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AWR Articles
The Use of Earned Value Management Systems (EVMS) by Federal Government Contractors
By Charles L. BonuccelliUse of these Earned Value Management Systems (EVMS) is mandatory on large DoD contracts and also on other select federal government contracts. Many subcontractors are also subjected to the same standards for covered prime contracts. While many companies believe EVMS is complicated and burdensome, the benefits to project management can be invaluable.
A decade ago such systems were too costly and complicated to implement and were only used on those contracts that required them. However, with the cost of computing being reduced significantly and the availability of software that can be adapted to meet these guidelines, I now believe that these systems are a good management tool for most contracts and programs. The exceptions are for contracts that only require a level of effort rather than a specific result.
The federal government has adopted the guidelines EVMS set by industry through the American National Standards Institute (ANSI)/ Electronic Industries Alliance (EIA). The government requires such systems for use on contracts that previously would have followed the DoD Cost/Schedule Control Systems Criteria (C/SCSC). Proper use of an EVMS will lead to better cost estimates, program management, change order management, financial statements and increase contractor profitability.
The fact is that the basic elements of the EVMS, such as a work breakdown structure (WBS), are good management tools for developing a technical approach, estimating the level of effort required, identifying key elements and associated risks and providing a tool for managing the projects. If adequate attention is devoted to properly planning the management and operations of a new project, then a company can readily identify the estimated cost.
A company would be able to develop a project budget with little modification to the original proposal. Management will be able to identify and monitor the critical and key elements of the project. With a contract baseline in place, the company will be able to better identify the impact of government actions or inactions. It enhances the ability of a company to minimize schedule delays and cost increases.
The only disadvantage of implementing the basic requirements of an EVMS is that training and discipline it requires. Training is important because a company is not only implementing a new set of procedures but also is developing a new mindset. The discipline is an ongoing problem. This discipline requires constant monitoring of key tasks and proactively working to overcome challenges as they become apparent.
Once the system is in place, it also provides a sound basis for developing rational and coherent approaches to bidding on new projects. It also provides a basis for defending the cost of such an approach. It clearly will raise the confidence of the government cost analyst because it will tie the cost and the technical approach together.
In bid protests often the main issue was that the government had to evaluate a cost proposal and did not have a guide as to how the technical and management plan related to the cost. The government cost evaluations seemed shoddy and the results suspect. The result may have been that there are times where the government has paid too much for a product or service without any additional technical benefit. Yet, the price or cost evaluation meets the basic government standards.
In reviewing the documents of government cost analysts, what seems obvious to the protestors was not obvious to the cost evaluators. Many times, this is as much the fault of the offeror as it is the government cost analysts, because the offeror does not present information in a clear and logical way that informs the government how the offeror’s cost proposal reflects its technical and management approach.
When there are problems with government price or cost evaluations, sometimes it is due knowledge of the technical aspects of the industries they are evaluating. However, it is also because within the same industry radically different approaches may be proposed to give the government a product or service. The contractor can provide information to minimize an evaluators misunderstanding. This is where an EVMS could make a real difference.
The key element of an EVMS is a properly defined and tailored Work Breakdown Structure (WBS) for a project. The WBS is a definition of the internal management of the project and it is an effective way to demonstrate the management approach and how work tasks relate to one another. From that basic definition, a company can estimate when to start a task, the staffing, how long the work will take and when the task will be completed.
A WBS also forces a company to look at its organizational structure and at each of the key operational elements of the project. Key tasks or subcontractors that could impede or accelerate the operations are identified.
Many companies actually go through this process formerly and actually provide Gantt Charts in their technical proposals. Yet when you go to the cost proposal all of this detailed information is lost. Instead the government is often given just the basic hours and dollars with no distinction linking the dollars with technical tasks. Other times such information is reconciled on an overall basis, but the details are lost.
Without the detailed WBS, the chance for the cost evaluator to make a meaningful comparison of prior and current proposals of a contractor is lost. The ability to determine the differences in approach and how it affected cost between contractors is lost. Evaluators are left with reasonableness comparison between offers and a lack of insight to tell whether a contractor is gaming the proposal (providing a offer that is significantly lower than what the actual price they expect to receive).
An offeror should actually price the WBS for cost proposal purposes, as long as such data can be kept in any page limitations imposed on the cost proposal. If nothing more, the priced WBS will support the technical proposal and provide a roadmap to the pricing.
Government questions concerning the technical and cost proposal can be addressed directly with obvious omissions and possible over or under statements of costs addressed rationally. Changes to approach based on government questions or changed requirements can be addressed from the technical directly to the cost proposal.
Thus, an offeror can put the best light on changes to its technical and cost proposals. The government on the other hand has a clear picture of how the work will be accomplished and a baseline to measure future changes to.
When the offeror has been awarded the contract, an EVMS will permit it to take the proposal and manage the project accordingly. Using an EVMS to manage a project requires coordination and discipline.
An EVMS also requires a contractor to integrate the company’s planning, scheduling, budgeting, work authorization and cost accumulation processes into one coherent system. Though this sounds complicated, it is simply having one set of guidelines for managing projects. In this process key elements in determining how the cost and schedule should be measured against performance should be established.
A key to a successful system is that all EVMS work is planned and authorized in a manner that reflects the sequence of work and identifies task dependencies on each other to keep the program on schedule and in budget. The physical products, milestones, technical performance goals, or other indicators are used to measure progress. This would include such things as accepted reports, completion and delivery of products, successful completion of testing or an actual program event.
Management reserves and undistributed budget should be clearly identified. The estimated cost between the proposal and the internal budget plus management reserves should equal each other. The proposal should be used as the baseline but should be updated to reflect the most current revisions and changes to the work.
The actual accounting should record direct costs in a manner consistent with the budgets and the financial accounting system.
With an EVMS, companies perform analysis monthly or more often. Managers monitor management reports that identify schedule and cost variances. By comparing the planned costs (original budget) with the earned costs (the amount of budget based on actual progress) and the actual cost, a company can identify and surface many problems before they have a major impact on the performance of the job. Often the earned cost must be determined by estimating how much additional cost is required to complete work and developing a percentage of completion.
By identifying the material differences between both planned and actual schedule performance and planned and actual cost performance, program management can identify and formerly detail the reasons for significant variances to program work. Program management can then focus on correcting deficiencies and harnessing the required resources within the company to get the project back on track.
This data within the EVMS should be used to develop estimates of cost at completion (EAC) for each project based on current and future conditions. Management should segregate change order work from existing authorized work until such change orders are approved.
The WBSs on previous jobs are good starting points for developing a WBS on a continuing or new job. The individual task efforts will be identified and reasons for overruns will be explained. The next estimate can eliminate mistakes and the future cost can be more accurately forecast.
With a good EVMS a company can identify problems in performance and avoid the same problems in future contracts. It can also identify changes as they occur and identify the internal and external causes. The cost of changes may be more readily segregated and tracked. Thus, establishing a contract baseline that can be used in negotiating change orders and equitable adjustments. The advantages are significant and the costs are greatly reduced. However, an EVMS requires discipline in execution and maintenance of data. It is time for companies to consider such a system.