Download The Role of Earned Value in Fixed Price Projects

The Role of Earned Value in
Fixed Price Projects
Dave Johnson
What is meant by Earned Value?
• Features of an Earned Value Management System (EVMS)
• Development of a Performance Measurement Baseline (PMB)
• Assignment and training of Cost Account Managers (CAMs)
• Creating the five reporting formats that pull together measures of progress
versus actuals
• Generating the reporting formats monthly and developing Corrective Action
Reports (CARs) where performance is out of threshold ranges
• In a government contract requiring EVMS, all of the above is done with
government (or customer) oversight
• Today, I will be discussing a less formal and more responsive form of
Earned Value – one where our company is the final “customer”
What is a Fixed Price Project?
• For today, Fixed Price will mean a Firm Fixed Price (FFP) contract with a
customer to develop and deliver, in accordance with requirements and/or
specifications:
• A system, typically one with a substantial software development and/or
integration involved
• A quantity of integrated hardware and software units that perform one or
more specialized functions
• Features, Benefits, and Pitfalls
• We are free to satisfy the contract requirements in any way we wish
• The customer cannot alter the requirements or terms of the contract without
our consent (and, presumably, an adjustment in compensation)
• We are obligated to deliver what we agreed to regardless of what it may
ultimately cost our company
Some Background
• What does it mean that our company is the ultimate “customer” in a FFP
contract?
• An example: a Senior Vice President (SVP) turned to me, the Project
Manager, after signing a multi-million dollar FFP contract and said:
• Right now all of the funds on this contract are company profit
• How much of this (my) profit do you need to deliver what we signed up for?
• If you are the Project Manager for a FFP contract, this point of view will
help you focus – you must succeed
• The SVP’s points are fair ones because the company has taken all the risk
and failure can take on two forms:
• It takes more money than the contract has to successfully complete, costing
your company money, possibly above and beyond any profit loss
• You are unable to complete, the company defaults, and may be obligated to
pay another company to successfully complete
Earned Value on such a Contract
• Typically, the cost (overhead) of executing Earned Value on a FFP contract is
not included in developing the bid
• Nonetheless, my claim is that you, as the Project Manager, cannot afford to
be without it
• As Tim Lister once told a Risk Management Seminar, “Risk Management is
Project Management for Adults” – good advice, especially when your
company’s funds are at risk
• While we often characterize risks based on the major cause (e.g.,
technical, schedule, cost) – all of them have cost impacts
• Earned Value on a FFP contract is a major method of exposing and
managing project risk – risk that manifests itself in project cost
Some Earned Value Management Terms - #1
• WBS – Work Breakdown Structure – the decomposition of the effort and
the tasks involved in meeting the contract requirements
• BCWP – Budgeted Cost of Work Performed – the value of the work
accomplished, measured in terms of the budget
• BCWS – Budgeted Cost of Work Scheduled – the value of the work
scheduled, measured in terms of the budget
• ACWP – Actual Cost of Work Performed – the expenditures incurred to
perform the planned work
• PMB – Performance Measurement Baseline – the allocation of the project
budget over the WBS and the project schedule, providing a baseline plan
against which to compare our execution/performance
Some Earned Value Management Terms - #2
• BAC – Budget At Completion – the budget to complete the project
• EAC – Estimate at Completion – the expected cost to complete the
project
• CV - Cost Variance = BCWP – ACWP (positive is good)
• CPI – Cost Performance Index = BCWP/ACWP (>1.0 is good)
• SV – Schedule Variance = BCWP – BCWS (positive is good)
• SPI – Schedule Performance Index = BCWP/BCWS (>1.0 is good)
• MR – Management Reserve – the amount of the project budget that
you set aside to deal with project risks; it is separate from your bid
profit
What EVMS Terms Apply?
• When we bid the project, we likely
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Decomposed the work into components or tasks, typically using a WBS
Estimated the effort that it would take to execute each WBS task
Estimated the schedule that it would take to complete each WBS task
Mapped the dependencies between the different elements of the WBS to ensure we
could account for impact due to delays
• Added in both Management Reserve and Profit
• All of the above constitute our PMB and we can use all the EVMS measures
– in other words, we know enough to make this work
• We can decompose in more detail in order to ensure that we can
effectively and efficiently measure progress (value) and uncover risks
• Traditional EVMS runs on a monthly reporting cycle, we should use finer
measures – like weekly (remember that all of our funds are at risk)
Inchstones vs Milestones
• Traditionally, progress is measured against schedule milestones
• Difficulty arises if they are too infrequent or too granular
• Inchstones – measures on the order of one to two weeks and
involving less than a handful of resources
• Permits additional insights into progress and exposes potential
stumbling blocks that require management intervention
• Rules for use:
• Apply common sense when identifying inchstones
• Decide on the most appropriate progress measure for each
• Recognize that the law of large numbers will generally smooth the detailed
progress data
Monthly EVMS Measures
• Formal tracking of EVMS measures occurs monthly and is also useful
• Recognize that EVMS has cumulative measures as well as monthly ones for
you to examine
• Be aware that actuals from subcontractors or procurement payment delays
can skew monthly data
• Consequently, always compute monthly information by using the Current
Month Cumulatives minus the Previous Month Cumulatives
• Rules for use:
• Compute the CV, CPI, SV, and SPI at every level you can
• Determine where you have problems (e.g., CPI or SPI < 1.0) and determine the TCPI
and/or TSPI required to recover
• Do not assume that you and your team will magically become more efficient or
effective – recognize that you have a management problem on your hands
Role and Responsibilities
• As Project Manager, you must use the inchstones and other EVMS data to
make decisions and course corrections
• Your team needs leadership from you to adapt to the realities of
performing their tasks and delivering
• Rules to use:
• If progress is stalled in an area for more than one week, it is likely that the issue is
management-related and you need to understand the issue and act
• Problems (especially significant ones) to not improve with age, so inform senior
management in your company and seek their advice and counsel
• Be candid and open with your team about project progress, their efforts and
accomplishments, and the challenges ahead (monthly at least)
• Find a way to demonstrate that you are as committed to project success as you
expect them to be
Summary
• #1: Management Reserve is Essential
• If it was not explicitly bid, then always extract a Management Reserve above
and beyond the profit amount that was bid
• You can’t get anyone out of trouble without financial resources at your
disposal
• #2: More Measurements are Better than Fewer
• Higher fidelity in measurement of the work means earlier and more insight
into problems
• Inchstones are better than milestones
• #3: Timeliness is Critical – Time is Money
• You cannot effectively address and fix potential problems you don’t see
quickly
• Weekly or even daily measures rather than only monthly
Summary
• #4: Track Everyone and Everything
• Assume that your team is performing and accounting for their progress fairly
• Look for validation and be aware of any stalls as indicators of a management
problem
• #5: Be Flexible
• Certain costs may exceed expected costs; look for offsets where you
accumulate savings
• When a problem arises, be open to adjusting your plan and/or approach
• #6: You are in Charge
• As the Project Manager, you need to make hard decisions and you need to
make them quickly
• It does no good to have insight into a problem if you take no action to fix it
Summary
• Finally: Remember the Contract Type
• Your company has assumed all of the risk of delivering in accordance with the
contract
• Do not permit yourself or members of your team to agree to scope changes in
the hopes of a “better” relationship with the customer
• Capture all interactions of this type, even informal requests for change, in
memoranda to the contracting officer – only the CO can determine whether
something is in scope
• Keep your senior management informed and aware of your actions
• Do not apologize for this behavior – the customer agreed to the same
contract that you and your company did and it constrains their behavior
• Everything that you permit to occur that is out of scope is costing your
company money
Questions?