EARNED VALUE MANAGEMENT SYSTEM CRITERIA

[Pages:36]EARNED VALUE MANAGEMENT SYSTEM CRITERIA

Organization 1. Define the authorized work elements for the progranl. A work breakdown structure

(WBS), tailored for effective internal management control, is commonly used in this

process.

2. Identify the program organizational structure including the major subcontractors

responsible for accomplishing the authorized work, and define the organizational

elements in which work will be planned and controlled.

3. Provide for the integration of the conlpany's planning, scheduling, budgeting, work

authorization and cost accumulation processes with each other, and as appropriate, the

program work breakdown structure and the program organizational structure.

4. Identify the company organization or function responsible for controlling overhead

(indirect costs).

5. Provide for integration of the program work breakdown structure and the program

organizational struc~re in a manner that permits cost and schedule performance

nleasurement by elements of either or both structures as needed.

Planning and Budgeting 6. Schedule the authorized work in a manner which describes the sequence of work and

identifies significant task interdependencies required to meet the requirements of the

program.

7. Identify physical products, milestones, technical performance goals, or other indicators that will be used to measure progress.

8. Establish and maintain a time-phased budget baseline, at the control account level, against which program performance can be measured. Budget for far-ternl efforts may be held in higher-level accounts until an appropriate time for allocation at the control aCCOllnt level. Initial budgets established for performance nleasurement will be based on either internal management goals or the extenlal Cllstol11er l1egotiated target cost including estimates for authorized but undefinitized work. On government contracts, if an .over target baseline is used for performance meaSlrrement reporting purposes, prior notification nlust be provided to the custonler.

9. Establish budgets for authorized work with identification of significant cost elements

(labor, material, etc.) as needed for internal management and for control of

subcontractors.

10. To the extent it is practical to identify the authorized work in discrete work packages, establish budgets forthis work in terms of dollars, hOllrs, or other measurable units. Where the entire control account is not subdivided into work packages, identify the far term effort in larger planning packages for budget and scheduling purposes.

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11. Provide that the sum of all work package budgets plus planning package budgets within a control account equals the control account budget.

12. Identify and control level of effort activity by time-phased budgets established for this purpose. Only that' effort which is unmeas'urable or for which measurement is imp~actical may be classified as level of effort.

13. Establish overhead budgets for each significant organizational component of the company for expenses which will become indirect costs. Reflect in the program budgets, at the appropriate level, the amounts in overhead pools that are planned to be allocated to the program as indirect costs.

14. Identify management reserves and undistributed budget.

15. Provide that the program target cost goal is reconciled with the sum of all internal program budgets and management reserves.

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

17. When a work breakdown structure is used, summarize direct costs from control accounts into the work breakdown structure without allocation of a single control account to two or more work breakdown structure elements.

18. Summarize direct costs from the control accounts into the contractor's organizational elements without allocation of a single control account to two or more organizational elements.

19. Record all indirect costs which will be allocated to the contract.

20. Identify unit costs, equivalent units costs, or lot costs when needed.

21. For EVMS, the material accounting system will provide for: (1) Accurate cost accumulation and assignment of costs to control accounts in a manner consistent with the budgets using recognized, acceptable, costing techniques. (2) Cost performance measurement at the point in time most suitable for the category of material involved, but no earlier than the time of progress payments or actual receipt of material. (3) Full accountability of all material purchased for the program including the residual inventory.

Analysis and Management Reports 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:

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(1) Comparison of the amount of planned budget and the amount of budget earned for work acconlplished. This comparison provides the schedule variance. (2) Comparison of the anlount of the budget earned the actual (applied where appropriate) direct costs for the same work. This comparison provides the cost variance.

23. Identify, at least monthly, the significant differences between both planned and actual schedule perfornlance and planned and actual cost perfornlance, and provide the reasons for the variances in the detail needed by program management.

24. Identify budgeted and applied (or actUal) indirect costs at the level and frequency needed by management for effective control, along with the reasons for any significant variances.

25. Summarize the data elements and associated variances through the program organization and/or work breakdown structure to support management needs and any customer reporting specified in the contract.

26. Implement managerial actions taken as the result of earned value information.

27. Develop revised estimates of cost at completion based on performance to date, commitment values for material, and estimates of future conditions. Conlpare this information with the performance meaSllrement baseline to identify variances at completion important to company management and any applicable customer reporting requirements including statements of funding requirements.

Revisions and Data Maintenance 28. Incorporate authorized changes in a timely manner, recording the effects of such changes in budgets and scheduless In the directed effort prior to negotiation of a change, base such revisions on the amount estinlated and budgeted to the program organizations.

29. Reconcile current budgets to prior budgets in terms of changes to the authorized work and internal replanning in the detail needed by management for effective control.

30. Control retroactive changes to records pertaining to work performed that would change previously reported amounts for actual costs, earned vallIe, or budgets. Adjustments should be made only for correction of errors, routine accounting adjustnlents, effects of customer or nlanagement directed changes, or to improve the baseline integrity and accuracy of performance measurement data.

31. Prevent revisions to the program budget except for authorized changes.

32. Document changes to the performance measurement baseline.

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GUIDANCE FOR EVALUATING,

EARNED VALUE MANAGEMENT SYSTEMS

Earned Value Management is a tool that allows both Government and Supplier Program Managers to have visibility into cost, schedule, and technical progress on their contracts to measure and manage performance. The industry guidelines establish the framework within which an adequate integrated cost/schedule/technical management system will fit. The guidelines do not describe a system, however, industry in recognizing the importance of earned value in program nlanagement, has developed an industry-based standard, "Earned Value Management System Guidelines" (ANSIlEIA-748-1998) for applying earned value.

In designing, implementing and improving the EVMS, the objective should be to d9 what makes sense. An EVMS that complies with the intent of the' guidelines will facilitate inherent,features of a good EVMS. Some of these features are thorough planning, timely baseline establishment and control, and information broken down by product and organization. Other features are objective measurements of accomplishment against the plan at levels where the work is performed, summarized reporting to higher management for use in decision making; reporting discipline, and the implementation of management actions to mitigate risk and manage cost and schedule performance.

The 32 guidelines are grouped into 5 sections (Organization! Planning, Scheduling, and Budgeting/ Accounting Consideraiions/ Analysis and :Nlanagement Reportsl RevisiollS alld Data ~v1aintenance) within the ANSIlEIA Standard. For Government reviews and analysis, these are further regrouped to facilitate, a process approach of nine processes:

ORGANIZING: The organizing process is concerned principally with: ensllring that each part of the EVMS is properly established; defining the work required to be performed; assigning the tasks to organizations responsible for performing the work, including major subcontractors; facilitating the collection and developing of il1formation for management purposes; and identifying organizational resources that facilitate the preparation of accurate and timely estimates of project cost and schedule completion.

SCHEDULING: The scheduling process defines the schedule hierarchy that must be established to ensure proper, effective planning, and statllsing of all effort on the project

WORKIBUDGET AUTHORIZATION: This process addresses the requirements for the project organization to integrate budget and work planning requirements with the program schedules to ensure completion of contractual efforts.

ACCOUNTING: The accounting system structure is defined by the suppliers Cost Accounting Standards Disclosure Statement. The intent is to ensure there is a timely and accurate transfer of actual cost information from the accounting system into the EVMS:

INDIRECT MANAGEMENT: This process pulls together those requirements that apply to the suppliers processes of establishing, implementing, controlling, and evaluating indirect budgets and costs that are incurred and allocated to the individual projects. Since indirect costs are

normally handled in organizations that are not project peculiar, there should be some method for assigning the appropriate values for indirect budgets and actuals to all affected projects.

MANAGERIAL ANALYSIS: This process is the evaluation and feedback loop of the EVMS. Management actions are determined based on lower level analysis of pro1?lems, corrective actiol1S are implemented, and their effect on cost and schedule performance are projected.

CHANGE INCORPORATION: Changes in ?major projects are inevitable. This process addresses the controlled processes whereby projects incorporate formal changes, conduct internal replanning, and adjust past, present, and futllre information to accommodate changes. The keys are timeliness and control.

MATERIAL MANAGEMENT: This process expands on the application of performance measuremel1t to both development and production material.

SUBCONTRACT MANAGEMENT: This process expands on the application of performance meaSllrement to subcontracted efforts. Only those aspects unique to n1anaging subcontracts are covered.

The 32 guidelines for an EVMS span these nine processes, with some guidelines impacting more than one process. To ensure all areas are appropriately covered, these nine processes are further broken down into approximately 56 sub-processes, all of which must be reviewed and accepted, before the DOD Executive Agent can accept an EV:NlS. To prevent duplication and conduct tIle most efficient review, each gllideline is allocated to a primary process or parent process, known as the "Key Process". All other processes affected are referred to as "cross-process areas". These are not duplicated in the" templates, with the exception of Subcontract Management. Key guidelines associated with Subcontract Management have been reproduced in the Subcontract Management templates to ensure that these aspects_are adequately covered. This is due to the role played by subcontracts in the Defense environment and the importance of ensuring the systems in place will facilitate effective management, measurement and reporting of those subcontracts.

The following is guidance in evaluating the industry guidelines/processes. The structure throughout provides: 1. A statement ofthe Guideline,

2. Additional supporting guidance to elaborate upon the intent of the guideline (characteristics expected in a good management system) or to direct attention to particular cross-process areas within the guideline, and

3. A reference list ofdocuments to review in ensuring the guideline has been met.

Guideline #1 - ORGANIZATION, Process Group ? Organizing:

Define the authorized work elen1ents for the program. A work breakdown structure eWBS), tailored for effective internal management control, is commonly used in this process.

Additional Guidance: Defining the Work: The statement of work (SOW) for the project should reflect all work to be performed. A critical aspect is to establish the organizational responsibility for segments of the work and to define in-house effort versus subcontracted effort. A work breakdown structllre (WBS) is frequently used but is not prescribed. A WBS dictionary provides the mechanism for captllring the correlation between the SOW and the WBS. The WBS established for the project should not be extended to unreasonably low levels, since this could affect management flexibility.

There should be only one SOW and one WBS for any program. Look for the following:

1. A comprehensive statement of work (SOW) defining project work requirements is prepared.

2. Correlation between the SOW and the WBS assigning segments of work to appropriate WBS

elements~

3. A WBS dictionary will capture this correlation.

Documents to Review: CWBS and Dictionary, if applicable, Contract Statement of Work, Work Authorizations Documents.

~llic1eline #2 - OR(;ANTZATTONj Process GrouD - Or!!anizin!!: Cross-Process Area: Subcontract Management:

Identify the program organizational structure including the major subcontractors responsible for accomplishing the authorized work, and define the organizational elements in which work will be planned and controlled.

Additional Guidance: Assigning Organizational Responsibility: The organizational breakdown structure (OBS) reflects the way the project is functionally organized. To assign work responsibility to appropriate organizational elements, any WBS and OBS must be interrelated with each other; that is, organizational responsibility must be established' for identified units of work. The assignment of lower level work segments to responsible lower level managers provides a key control point for management purposes and cost collection. This is called the control aCCOllnt (CA).

Establish Subcontract, Management Organizations: When effort is to be subcontracted out, the' applicable subcontractor is identified and related to the appropriate WBS element and/or organization charged with acquiring the subcontracted itenl. When designating the internal organization responsible for managing sllbcontracted efforts, the prime contractor must assign a manager with sufficient authority and responsibility to be able to ensure the subcontractor will perfoffil to the terms and conditions of the project. This person should have all the same responsIbilities as other control account managers within the program organization.

Look for the following: 1. Early identification of a program organization structured for efficient execution of the project

work efforts.

2. Integration of the major subcontractors into the project structure.

3. The project will identify the appropriate organization with responsibility for managing the performance of the major subcontractors.

4. Major subcontractors will be identified to a scope of work and its related WBS elements.

Documents to Review: CWBS and Dictionary, if applicable, Contractor Organization Charts.

Guideline #3 ? ORGANIZATION, Process Group ? Organizing:

Provide for the integration of the supplier's planning, scheduling, budgeting, work authorization and cost accumulation processes with each other, and as appropriate, the program WBS and program organizational structure.

Additional Guidance: Ensure Management Subsystems Integration: The control account is the main action point for planning and control of effort. All aspects of the systenl come together at this point including.~ budgets, schedules, work? assignments, cost collection, progress assessment, problem identification, and corrective actions. Most management actions taken occur as a result of significant problems identified at this level. The control account levels should be determined by the scope of the management tasks. The proper levels should not simply be an arbitrary determination or the result of one "across-the-board" level for control accounts. Control accounts are usually located at levels consistent with the project's method of management.

Look for the following:

1. Integration of the various subsystems into an EVMS that provides timely and valid project information to management.

2. Establishment of control accounts at the appropria~e organizational level, optimized for efficient project management.

Documents to Review: Internal Performance Measllrement Reports.

Guideline #4 (DCAA) ? ORGANIZATION, Process Group ? Indirect Management:?

Identify the supplier's organization or fllnction responsible for controlling overhead (indirect costs).

Additional Guidance: Assign Managerial Responsibility for Indirect Cost: The sllpplier establishes an indirect budgeting process which includes the formal assignment of duties and limits of responsibility, a description of the indirect system, and policies and procedures applicable to the ~stablishment and control of indirect costs. Assignment and control of indirect resources must be clearly defined and should be commensurate with the authority to approve or avoid the expel1diture of resources.

Look for the following: 1. Managerial positions responsible for establishing and controlling indirect budgets are clearly

identified in the supplier's organizational structure.

2. The responsibilities and allthorities are clearly described.

Documents to Review: Organization charts, Overhead budgeting policies and procedllres.

Guideline #5 - ORGANIZATION, Process Group - Organizing:

Provide for the integration of the program WBS and program organizational structure in a manner that permits cost and schedule performance measurement by elements of either or both structures as needed.

Additional Guidance: Organize for Effective Performance?Measurement: The control account in 'an EVMS is the lowest levels in the structure at which the comparison of actual costs to planned budgets and earned value are reqllired. The cost collection point must be at a level, which will identify the cost elements and factors contributing to cost and/or schedule variances. Managerial authority and responsibility for corrective action should exist at the control account level making it the key management control point in the system.

Look for the following: 1. Defines control accounts in terms of organizational versus WBS responsibility and establishes

manageable subdivisions of the project effort.

2. Provides earned value information at this level for effective 'resource planning.

Documents to Review: Internal Performance Measurement Reports, Manufacturing Breakdown Structure, if applicable, CWBS.

Guideline #6 - PLANNING & BUDGETING, Process Group - Scheduling:

Schedule the authorized work in a manner that describes the sequence of work and identifies significant task interdependencies required to meet the requirements of the program.

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