned value (PV). BCWS or PV is the dollar value of the work that was scheduled for completion by this point in the project's schedule.
Earned Value (EV) or Budgeted Cost of Work Performed (BCWP)
This periodic measurement shows the original estimated costs for work actually completed. BCWP can be the most confusing of the basic measures because it uses both an actual measurement and a budget measurement. It is a measure of the work completed during the status period, but at its planned (budgeted) amount, not its actual cost. It is the earned portion of the budget. Both EV and PV typically represent cumulative-to-date values, but this additional clarification (EVcum and PVcum, respectively) is seldom used.
Actual Cost (AC) or Actual Cost of Work Performed (ACWP)
The actual costs incurred from the initiation of the project represent the third periodic measure. Costs incurred (direct or indirect costs used on the project) are not necessarily the same as costs paid in cash due to billing and accounting processing delays. The formal name for costs incurred is actual cost of work performed (ACWP), but actual cost (AC) is often used. Like the other two basic periodic status measures, this is usually a cumulative amount. Again, the terminology can be confusing. It might seem logical to use the term actual value to maintain the value terminology (PV, EV), but once the actual amount of a predicted value becomes known, it is universally referred to as a cost.
REPORTS AND COMPARISON METRICS
Reviewing, the four basic measurements are (1) TV or BAC, (2) PV or BCWS, (3) EV or BCWP, and (4) AC or ACWP. Other major reporting metrics that are derived from these basic measures are cost and schedule variances and their related ratios. The latter metrics also are used in computing estimates of future performance.
Variances are designed to portray the absolute difference, in currency, between planned and actual project performance. The ratios built from variance inputs are relative metrics that can be compared across projects.
The cost variance (CV) is the difference between the budgeted cost of work actually performed (EV) and the actual cost of that work (AC). The formula for the cost variance is EV – AC or BCWP – ACWP. The CV's related ratio is the cost performance index (CPI). The formula is EV/AC or BCWP/ACWP.
The schedule variance (SV) is the difference between the (expected or forecasted) cost of the work that was actually completed (the earned value) and the budgeted cost of work scheduled for completion (the planned value). The formula for schedule variance is EV – PV or BCWP – BCWS. The SV's related ratio is the schedule performance index (SPI). The formula is EV/PV or BCWP/BCWS.
An analogy to earned value analysis is found in a standard cost system. The bar or triangle approach to calculating variances in a standard cost system can also be applied to compute earned value variances, as shown in Figure 2-1.
The variance formulas are designed so that a positive amount represents favorable performance and a negative amount signals unfavorable performance. However, it is important to pay attention to how an index metric was formulated before deciding if it represents a desirable or an undesirable situation.
People performing project activities (tasks) focus on work completion and time required to complete tasks. As in manufacturing and service industries, metrics built from currency amounts are not meaningful for people completing the work. An emerging practice in EV uses an additional measurement called earned schedule (ES) that describes how early or late the project is likely to be.
Excerpted from The Government Manager's Guide to Earned Value Management by Charles I. Budd, Charlene S. Budd. Copyright © 2014 Management Concepts, Inc.. Excerpted by permission of Management Concepts Press.
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Table of Contents
CHAPTER 1 The Fundamentals of EVM,
CHAPTER 2 EVMS Metrics,
CHAPTER 3 Industry and Government Connections,
CHAPTER 4 EVM Implementation and Verification,
CHAPTER 5 Reporting, Compliance, and Oversight,
CHAPTER 6 Overview of the Integrated Program Management Report,
CHAPTER 7 An Introduction to IPMR Analysis,
APPENDIX I The 32 EVMS Criteria,
APPENDIX II Glossary of Acronyms and Key Terms,