The Role of Earned Value in Fixed Price Projects - PowerPoint Presentation

Slide1

The Role of Earned Value in Fixed Price Projects

Dave JohnsonSlide2

What is meant by Earned Value?

Features of an Earned Value Management System (EVMS)

Development of a Performance Measurement Baseline (

P

MB)

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”Slide3

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 companySlide4

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:

R

ight now all of the funds on this contract are company profit

H

ow 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 completeSlide5

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 Slide6

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/performanceSlide7

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 profitSlide8

What EVMS Terms Apply?

When we bid the project, we likely

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)Slide9

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 dataSlide10

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 handsSlide11

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 beSlide12

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

Y

ou can’t get anyone out of trouble without financial resources at your disposal

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2: More Measurements are

Better than Fewer

Higher fidelity in measurement of the work means earlier and more insight into problems

I

nchstones

are better than milestones

#

3: Timeliness is

Critical – Time is Money

You cannot effectively address and fix potential problems you don’t see quickly

W

eekly or even daily measures rather than only monthlySlide13

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

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5: Be Flexible

C

ertain 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 itSlide14

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 moneySlide15

Questions?