Earned Value Professional (EVP) Certification Study Guide First Edition, Revised
2008
Earned Value Professional (EVP) Certification Study Guide First Edition, Revised Copyright © 2008 By AACE International 209 Prairie Avenue, Suite 100 Morgantown, WV 26501-5934 USA Phone : +1.304.2968444 Fax: +1.304.2915728 Email :
[email protected] Web : www.aacei.org
Printed in the United States of America ISBN: 978-1-885517-69-6
A Special Publication Of AACE International – The Association for the Advancement of Cost Engineering
Earned Value Professional (EVP) Certification Study Guide First Edition, Revised
A continuing project of the AACE International Education Board
Acknowledgments The 2007-2008 AACE International Education Board is grateful to the AACE International members who have assisted in the development of this EVP Certification Study Guide, including: Chris A. Boyd CCE (Co-editor) Mark T. Chen, PE CCE Prof. John (Jeff) Hannon Harry Jarnagan,PE CCE Dr. Sean Regan, PhD CCE CEP (Co-editor)
2007/2008 Education Board Members: Harry Jarnagan, PE CCE (Chair) Mahendra (Pal) Bhatia Chris A. Boyd, CCE Mark T. Chen, PE CCE Audrey M. Clark, CCC John O. Evans, III PSP Clive Francis, CCC Prof. John (Jeff) Hannon Prof. Dr. Mark Hastak, PhD CCE Donald F. McDonald, Jr. PE CCE PSP Dr. Sean Regan, PhD CCE CEP Barrett Richards, CCC PSP Peter W. Griesmyer
The assistance and support of the AACE International Headquarters (HQ) staff members are also greatly appreciated: James Baxter, Executive Director Marvin Gelhausen, Managing Editor Noah Kinderknecht, Graphic Designer Robin Donley, IT/IM/Graphics Specialist Charla Miller, Staff Director-Education and Administration Dr. Randy Rapp, D.Mgt PE CCE, Subject Matter Expert for Assoc. Board Support Sandra Willard, Administrator, Certification and Education
Contents I. INTRODUCTION TO EVP CERTIFICATION STUDY GUIDE......................................................... 1 Origin of Earned Value ..................................................................................................................................... 6 EVP Certification Examination Structure........................................................................................................ 9 CHAPTER 1 – ORGANIZATION..................................................................................................................9 1.1 Work Breakdown Structure ................................................................................................................ 11 1.2 Organizational Breakdown Structure................................................................................................. 15 1.3 Work Authorization ............................................................................................................................ 19 1.4 Responsibility Assignment Matrix ...................................................................................................... 23 CHAPTER 2 - PLANNING SCHEDULING AND BUDGETING ......................................................... 27 2.1 Critical Path Schedule ....................................................................................................................... 29 2.2 Milestones and Deliverables............................................................................................................... 35 2.3 Performance Goals ............................................................................................................................. 41 2.4 Performance Management Baseline ................................................................................................. 45 2.5 Risk Assessment and Mitigation ......................................................................................................... 49 2.6 Control Accounts................................................................................................................................ 53 2.7 Work Package ..................................................................................................................................... 57 2.8 Planning Package ............................................................................................................................... 61 2.9 Cost Elements..................................................................................................................................... 65 2.10 Contingency ....................................................................................................................................... 69 2.11 Management Reserve ......................................................................................................................... 73 2.12 Undistributed Budget ......................................................................................................................... 77 2.13 Over-Target Budgets and Over–Target Schedule .............................................................................. 81 2.14 Contracting......................................................................................................................................... 85 2.15 Integrated Baseline Reviews ............................................................................................................... 89 2.16 Earned Value Methods....................................................................................................................... 93 CHAPTER 3 - ACCOUNT CONSIDERATION ........................................................................................99 3.1 System Identification ........................................................................................................................ 101 3.2 Direct Costs ...................................................................................................................................... 105 3.3 Control Accounts.............................................................................................................................. 109 3.4 Indirect Cost ..................................................................................................................................... 113 3.5 Unit Costs ......................................................................................................................................... 117 3.6 Performance Measurement Baseline Authorization ........................................................................ 121 CHAPTER 4 - ANALYSIS AND MANAGEMENT REPORTS............................................................... 125 4.1 Critical Path Analysis........................................................................................................................ 127 4.2 Progress Reporting ............................................................................................................................ 131 4.3 Variance Reporting........................................................................................................................... 135 4.4 Customer Reporting and Submittals................................................................................................ 139 4.5 Earned Value Mitigation.................................................................................................................. 143 4.6 Analysis ............................................................................................................................................. 147 4.7 Estimate-at-Completion and Estimate-to-Complete........................................................................ 151 4.8 Subcontract Management ................................................................................................................ 155 4.9 Retainage .......................................................................................................................................... 159 CHAPTER 5 - REVISION AND DATA MAINTENANCE..................................................................... 163 5.1 Change Control................................................................................................................................ 165 5.2 Reconciliation................................................................................................................................... 169 5.3 Document Control........................................................................................................................... 173 5.4 Performance Measurement Baseline Authorization ........................................................................ 177 5.5 Retroactive Change .......................................................................................................................... 181
PREFACE The AACE International Earned Value Professional Certification Study Guide is being developed to accomplish two purposes similar to that of the AACE International CCC/CCE Certification Study Guide. First, it is intended to aid professionals wishing to achieve AACE International’s specialty certification in Earned Value Management (EVM). Second, the intent of the Earned Value Professional Certification Study Guide is to assemble and summarize various topics considered essential for earned value professional (EVP) knowledge, as outlined in AACE International’s Recommended Practice 11R-88, Required Skills and Knowledge of Cost Engineering and included in the current edition of AACE International’s Skills and Knowledge of Cost Engineering. We expect that the Earned Value Professional Certification Study Guide will be as popular and useful as the CCC/CCE Certification Study Guide. This publication will serve the needs of earned value management (EVM) professionals who prepare to take the AACE International EVP certification examination. This publication is organized in a concise and easy to follow format, and covers the major skills and knowledge used by an earned value management professional. The information contained in this Earned Value Professional Certification Study Guide parallels the related topics of the Skills and Knowledge of Cost Engineering and the CCC/CCE Certification Study Guide. These publications can be combined for a course of study in both cost engineering and earned value management. The publications include sample problems related to the subject matter. Terms and phrases incorporated in the Earned Value Professional Certification Study Guide are generic to the profession and listed in AACE International’s Recommended Practice 10S-90 and the Glossary of Terms of this study guide. The terms and phrases used in industry and technical software may not always agree precisely with your understanding, therefore consult the EVP Glossary found in Appendix A. The goal of the AACE International Education Board is to continually improve this publication, making it a living document that will be revised as needed to support the EVP exam while maintaining the recognized strengths described above. All are encouraged to offer comments and suggestions for improvements in future editions. Please forward comments to the Education Board at AACE International.
Introduction to EVP Certification Study Guide This is a study guide for the Earned Value Professional (EVP) certification examination sponsored by AACE International, the Association for the Advancement of Cost Engineering. The following systematic approach was used to develop this guide: 1. Review basic earned value (EV) concepts. 2. Establish the terminology used in EV in a way that is consistent with the EIA/ANSI-748-A standards and AACE International Cost Engineering Terminology (10S-90), which has been adopted by ANSI. 3. Review the EV process. 4. Review methods for monitoring a project by using EV. 5. Review methods of reporting, executing, and forecasting project performance using EV. 6. Ensure consistency with the Total Cost Management (TCM) Framework, as in Figure 1.
The TCM Framework
Basic Processes of Total Cost Management
Functional Processes for Strategic Asset Management
Enabling Processes For Total Cost Management
1 Introduction
3 Strategic Asset Planning
2 The TCM Process Maps
4 Project Implementation
11.1 The Enterprise in Society
5 Strategic Asset Performance Measurement
11.2 People and Performance Management
6 Strategic Asset Performance Assessment
11.3 Information Management
2.1 Basis 2.2 Total Cost Management 2.3 Strategic Asset Management 2.4 Project Control
11 Enabling Processes
11.4 Quality Management 11.5 Value Management
Functional Processes for Project Control
11.6 Environment, Health and Safety
7 Project Control Planning 8 Project Control Plan Implementation 9 Project Performance Measurement 10 Project Performance Assessment
Figure 1: The outline structure of AACE International’s TCM Framework. As shown in figure 1, EV comprises a critical part of the functional processes for project control. Earned value is a specific methodology that includes planning, measurement and assessment steps. While the TCM Framework process is not limited to EV methods, it is consistent with them. For example, the TCM process map for project performance measurement (Chapter 9) as shown in figure 2 includes general measurement steps that apply to EV.
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Work, Resource, and Process Performance
Project Control Plan and Control Accounts Project (8.1) Implementation Basis (4.1)
Project Cost Accounting Plans (9.1)
Plan for Progress and Performance Measurement
Measure Physical Progress Changes (10.3)
Track Resources Initiate Progress and Performance Measurement
Project Control Plan and Control Accounts (8.1)
Review Progress and Peformance Measures
Information Information for for Cost Performance Accounting Assessment (9.1) (10.1)
Report Progress and Performance
Measure Performance Develop and Maintain Measurement Tools Historical Project Information (10.4)
Status Schedule
Information for Enterprise Status for Resource Changes PlanningHistorical (10.3) (5.2) Project Information (10.4)
Corrections to Measurement Basis
Figure 2: The TCM Process Map for Project Performance Measurement Overall learning objectives are: • Understand the basis of EV within the TCM Framework process. • Know the evolution of earned value. • Describe what is essential to plan and initiate an earned value system. • Understand and be able to execute the measurement and tracking of earned value as a basis of project management. And, • Provide the basis for AACE International EVP certification within the framework of figure 2.
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These are the references providing the basis of knowledge outlined in this guide: 1. AACE International Recommended Practice (RP) 10S-90, Cost Engineering Terminology. (2007). 2. AACE International Recommended Practice (RP) 11R-88, Required Skills and Knowledge of Cost Engineering. (2006). 3. AACE International Recommended Practice (RP) 14R-90, Responsibility and Required Skills for a Planning and Scheduling Professional. (2006). 4. AACE International Recommended Practice (RP) 23R-02, Planning & Scheduling Identification of Activities. (2007). 5. AACE International Recommended Practice (RP) 24R-03, Planning & Scheduling, Developing Activity Logic. (2004). 6. AACE International Recommended Practice (RP) 52R-06, Time Impact Analysis--As Applied in Construction. (2006). 7. American National Standards Institute/Electronic Industries Alliance Standard (ANSI/EIA) 748A-1998, Earned Value Management Systems. th 8. Amos, S. (Ed.). Skills & Knowledge of Cost Engineering, 5 Edition. (See especially Section 4, Progress and Cost Control), (2004). rd 9. Bramble, B. and M. Callahan, Construction Delay Claims, 3 Edition, (2007). nd 10. Crawford, T. (Ed.). Professional Practice Guide (PPG) No. 4, Planning and Scheduling, 2 Edition, (2006). rd 11. Fleming, Q. and Koppelman, J. Earned Value Project Management, 3 Edition, (2005). nd 12. Glavinich, T. Construction Planning and Scheduling Manual, 2 Edition, (2004). 13. Haugan, G. Project Planning and Scheduling, (2001). 14. Hollman, J. (Ed.). Total Cost Management Framework: An Integrated Approach to Portfolio, Program, and Project Management, (2006). 15. Humphreys and Associates. Project Management Using Earned Value, (2002). 16. Kerzner, H. Project Management: A Systems Approach to Planning, Scheduling & th Controlling, 9 Edition, (2005). nd 17. Marshall, R. (Ed.). Professional Practice Guide (PPG) No. 5, Earned Value, 2 Edition, (2007). 18. National Defense Industrial Association (NDIA) Program Management Systems Committee (PMSC). Earned Value Management Systems Intent Guide. http://management.energy.gov/documents/NDIA_PMSC_EVMS_IntentGuide_Nov_2006.pdf 19. O’Brien, J. and Plotnick, F. CPM in Construction Management, 6th Edition (2005). rd 20. Pritchett, M. (Ed.). CCC/CCE Certification Study Guide, 3 Edition. (See especially Section 4, Progress and Cost Control.) (2006). 21. Wickwire, J., Driscoll, T., and Hurlbut, S. Construction Scheduling: Preparation, Liability nd and Claims, 2 Edition, (2007). This EVP Certification Study Guide assumes a typical engineering, procurement, and construction (EPC) project as a basis for integrating the EV knowledge and skills that it contains. This manual guides the student to learn the basic terminology and processes for the EPC earned value management process. However, an individual’s company or industry may dictate or emphasize other methods or means as part of the EVM process of a project or program implementation. The study guide is organized according to figure 1, EVP scope of knowledge, which provides an overview of the EVP scope of knowledge that each EVP candidate will be tested on recommended examination preparation should include review of many of the references listed above. The candidate must also draw from their personal EVM experience. 3
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Origin of Earned Value The earned value management system, or EVMS, is not a new concept. In fact, according to Driessnack, it was derived from the factory floor in the late 1800’s. Planned, earned, and actual standards were the terminologies used then: “The earned value concept came to us right off the factory floor, from the industrial engineers who were comparing their planned standards with the earned standards and the actual costs. We simply applied this same concept to our one-time only, non-recurring developmental tasks” (Driessnack, 1990). In the 1950’s, “cost variance” was defined by industrial engineers as the difference between the actual costs expended as compared to the earned standards achieved. This is an early indication of the correct application of modern earned value analysis methods. PERT/Cost, Late 1950s-Early 1960s The earned value concept evolved over time in major phases. Much of the material below is taken nd from Quentin Fleming in his book, Earned Value Project Management, 2 Edition (Project Management Institute, 2000). The scheduling methodologies that underlie today’s earned value systems derived from two types of schedule logic networks: • Activity-on-node (AON) network. And, • Precedence diagram method (PDM) network. The program evaluation and review technique (PERT) was developed by the US Navy in 1958 to manage the Polaris missile program. Its objective was to simulate the schedule risk of the missile R&D program work using a flow diagram technique that, in turn, lent itself readily to scheduling and network analysis. However, its complexity made it unpopular and limited its applicability as a tool for general scheduling. The scheduling methodology called critical path method (CPM) was developed at about the same time by a DuPont engineer using the activity-on-arrow (AOA) method for network development, and it became a more readily accepted basis for scheduling. While not identical, procedures for both techniques were similar and leveraged the computational capabilities provided by electronic computers. According to Fleming, “Most of the networks today that are called PERT are actually precedence diagram method (PDM) networks, not true PERT networks.” The importance of PERT to earned value, however, lies in the implementation of the PERT/cost models in industry. With the implementation of PERT in 1962, eleven reporting formats were required, one of those being a “cost of work report,” which required the measurement and comparison of “value of work performed” versus the “actual costs.” This was a beginning of the modern earned value technique as a project management tool as we know it today. Cost/Schedule Control Systems Criteria (C/SCSC): 1967 to 1996 The development of the C/SCSC system was led by the US Air Force, which endeavored to determine if contractors involved in the development of systems could do so while observing certain simple management criteria. According to Driessnack, an interview of an individual who was actually involved.
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• • • •
Does the contractor break down the work into short span packages that can be budgeted, scheduled, and evaluated? Does the contractor have a system for accumulating costs? Does the contractor measure performance on these work packages? And, Does the contractor report status and variances to their own internal management?
When initially implemented, the US Department of Defense (DOD) imposed 35 criteria on any contractor desiring to perform work on cost reimbursable or cost incentive contracts over a certain funding threshold. This system was adopted by many governmental agencies. According to Fleming, although generally beneficial in its ultimate effect, the C/SCSC system had mixed results; much valuable project data was gained, but the system grew ever more bureaucratic and difficult for contractors to implement and maintain on projects. Many of the more detailed aspects of system implementation were resisted by contractors. In fact, it was not adopted by private industry for a number of reasons. Much of the rejection of the C/SCSC system was based on the need to understand a new set of terminologies that were not intuitive to many project managers, such as using the term budgeted cost of work scheduled (BCWS) instead of the word “planned”; budget cost of work performed (BCWP) instead of “earned;” and actual cost of work performed (ACWP) instead of “spent.” Additional frustration was experienced by practitioners in the field through the adoption of other confusing terms within the system that, they felt, served to only cloud the simpler project issue of cost overruns. EVMS (ANSI/EIA 748): 1996 to Present; Feedback from practitioners and the refusal of private industry to adopt the C/SCSC system led the US government to revise it and develop a simpler system that would be accepted by the private sector. The National Defense Industrial Association (NDIA) led this effort, reducing the number of system performance criteria (from 35 to 32), and simplifying the terms for various types of data (moving away from the more cumbersome phrases of BCWS, BCWP, and ACWP). The result of NDIA’s work was called the “earned value management system” (EVMS), which was adopted by the Department of Defense in December 1996, and incorporated into DOD Instruction 5000.2R. Wider application of this system outside the realm of the DOD was the goal of its 32 criteria being reflected in American National Standard Institute/Electronic Industry Association (ANSI/EIA) 748 Guide that was issued in 1998. With a return to a simpler, more intuitive approach as represented by EVMS, private industry adoption of earned value management techniques grew in recognition of it being a best-practice methodology. The passage of the Sarbanes-Oxley (SOX) Act in 2002, which intended to more effectively detect fraud in corporate operations, has further strengthened the standing of the EV method. It is a robust means to ensure that project execution proceeds in a transparent way and in accordance with SOX requirements.
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EVP Certification Examination Structure Introduction Certification as an Earned Value Professional (EVP) requires passage of a written examination in addition to other experience criteria as set forth by AACE International. This study guide provides direction for preparing to meet these requirements. Examination Basis The purpose of any professional certification or licensing program is to provide a mechanism to formally and objectively evaluate and publicly recognize the capabilities of an individual in a defined skill area. Certification as an Earned Value Professional (EVP) recognizes certificate holders who have demonstrated their expertise in earned value management (EVM). Specifically, EVM includes the following. • • •
critical path method (CPM) scheduling; performance measurement techniques; and, reporting and analysis.
These EV components provide the basis for the AACE International certification examination. The examination tests for proficiency across these areas. To define earned value more specifically in terms of expected skills and knowledge, AACE International has published AACE International Recommended Practices- Project Controls. Earned value is a dynamic management system affected by advances in philosophies, methodologies, and technology. A professional project controls engineer specializing in earned value measurement is expected to keep abreast of these advances and demonstrate this awareness in the examination. In summary, the definition of EVM and the Recommended Practice 11R-88, Required Skills and Knowledge of a Cost Engineer (EV portion) form the basic scope for the EVP certification examination. In recognition of this, the examination addresses the following. • •
minimum knowledge covered by the basic skills documents; and advanced knowledge based upon earned value experience.
Examination Schedule At each Annual Meeting, AACE International offers a general sitting for all of its certification examinations. AACE International also offers examinations on demand, along with various local sections hosting examinations. There are opportunities throughout the year to sit for the examination at a time and location most convenient for the certification applicant. Examination Format The examination consists of four parts (105 minutes each, in one day): • • •
Part I tests basic EVM knowledge. It consists of multiple-choice questions concerning the basics of earned value measurement. Part II tests EV applications. It consists of multiple- choice questions involving earned value scenarios. Part III is a practical exercise. This part entails answering a series of multiple-choice questions concerning various aspects of a single earned value measurement problem. 7
•
Part IV is a practical communications exercise. It requires the candidate to draft a one-page memorandum to simulate reporting on an earned value issue of a project, explaining their analysis and proposing a solution.
The examination is closed book with simple, non-programmable calculators allowed. The examination is not based upon use or knowledge of specific software, but rather embodies the knowledge and experience of an earned value practitioner using such tools. All materials provided during the examination, including work paper, are required to be turned in upon completion of each examination phase. •
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Recognizing that there are many industries and fields within the profession – engineering, construction, manufacturing, process facilities, mining, utilities, transportation, aerospace, environment and government – the applicant can expect some questions from any of those settings. However, as a practical matter, no one can be expected to be conversant in all areas, and the exam is designed to take this into account through its multiple option format and extensive use of questions of general applicability.
Chapter 1.0 - Organization Introduction Organizing the work is the initial task for planning any project or task. Organization entails defining the project or task scope of work and the groups or individuals that will be responsible for the various execution phases of any task or project. The organizational elements of a project management office (PMO) consist, at a minimum the work breakdown structure (WBS), organizational breakdown structure (OBS), work authorization (WA), and a responsibility assignment matrix (RAM). The project organization structure (POS) which is comprised of the above elements reflects the company’s organization as integrated with a particular PMO to support a specific project. Many organizations operate as a matrix organization and others may use an integrated product team approach. A PMO is usually established to be responsible for the business and technical management of the project. Terms to Know Project management office (PMO); Work breakdown structure (WBS); Organization breakdown structure (OBS); Work authorization (WA); Responsibility assignment matrix (RAM); and, Project organization structure (POS) Key Points for Review Organization is the key in developing a system for execution and management of a project supported by an earned value management system.
1.0 Organization 1.1
WBS
1.2
OBS
1.3
WA
1.4
RAM
Figure 1.0: Body of Knowledge Diagram
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Section 1.1 Work Breakdown Structure (WBS) Introduction The work breakdown structure (WBS) is the fundamental definition of the program. The WBS provides the framework by which all project effort is organized so it can be scheduled, budgeted, authorized, measured, and reported. The WBS is an organized, hierarchical decomposition of project scope that serves as the backbone for the planning and management of the project. The WBS is developed by decomposing the program into its various deliverables and services. Each deliverable and service is continually decomposed until all tasks necessary to complete the project are identified and assigned to a specific party or team, and all resources essential to accomplish the tasks are assigned in detail to the tasks. The deliverable-orientation of the structure allows for effort to be estimated for the identified tasking, the effort to be translated into an estimated cost, and the estimated costs to be rolled-up to sub-deliverables of the program. This, in turn, allows for the delicate balancing of scope to budget that is crucial for a successful earned value management program. The lowest level of each branch of the WBS is defined as a work package. The work package is assigned to an individual resource or an integrated team of resources. The work packages identified by the WBS are used to produce the program schedule, by logically linking together work packages as the work is planned to be accomplished over time. The work package level is also where the data points used to perform earned value analysis, i.e., the budget cost of work scheduled (BCWS), budget cost of work performed (BCWP), and actual cost of work performed (ACWP), are collected and rolled-up the structure of the WBS for problem identification and management control decision making. The grouping of work packages that make up a sub-deliverable (WBS) and are assigned to resources from a particular department within the organization (OBS) responsible for the program or portion of the program is defined as a control account. A management-level resource is assigned authority of the control account and is defined as the control account manager (CAM). The CAM accepts the responsibility of collecting the earned value data and is accountable for the accomplishment of the work packages The WBS dictionary provides a cross reference between WBS elements and the corresponding project statement of work, mission statement, or other customer documents that define the scope of work. The WBS should be designed with the intent that each WBS level may be used to report information of a similar level of detail consistently across the WBS. The WBS should be numbered such that each element is associated with a unique identifier. Terms to Know • • • • • •
Work breakdown structure (WBS); Statement of work (SOW); WBS dictionary; WBS number; WBS level; Work package; 11
• •
Control account; and, Control account manager (CAM)
Key Points for Review 1. Know why the WBS should never over- or under-represent the full project scope. 2. Know how the WBS graphically explains the project deliverables that must be completed. 3. Know the relationship between the WBS and SOW.
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Sample Questions for Section 1.1: 1.
Which of the following is not a component of the work breakdown structure? A. B. C. D.
2.
The WBS numerical designator 01.02.02.01.02.06 Low Level Waste Disposition represents what reporting level of the WBS hierarchy? A. B. C. D.
3.
4 5 6 7
Which of the following statements about the WBS is not true? A. B. C. D.
4.
Scope Deliverables Numerical designator RAM
A project consists of the sum of all the WBS elements. Any element that is not contained in the WBS is not part of the project. Any work that cannot be identified in the WBS requires an approved change order. Required WBS omissions require a notice to proceed (NTP).
A WBS: A. B. C. D.
Is derived from the project schedule network logic diagram. Is derived from the conceptual cost estimate for the project. Always has five hierarchical levels. Is the structure by which the project scope is decomposed into manageable components.
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Solutions to Sample Questions for Section 1.1: 1.
D.
The responsibility assignment matrix (RAM) combines the WBS and organizational breakdown structure (OBS) to identify who is responsible for what CA.
2.
C.
Six levels, as identified by the break, which is normally a period or dash.
3.
D.
The NTP is related to the project as an entity and not to individual elements of the WBS.
4.
D.
The WBS divides the project into manageable scopes of work, which are assigned to responsible parties with necessary management authority.
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Section 1.2 Organizational Breakdown Structure (OBS) Introduction The organizational breakdown structure (OBS) or the project organization structure as it is called by some companies reflects the company’s organization as integrated with a particular project management office to support a specific project. The OBS is usually illustrated by a graphical or tabular listing of the control account managers (CAMs), structured in a hierarchical manner. The OBS provides flexibility in reporting the internal organization of a company. The OBS is a direct representation of the hierarchy of the organization established to provide the necessary resources to plan and perform the required work. The procedures in this document provide guidelines for establishing an OBS for contracts requiring a certified EVMS. The OBS helps management establish the most efficient organization by taking into account the availability and capability of management and technical staff—including subcontractors—to achieve the project objectives. The OBS is an integral part of the formation of the responsibility assignment matrix (RAM) and ultimately determines who has responsibility for control accounts. There are three main types of organizational structures: functional, matrix, and project: •
•
•
The functional organization structure is one of indians and chiefs. Each functional group has a manager over the group’s function such as engineering services, and experienced individuals reside in the functional group performing tasks assigned to the group. The matrix organization is one in which functional professionals are grouped together to support a specific project, while simultaneously remaining a member of their functional organization. The “matrixed” individual receives their assignments from the person whom they are supporting. However, the administrative needs of the matrixed individual remain the responsibility of the functional manager while on assignment to a ”matrixed” project. The project organization is one in which a project is authorized to proceed, given a budget to allocate expenditures, and has a definite start and finish date. The project organization has an appointed manager or task leader and develops an organizational structure from which they draw specific resources in order to execute the project. The individuals assigned to the project support the project execution until released by the manager, when they then return to their respective functional organization for reassignment or continue their functional management duties.
Terms to Know • • • •
Organizational breakdown structure (OBS); Functional organization; Matrix organization; and Project organization.
Key Points for Review 1. Explain the differences between the OBS and WBS. 2. State the purpose of the OBS.
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Sample Questions for Section 1.2: 1. Which of the following is not considered an element of the OBS for EV? A. B. C. D.
Functional organization Matrix organization Project organization Labor counsel organization
2. Which organizational manager has administrative responsibility of an individual assigned to a project? A. B. C. D.
Functional manager Project manager Business manager Human resource manager
3. Which organizational manager is responsible for the job specific training of an individual assigned to a matrix organization? A. B. C. D.
Functional manager Project manager Engineering manager Site training manager
4. Which of the following statements does not reflect the use of the organization concepts when developing a project execution and management plan? A. B. C. D.
The organizational structure becomes an element of the planning grid, usually represented on the Y-axis of the grid. The WBS becomes an element of the planning grid, usually represented on the X-axis of the grid. The RAM becomes an element of the planning grid, usually represented on the Z-axis of the grid. The functional organization annual performance evaluation numerical ranking value becomes an element of the planning grid based on the value represented by the intersection of the other elements of the grid.
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Solutions to Sample Problems for Section 1.2: 1.
D.
The labor counsel organization relates to project management, not EV.
2.
A.
The functional manager is responsible for the personnel that are assigned to the team. This is demonstrated by the personnel who manage the staff which work under a CAM’s authority.
3.
B.
The project manager is responsible for the staff working on their project and must see they are trained to function in the assigned positions. They work under a CAM’s budget authority but are managed by function and project.
4.
D.
Functional organization annual performance evaluation relates to staffing and not execution.
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Section 1.3 – Work Authorization Introduction Work authorization is a formal process related to various levels of the organization. Each level of authorization is agreed to by the parties involved so that there is not any question as to what is required to authorize work. The work authorization approvals normally involve two types; outside or customer-client authorization and internal authorization within the organization performing the work. The customer-client authorization is applicable to items such as the basic contract, contract change notices, and supplemental agreements. The internal authorization will vary based on individual company policies and procedures starting at the highest level of management down to the control account manager (CAM). The sublevel managers have an established level of authorization based on company policy and can delegate their authority to subordinate mangers as they deem appropriate. The above organizational process flow of work authorization is captured in the work authorization document (WAD). It is the abstract by which governments, companies, and organizations provide the processes, directions, policies, procedures, and signature authority to commence work. At the organization or project level where the work scope is executed, the WAD is developed for authorizing work to each CAM. It includes the scope of work to be performed and the associated budget and schedule. The WAD is a contract between the PM and the CAM and carries the task definition, its start and completion dates, the total task budget, defined delivery milestones, and the WBS element that will be used to summarize costs for the task. A WAD, completed and signed by the authorizing agent for a specified project scope is the formal authorization document issued to perform the stated work. There are three types of authority encountered in the delivery of construction projects, and the WAD shall differentiate each type: 1. Actual Authority: This is authority from the project owner which is granted (expressly stated) in the contract to the owner’s representatives, as possibly to designers, contracting officers, etc. 2. Implied Authority: This is authority which is not expressly communicated (implicit) from the owner, but is necessary for the designated owner’s representative(s) to exercise their granted actual authority. An example would be when a contracting officer has the actual authority to demand performance and payment bonds from the prime contractor. Courts have determined that in such situations, the representative implicitly has the authority to demand the same from subcontractors. 3. Apparent Authority: Refers to authority which is neither expressly stated in the contract nor implied by actual authority. It describes authority which is ‘perceived’ to be held by the owner’s representative by other parties to the contract (i.e., the contractor, subcontractors, vendors, etc.). An example would be when a contract states that an engineer has the authority to solicit change order requests (CORs). The contractor may therefore perceive that the engineer also has the authority to accept or reject the COR, when contractually the engineer does not. Terms to Know • • •
Change order request (COR); Work authorization document (WAD); and, Project management office (PMO). 19
Key Points for Review 1. What is the purpose of work authorizations? 2. When is work authorized? 3. How do work authorizations relate to the execution of work?
The following organizational chart pertains to the sample questions of section 1.3:
Owner-Client
Contracting Officer / Manager
CEO / Manager of Projects
Project Manager
Project #1
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Engineer Manager
Engineering Discipline Department Managers
Project Controls Manager
Business Manager
Procurement
Contracts
Human Resources
Sample Questions for Section 1.3: 1. A multi-national construction company has bid on a request for proposal (RFP) and won the contract. Of the following list of managers, which one has the authority to award the contract in normal circumstances? A. B. C. D.
Client project controls manager Client procurement manager Client contracting manager Client general counsel.
2. A multi-national construction company has won a contract and received the notice to proceed (NTP) by the client. The engineering design phase has been authorized, and the project manager has directed the design to commence. Which one of the following managers has the authority to assign specific work to the engineering personnel on the project? A. B. C. D.
Project manager. Contracting manager Engineering manager Client representative
3. During the execution of the contract scope the contractor encounters a “soft-spot” during the excavation and has to bring in extra fill to bring the elevations up to grade. This situation was not shown on the excavation drawing or in the soil boring report. The contractor prepares a contract change order for the additional scope. Which one of the following managers has the authority to approve the change notice? A. B. C. D.
Client project manager Client contracting manager Contractor engineering manager Contractor client representative
4. The Work Authorization Document (WAD) is the “contract” of the scope, plan, and schedule between the ________ and the ______ for the project. A. B. C. D.
Client and the project manager Project manager and the control account manager Project manager and the functional manager Client and the control account manager (CAM)
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Solutions to Problems for Section 1.3: 1.
C.
Only the contracting officer or contracts manager has such authority.
2.
C.
The functional manager is responsible for assigning the scope of work his personnel shall work on. The CAM is responsible for the budget and maybe at a lower level, pending the RAM and scope of work.
3.
B.
Only the client contracting officer or contracts manager can approve changes and assign work.
4.
B.
The project manager is responsible for issuing the WAD, and the CAM is responsible for implementing the WAD.
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Section 1.4 Responsibility Assignment Matrix (RAM) Introduction The responsibility assignment matrix is a resource matrix of the organizational breakdown structure with the WBS which identifies the resources associated with the control account levels established for the project and cross references these levels to the appropriate WBS elements. The control account is important because it is the point at which technical performance, schedules, and costs are integrated. The RAM includes the functional organization and the named CAM. The RAM is a direct result of the intersection between the WBS and the OBS and permits the measurement of cost and schedule performance by elements of both structures. This intersection results in the designation of a focal point for management control—the control account. A potential control account exists where a single OBS element and a single WBS element intersect. It is defined as the point where a functional organization has responsibility for work designated to a WBS element. The control account is also where work is authorized, actual costs are collected, and budget and performance are summarized. The RAM will be updated as required based on changes in the CAM, WBS, OBS, and scope of work. The RAM is expressed as a graphic or tabular listing of the intersection of the WBS and the responsible organizations (OBS) at the control account level. Terms to Know • • • • •
Control account manager (CAM); Work breakdown structure (WBS); Organizational breakdown structure (OBS); Project manager (PM); and, Control account.
Key Points for Review 1. Understand the relationship between the OBS and WBS. 2. Understand the purpose of the RAM. 3. Understand the data reflected on the RAM.
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Sample Questions for Section !.4: 1. What is the name of the responsible individual or position where the WBS, OBS, and responsibility matrix intersect? A. B. C. D.
Project manager Project engineer Control account manager (CAM) Accounting manager
2. Which of the following is not part of the RAM relationship? A. B. C. D.
Work breakdown structure (WBS) Organizational breakdown structure (OBS) Schedule of values Control account
3. Which of the following is not addressed by the control account relationship in the RAM? A. B. C. D.
Technical performance Schedule Cost Pricing
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Solutions to Problems for Section 1.4: 1.
C.
The CAM is responsible where the WBS, OBS, and responsibility matrix intersect?
2.
C.
A schedule of values is not part of the WBS, OBS, RAM, or control account. It is a basis of cost control.
3.
D.
Pricing is not part of the control process.
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Chapter 2.0 Planning, Scheduling, and Budgeting Introduction In developing a plan for a program or project there are many considerations and constraints that require identification and evaluation. Among the elements are; resources, value engineering, stakeholders, and project variable requirements necessary to understand and implement the planning process. An important component of the baseline is the completion of a network schedule. The schedule is used to show how the work will be accomplished and contains the lists of activities to complete the physical products, milestones, and technical performance goals. A critical path schedule is simply a network schedule that depicts the activities, milestones, and the logic of how the work will be accomplished. The critical path is the network sequence of work to be done, which will take the longest time to complete the project.
2.0 Planning, Scheduling, and Budgeting 2.1 Critical Path Method Schedule
2.2 Milestones & Deliverables
2.3 Performance Measurement
2.4 Cost Elements
2.5 Work Package
2.6 Control Account / Planning Package
2.7 Budget Baseline
2.8 Overhead Pools
2.9 Contingency, Management Reserve, Undistributed Budget
2.10 Integrated Baseline Reviews
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Section 2.1 Critical Path Schedule Introduction An important component of the baseline is the completion of a network schedule. The schedule is used to show how the work will be accomplished and contains the lists of activities to complete the physical products, major project events (milestones), and technical performance goals. A critical path method (CPM) schedule is simply a network schedule that depicts the activities, milestones, and the logic of how the work will be accomplished. In this regard, the CPM schedule is an important mathematical model of the work needed to complete a given project. The critical path is that series of individual activities that represents the “string” or strings of logically successive activities, which will take the longest time to complete. The critical path then defines the quickest possible project completion date. The student must understand CPM scheduling. Understanding CPM includes the components of CPM schedules; how they act both as schedule building-blocks and as drivers of CPM schedule mathematics; how the components are developed to arrive at an overall schedule model; and the importance and techniques of schedule updating. Terms to Know
Activity; Activity description; Arrow diagramming method (ADM); Backward pass; Bar chart; Calendar unit; Constraint; Critical path; Critical path method (CPM;) Duration; Early finish date (EF); Early start date (ES); Forward pass; Free float (FF); Gantt chart; Late finish date (LF); Late start date (LS); Logic; Milestone; Network; Original duration; Program evaluation and review technique (PERT); Planning; Precedence diagramming method (PDM); Schedule update; Scheduling; Status; Target schedule; Total float (TF); Work breakdown structure (WBS); and, Work Unit 29
Key Points for Review 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
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Define what a bar chart (“Gantt Chart”) is, and explain the steps in preparing one. Define PERT, and summarize how such a schedule is developed. Define CPM and common schedule components. Define, compare, and contrast the ADM and PDM approaches to scheduling and how such schedules are developed. Describe the different types of logical relationships that can interrelate the work flow between activities (finish-to-start; finish-to-finish; start-to-start; start-to-finish). Explain coding techniques that can be used in schedules. Define the purpose of forward and backward passes, and explain the calculations used to complete the passes. Define FF and TF. Define the critical path, and how it is identified in the schedule. Define constraints, and discuss how constraints can be effectively used and misused in schedules. Discuss schedule updating and the reasons for it; discuss time intervals for updating schedules; and discuss procedures that should be used in updating schedules.
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Sample Questions for Section 2.1:
1. When constructing a PERT schedule, each schedule activity is assigned three durations. These durations represent:
A. Total float, free float, and lag. B. Original duration, Remaining duration, and percent complete. C. There should not be three durations; each schedule activity should have only one duration when doing a PERT schedule.
D. Optimistic duration, pessimistic duration, and most likely duration. 2. You have performed a schedule update. You have reviewed the update, and all the schedule mechanics appear correct. The TF value now shown on the “Project Complete” milestone is negative 15 workdays. What does this tell you?
A. That the project can be delayed by 15 days and still meet the required completion date.
B. That the project is now forecasted to be completed 15 workdays behind the required completion date.
C. That there must be an error. There is no such thing as negative float values in CPM scheduling.
D. That the percent of critical path activities physically complete is greater than what is scheduled to be complete at this point for those specific activities.
E. That the project is progressing satisfactorily and no adjustments to the to-go work plan is required. Questions 3 through 5 concern the CPM network schedule shown below. The time unit is workdays:
4 A 2
5
D
E
2
1 Proj. Start
3
B
G
ES
OD
EF
AD
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LS
TF
LF
3
7
C
F
ES = Early Start EF = Early Finish OD = Original Duration AD = Activity Description LS = Late Start LF = Late Finish TF = Total Float
Proj. Compl.
3. What is the total duration of this project? 4. What activities comprise this project’s critical path? 5. What activity has the most TF? How much float does that activity have?
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Solutions for Problems in Section 2.1: 1.
D.
PERT reflects the optimistic duration, pessimistic duration, and most likely duration.
2.
B.
The project is behind schedule. Negative float equates to behind schedule and positive float equates to ahead of schedule.
3.
16 workdays.
4.
A-D-F-G.
5.
Activity C.
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TF = 3 workdays.
Section 2.2 Milestones and Deliverables Introduction An important component of the project management plan is the list of deliverables and milestones for the project. The list indicates which deliverables and milestones are mandatory, and it might also address the relative weight of those deliverables. The term “deliverable” is sometimes used interchangeably with “milestone,” however the two are distinct items. Completion of a deliverable need not be denoted with a formal milestone in the network, but it might be. A milestone is a scheduled event that marks the accomplishment of a specified effort or objective. In scheduling terms, milestones are an event with zero duration that marks the start, interim step, or the end of one or more activities. A deliverable is a contract or management requirement that identifies a physical product. Deliverables across the breadth of the project scope and schedule represents a widely varying set of products, including economic studies and alternative selection; requests for proposals; contract documents and purchase orders; white papers, decision documents, and reports; environmental documents; technical models and design documents; acquisition of real estate to accommodate the project improvements; installation of permanent materials and equipment in place; punchlists; start-up plans and system performance verification documents; project closeout reports; and as-built drawings. A deliverable may be associated with a milestone, but a milestone is not necessarily a deliverable. While the completion of both deliverables and milestones is an indicator of progress, milestones are the scheduling tools that objectively measure progress to some level of accuracy. A deliverable is usually composed of several activities, and milestones—which are events and not activities--might be inserted within that collection of activities with weighted values according to their relative importance. By using these weighted milestones, progress for an activity can be measured, either as those milestones are achieved, such milestones thus representing “progress gates;” or where individual weighted milestones can be assigned a progress value based on the performance of their associated activities, and then an overall progress value for the given deliverable can be derived mathematically. Larger scale key milestones representing comprehensive project achievements are important tools in focusing management attention, reporting, and in managing the critical path of the project or program. Thus, the student must understand the differences between deliverables and milestones; the various types of milestones and their uses in scheduling, measuring progress, and reporting; and the calculation of progress percentages using weight milestone methods. Although deliverables and milestones are different, the terms are used in conjunction with one another. Terms to Know
Control gate; Deliverable; End Item; Input milestone; Interim deliverables; Major milestone; Milestone; Milestone level; Milestone payment; Milestone plan; 35
Milestone report ; Milestone schedule; Product; and, Progress milestone.
Key Points for Review
1. 2. 3. 4.
36
Define, compare, and contrast milestones and deliverables. Discuss the use of milestones in project plans, contracts, schedules, and EVM systems. Calculate progress in terms of physical percent complete using “progress gate” concepts. Calculate the physical percent complete using a weighted milestone method.
37
Sample Questions for Section 2.2: 1. Which of the following best represents a deliverable? A. B. C. D.
On the project schedule, an event entitled, “Begin plant start-up sequence.” Attending required safety meetings. Level-of-effort project management services within a given contract. The project Environmental Impact Report (EIR).
2. One of the major milestones on your flood control dam project is “30 percent Design Complete.” You are the lead scheduling engineer responsible for assembling the schedule, and you have decided that you will place a constraint on this milestone to help properly manage it. What type of constraint would you likely use? A. B. C. D.
Finish no-later-than Start no-earlier-than Mandatory start None of the above
3. You have decided to use a “progress gate” type of milestone method to measure progress on a major report. Your first milestone for this type of report is entitled, “Make Preliminary Draft Presentation,” and the milestone dictionary for your project states that delivery of this type of presentation earns the consulting firm working for you 50 percent progress. The consultant is authorized to use their subjective assessment of percent complete in the activities that precede this presentation. In their latest monthly report, they have reported that this presentation was actually made on the last day of the month (which you have verified), and they have claimed progress of 65 percent for this report overall. What percent complete should you report in your published project monthly report? A. B. C. D.
65 percent. The average between 65 percent and 50 percent, say about 57 percent You must first do a detailed audit of their deliverables before you can report anything 50 percent
The next two questions are based on the following table:
Real Estate Acquisition Process Milestone #
1 2 3 4 5 6 7 8 9 10
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Description
Right of Way Plan Completed List of Parcels Obtained Surveys Completed Legal Descriptions Completed Appraisals Completed Need Justifications Completed Negotiations Completed. Purchase Funds Placed in Escrow Title Transfer Documents Executed Funds in Escrow Released
Total Weighted %
15% 15% 10% 10% 5% 10% 5% 10% 5%
% Actually Weighted % Complete To- Complete ToDate Date 100% 90% 85% 70% 65% 60% 40% 40% 0% 0%
4. Your project is a rail transit project involving the purchase of various real estate parcels. You have documented the process and have decided to use a weighted milestone approach to measuring progress. You have asked a junior cost engineer to tabulate data from your latest status report, which included the table above, but you notice that a total weighted percent value for milestone #3 is missing. What should that value be? A. B. C. D.
20 percent 15 percent. 10 percent 5 percent
5. Activities involving appraisals, negotiations, and placement of funds into or release of funds from the project escrow account are being handled by a separate consulting firm. You need to determine the percent they have earned of their consulting contract value, if you are to process their firm’s invoice. What is the consultant’s percent earned for their part of the work, according to data in the above table? A. B. C. D.
64 percent 42 percent 13 percent Impossible to tell from the table above
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Solutions for Problems on Section 2.2: 1.
D.
The project environmental implementation report (EIR) is the only direct deliverable.
2.
A.
Finish no-later-than dictates the latest allowable completion date. (Overall constraints should be held to a minimum, per proper schedule maintenance.)
3.
D.
You report based on the established program or phase gate milestone from the baseline, 50 percent, not what the contractor dictates.
4.
B
The sum of the values in the Total Weighted percent column must equal 100 percent. The other Total Weighted percent values sum to 85 percent; so milestone #3 is 15 percent.
5.
B.
Milestone #5, Appraisals, shows 10% x 65% = 6.5% of all work complete; Milestone #7, Negotiations, shows 10% x 40% = 4% of all work complete; Milestone#8, Funds into Escrow, shows 5% x 40% = 2% of all work complete; and Milestone #10, Funds Released, shows 5% x 0% = 0 percent complete. The consultant has 10% + 10% + 5% + 5% = 30 percent of all work assigned, and 6.5% + 4% + 2% = 12.5 percent of their work is complete. Thus, the consultant has earned 12.5/30 = 0.417 = 42 percent of their possible value.
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Section 2.3 Technical Performance Goals Introduction Critics of EVMS often claim that there is nothing in EVMS that requires the final product meet specific criteria. EVM professionals know that one can document “technical requirements to complete a work package.” What happens when this goal is not met? Is the work package never completed? The key word here is goal. Is it a requirement or a goal? It is a better design to use notes on a work package describing contractual technical requirements and the goals for a work package rather than using these requirements as EV types. So, a good question would be: if a particular technical goal described in a contract for a product or deliverable may be difficult to achieve, is that requirement a good milestone for completing a work package? Technical performance reflects the basis of performance measurement by establishing a set of deliverables with a value for status updates and determining progress. The measurements reflect measurable and achievable points which reflect a value for completing the work package. This physical progress is then assigned a value based on the unit pricing from the contract budget baseline (CBB). Terms to Know • • •
Technical performance; Work package; and, Contract budget baseline (CBB).
Key Points for Review 1. Technical performance reflects measurable and achievable scope of the work package. 2. Technical scope is used to determine the physical progress of the work package.
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Sample Problems for Section 2.3: 1. Technical performance goals are used as indicators to measure progress. A. True B. False 2. Earned value management is an integration of: A. Technical performance, cost control and accounting, resource loading, and risk management. B. Technical performance, resource planning with schedules, and risk management. C. Technical performance, cost control and accounting, planning, and risk management. D. Technical performance, resource planning with schedule, cost control, and accounting. 3. Identify by “yes” or “no,” if the following are technical performance goals: A. B. C. D. E. F.
Installation 1000 LM/LF pipe Completion of hydro-test package IFC piping spools ISO Bump motor. Issue material certification/passport Issue baseline schedule and performance metrics
43
Solutions for Problems in Section 2.3: 1.
A
True. They are combined with products, milestones, or other control point indicators to define progress management.
2.
B
Technical performance, resource planning with schedules, and risk management are the fundamentals of EVM, without which a proper EVMS cannot be established.
3.
All
All can be technical performance goals, if they can be measured as a scope of work.
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Section 2.4 Performance Measurement Baseline Introduction The performance measurement baseline (PMB) is the assignment of budget to the scheduled scopes of work. It is established to measure the actual performance of the work against the established budget. The PMB is the basis for the EVM system and is the only effective means of evaluating progress. The PMB will be broken into control accounts which, when authorized, become work packages. Work that cannot be assigned to a work package, are assigned into planning packages. The control accounts are measured with control account plans (CAP), which are assigned to a control account manager (CAM). It is a requirement to have control accounts from program start through the end of the contract. The PMB represents the formal plan for each control account manager to complete the designated technical scope. It is assigned with a designated time and within the authorized budget. In an EVM checklist or audit, if there is no PMB, then the EVM system is a failure. The PMB can be established at a summary level as there may be gaps in the plan or scope, so this will require approved changes to the PMB. There also may arise times where the budget for allocated work exceeds the CBB. This is tracked as the over-target baseline (OTB). The OTB cannot be executed until a change is authorized to place it in the CBB. The PMB can only be changed when an approved change order has been done and incorporated. Rebaselining is done to realign the PMB, i.e., to improve the correlation between the work plan, baseline budget, scope and schedule. This is different from reprogramming, which is the comprehensive re-planning of the remaining PMB that result in a total budget or schedule in excess of contract requirements. The results of reprogramming will be an OTB. After contract award, the emphasis turns to activities necessary to provide a smooth transition from proposal to performance of the contract effort. The project team is concerned principally with structuring the work to be performed and assigning activities to responsible organizations. These activities are accomplished by subdividing the SOW into segments (developing the WBS) and assigning responsibility (establishing the organization) for authorizing, planning, executing, and controlling the work. The approved baseline must also be established. The baseline implementation process involves structuring the three main management objectives (schedule, budget, and scope of work) into a cohesive, integrated environment. This is known as the PMB, which represents the sum of distributed and undistributed budgets, including all associated indirect cost against which contract performance is measured. It does not include management reserve (MR). A baseline implementation schedule is published at this time. All project team staff members are responsible for meeting this schedule in preparation for the integrated baseline review (IBR) or PMB review, as required. However, if the team believes the schedule is unrealistic, the problem must be resolved immediately, so that a revised implementation schedule can be developed. Baseline implementation is completed within a timeframe directed by the contract. Subcontractor information must be integrated into the prime PMB in a timely manner. Implementation of the baseline may undergo several revisions before it is finalized. Once established, it is subject to strict 45
change control. Formal change control does not begin until the PM approves the final baseline. For some contracts, the customer may mandate a specific date for the baseline to be established. Terms to Know • • • • • • • • • • • • •
Contract budget baseline (CBB); Integrated baseline review (IBR); Performance measurement baseline (PMB); Authorization to proceed; Time-phased scope; Control account (CA); Planning package; Work package; Control account plan; Control account manager (CAM); Over-target baseline (OTB); Rebaselining; and, Reprogramming.
Key Points for Review 1. The CBB value is used to establish the PMB. 2. The PMB represents the time-phased scope, schedule, and associated budget through the end of the contract. 3. Included in the CBB are any budgets set aside for MR and contingency. 4. The PMB should be the priority after the authorization to proceed. It is developed from the CBB into the schedule for complete resource loading. 5. An OTB is a CBB that was formally reprogrammed to include additional performance management budget, and which therefore exceed contract target cost.
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Sample Problems for Section 2.4: 1. The PMB is developed from the __________ scope, time __________ consistent with the __________ schedule. A. B. C. D.
Budgeted, phased, baseline. Work, based, integrated. Work, phased, integrated. Planned, based, resource.
2. Over-target baseline is based on: A. B. C. D. 3.
CBB plus additional scope in excess of scope. Rebaselining the PMB. PMB plus additional scope in excess of contract. Overrun of the actual cost or schedule of the CBB.
You have a scope order of $5,000,000 over 5 years, funded at $1,000,000 a year. Which way would you list your scope and budget: A. B. C. D.
CBB = $5,000,000, PMB Year 1 = $1,000,000, and OTB = $4,000,000. CBB = $1,000,000, PMB Year 1 = $5,000,000, and OTB = $1,000,000. CBB = $5,000,000, PMB Year 1 = $5,000,000, OTB = $4,000,000. CBB = $1,000,000, PMB Year 1 = $1,000,000, OTB = $4,000,000.
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Solutions for Problems in Section 2.4: 1.
C
Scope of work, with a schedule that is resource loaded establishes the PMB.
2.
A
Establishment of an OTB entails adding budget for either future work or in process work and possibly for adjusting of variances.
3.
A
You have established the contract value, funding notifications will be your change order system, so each year you will reduce the OTB and Increase the PMB.
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Section 2.5 Risk Assessment and Mitigation Introduction Understand how the risk assessment relates to the application of earned value management. The key learning objectives include:
Understand the basic steps of a risk management process. Assess WBS elements as potential risk events and their probability of occurrence and impact to technical, schedule and cost. Develop responses to mitigate common project risks. Identify the accountable person to manage risks.
Terms to Know
Risk management; Risk identification; Internal and external risks; Risk assessment; Risk analysis; and, Risk mitigation.
Key Points for Review 1. Risk management. A. B. C. D. E.
Planning; Identification; Assessment; Analysis; and, Mitigation.
2. Risk assessment and WBS relationship. A. Develop WBS (Work Breakdown Structure) at a level of detail sufficient to facilitate the assessment of technical, schedule and cost risk events. B. May need to decompose WBS to a lower level to align risk events with WBS elements to help monitor and manage risk events. 3. Formal and informal risk managements. A. Formal management. B. Apply to large, complex, or multi-year, multi-million projects. C. Qualitative vs. quantitative approach to risk management. D. Quantitative risk analysis uses mathematical techniques and models to numerically establish the probability of risk and consequences of risk. Typical techniques are simulation, sensitivity analysis and decision-tree analysis. E. Informal management. F. Apply to small or less-complex projects. 49
G. Project manager engages stakeholders to explore their perception of risks (problems and opportunities) surrounding the project. H. Based on the problems and opportunities identified, Project manager plans and develops a detail task outline instead of a WBS, select an earned value method, if appropriate, to help mitigate the impact of risk events.
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Sample Problems for Section 2.5: 1. Risk management process includes all the following steps except: A. B. C. D.
Risk identification Risk assessment Risk analysis Risk elimination
2. Projects can control all the following risks except: A. B. C. D.
Design errors because of untrained personnel Price changes because of market forces Cost overrun because of excessive changes Ineffective contractor due to flawed selection process
3. To effectively manage project risks, the WBS elements may have to be decomposed to lower levels to align risk events with individual WBS elements. A. B.
True. False.
4. All projects should perform formal risk assessments. A. B.
True. False.
5. For a small or less complex project, which one of the following is a practical approach to manage risks? A. B. C. D.
Do nothing Formally assess risk Informally assess risk Develop responses only when risks actually happen
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Solutions to Problems in Section 2.5: 1.
D
Risk elimination. Risk mitigation is the final step of the risk management process. A risk mitigation plan could include avoidance, reduction, transfer, hedging and insurance. It is neither practical nor cost effective to eliminate all project risks. (P 31.1 & P 31.5, S&K5)
2.
B
Price change because of market forces is an external risk. A project can not control the occurrence of an external risk but can mitigate the impact if such risk occurs. (P 31.3, S&K5)
3.
A
True. During the risk assessment, the team may determine that the WBS needs to be decomposed to lower levels to align risk events with individual WBS elements to help monitor and manage risk events and responses.
4.
B
False. All projects have some limitation on resources (money or people). To manage project risk, it is a good practice to perform risk assessment. However, depending on the project size and complexity, it is not always practical to perform a formal risk assessment.
5.
C
Informal risk assessment. For small or less complex projects, an informal risk assessment might be the right approach for project manager to discuss with stakeholders to surface potential risks and develop detail task outline to manage the impact of risk events.
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Section 2.6 Control Accounts Introduction A control account is a management control point at which budgets (resource plans) and actual costs are accumulated and compared to earned value for management control purposes. A control account is a natural management point for planning and control since it represents the work assigned to one responsible organization element and one program work breakdown structure. The purpose of defining control accounts is to decompose the project scope into work elements that can be planned accurately and managed effectively. Control accounts should not span multiple WBS or multiple OBS elements. The control account is the basic building block of the project management process. It is the control point where technical scope, schedule, and cost parameters will be integrated. It is also the point where work progress is measured, where actual costs are collected, where variance analysis occurs, and where corrective action will be initiated. Because a control account represents the work assigned to one responsible organizational element in the WBS, it is a natural control point for cost and schedule planning and control. Control accounts are initially established at the lowest WBS level and are at, or below, the reporting level. Control account may then be further broken down into work packages, which may also be assigned an even lower-level WBS element for ease of identification. Each control account is uniquely identified by its own number and is the primary management control point at which budgets are established, actual costs are accumulated, and performance is measured. Control account levels are influenced by the way the work is managed and performed. The CAM who exercises operational control over the resources to be expended in performance of the control account work is assigned the responsibility for the work. Since control accounts are identified by the intersection point of the WBS to the OBS, only one organizational element can be responsible for each control account. Control accounts and their related budget, performance, and actuals, can be summarized by organizational element where required for reporting and analysis (e.g., CPR format 2). The attributes of an appropriate control account are the following: • • •
There is a single control account visible at the intersection of the WBS and OBS (clearly identified in the responsibility assignment matrix, the RAM). Any supporting activities are clearly identified. And, The performance elements of cost are evident.
The control accounts are defined by integration of the OBS and the WBS and represent a defined work scope given to a single organization unit. Multiple control accounts may exist within a single WBS depending on the number of organizations authorized to do work within the WBS element scope. Control accounts are where cost, schedule, and work scope requirement are integrated, planned and managed. Integrating schedule activity duration and cost estimates results in a time-phased budget and resource plan. The application of earned value methods to control accounts allows measurement of work scope cost and schedule performance that are summarized and reported to management as project performance. 53
Control accounts are used on large, complex projects. For smaller projects of low complexity control accounts are not used nor is the terminology familiar to project teams. Typically the scopes of these projects are decomposed two levels, and performance is then measured at the lower level. It is common for multiple organizational units of the same project team to charge costs against a shared task. This practice is driven by lack of flexibility of some lower-cost project financial management systems. In other cases, it results from the absence of contractual requirements to manage work using CAs and to report project performance using an EVMS. Terms to Know Control account element; Responsibility assignment matrix (RAM); Work scope; and, Work breakdown structure (WBS). Key Points for Review 1. 2. 3. 4. 5. 6.
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What is a control account? What are the characteristics of a control account? How does a control account help manage project performance? When would multiple control accounts exist in one WBS element? How many WBS elements should a control account encompass? When would you expect not to use control accounts and why?
Sample Problems for Section 2.6: 1. Control accounts are where ______, _______, and ________ requirement are integrated, planned and managed? A. B. C. D.
Cost, schedule, and performance Cost, schedule, and risk Cost, schedule, work scope Budget, scope, and change
2. Control accounts are based on a single element from _________ and _______? A. B. C. D.
The OBS and RAM The WBS and RAM The OBS and WBS The WBS and PMB
3. When should changes be incorporated into the control account plans? A. B. C. D.
Upon approved changes to the PMB Upon approved changes to the CBB Upon forecasted changes to the PMB Upon approved changes via authorization to proceed
4. The CBB represents the time-phased scope, schedule, and associated budget through the end of contract. A. B.
True False
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Solutions to Problems for Section 2.6: 1.
C.
The CAs are the nexus of scope, schedule, budget, and responsibility--basically the means for a project to establish a managerially-effective point of control.
2.
C.
The CA lies within the intersection of the OBS and WBS, and it requires the assignment of responsibility for the account from the RAM.
3.
B.
All changes must be approved by the client and implemented as a change to the CBB.
4.
B.
The PMB represents the time-phased scope, schedule, and associated budget through the end of contract.
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Section 2.7 Work Package Introduction A work package is task or set of tasks performed within a control account. A work package is the point at which work is planned, progress is measured, and earned value is computed. Work package is a generic term used to describe working level jobs, tasks, or processes that are natural to enterprise operations. Work packages are an element of control within control accounts. The number, size, and duration of work packages in a control account are defined by management need, company policy, as well as size and complexity of the project. Not all control accounts will require multiple work packages for effective planning and control. Terms to Know Control account; Planning package; Technical performance; and, Work package. Key Points for Review 1. 2. 3. 4.
What is a work package? What are the characteristics of a work package? How does a work package help manage project performance? When would you expect not use work packages and why?
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Sample Problems for Section 2.7: 1. A work package is the point at which work is planned, progress is measured, and earned value is computed. A. B.
True False
2. Work packages comprise detailed scope of __________. A. B. C. D.
Control accounts Planning units Worker-hours Budget
3. How many work packages are recommended per control account? A. B. C. D.
3 2 1 None of the above
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Solutions to Problems for Section 2.7: 1.
A
The work package is the fundamental basis of planning, measuring and performance measurement.
2.
A
The process is control account, to work packages, with planning packages assigned to items that we cannot do direct scope.
3.
D
There is no set number of packages assigned to the account, it is based on the requirements to accurately plan the scope of work.
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Section 2.8 Planning Package Introduction A planning package is a logical aggregation of work somewhat like a work package, usually for future efforts that can be identified and budgeted, but which is not yet planned in detail at the work package or task level. Planning packages are used as budget placeholders within a control account. The planning package budget is time-phased and consistent with schedule due-dates. The planning package is refined as deliverables and products are defined in more detail and the time to start work draws nearer. There is no standard advance planning deadline for conversion of planning packages into work packages. Each enterprise will select the conversion methods that best meet the needs of each project. Summary level planning packages (SLPPs) are used as high-level budget placeholders for work that has been time-phased for interim resource management and budgeting, but which has not been assigned to specific organizational units or control accounts. An SLPP must be assigned to an organizational unit and control accounts, before the work is planned in detail or begins. Planning packages are used on large, complex projects. For smaller projects of low complexity planning packages are not used nor is the terminology familiar to project teams. Typically the scope of small projects is decomposed two levels and performance is measured at the lowest level. This practice is driven by the financial management system constraints and the absence of clientmandated requirements to plan and manage work using the control accounts, work packages, and planning packages. Terms to Know Control account; Planning package; Summary level planning package (SLPP); and, Work package. Key Points for Review 1. 2. 3. 4.
What is a planning package? What are the characteristics of a planning package? How does a planning package help manage project performance? When would you expect not use planning packages and why?
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Sample Problems for Section 2.8: 1. Work can commence from the planning packages with allocation to work packages? A. B.
True False
2. Planning Packages are summaries that reflect______ and _______ or by ______units? A. B. C. D.
Work, scope, budget Dollars, hours, package Scope, budget, planning Dollars, hours, other measurable
3. The planning package is refined as deliverables and products are ______ in more detail and the time to start work draws closer. A. B. C. D.
Planned Defined Analyzed Established
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Solutions to Problems for Section 2.8: 1.
B
The work has to be allocated to a work package and authorized, before it can commence.
2.
D
Planning packages reflect the scope of a work package, but they have not been authorized to work. In some cases it may be summarized pending further information.
3.
B
Planning package has to be defined to establish work packages.
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Section 2.9 Cost Elements Introduction Understand what makes up the cost elements to perform an activity or acquire an asset. Key learning objectives include the following. • • • • •
Understand the basic cost elements. Be able to distinguish cost elements that are directly and indirectly applied to an activity or asset. Understand the work package budget consisting of budgets for cost elements estimated to complete the work scope. Apply cost elements to earned value calculation. Understand the direct and indirect costs associated with cost elements (i.e., direct, G&A, COM, material handling, overhead, etc.).
Terms to Know • • • • • • • • • • • •
Direct cost; Indirect cost; Fixed cost; Variable cost; Cost accounting; Cost estimating; Cost trending; Cost forecasting; Life-cycle cost; Code of accounts (COA); Activity-based costing (ABC); and, Other direct costs (ODC).
Key Points for Review 1. 2. 3. 4. 5.
Know the title of the categories of cost. Know typical cost elements within each cost category. Know how costs are structured. Explain how costs are accounted. List and explain the activities that enable cost to be managed properly.
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Sample Problems for Section 2.9: 1. Typical project cost categories include all the following except: A. B. C. D.
Labor People Materials Other costs
2. Which one of the following is a direct cost? A. B. C. D.
Trailer rental Office supplies Concrete Utility services
3. Codes of accounts have a standard structure that applies to all industries. A. True B. False 4. Cost trends are established from budgets. A. True B. False 5.
In a fixed-price work, the total earned value equals to the sum of all cost elements. A. True B. False
67
Solutions to Problems in Section 2.9: 1
B
People. The labor cost is a cost category. However, the number of people is a resource but not a cost category.
2.
C
Concrete. Concrete is used directly to complete the installation of a specific foundation thus becomes a direct cost.
3.
B
False. Code of accounts has a standard and consistent format unique to each company or organization. It is structured to meet needs of the end users. There are recommended best practices to structure code of accounts. However, there is no structure applicable to all industries.
4.
B
False. Cost trends are established from historical cost accounting information.
5.
A
True. The final cumulative earned value equals the total of all cost elements for a fixed-price work. However, in a cost reimbursable contract, where the budget is subject to considerable variation, the fixed budget earned value system will not reflect the true cost and schedule performance. A variable budget system would be appropriate.
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Section 2.10 Contingency Introduction Contingency is a reserve added to the cost estimate and schedule duration for possible but not certain events. These “known-unknown” events are identified during a risk assessment or by experienced estimators and project managers that have delivered similar work scopes to that being estimated. Enterprise management may add a contingency reserve to increase their confidence and the probability that the project will be delivered within budget and no later than the planned project completion date. Contingency reserves are part of cost and schedule baseline plans to deliver the authorized work scope. When the reserves for the known-unknown events are removed from the baseline plans, the performance measurement baseline (PMB) is created. The PMB is the schedule of expenditures of the estimated resources to deliver the project scope. Project performance is measured against the PMB by using EV techniques. Using EV techniques to measure performance against baselines that include contingency reserves will distort variances, because the EV will be derived from the baseline plans that include the reserves. On complex, federal cost-reimbursement contracts, contingency is prepared by the prime contractor and controlled by the government agency. The contingency is allocated to the contractor following client approval of contractor-prepared change proposals. Upon receipt of contingency budget from the client, the contractor allocates the budget increments to appropriate control accounts in the PMB. On firm-fixed price (FFP) contracts, contingency is calculated and managed by the contractor. Terms to Know • • •
Allocation; Contingency; and, Management reserve (MR).
Key Points for Review 1. 2. 3. 4.
What is a contingency? Why are contingencies prepared? Why would management want to add contingency to a project budget? How is contingency treated, so that EV performance measurement against the PMB remains valid?
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Sample Problems for Section 2.10: 1. Contingency is allocated by whom? A. B. C. D.
By the project manager By the owner By the program manager It is dictated by contract
2. Contingency is part of what scope of the contract process? A. B. C. D.
CBB PMB PP CA
3. When do you monitor contingency in the project? A. B. C. D.
When added to the CBB by approved change order From inception When added to the PMB by approved change order None of the above
4. The contingency is allocated to the contractor following approval of contractor-prepared change proposals. Upon receipt of contingency budget from the project manager, the contractor allocates the budgets to control accounts in the performance measurement baseline. A. B.
True False
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Solutions to Problems for Section 2.10: 1.
D
Contingency is contract-dictated; MR is an optional allocation.
2.
A
Contingency cannot be used without a CBB. MR is by project manager.
3.
C
Contingency cannot be used without a CBB. MR is by project manager.
4.
B
Contingency cannot be allocated, until the change is approved by client.
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Section 2.11 Management Reserve Introduction Management reserve (MR) is an amount of the total budget withheld for management control purposes rather than being designated for the accomplishment of a specific tasks or set of tasks. MR is extracted from the CCB to provide management flexibility to cover cost growth within the currently authorized work scope, rate changes, and other project unknowns. Prudent use of MR prohibits its use to offset accumulated cost variances. MR may be held at the total project level or distributed and controlled at lower levels, but it is reconcilable to the total contract level. MR is not used to absorb contract changes and must not be viewed by the customer as a source of funding for added work scope. Like contingency, MR is not part of the performance measurement baseline and is excluded from earned value calculations. MR is used on large, complex federal projects. MR is rarely used on state, municipal and small, low-complexity commercial projects, because of a lack of experience creating and managing the reserve and the confusion clients and contractors have about contingency and management reserve. The most often used term is contingency and it is used primarily on lump-sum contracts to cover authorized scope growth. When the client adds new scope, typically the contract is amended to describe the new scope and associated changes to the budget and schedule duration. Terms to Know • • • •
Allocation; Contingency; Management reserve (MR); and, Performance measurement baseline (PMB).
Key Points to Review 1. 2. 3. 4.
What is the MR? Why is MR prepared? How is MR allocated for EV performance measurement techniques? Compare and contrast MR and contingency for both large, complex federal projects and smaller, non-federal projects.
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Sample Problems for Section 2.11: 1. Management reserve is part of the PMB and is included in EV calculations? A. B.
True False
2. Management reserve is to be used to support which scope of work? A. B. C. D.
Contract changes Additional funding Unplanned activity within contract scope None of the above
3. Management reserve should be commensurate with the___________ identified by the project and withheld for management control purposes? A. B. C. D.
Percentage allocation of budget CBB Planned scope Level of risks
4. Management reserve and contingency are the same as part of the CBB? A. B.
True False
5. Program control logs should reflect what? A. B. C. D.
MR, UB, PMB, and CBB Contingency, UB, PMB, and CBB MR, contingency, PMB, and CBB MR, contingency, UB, and PMB
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Solutions to Problems for Section 2.11: 1.
B
MR is not part of the PMB until allocated by change.
2.
C
MR is to support scopes of work that may not have been foreseen when the project was funded. This percentage will be higher or lower based upon the value of the scope.
3.
D
MR is a percentage based on the planned scope, and it is higher or lower based upon the degree of scope definition at the time of the project allocation.
4.
B
Contingency is allocated by contract and requires a change order, MR is allocated by the PM based upon internal change management, no client approval required.
5.
A
The log reflects the CBB, divided into the PMB, with contingency, OTB, and MR allocated in the log.
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Section 2.12 Undistributed Budget Introduction Undistributed budget is associated with specific work scope or contract changes that have not yet been assigned to a control account or a summary level planning package. Undistributed budget that is not allocated either to working budgets or to management reserve should be appropriately allocated as quickly as practical, since it represents resources whose use is not yet planned. Undistributed budget is not part of the performance measurement baseline and is excluded from earned value calculations Undistributed budgets are used sparingly and for short time frames on large, complex federal projects. The contractor uses undistributed budget to account for the total contract budget for the authorized work scope before WBS elements are identified for future control accounts and planning packages. Undistributed budgets are not used on small contracts for state, municipalities, and commercial projects, because of the shorter-term duration of these contracts and the use of contract amendments to extend contracts. Terms to Know Change management; Planning packages; and, Undistributed budget (UB). Key Points for Review 1. What is UB? 2. Why is UB prepared? 3. How is UB allocated for EV performance measurement techniques?
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Sample Problems for Section 2.12: 1. Undistributed budget is not used on which of the following projects? A. B. C. D.
Small state Small municipalities Small commercial All of the above
2. If the approved planned budget is $1,100,000 and the undistributed budget is $100,000, what is the CBB? A. B. C. D.
$1,100,000 $1,200,000 $1,000,000 None of the above
3. Undistributed budget that is not allocated either to working budgets or to management reserve should be appropriately allocated as quickly as practical? A. B.
True False
4. Undistributed budget is part of the performance measurement baseline and is excluded from earned value calculations? A. B.
True False
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Solutions to Problems for Section 2.12: 1.
D
Undistributed budgets are not used on small contracts for state, municipalities, and commercial projects, because of the shorter-term duration of these contracts and the use of contract amendments to extend contracts.
2.
B
Planned plus undistributed budget = CBB.
3.
A
Budget has to be allocated to be earned, so it should be allocated as soon as authorized.
4.
B
Undistributed budget is not part of the performance measurement baseline and is excluded from earned value calculations
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2.13 Over-Target Budget and Over-Target Schedule Introduction An over-target baseline (OTB), also known as formal reprogramming, may arise when contract performance deviates from the plan to such an extent that the original plan no longer serves as a reasonable measurement device. In this case, formal reprogramming to a budget that exceeds the CBB may be necessary. The OTB is the sum of the CBB and the recognized overrun. A major consideration for reprogramming is an analysis of the remaining work and remaining budget. The fact that a contract is overrunning to date and is projecting an overrun at completion is not the most important factor in the decision. Changing a baseline merely to compensate for variances already experienced is inappropriate. Prior to requesting the procuring organization to recognize an OTB, the following conditions are taken into consideration: • • •
The available contract budget for the remaining work is decidedly insufficient. General guidance: At least six months of substantial work remain after reprogramming. And, Guidelines are in place to implement the change, including the extent of the reprogramming, the WBS elements affected, the base month for the reprogramming, ground rules, performance measurement during the implementation of the reprogramming effort and establishment of Management Reserve (MR).
If these conditions are satisfied, and the procuring organization has been consulted prior to the reprogramming, the change to the budget and schedule are recorded as though a change in contractual scope had been received. General Guidance: Changes to the baseline budget are fully documented and traceable and reconciliation from OTB to the CBB is provided at the bottom of format 1 of the cost performance report (CPR). Industry reference: ANSI 748 Terms to Know • • • •
Contract budget base (CBB); Over-target baseline (OTB); Performance measurement baseline (PMB); and, Management reserve (MR)
Key Points for Review 1. Demonstrate understanding of the relationship between the CBB and the OTB. 2. Have clear understanding of the purpose and restrictions related to an OTB. 3. Understand where OTB Data is referenced on the CPR.
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Sample Problems for Section 2.13: 1. During the life of a project situations may arise whereby available budgets for the remaining work are insufficient to ensure valid performance measurement. Under these circumstances, a requirement may exist for the total budget allocated to work to exceed the recognized CBB. This result is referred to as the OTB? A. B.
True False
2. Guidelines are in place to implement the change, including the extent of the reprogramming, the WBS elements affected, the base month for the reprogramming, ground rules, performance measurement during the implementation of the reprogramming effort and establishment of contingency? A. B.
True False
3. When can an OTB be issued after the project has commenced? A. B. C. D.
When the difference between the ETC and the original budget is significant When the difference between the EAC and the remaining budget is significant When the difference between the ETC and the remaining budget is significant When the difference between the EAC and the original budget is significant
4. Advance notification to the appropriate parties is not required, prior to implementation of an OTB? A. B.
True False
5. The ________ represents the formal plan for each control account manager to accomplish the authorized work assigned within the time defined by the project schedule and within the authorized budget? A. B. C. D.
CAP OTB CBB PMB
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Solutions to Problems for Section 2.13: 1.
A
OTB arises when additional scope that exceeds the budget is required to complete the project. The CBB can be exceeded, when formal notification is issued as the OTB.
2.
B
The guidelines are in place up to the contingency, which is allocated per the contract.
3.
C
OTB arises after a project has commenced and scope has been identified. Projects cannot start with an OTB, as the amount should have been funded prior to commencing work.
4.
B
OTB requires immediate notification to the client, prior to implementation.
5.
D
PMB is the completed formal plan of the work planned and the authorizations to proceed.
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Section 2.14 Contracting Introduction Understanding the different contract types and their impact on the selection of the appropriate earned value method. Key learning objectives include the following. • • •
Understand the basic contract types. Be able to match the right EV method to each contract type. Specify the required information in each contract to enable EV tracking.
Terms to Know • • • • •
Firm-fixed price (FFP) or lump-sum contract; Unit-price contract; Cost-reimbursement or cost-plus contract; Incentive contract; and, Time and material (T&M) contract.
Key Points for Review 1. Know the principal contract types and their impact on EV application. 2. Know the principal contract types and their impact on contract risk. 3. Know the principal contracts types and their impact on tracking system selection. A. Contractors are more comfortable with their in-house tracking systems. However, such systems might not use the EV approach. Owners have the greatest influence and ability to specify the most appropriate EVMS in the contract. B.
The method selected will depend on the degree of project control associated with each contract type and the objectives of the owner’s project team. For FFP contracts, the owner will specify the method reflecting the true schedule status. On cost reimbursable contract, the owner needs to implement the method measuring both cost and schedule performance.
C. In a few cases EVM techniques have been adapted to T&M commercial contracts. In the public sector, however, some references specifically exclude T&M, labor-hour, levelof-effort, and even firm fixed-price contracts from those that offer good opportunity for EVM. It would seem that the additional cost of implementing an EVMS is often not justifiable, because of minimal management benefit by EVM for such contract types. The decision to require EVM resides with the federal contracting officer or other public owner representative.
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4. Know how EV reporting requirements vary with the contract type. A. Reporting requirement varies with each contract type. In general, a cost reimbursable requires a wider range of measurements including CPI, SPI, CV and SV. In addition, tracking the critical path activities is also essential. B. Fixed price/lump sum contract generally will report only SPI and SV since the contractor is assuming all the cost risk. In addition, tracking the critical path activities is also essential.
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Sample Problems for Section 2.14: 1. A contractor will assume the highest risk in which contract type: A. B. C. D.
Target Unit-price Firm-fixed price, lump-sum Cost-reimbursement
2. Which contract type will enable the owner to proceed with the project before the scope is fully defined: A. B. C. D.
Target Unit-price Firm-fixed price, lump-sum Cost-reimbursement
3. The same EV reporting requirements should be applied to all types of contracts. A. True B. False 4. The information required for EV tracking should be included in the contract specification. A. True B. False 5. Which contract type tends to involve the most rigorous EV measurements? A. B. C. D.
Target Unit-price Firm-fixed price, lump-sum Cost-reimbursement
87
Solutions to Problems for Section 2.14: 1.
C
FFP. The contractor assumes the highest risk but also has the best chance to make a sizable profit.
2.
D
Cost-reimbursement. One of the advantages of cost reimbursement contracts is enabling the contractor to proceed with a minimum scope definition.
3.
B
False. The EV reporting requirement should vary with each contract type.
4.
A
True. Specifying the information required for the EV tracking in the contract is one of the project management best practices.
5.
D
Cost-reimbursement. An owner has the highest degree of project control and risk. To minimize the risk impact, the owner will implement all tools associated with the EV tracking.
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Section 2.15 Integrated Baseline Reviews (IBR) Introduction An IBR is a formal review conducted by the customer and prime contractor, and in some cases, major subcontractors. IBRs are typically required following contract award to verify the technical content of the PMB and the accuracy of the related resources (budgets), schedules, and technical ground rules and assumptions. An IBR is a formal and collaborative review process during which the PMB and related budgets and schedules are evaluated. The objective of an IBR is to establish and maintain a mutual understanding of the risks inherent in a project’s PMB. An IBR serves as a means for communication, review, and ultimate acceptance of the PMB. This procedure discusses the IBR process between the client and the prime contractor. An IBR will also be performed when work on a production option of a development contract begins or, at the discretion of the program manager, when a major modification to an existing contract significantly changes the existing PMB, or when a significant shift in the content or time-phasing of the PMB occurs. The intent is for the IBR to be a continuous part of the process of program management by both the client and the contractor. General Guidance: IBRs should be conducted within six months of contract award and are continued, depending on changes to the PMB. They are determined by a set value in the program/client program. The IBR consists of the following jointly executed project management activities: • • • •
PMB assessment; IBR preparation; IBR execution; and, Management processes.
The objectives of the IBR: •
Ensure that the technical content of work packages and control accounts is consistent with the contract scope of work, the WBS, and the WBS dictionary. Establish a logical sequence of effort planned consistent with the contract schedule. Assess the validity of allocated control account, work package, planning package budgets, both in terms of resources and time-phasing. Assess the EVMS and related processes and procedures, i.e., material management, subcontractor management, EAC process, etc. Conduct a technical assessment of the earned value methods that will be used to measure progress to assure that objective and meaningful performance data will be provided. Establish a forum through which the project team can gain a sense of ownership of the cost/schedule management process.
• • • • •
Terms to Know • •
Estimate at completion (EAC); Integrated baseline review (IBR); 89
• •
Performance measurement baseline (PMB); and, Work breakdown structure (WBS).
Key Points for Review 1. Know the core documents required during an IBR. 2. Understand the goals and objectives of an IBR. 3. Know when to conduct an IBR.
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Sample Problems for Section 2.15: 1. Preparation includes _____ that identifies key responsibilities, required ________ _________, training, review dates, review ______, risk evaluation criteria, documentation needs, disposition of findings, and procedures for risk identification, documentation, and incorporation into project risk management planning. A. B. C. D.
Planning, technical expertise, scope Manager, technical expertise, cost Planning, resource allocation, results None of the above
2. Which technical issues and risks identified during the IBR should be reviewed and assessed? A. B. C. D.
Schedule Cost Management process All of the above
3. The IBR process consists of the following jointly executed project management activities: A. B. C. D.
PMB assessment, IBR preparation, PMB execution, management processes PMB development, IBR preparation, IBR execution, management processes PMB Assessment, IBR preparation, IBR execution, management processes PMB development, IBR processes, PMB execution, management processes
4. The objective of the IBR is to enable managers to effectively use the project PMB to assess performance and understand inherent risks. A. B.
True False
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Solutions to Problems for Section 2.15: 1.
A
The IBR is based on preparation and is meant to evaluate and provide recommendations to the program and not to penalize or critique.
2.
D
All processes should be reviewed and assessed during the review.
3.
C
PMB assessment, IBR preparation, IBR execution, and management processes are the fundamentals of a successful program.
4.
A
AN IBR is meant to be a productive assessment and evaluation for the program.
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Section 2.16 Earned Value Methods Introduction The earned value concept requires that a project performance measurement plan be created or implemented, usually identified as the planned value (PV) or budgeted cost of work scheduled (BCWS). Typically earned value is measured using a scheduling software package against the PV to obtain a physical percent complete or budgeted cost of work performed (BCWP). This EV is compared to the actual cost of work performed (ACWP) to arrive at a true measurement of the cost performance. EV provides PMs with early warning of inadequate performance that allows them to take necessary corrective action before the project spins out of control and is not recoverable. Warning of problems is usually available to management before 15 percent of the program is complete, in time to take corrective measures to alter an unfavorable outcome. EV methods (EVMs) provide the means to quantify the project accomplishment in terms of laborhours or currency. Both objective and subjective methods are widely used. Using objective instead of subjective EVMs to measure progress provides insight into accurate project status. Selecting the appropriate earned value technique is crucial to the effectiveness of earned value reporting. Earned value techniques are selected consistent with the way planned work is to be performed. The EVMS must be reviewed with the customer during the IBR. Excessive use of subjective EVM such as percent-complete may be challenged. Detailed supporting documentation is typically required during the IBR to demonstrate a clear measurement approach and strategy. The following paragraphs provide a description of applicable EVMs that can be usd to reflect program accomplishment: 1. The Percent Complete EVM requires that the CAM estimate or measure the percentage of actual physical progress that has been achieved on the work package, relative to the total value of the work package. Budget value is earned as the product of the PC and the budget. The percent complete is applied to the budget at completion (BAC) to determine cumulative BCWP. A. Advantages. This can be an objective EVMS, if earned value is based on detailed schedule status or metrics, though interim milestones do not appear on the work package. B. Disadvantages. If detail schedule status or metrics are not used in concert with this EVM, it may yield an inaccurate subjective assessment of performance. 2. Level of Effort (LOE) is applicable to program activities that are supportive in nature, have no substantive physical product (other than routine deliverables), and have no significant schedule impact. This method sets incremental earned value equal to the planned (budgeted) amount and precludes any schedule variance. This EVM should not be applied to activities that contain measurable work or to those activities that should be a visible part of the product schedule. A. Advantages. Monthly budget value is earned with the passage of time and is equal to the monthly scheduled amount (BCWP = BCWS). This method usually is used for accounts that are more time related than task oriented. This method is appropriate for 93
sustaining tasks such as Program Management. B. Disadvantages. Level of effort work packages are often challenged by the customer. This method should be used for a minimal number of work packages. LOE work packages require accurate assessment (planning) of monthly performance. 3. The Milestone EVM requires that the work package be defined in terms of sequential milestones, at least one per accounting period. These milestones are then assigned a portion of the total budget, so together they represent the value of the entire work package. When each milestone is completed, 100 percent of the respective budget value is earned. CAMs provide the actual start for the activity and the actual finish date for each milestone. Completion of the last milestone completes the work package. A. Advantages. This method requires objective measurable milestones, which the customer typically prefers. B. Disadvantages. This method does not allow partial credit for in-process work, and requires detailed milestone planning. 4. The Measurable Milestone requires that the work package be defined in terms of sequential milestones, ideally, one each month. These milestones are then assigned a portion of the total budget so they represent the value of the entire work package. As the work on each milestone progresses, a percent complete assessment/entry for each individual milestone can be made. This method is very effective when a discrete milestone does not occur naturally each month because it gives the CAM the ability to claim partial completion. The required input is the percent complete for each milestone. A. Advantages. This method requires objective measurable milestones, which the customer prefers, and allows for partial credit against milestones. This EVM can reduce excessive schedule detail by representing numerous activities as sequential milestones within a single work package. B. Disadvantages. This method requires a CAM assessment of the percent complete for each milestone. 5. Percent start, percent complete provides easy handling of short-term activities, i.e., activities that span one to two months. Using this method the CAM simply plans for (and subsequently earns) a portion of the budget when the activity starts, and plans for/earns the remainder when the activity is complete. The 0/100 and 50/50 splits are common forms of this method; 0/100 is applicable to an activity confined to a single period, 50/50 is used where the activity may start in one month and end in the next. Splits such as 25/75, or 40/60 are also commonly used. This EVM requires only a simple and objective assessment of status. Procurement activities can be measured well this way. A. Advantages. This method is for short-term work packages, and requires minimal effort to status. B. Disadvantages. No significant disadvantages for short term, low value work packages. 6. The apportioned EVM is used to calculate earned value for tasks that are related in direct proportion to a base work package. Apportioned effort is also referred to as factored effort or factored method. When selecting this EVM, a base WBS must also be selected to determine the percent complete for the WBS element. The percent complete for an apportioned effort task is always equal to the percent complete of its base WBS. 94
A. Advantages. This method is appropriate for work packages which mirror established cost estimating relationships. B. Disadvantages. No significant disadvantages for related work packages with historical and empirical data to support the apportionment. Terms to Know • • • • • • • • • • •
Planned value/budgeted cost of work scheduled (PV/BCWS); Earned value/budgeted cost of work performed (EV/BCWP); Actual cost/actual cost of work performed (AC/ACWP); Schedule performance index (SPI); Cost performance index (CPI); Cost variance (CV); Schedule variance (SV); Budget-at-completion (BAC); Estimate-at-completion (EAC); Estimate-to-complete (ETC); and, Variance-at-completion (VAC).
Key Points for Review 1. Know the industry-accepted EVMs. 2. Describe when to apply the various EVMs, based on scope of work. 3. Explain the impact on the generated EV and resulting variances when selecting the various EVMs. 4. State the algorithm associated with each EVM.
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Sample Problems for Section 2.16: Given the following information:
Budget
Actual
Account Code
UoM
Quantity Total
Quantity To-Date
03110 Formwork 03210 Rebar 03310 Place & Finish Subtotal Slabs at grade
SF Ton CY
4,000 10 800
3,000 6 640
Budget PV
Earned EV
Percent Complete
6,000 900 1,600
_______ _______ _______ _______
_______ _______ _______ _______
1. What is the earned (EV/BCWP) for accounts 03110, 03210, and 03310? 2. What is the percent complete for accounts 03110, 03210, and 03310? 3. Given PV (BCWS) equals $1,500,000; EV (BCWP) equals $1,575,000; AV (ACWP) equals $1,490.000. Which of the following is a true statement? A. B. C. D.
The project is under budget and ahead of schedule The project is under budget and behind schedule The project is over budget and ahead of schedule The project is over budget and behind schedule
4. The EV reporting for level of effort activities is based on the following principle: A. B. C. D.
EV (BCWP) is equal to actual cost (ACWP): no cost variations can exist EV (BCWP) is equal to scheduled (BCWS); no schedule variations can exist EV (BCWP) is equal to quantity installed None of above
97
Solutions to Problems in Section 2.16: 1.
3,000, 6, 640.
2.
75 percent, 60 percent, 80 percent.
3.
A
CV = BCWP – ACWP > 1.0 and SV = BCWP – BCWS >1.0. CV and SP are differences, as stated in the formulas here, in terms of measured units. It is CPI and SPI for which ratios < and > 1.0 are important. Example, if CPI = BCWP ÷ ACWP > 1.0, then cost performance is deemed acceptable. But even if an index exceeds the threshold for acceptability--if it is, say, greater than 1.1--then it will surely draw much attention; management will wonder why the budgeted (estimated) costs were much higher than the actual costs.
4.
B
No schedule variations can exist: SV = 0. Whatever effort is provided by the level-ofeffort, if such effort meets contractual requirements, is exactly on-schedule: SPI = 1.0.
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Chapter 3.0 Accounting Considerations Introduction An EVMS is not an accounting system, and EVMS guidelines do not suggest changes to accepted accounting practices or principles. An EVMS uses actual cost data from the company accounting system as appropriate for accurate reporting of program costs and performance. Aspects of the accounting process must be coordinated with control accounts and other budgeting processes, so that direct comparison and analysis can be done. Accounting identification requires establishing a “clean” and certain method of cost collection into the control accounts. Any cost incurred will be allocated without fail to one and only one control account. Identification of the methodology of collection of direct cost, by elements, into work, planning and control account packages and allowing of actual cost to merge in the picture are fundamental requirements. Some firms may include the overheads within the labor rate, and some will identify them separately. This section of EVMS relates to the development of the actual cost definition, versus the accounting definition. Actual cost in EVMS will generally include the accrued cost, as accounting based on GAAP is not. Terms to Know • Accrual; • Actual cost; and, • Generally accepted accounting principles (GAAP). Key Points for Review These elements are described as planning process. They are outlined in the table below.
3.0 Accounting Considerations
System Identification
Direct Costs
Control Accounts
Indirect Costs
Unit, Equivalent, and Lot Costs
Material and Equipment
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100
Section 3.1 System Identification Introduction Record direct costs in a manner consistent with the budgets in a formal system controlled by the general books of account. 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. 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. Record all indirect costs, which will be allocated to the contract. Identify unit costs, equivalent unit costs, or lot costs when needed. For EVMS, the material accounting system will provide: • • •
Accurate cost accumulation and assignment of costs to control accounts in a manner consistent with the budgets by using recognized, acceptable costing techniques. 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. Full accountability of all material purchased for the program including the residual inventory.
The accounting system structure is defined by the contractor's cost accounting standards disclosure statement. The intent of this discussion is to ensure there is a timely and accurate transfer of actual cost information from the accounting system into the earned value management system. The accounting system must be capable of accounting for all resource expenditures on an "applied" basis (i.e., on an "as-used" or "as-consumed" basis). This requirement creates few difficulties in the categories of direct labor (where time cards or other time measurement devices are used) or other direct charges (where services are rendered on some type of monetary per-unit basis). In the area of material accountability, there is considerable variation among the respective processes of accounting for material usage. Recognizing the absence of uniformity in material methodologies, the CAS provides relaxed interpretations as to what constitutes an "applied" basis of material accounting, as well as alternatives for acceptance on an "other-than-applied" basis. Terms to Know • • • • •
Generally accepted accounting principals (GAAP); Control account; Cost accounting disclosure statement; Direct cost; and, Indirect cost.
Key Points for Review 1. 2. 3. 4.
Identify what the accounting system must do and what data it structures. Define the standards and confirm what a disclosure statement is. State differences between an accounting and a cost control system. Define the applied basis of material accounting.
101
102
Sample Problems for Section 3.1: 1. The accounting system structure is defined by the contractor's cost accounting standards disclosure statement? A. B.
True False
2. Accountability for material includes: A. B. C. D.
Installed, purchased, inventory Installed, stored, inventory Installed, in transit, Inventory Installed, purchased, in transit
3. When an organization breakdown structure is used, the program can summarize direct costs from control accounts into the work breakdown structure? A. B.
True False
4. Direct Cost is directly related to the budget accounting system? A. B.
True False
5. Accurate cost accumulation and assignment of costs to control accounts in a manner consistent with the ______ using recognized, acceptable, costing techniques? A. B. C. D.
Control accounts Work breakdown structure (WBS) Budgets PMB
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Solutions to Problems for Section 3.1: 1.
A
The first thing that is identified is the accounting disclosure statement, as it dictates the methodologies of accounting.
2.
A
Based upon FAR and GAAP installed, purchased and in inventory are the main accounting classifications for materials.
3.
B
Actual cost is incorporated into the structure via work packages to control accounts.
4.
B
Direct cost is just one scope of work to the system.
5.
C
Budget is the basis of spreading the cost and measuring and establishing EV methodologies.
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Section 3.2 Direct Costs Introduction Direct costs are any that may be identified specifically with a particular cost objective. Generally, they are labor, material, equipment, and subcontract costs. Generally direct costs are the result of measurable items with identification of significant costs elements as needed for internal management and control of the subcontractors. This can include ODCs and other costs, which are directly attributed to the completion of the work, exclusive of overheads. Direct costs are those which can be identified specifically with a particular sponsored project and which can be directly allocated to such activities relatively easily and with a high degree of accuracy. For example, the materials needed for a refinery project, the salaries of the individuals who work on the project, cost of subcontractors who execute specialty scopes of work, and travel expenses for those individuals comprise direct costs. Direct costs are necessary to meet the project-specific and technical requirements. Terms to Know A. B. C. D. E. F.
Apportioned; Direct costs; Generally Accepted Accounting Principles (GAAP); Indirect costs; Retroactive adjustments; and, Variance analysis.
Key Points for Review 1. Ability to identify direct versus indirect costs? 2. Ability to apply direct cost to control accounts and EVMS?
105
106
Sample Problems for Section 3.2: 1. Control accounts should be placed in which format to establish CAP? A. B. C. D.
Distributed by curve Resource loaded into the schedule Allocated by weighting None of the above
2. What set would be considered direct costs? A. B. C. D.
Concrete, rebar, masonry, and pumping subcontractor Concrete, rebar, mason, overhead, and G&A Concrete, rebar, subcontractor, and profit Travel, masonry, concrete, and G&A
3. Direct costs are necessary to meet project-specific and technical requirements. A. B.
True False
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Solutions to Problems for Section 3.2: 1.
B
To establish a level of effort (LOE) BCWS, all direct costs, including management support, should be resource-loaded into the schedule to establish a LOE BCWS.
2.
A
All the items are associated with readily measurable quantities and costs that can be time-phased with status recurrently established.
3.
A
Technical scope with direct scope, phase and budgeted.
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Section 3.3 Control Accounts Introduction Ensure accurate summarization through the WBS. Allowable costs collected within the control account by element of expense (EoE) must summarize from the control account level through the WBS, to the top level without being allocated to two or more higher-level elements. A carefully developed WBS and a corresponding cost collection structure should prevent any single element's data from being summarized to multiple higher-level elements. However, this rule does not preclude common item purchases from a single CA being applied on multiple parts of the project. Ensure accurate summarization through the OBS. The same requirement for accurate cost summarization applies to the project organization as well. A carefully developed project WBS and cost collection structure will assure accurate data summarization for management. Establish a capability to track costs for apportioned effort. The system should ensure that actual costs for apportioned effort are collected properly, so that valid comparisons to budgets for the apportioned effort may be made. Use the accounting system actual cost for variance analysis. It is essential that all actual costs used for variance analysis come directly from or be reconcilable with the accounting system. This is especially true for firms subject to Sarbanes-Oxley. In some cases, it may be necessary to use “estimated actual cost” to avoid artificial variances which might be created by the time lag of costs being recognized by the accounting system. Control retroactive changes to actual costs. Retroactive adjustments to costs should only be made for routine accounting adjustments or for correction of errors. Any direct or indirect cost adjustments must be made in a timely manner in accordance with generally accepted accounting principles (GAAP). Terms to Know • • • • • •
Apportioned; Control account manager (CAM); Direct costs; Indirect costs; Retroactive adjustments; and, Variance analysis (VA).
Key Points for Review 1. 2. 3. 4.
Ability to identify a control account? Ability to recognize the summarization and accuracy? Ability to identify the three keys areas of a control account? Ability to analyze the performance indexes based on the key areas?
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110
Sample Problems for Section 3.3: 1. Control accounts are the points where the WBS tasks and organizational responsibilities intersect, and they are best defined as being _______. A. B. C. D.
Where a single organizational element is responsible for a single WBS element Where the organization is responsible for single WBS element Where a single organizational element is responsible for multiple WBS elements Where the organization is responsible for multiple WBS elements
2. Who is assigned has responsibility for ensuring accomplished work is accomplished within the CA? A. B. C. D.
Project manager Program manager Project controls Control account manager (CAM)
3. The project manager is the primary CAM for the project. A. B.
True False
4. The CA establishes the highest level of performance measurement necessary for program management. A. B.
True False
5. Control accounts are the focus for work _____, work _____, and work _____: A. B. C. D.
Control, authorization, and performance measurement Planned value, authorization, and management Authorization, management, and performance measurement Authorization, control, and performance measurement
111
Solutions to Problems for Section 3.3: 1.
A
Any CA corresponds to a single WBS element.
2.
D
The CAM is responsible for the CA, including the actual cost and representing the correct methodologies into the CA.
3.
B
The PM is not a CAM. The CAMs report directly to the PM, so that they have sufficient authority and visibility to fully monitor and analyze the control accounts and to make necessary recommendations to the PM.
4.
B
The PMB, which summarizes all control accounts, is the highest level of performance measurement.
5.
D
Controls accounts are focus for work authorization, control, and performance measurement, which is analyzed by the CAM and acted upon, if necessary, by the PM.
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Section 3.4 Indirect Costs Introduction Indirect management. This section discusses requirements that apply to the contractor's process of establishing, implementing, controlling and evaluating indirect budgets and costs that are incurred and allocated to the individual projects. Since indirect costs are normally managed by organizational levels where costs are not project peculiar, there should be some method for assigning the appropriate values for indirect budgets and costs to all affected projects. Assign managerial responsibility for indirect cost. The contractor establishes an indirect budgeting process which includes the formal assignment of duties and limits of responsibility, a description of the indirect costing system, and policies and procedures applicable to the establishment and control of indirect costs. Assignment and control of the indirect resources must be clearly defined and should be commensurate with the authority to approve or to avoid the expenditure of resources. Include indirect budgets in the PMB. The PMB should include indirect budgets. Budgets should be included in the time-phased control account budgets, SLPP budgets, or UB. Irrespective of the level at which indirect budgets are allocated or assigned to the project, average indirect rates for the life of the contract or control account, may cause too much distortion in cost performance. Correlate indirect budgets with project activities. Realistic time-phased budgets and forecasts for indirect costs must be established by organization. The contractor should apply the most appropriate indirect rates so that a valid PMB can be established. Indirect budgets should be reviewed at least annually or when major changes are identified in factors affecting indirect costs. Collect actual indirect costs for allocation to individual contracts. Overhead costs represent expenses which benefit more than a single contract. The accounting process should record all allocable indirect costs consistent with the provisions of the contractor's disclosure statement. The contractor's procedures and/or EVMS description should specify the level at which indirect cost information will be allocated to individual contracts. Analyze indirect variances. The contractor establishes controls to ensure actual indirect costs are compared to indirect budgets, and resulting information should be shared with all affected programs. Specific control procedures should be implemented to ensure variances are identified, reported, and addressed by the appropriate level of management. Such controls increase the likelihood that potentially significant variances are communicated and considered in the development of the project EAC. Ensure most accurate rates are used to project indirect costs. The most current information is used in preparing indirect rates--including historic experience, contemplated management improvements, projected economic escalation, and anticipated business volume. The use of these rates to generate indirect cost estimates will ensure a valid projection of project costs. Comparing indirect budgets to estimates of final indirect costs will reveal where significant differences occur. These variances must be analyzed to determine the causes and appropriate corrective actions. Indirect costs are for common activities that cannot be identified specifically with a particular project or activity and should typically be budgeted ad controlled separately at the functional or organizational manager level. Typical Indirect costs are overhead, burden, and general and administrative (G&A) costs. 113
Terms to Know • • • • • • • • • • • • •
Apportion; Allocate; Burden; Control accounts; Direct costs; Estimate-at-completion (EAC); Generally accepted accounting principles (GAAP); General and administrative (G&A) Indirect costs; Overhead; Performance measurement baseline (PMB); Retroactive adjustments; and, Variance analysis.
Key Points for Review 1. 2. 3. 4. 5.
114
Explain the differences between direct and indirect costs. Give four examples of both direct and indirect costs. If indirect cost variances occur, how should earned value managers react? Know how to forecast indirect budget estimates. Know how to review PMB direct and indirect costs.
Sample Problems for Section 3.4: 1. Indirect costs should not be incorporated into the PMB. A. B.
True False
2. When should indirect rates should be validated? A. B. C. D.
Annually Project closeout Management decides Never
3. Indirect costs are directly correlated to direct costs. A. B.
True False
115
Solutions to Problems for Section 3.4: 1.
B
Indirects are included in the PMB. The PMB reflects all costs except those overtarget and contingency.
2.
A
Normal adjustment of indirect rates occurs annually, but company accounting standards are also a normative, per GAAP. For cost-reimbursement contracts
3.
A
Indirect costs are directly related to the direct costs.
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Section 3.5 Unit, Equivalent, and Lot Costs Introduction Identification of measurable costs is a requirement. This cost is based on the overall cost and quantity. This provides the ability to track costs on various, per-unit bases. Based on management needs or preferences, EVMS can provide valuable information based on any variety of units (per widget, per distance, per unit volume, etc). This information allows the program to focus efforts on reducing costs. Unit-cost derives from a measurable work item quantity with a set, assigned price. This price can be inclusive of labor, material, equipment, subcontracts, and ODCs—and maybe markup, too. This sum of all allocable item costs is then divided by the quantity of work expected to be done. The unit cost should have a basis and assumption explanation for the scope. Lot cost is a grouping of similar items into large quantities and values. The requirement is that the accounting system accurately accumulates costs and assigns them to appropriate control accounts using recognized and acceptable costing techniques.
Terms to Know • • • •
Equivalent costs; Lot costs; Unit costs; and, Unit pricing.
Key Points for Review 1. Ability to track cost by unit. 2. Ability to determine best unit cost measurement. 3. Ability to analyze the unit cost to cost and accounting systems.
117
118
Sample Problems for Section 3.5: 1. Which measurement would offer the best opportunity for EVM unit-cost for engineering? A. B. C. D.
Number of drawings issued for construction Worker-hours expended Number of submittals reviewed Number of work packages issued
2. What would be the most correct representation of unit costs? A. B. C. D.
Quantity of spools/budget cost Lot and percent complete Worker-hours/month Budget cost/quantity of spools
3. Quantity of concrete installed is a measurement of lot cost. A. True B. False
119
Solutions to Problems for Section 3.5: 1.
A
The drawings are meaningful production by engineering, and they offer realistic and measurable quantities.
2.
D
Budget cost/quantity of spools is the only appropriate example of a unit-cost.
3.
B
The quantity of concrete is a unit price.
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Section 3.6 Performance Measurement Baseline (PMB) Authorization Introduction PMB authorization is based upon a bilateral approval of the PMB by the client and customer. This is formal notification, and all changes would be implemented via a change management program. The PMB is defined as the time-phased budget plan against which contract performance is measured. The program must have agreement on the budgets assigned to scheduled control accounts and any applicable indirect accounts. All budget value must be planned but not necessarily to the control account level. The PMB also includes budgets assigned to higher-level CBS elements, as well as any UB, since the PMB equals the total allocated budget, minus any MR. Terms to Know • • • • • •
Baseline; Performance measurement baseline (PMB); Performance measurement system; Undistributed budget (UB); Cost work breakdown structure (CWBS); and, Authorization.
Key Points for Review 1. 2.
Recognize the authorization process. PMB authorization documentation.
121
122
Sample Problems for Section 3.6: 1. Which statement best describes the basis of the PMB authorization? A. B. C. D.
Approval by management of scope, cost, and schedule Official notification by client of baseline approval Official notification by client and contractor of baseline approval For information only
2. The PMB authorization document contains the following information? A. B. C. D.
Summary date and cost with client and contractor approval Time-phased budget, resources, and schedule with client approval Summary and detail budget time-phased from the baseline schedule Time-phased budget, resources, and schedule with contractor approval
3. The PMB authorization is continually revised to meet the scope of work. A. B.
True False
4. A PMB authorization is directed by the PM. A. B.
True False
123
Solutions to Problems for Section 3.6: 1.
C
PMB authorization is the official notification by client and contractor of baseline approval to commence work.
2.
A
PMB authorization contains the summary date and cost with client and contractor approval.
3.
B
The program is authorized once, and then it moves into the change management process.
4.
B
Client authorizes the PMB, It is the basis for commencing the program.
124
Chapter 4.0 Analysis and Management Reports Introduction 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: (1) Comparison of the amount of planned budget and the amount of budget earned for work accomplished. This comparison provides the schedule variance. (2) Comparison of the amount of the budget earned the actual (applied where appropriate) direct costs for the same work. This comparison provides the cost variance. Identify, at least monthly, the significant differences between planned and actual schedule performance and planned and actual cost performance, and provide the reasons for the variances in the detail needed by program management. 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. 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. Implement managerial actions taken as the result of earned value information. Develop revised EACs based on performance to date, commitment values for material, and estimates of future conditions. Compare this information with the performance measurement baseline to identify variances at completion (VACs) important to company management and any applicable customer reporting requirements, including statements of funding requirements. Terms to Know • • • • • • • •
Actual cost; Budget cost; Data elements; Direct cost; Estimate-at-completion (EAC); Funding; Indirect cost; and, Performance measurement.
125
126
Section 4.1 Critical Path Analysis Introduction Understand the importance of critical path analysis for tracking project performance. learning objectives are: • • • •
The key
Explain the different types of task float and their impact on the critical path. Distinguish between critical path network activities and milestones. Understand the difference between free float and total float. And, Explain the advantage of critical path analysis in measuring schedule progress vs. that of Gantt charts.
Terms to Know • • • • • • • • • • • • • •
Activity; Early start (ES); Early finish (EF); Late start (LS); Late finish (LF); Critical path; Milestone; Critical path method (CPM); Precedence diagramming method(PDM); Arrow diagramming method (ADM); Forward path; Backward path; Free float (FF); and, Total float (TF).
Key Points for Review 1. CPM. A. B. C.
Determine the shortest time a program or project can be completed. Identify those activities that are critical and can not be slipped or delayed. Show the potential slippage or delay available for activities that are not critical.
2. Critical path activities vs. major milestones. A. Critical path consists of activates with zero total float and are determined mathematically. B. Major milestones are subjective completion events dictated by stakeholders. 3. Activity relationship. A. Finish to start (FS) B. Finish to finish (FF) C. Start to start (SS) D. Start to finish (SF) E. Lag
127
4. Scheduling techniques. A. Forward and backward path B. Float C. Free float (FF) D. Total float (TF) 5. Critical path. A. Total float defines the critical path of the project. B. Critical path is also the longest chain or chains of activates in the schedule network.
128
Sample Problems for Section 4.1: 1. Total float is calculated from: A. B. C. D.
LF-ES LF-LS LF-EF EF-LS
2. Which one of the following is not a correct statement regarding the critical path: A. B. C. D.
The longest chain or chains of activities, in terms of duration, through a network. Free float defines the critical path of the project. A delay of any critical path activity will cause the project schedule slippage. CPM determines the shortest time in which a program or project can be completed.
3. The schedule variance (SV) is defined as SV = EV (BCWP) – PV (BCWS). A always indicates that the project is ahead of schedule. A. B.
positive SV
True False
4. Major milestones are determined mathematically from the network schedule A. B.
True False
5. A project’s completion will slip by the amount equivalent to the cumulative delay path activates A. B.
of
critical
True False
129
Solutions to Problems in Section 4.1: 1.
C
LF-EF. Total float is equal to the difference between the activity’s LF and EF, or the difference between the activity’s LS and ES.
2.
B
Free float defines the critical path of the project. Total float is used to define the critical path of the project.
3.
B
False. A positive SV generally indicates a favorable schedule performance. However, a project could achieve a positive SV by accomplishing more non-critical path activities while the critical path activities were falling behind the plan. A combination of earned value measurement and a CPM schedule tracking is a powerful and effective project schedule measurement tool.
4.
B
False. Major milestones are key events of a project without durations. They are typically set by the stakeholders in a subjective manner.
5.
A
True.
130
Section 4.2 Progress Reporting (BCWS, BCWP, ACWP) Introduction Understand key elements of an earned value management system. Key learning objectives are: • • •
Understand three key elements used in earned value system Be able to use different methods to measure work progress Understand the source of data to calculate BCWS, BCWP and ACWP
Terms to Know • • • • •
BCWS (PV); BCWP (EV); ACWP (AC); WBS; and, CBS.
Key Points for Review 1. Budgeted Cost of Work Scheduled (Planned Value) a. Sum of the budgets for work scheduled to be accomplished, plus the appropriate portion of the budget for the level-of-effort in the relevant time period b. This is the baseline for performance measurement 2. Budgeted Cost of Work Performed (Earned Value) a. Sum of the budgets for completed portion of in-progress work, plus the appropriate portion of the budget for the level-of-effort in the relevant time period b. The earned value is determined from the most appropriate progress measurement method 3. Actual Cost of Work Performed (Actual Value) a. The total costs incurred in accomplishing work during a given time period b. The actual value is based on the costs captured or workhours recorded 4. Work Progress Measurement a. Unit Completed (Used on repeated tasks such as pulling cables) b. Incremental Milestone (Applicable to control account that includes subtasks which must be handled in sequence; completing any subtask is considered to be the achievement of a milestone) c. Start/Finish (Applicable to tasks that lack readily definable intermediate milestones or those for which the effort/time required is very difficult to measure) d. Supervisor Opinion (Supervisor makes a subjective judgment of percent complete) e. Cost Ratio (Applicable to tasks which are estimated and budgeted on bulk allocations of dollars and work-hours rather than on the basis of production) f. Weighted or Equivalent Units (Applicable when a task composed of two or more overlapping subtasks, each with a different unit of work measurement)
131
5. Earned Value Data Source a. Project budget b. Project execution plan and schedule update c. Project cost report (monthly, weekly as appropriate) d. Weekly or monthly work-hour report e. Deliverable package progress report and construction physical quantity survey
132
Sample Problems for Section 4.2: 1.
Which one of the following progress measurements yields the most reliable status: A. B. C. D.
2.
Which one of the following provides the baseline for earned value measurement: A. B. C. D.
3.
True False
When ACWP and BCWP are compared, it is done using the same periods. It is possible that work may be recorded as BCWP while the actual costs for the work have not made through the financial system and do not appear in ACWP. These costs must be estimated, or accrued to generate an accurate picture of the cost variance. A. B.
5.
WBS ACWP BCWS BCWP
A project cost breakdown structure (CBS) is created by adding to the WBS all other project accounts that have either a cost or a cost and workhour budget, but which are not used to measure progress (e.g., management, quality control, administration). In other words, the WBS is incorporated within the CBS. A. B.
4.
Incremental milestone Unit completed Cost ratio Weighted or equivalent units
True False
The following data were obtained from the contractor’s report regarding the installation of 100mm stainless steel pipe. The budget unit labor rate is 2.0 WH/Meter.
Week
Unit
Planned Qty
Installed Qty
Actual WH
1 2 3 4 5 6 7 8 9 10
M M M M M M M M M M
100 150 200 300 450 550 600 400 250 100
80 140 220 280 400
220 320 450 500 750
BCWS (WH)
BCWP (WH)
ACWP (WH)
Cum. BCWS
Cum. BCWP
From above incomplete report, calculate BCWS, BCWP and ACWP for week 1. Also calculate the cumulative BCWS, BCWP and ACWP at the end of week 3.
133
Solutions to Problems for Section 4.2: 1.
B
Unit completed. The unit completed such as linear meters of pipe installed is based on the physical quantity accomplished of a repeated task that reflects the most objective and reliable measurement. (P 14.1, S&K5)
2.
C
BCWS. By definition, BCWS represents the baseline for comparison with BCWP. (P 14.3, S&K5)
3.
A
True. WBS includes all work tasks that must be controlled for the purpose of determining project progress. Tasks such as management, supervision, taxes are not typically included in WBS. However, their costs are included in CBS to reflect the total project budget and expenditure. (P 14.2, S&K5)
4.
A
True.
5.
The budget unit labor rate of 2 WH/M is used to determine the BCSW and BCWP. ACWP is based on the actual WH expended to install the pipe as shown in the table. Planned Installed Actual Week Unit Qty Qty WH
BCWS (WH)
1
2x100=200 2x80=160
M
100
80
220
BCWP (WH)
ACWP (WH) 220
The cumulative BCWS, BCWP and ACWP are derived from the weekly data
Week
Planned Qty
Installed Qty
BCWS (WH)
BCWP (WH)
ACWP (WH)
1
100
80
2x100=200
2x80=160
220
2
150
140
2x150=300
2x140=280
320
3
200
220
2x200=400
2x220=440
450
134
Cum. BCWS
Cum. BCWP
Cum. ACWP
200 200+300=50 0 500+400=90 0
160 160+280=44 0 440+440=88 0
220 220+320=54 0 540+450=99 0
Section 4.3 Variance Reporting Introduction Understand performance variance analysis and the resulting corrective action required to restore effective project controls. Key learning objectives are: • • •
Explain how to use variance analysis to provide early warning. Determine likely causes of a performance variance, given a scenario. And, Recommend a corrective action to reverse an unfavorable performance trend.
During the variance analysis cycle, the CAM analyzes the variances that exceed the established thresholds and prepares a variance analysis report (VAR). Thresholds are typically established by the customer at program onset for reportable level requirements. These thresholds are to be the minimum thresholds required for variance analysis. However, tighter thresholds may be established by the program manager (at the control account level) with advice from project controllers to ensure they are established at a level appropriate for any specific program management issues (e.g., risk, resources, visibility, etc Variance analysis is performed at the level of detail and by cost element necessary for a comprehensive explanation of the variance. This analysis includes a statement of the variance, the cause for the variance, the impact on cost and schedule, and any corrective actions required. The IPT Lead or PM reviews and approves the CAM’s variance analysis, which may also include a proposed EAC revision, before it is submitted to the project controls shop for use in preparing Format 5 of the CPR. This review process ensures that the CAM has included all the required information and has identified the appropriate corrective action. Variance analysis reports (VARs), schedule status, and corrective action plans are addressed in detail in periodic project review meetings, normally held monthly. These meetings are forums for investigating and resolving problems not resolved during day-to-day contact. Status is verified, decisions are documented, and action items are assigned and recorded in the meeting minutes. Follow-up is exercised against open action items at subsequent project review meetings. Variances that require follow-up and/or corrective action must be documented and communicated through appropriate program reporting channels, up to and including Summary format 5 submittals, program management reviews, and program status reports. Terms to Know • •
Variance threshold level; and, Variance analysis report (VAR)
Key Points for Review 1. Periodic versus cumulative performance variances. a. Periodic performance provides early warning but is subject to a wider range of variation. It provides a reasonable time for the accountable person to take corrective action. b. Cumulative performance offers a more reliable performance trend indication. The acceptable range of variation should be narrower than that of periodic performance. It is the basis used to forecast the remaining effort to complete the tasks or project. 135
2. Set appropriate variance threshold levels. a. The variance threshold tolerance level for the project control team is lower than the level that triggers a special report to the project manager. b. Threshold levels vary by the experience and comfort of project control team and project manager. These threshold levels should be defined at the onset of the project. 3. Performance analysis tree (when TF > 0). a. SPI > 1.0 ahead of schedule on critical path; more work being done than planned. b. SPI = 1.0 ahead of schedule on critical path; total work volume is as planned. c. SPI < 1.0 ahead of schedule on critical path; shortfall on non-critical activities. 4. Performance analysis tree (when TF = 0). a. SPI > 1.0 critical path on schedule; more work being done on non-critical activities. b. SPI = 1.0 critical path on schedule; total work volume is as planned. c. SPI < 1.0 critical path on schedule; shortfall on non-critical activities. 5. Performance analysis tree (when TF < 0). a. SPI > 1.0 critical path activities behind schedule; total work more than planned indicating excessive attention to non-critical activities. b. SPI = 1.0 critical path activities behind schedule; total work volume as planned indicating too much attention to non-critical activities. c. SPI < 1.0 critical path activities behind schedule; total work less than planned indicating more overall effort is required. 6. Variance report. a. Provide the performance metrics (variances and indices) and explain their significance and impact to the final project outcome. b. Describe reasons for favorable performance and root causes of deviation. c. Recommend corrective action if required. d. Assign an accountable person to execute the corrective action plan. a. Re-assess the progress at the next project update.
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Sample Problems for Section 4.3: 1. The latest report indicates TF = 0 for the project. Furthermore, the cumulative SPI is greater than 1. What is your assessment of the project status: A. B. C. D.
Critical path activities behind schedule; total work more than planned indicating excessive attention to non-critical activities Critical path on schedule; more work being done than planned Ahead of schedule on critical path; more work being done than planned Critical path on schedule; shortfall on non-critical activities
2. The project control manager just informs you that there is a positive TF, and the cumulative SPI is 0.92. As a project manager, what action would you take? A. B. C. D.
Since the overall project is ahead of schedule, no corrective action is needed Keep the current pace on the critical path activities and focus energy on completing non-critical path activities Authorize project wide overtime to focus on all project activities Divert resource from the critical path activities to focus on the completion of all noncritical path activities
3. A project control team should report any performance variance to the project manager immediately. A. B.
True False
4. The variance analysis is typically conducted at which level? A. B. C. D.
The highest level to determine the overall project status The level where the project team is competent to perform Any level of your preference The lowest practical level of the WBS
5. A variance report may include all of the following items except: A. B. C. D.
Overall project critical path activities status SPI, CPI Resource plan Recommended corrective action
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Solutions to Problems for Section 4.3: 1.
B
Key variance analysis is computation of the CPI and SPI. Greater than 1.0 is to the good, and less than 1.0 is over budget or behind schedule.
2.
B
Key variance analysis is computation of the CPI and SPI, then comparing to . Greater than 1.0 is to the good, and less than 1.0 is over budget or behind schedule.
3.
B
If the variance level does not exceed the predetermined project control team threshold level, then the team could execute corrective action to reverse the unfavorable performance, before calling it to the PM’s attention.
4.
D
Variance analysis is performed at the low, detailed level of the WBS and is then summarized into the PMB.
5.
C
Resource plan is a definition of the resource, but is not recognized as a time-phased plan or control account.
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Section 4.4 Customer Reporting/Submittals Introduction Customer reporting requirements will vary by contract. Each public entity will refer to its regulations or guidance documents, while commercial owners will align the reporting requirements per corporate or program guidelines. Initial budgets will have to be reviewed and approved by the customer. This establishes the reporting criteria that must be met. . Submittals of reports and requirements should be clearly identified in the contract. (If not initially provided, the earned value professional should recommend to contract managers that it be included.) Otherwise reporting requirements and their costs might grow, or the owner will think the earned value professional is being unresponsive. Many seasoned professionals in owner organizations are nevertheless new to EVMS. Their lack of experience can cause them to think that they need all sorts of new or different reports. This situation should be anticipated and prevented by proactive interaction and good client management. This is the basis for the submittal process. Graphs, reports, schedules, software, and means of delivery are all aspects which must be considered. The submittal process should also designate approvers, reviewers, allowable report approval durations, and document control requirements. Without contractual stipulations for these matters, excessively costly schemes might be requested later. For the US Department of Defense DoD), the contract documentation requirements List (CDRL) should detail what is required, how much, how often, and what format. And as a part of project closeout documentation, the storage and turnover of EVMS data and reports should be clearly agreed before the first report is prepared. Terms to Know • • •
Contract conditions; Reporting criteria; and, Federal Acquisition Regulation (FAR).
Key Points for Review 1. Explain a typical customer approval process on reports and submittals. 2. How are the reporting criteria approved? 3. What are the approved means of submittals?
139
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Sample Problems for Section 4.4: 1. Which of the following comments would accurately reflect the customer reporting requirements? A. B. C. D.
Reporting performance, schedule and methodologies are directed by the client. Reporting systems should reflect the client needs and the contractor current systems. Reporting systems should be dictated by the contractor and contract. None of the above.
2. Every project has the same standards for project reporting in the government project management system? A. B.
True False
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Solutions to Problems for Section 4.4: 1.
B
There are dictated standards, but the use of company standards as agreed between client and contractor are a solid basis for implementation.
2.
A
Government reporting at all levels dictates in their contracts, the specific standards to be used.
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Section 4.5 Earned Value (EV) Mitigation Introduction EV mitigation is the logical framework and response to the identification of program risks. The mitigation plan is based on risk assessments and makes predictions of the actual spend and completion and ways to maintain the performance baseline. Risk management shares a common framework with EVM. Both include the breakdown of the structure, identification of budget, time scale, and project definitions. When combined with organizational structure and responsibility management, one has the basis to identify overall risks within the program. Through the EV system managers monitor progress to date, and based on this a plan is developed. Integrating the basis of predictions and potential risk and opportunities for impact are integrated and you have developed a mitigation plan. Risk mitigation commences post-contract award on two key tracks: 1. Monitoring progress. 2. Forecasting project overruns. Timely and thorough variance analysis reports (VARs) can support good risk mitigation. Mitigation of the activities as they occur is performed through ongoing qualitative and quantitative analysis and proposal on the program. Quantitative is the direct outputs of cost and time-scale analysis. Mitigation should result in a well-structured register of actions to take for each listed risk. The actions should be options that use the existing budget without having to dip into MR or contingency. Mitigation should first attempt to recover within existing cost and schedule limits. Only if that is otherwise impracticable should additional funds or time be added. Terms to Know • • • • • •
Estimate-at-completion (EAC); Forecasting; Risk impact; Risk opportunity; Risk mitigation; and, Work breakdown structure (WBS)
Key Points for Review 1. 2. 3. 4.
Ability to identify potential risk impacts? Ability to develop risk mitigation plans? Ability to analyze risk impact on program costs? Ability to monitor progress and forecast impacts?
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Sample Problems for Section 4.5: 1. At which of the following points would you implement a mitigation? A. B. C. D.
Pre-contract award Post contract award Contract closeout None of the above
2. What is considered a mitigation event? A. B. C. D.
Procurement delayed because of material shortage Owner request additional scope of work Procurement delayed due to hurricane Work delayed due to owner financing
3. When a risk impact is identified the PM should immediately draw funds from the MR to prevent overrun. A. B.
True False
4. Risk mitigation requires development of alternative scenarios or remedial __________, which apply resources in new, different ways to enhance the probability of achieving project objectives. A. B. C. D.
Impacts Strategies Assessments Issues
5. Which of the following is best to analyze cost and schedule with mitigation and EV system? A. B. C. D.
Qualitative Cause and effect Quantitative PMB Review
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Solutions to Problems for Section 4.5: 1.
B
Mitigation is based on a review of work in progress. Planned mitigation are steps which can be used when identified and actually occur.
2.
A
A mitigation event means that there has to be control. One cannot mitigate a events or actions that are not in your control.
3.
B
That is determined by mitigation and assessment reviews.
4.
B
Strategies are plans to assist in mitigating events.
5.
C
Quantitative is an ability to measure, assess, initiate, and implement.
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Section 4.6 Analysis Introduction Data generated from an EVMS provides the PMB and the current, cumulative, and at-completion performance status at the work package, control account, and total project levels. Variances to plan are captured by various metrics and indices including the schedule variance (SV), cost variance (CV), schedule performance index (SPI), and cost performance index (CPI). The schedule variance (SV) is the difference between the value of work performed and the work scheduled and indicates an ahead of schedule, behind schedule, or on schedule status. The formula to calculate schedule variance (SV) = BCWP – BCWS. The cost variance (CV) is the difference between the value of work performed and the actual cost, and indicates a cost underrun, overrun, or on-target status. The formula to calculate cost variance (CV) = BCWP – ACWP. Variances which trigger the reporting thresholds must be explained and corrective action plans generated. Variances are neither good nor bad; they indicate potential risk areas which may require management attention and focus. Positive or negative extreme variances may indicate poor planning, improper assignment of EV methods, inaccurate tracking, or poor management. The schedule performance index (SPI) is a measure of schedule efficiency. The SPI measures the value of work performed against that of the work scheduled. The formula for schedule performance Index (SPI) = BCWP/BCWS. Less than 1.0 is unfavorable and indicates a behind-schedule status. An SPI greater than 1.0 is favorable and indicates an ahead-of-schedule status. An SPI of 1.0 indicates an on-schedule status. The cost performance index (CPI) is a measure of cost efficiency. The CPI measures the value of work performed against the actual cost. The formula for the Cost Performance Index is CPI = BCWP/ACWP. A CPI less than 1.0 is unfavorable and indicates a cost overrun. A CPI greater than 1.0 is favorable and indicates a cost underrun. A CPI of 1.0 indicates an on-target cost status. Industry Reference: ANSI 748-A Criterion 23: Identify, at least monthly, the significant differences between planned and actual schedule performance and planned and actual cost performance, and provide the reasons for the variances in the detail needed by program management. Terms to Know • Cost performance index (CPI) • Cost variance (CV) • Estimate at completion (EAC) • Estimate to complete (ETC) • Earned value (EV) • Schedule performance index (SPI) • Schedule variance (SV) • Variance analysis Key Points for Review 1. 2. 3. 4.
Understand the core metrics and indices. Know the formulas for calculating the core metrics and indices. Understand the linkage between variances and project status reporting. Understand how core metrics and indices are used to forecast. 147
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Sample Problems for Section 4.6: 1. Which of the following basic analysis comments would you make on a CPI of 1.07 and SPI .85 on the closing of the project? A. B. C. D.
Schedule was completed early, and cost was over budget Schedule was completed late, and cost was under budget Schedule was completed early, and cost was under budget Schedule was completed late, and cost was over budget
2. What is considered a reasonable benchmark for determining potential re-baselines on a project? A. B. C. D.
CPI/SPI +/- 5 percent, based on consecutive months CPI/SPI +/- 7 percent, based on consecutive months CPI/SPI +/- 10 percent, based on consecutive months Never
3. When reporting the variances you should not go into the details of cause and effect. A. B.
True False
4. If the value of deliverable on a contract is $50,000.00 and the earned value of the performance is 20 percent and the actual cost accrued 15 percent what is the correct status? A. B. C. D.
$10,000 earned, $15,000 actual, cost variance $5,000. $10,000 earned, $7,500 actual, cost variance $2,500. $10,000 earned, $5,000 actual, cost variance -$5,000. $10,000 earned, $7,500 actual, cost variance -$2,500.
5. Which of the following is recommended for procurement EV, so as to not skew the performance measurement metric? A. B. C. D.
Invoice Delivery FOB or milestone payment None of the above
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Solutions to Problems for Section 4.6: 1.
B
At the completion of the project the values above 1 or below 1.0, indicate if the program finished under or over budget and ahead or behind schedule. Values ≥ 1.0 are generally favorable for budget and schedule.
2.
A
It is often recommended by federal and commercial sector practitioners that three consecutive reporting periods with greater than 5 percent variance should be closely evaluated and mitigated.
3.
B
The details are the basis of really understanding the program, so that decision-making can be effective.
4.
B
Earned = $10,000; actual = $7,500; cost variance = $2,500; so the project is underbudget.
5.
C
As recommended by the FAR and generally accepted accounting principles (GAAP).
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Section 4.7 Estimate at Completion, Estimate to Complete Introduction Understand methods for determining EAC and ETC for the project. Key learning objectives are: • • •
Know the data and formulas to calculate the EAC and the ETC. Select an appropriate method to calculate EAC and ETC. Understand the reason to use more than one method to derive a realistic EAC.
Comparisons of planned versus actual performance, combined with variance analysis and knowledgeable projections about the future, may indicate a need to revise current estimates for the cost at completion. An EAC is defined as the sum of the ACWP to date (cumulative) plus the ETC for the remaining authorized work (i.e., EAC = ACWPCUM + ETC). EACs that consider risk and use predictive performance measures increase the probability that the project can be executed within the reported EAC. The value of these financial reporting requirements is enhanced when EACs are analyzed at least monthly and updated as required. Monthly EAC reviews are essential for accurate management decisions, including the proper planning of a project’s future funding requirements. EACs are typically developed at the control account level and are summarized within the PMB and for “roll-up” in the WBS. An EAC review is required, at a minimum, when one of the following conditions exists: • • • •
During the annual, project-wide, comprehensive EAC review (at least once annually, a bottom-up ETC is developed). When a periodic review is required. When the cumulative CPI generated by the EV software is no longer realistically attainable compared to the to-complete performance index (TCPI). If a CAM or PM anticipates that a significant cost, schedule, or technical variance may be developing or an inception-to-date cost variance threshold has been exceeded.
Terms to Know • • • •
Estimate-to-complete (ETC); Estimate-at-completion (EAC); Budget-at-completion (BAC); and, Variance-at-completion (VAC).
Key Points for Review 1. Estimate-to-complete (ETC). a. Several methods to approximate ETC. b. Method 1: ETC = BAC – BCWP = original budget at completion – BCWP. c. Method 2: ETC = (BAC –BCWP)/CPI = (BAC-BCWP)/current cumulative CPI. d. Method 3: Bottom Up ETC detail analysis.
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2. Estimate-at-completion (EAC). a. Method 1: EAC = ACWP + (BAC – BCWP) = actual cost of work performed to date + (BAC-BCWP). b. Method 2: EAC = ACWP + (BAC – BCWP)/CPI. c. Method 3: EAC = BAC/CPI Assuming the rate of progress prevailing will continue to prevail. d. Method 4: EAC = ACWP + ETC Determined by the bottom-up analysis. 3. Productivity considerations. During the last 20 percent of design, construction or project duration, the work becomes more difficult to accomplish. a. Work is done on a smaller scale and is less efficient. b. More attention is required for details to complete the remaining tasks. c. More frequent last-minute minor adjustments and changes to the remaining tasks d. Personnel are mentally or physically fatigued. e. Key people move on to other tasks and remaining tasks are done by new personnel. f. Regardless which method used to calculate ETC and EAC, it is prudent to make additional adjustment by including a productivity adjustment factor to provide a more realistic schedule estimate, which will impact the budget estimate. g. ETC and EAC are dynamic calculations. They should be constantly updated and adjusted to yield the most realistic approximation.
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Sample Problems for Section 4.7: 1. Which method provides the most realistic approximation of the EAC: A. B. C. D.
EAC = ACWP + (BAC – BCWP) EAC = ACWP + (BAC – BCWP)/CPI EAC = BAC/CPI EAC = ACWP + ETC determined by the bottom-up analysis
2. The project original budget at completion is 100,000 WH. The total earned value is 90,000 WH with a cumulative CPI of 0.95. The project has expended a total of 94,737 WH. (The project duration is within seven percent of completion.) You are the project manager. Which one of following ETCs would you report to senior managers? A. B. C. D.
ETC = BAC – BCWP = 100,000 – 90,000 = 10,000 WH. ETC = (BAC – BCWP) / CPI = (100,000 – 90,000) / .95 = 10,526 WH. ETC = 100000 – ACWP = 100,000 – 94,737 = 5,263 WH. ETC > 10,526 WH.
3. From a practical project management standpoint how many methods should typically be used to derive a realistic EAC? A. B. C. D.
1 2 3 4
4. You have a fixed price contract of $1,000,000. The contractor has completed 20% of the total work and spent 25% of total work hours. The contractor submits an invoice for a total payment of $250,000. Would you approve the invoice? A. B. C. D.
Yes No Subject to negotiation Pending on further review
5. You have a cost reimbursable design contract with a consultant. The estimated budget at completion is 30,000 WH. The consultant has spent 19,500 WH. The design is 60 percent complete. Which one of following is your estimate of the EAC? A. B. C. D.
32,500 WH 31,500 WH 30,000 WH > 32,500 WH
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Solutions to Problems for Section 4.7: 1.
D
Bottom-up is the most detailed analysis to derive the ETC. Combined with ACWP, it should provide the most realistic EAC.
2.
D
Since the project is within the final 20% of its duration, productivity will be lower than for the project to-date. Assuming a resulting loss of 10 percent in cost efficiency for the remaining work should allow a more accurate ETC to be calculated: ETC = (BAC-BCWP) / (0.95 – 0.1) = (100,000 – 94,737) / (0.85) = 11,765 WH. This is the ETC value that should be presented to the senior management team and by which the project would be controlled to completion.
3.
B
Since EAC is an approximation technique, an estimate, it is necessary to combine at least two different methods to reveal a less risky estimate. However, using too many methods might not be cost-effective.
4.
B
A typical FFP or lump-sum contract requires the owner to pay the contractor based on the pre-agreed method of progress. In general, the owner pays for the value received. In this case, a payment equivalent to the 20% earned value ($200,000) would be reasonable.
5.
D
The design is heading toward the last 20 percent of the design duration. The remaining productivity would tend to be lower than the design-to-date productivity. Thus an estimate higher than 32,500 WH would be more realistic.
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Section 4.8 Subcontract Management Introduction When managing subcontractors, you must document the reporting requirements for the work in the contract. At the time of this documentation, you must determine what your management intent of the subcontract is. For example, do you simply want to include values reported by the subcontract in your report? Or do you want all of the benefits of EVMS on the subcontract? Management of subcontractor effort is a vital part of many contracts or projects. Without an effective subcontract management process, successful execution of a project would be greatly jeopardized. The degree of subcontract management visibility and control varies with the degree of risk and impact to contract requirements. Subcontracts requiring performance measurement visibility during execution or in advance of material receipt are classified as “major subcontracts.” Major subcontracts are normally identified in the proposal stage and require increased surveillance due to the size and nature of the specialized services and material being procured. Each major subcontract has a subcontract administrator (SCA) designated to be an integral member of the project team. When it is deemed necessary, either because of a government requirement or a management decision, EVM reporting requirements may “flow down” contractually to a major subcontractor. Subcontractors with certified EVMSs are required to provide a copy of their advanced agreement with the certifying agency to the SCA for confirmation of capability. In these instances, the subcontractor may utilize its EVMS and report CPR data up to the prime contractor for CPR reporting to the client. Subcontractors without a certified EVMS must provide a written EVMS description that is used during program execution to report subcontract performance. An integrated baseline review (IBR) may be required, and is usually conducted within 90 days after contract award, depending on customer and contractual requirements. It verifies the technical content and the practicality of the related budget and schedule. The IBR also ensures shared understanding of the risks embodied in the contractor’s management control systems and plans, and it develops a plan to reduce such risks. This is accomplished by reviewing data produced through the described EVMS to evaluate cost and schedule data timeliness and validity, in order to verify the adequacy of the subcontractor’s EVMS description. At a minimum, each month the CAM evaluates the subcontractor report submittals relating to subcontractor progress status. The CAM is also responsible for the integrity of the subcontractor’s EV information, which includes the PMB, actual costs, and forecasts. Inconsistencies are addressed with the subcontractor and could result in disapproving the subcontractor’s systems or submitted reports. The subcontract includes appropriate flow-down clauses that incorporate the required detail and specificity from the SOW to ensure adequate accuracy, comprehensiveness, and timeliness of the subcontractor’s EVMS. Details of the subcontractor’s fee are determined by the subcontract type and requirements. If the subcontractor is not required to submit formal EV reports, then the CAM works with the subcontractor to establish the PMB, track progress, and collect actuals. The CAM maintains responsive communication with the subcontractor to share information such as schedules, technical reports, subcontractor invoices, etc. While balancing the fact that greater reporting requirements will probably increase the price of the subcontract, one should answer the following questions. Depending on the answer, more data may be required from subcontractors. 155
1. Should both price and usage variance be reported? e.g., is it costing more because the resources are more expensive than budgeted, or is it taking more labor-hours than budgeted? Answer: The subcontractor should report both labor-hours and dollars. 2. Is it necessary to perform statistical forecasts based on past performance to get a statistically accurate EAC 20 percent into the project? Or can one just assume the EAC each center is providing is correct? Ans. One seeks a time-phased BCWS, BCWP, and ACWP at the control account level. 3. Do you wish to apply effective correction action to projects or determine an independent EAC if a variance occurs? Answer: You need element of cost below the control account in order to analyze whether the variances are caused by labor, services, material, or subcontractor before determining if it is a price or usage variance. Once you totally understand the cause of the variance, an effective correction plan can be created. 4. Do you want to perform critical path analysis to make sure subcontractors are not “picking the low fruit” (not working the critical path) for a high BCWP? Is it necessary to see the total effects on the project finish date when one center is behind schedule? Answer: The schedule should be in the format that can be loaded into your scheduling tool. 5. Do you plan to “crash a schedule” (working tasks normally performed in sequence concurrently to bring in a finish date) and determine the overtime costs associated with crashing a project? Answer: You need a resource-loaded schedule. 6. Does this program require “vertical integration”? In other words, will contractor A rely on a product or component produced by contractor B? Technical difficulties can delay or change components required by another contractor. Much communication is required to make sure these subcontractors communicate and adjust to changes. Answer: A communication tool such as a project portal is required. The portal links to relevant documents, reports, files, and web pages for all team members to use. Terms to Know • • • •
Baseline schedule; Contract administration; Contract amendment; and, Vertical integration.
Key Points for Review 1. 2. 3. 4. 5. 6.
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How is subcontractor scope authorized? What is a variance analysis report? How do you apply templates to integrate the subcontract data? What are the components of an integration variance analysis? What levels of the subcontractor data are provided by the contractor? At what level are variance analyses reported by the subcontractor?
Sample Problems for Section 4.8: 1. Which of the following elements of a project does a subcontractor considered useful in executing scope? A. B. C. D.
Contract Material Labor rates Overhead
2. What would determine the data incorporated by the subcontractor? A. B. C. D.
Type of contract and value Project scope, schedule, and budget Client Type of subcontractor
3. When reviewing the subcontractor reporting requirements, the prime or general contractor can dictate the structure and format for reporting. A. B.
True False
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Solutions to Problems for Section 4.9: 1.
A
The contract defines scope for the subcontractor
2.
B
Subcontractor must have the scope, schedule and budget to perform
3.
A
If it is not dictated to the subcontractor, then the data might not be provided in a required and functional format. To preclude possible claims, the subcontract should be relatively detailed in specifying data, information, formats, and frequency of reporting.
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Section 4.9 Retainage Introduction Retainage is a portion of a contract or service payment that is withheld in escrow, often at interest, until the contract or service completion to ensure that full performance of the contract or service terms and conditions have been met. Retainage uses the accounting billing process as a contract mechanism giving the project owner the right to retain funds from the contract or service provider. If the retainage does not motivate the contractor to satisfactorily complete the contract or service, then the owner can use retained funds to accomplish remaining work. Sureties involved in the project have interest in retainage, since it also reduces some of their exposure to risk. The usual retainage is 10 percent of the contract or service value, but it can be less, if the owner so desires. There has been a trend in some states on public works projects to reduce it no later than the 50 percent complete point, if the project appears to be adequately managed with subcontractors and suppliers paid timely. A cumulative sum of the retainage is maintained throughout the contract or service period and issued during the satisfactory completion of each deliverable or at the end of the contract or service period. Retainage is not separately factored into the performance measurements of an EVMS. Retainage funds need not be released in order for the contractor to earn full value for the work from which the retained funds derived. The contractor has already earned whatever is retained. Thus the reported EV and the performance metrics or indices that derive from BCWP remain what they are no matter how much of the contractor’s earnings are retained. Contract provisions affecting payment and cash flow with regard to retainage are not influenced by EVMS. Instead, the value of any retainage is accrued during billing periods but not invoiced until completion of the deliverable that allows full payment. Simply stated, an EVMS should ignore the cash flow effect of contractual provisions about retainage. Terms to Know • • • •
Retainage; Invoice; Accrual; and, Performance metric.
Key Points for Review 1. 2. 3. 4.
What is the definition of retainage? What role does the invoice serve in the retainage process? What role does the accrual serve in the retainage process? What role does the performance metric serve in the retainage process?
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Sample Problems for Section 4.9: 1. Against which following element of a project is retainage considered useful to help ensure execution of scope? A. B. C. D.
Labor Materials Contracts or services Overhead
2. What is considered the industrial standard hold back percentage for retainage? A. B. C. D.
5 percent 10 percent 12.5 percent 15 percent
3. When measuring performance on a given task for which funds are retained from earnings the value of the retainage must be deducted from the measured performance. A. B.
True False
4. If the value of deliverable on a contract is $50,000.00, and the earned value of the deliverable to date is 20%, what is the value of the retainage to date, if the owner uses the historical standard? A. B. C. D.
$10,000 $5,000 $1,000 $500
5. Which of the following accounting/contract methods is used to capture retainage values in a given pay period and not affect the Performance Measurement metric? A. B. C. D.
Invoice Forecast Accrual None of the above
161
Solutions to Problems for Section 4.9: 1.
C
Retainage against a contractor or service provider is a means of motivating project completion; it reduces risk exposure to the owner and any sureties associated with the work. In the event of contractor default or non-payment of subcontractors or suppliers, retained funds help defray the cost of remedy.
2.
B
10 percent is an industry average, but it can be adjusted based on performance and prior experience.
3.
B
Retainage is deducted from the value of each approved invoice – to a set percentage of the total contract cost.
4.
C
20 percent x $50,000 = $10,000 earned and billed; of earned and billed, the owner retains 10 percent x $10,000 = $1,000.
5.
C
Retainage is accrued.
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Chapter 5.0 Revision and Data Maintenance Introduction As the project matures, many documents are created to support the planned outcome. These documents become official records of the project and must be maintained throughout their lifecycle up to some finite end date. All related details should be contractually agreed before work begins. When an authorized change is received, all affected work documents are to be updated in a timely manner to reflect the change. This process requires a revision to the affected official records thus requiring the data to be maintained. This process sometimes is referred to as the “paper trail” or “audit trail,” whereby the documents provide a legally sufficient history for how it started, where it has been, and how it got to where it currently is. There are three situations where a revision is prompted while executing a project. There is the external or directed change, which is directed and authorized by the customer or client. Second, there is the internal change consisting of re-planning within the constraints of the scope, schedule, and budget of the current project. These changes are normally based on allocation of the MR, distribution of UB, and conversion of planning packages to work packages akin with some time phasing of the work package budget. The third and least desirable is formal reprogramming. When budgets for remaining work are insufficient to ensure valid performance measurement, the formal reprogramming revision type maybe implemented. Terms to Know • • • • •
Baseline change proposal (BCP); Baseline change requests (BCR); Information system database; Official records; and, Archives.
Key Points for Review 1. 2. 3. 4.
What defines a official documentation? What is the definition for the internal change system? How is reprogramming accomplished? The basis for an archival process?
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Section 5.1 Change Control Introduction The most singular component of change control is a matter of review and approval of what is new or revised work scope versus original contract base scope. Only approved and signed contract change orders will be incorporated into the original base line contract. The revised contract base line will contain the revised monetary base, revised work scope, revised schedule and revised management plan. Thus, the progress measurement base for a given reporting period for CPI and SPI calculations will be current after change order approval. However, there are some project activity changes that might be construed as a basis for an approved change order. Examples: retroactive accounting revisions to correct billing or other data entry errors; changes in project management’s directions for accomplishing direct work via a subcontractor; a monetary request from design groups for added funds to cover cost overruns; additional funds requested for increased labor costs due to less than expected labor productivity; and additional funds for procurement to cover bid awards greater than the estimate base. The aforementioned examples fail to meet the criterion for an approved change order, because the original contract scope of work remains the same. There is, however, one singular project document that could become the basis for an approved change order, if not carefully prepared: owner representative replies to a contractor’s request for information (RFI). An owner’s agent might reply to an RFI in such a way as to inadvertently change the contract. Terms to Know • • • • •
Base work scope; Change order request; Request for information (RFI); Authorization; and, Directed change.
Key Points for Review 1. 2. 3. 4. 5.
What defines a change order? What aspects of a project typically will not be modified by a change order? How are correct monetary bases for CPI and SPI calculation assured? What is the most significant document for adding non-contracted work scope? What is the basis for an approved change order?
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166
Sample Problems for Section 5.1: 1. Which statement best describes a situation that justifies a change order? A. B. C. D.
The cost of installing a piece of equipment increased by $5,000.00 A request to increase the engineering hours by 280 was submitted to the PM The client authorized an additional 1,200 square feet to the facility The installation of drywall took two additional weeks by the subcontractor
2. The client is walking down the work area and tells the superintendent to replace the brick veneer specified on the drawing with river stone. Which change control attribute best describe the client’s action. A. B. C. D.
Authorization Directed change Request for Information (RFI) Change order request
3. Which statement best describes the definition of change control? A. B. C.
D.
A chronological list of tasks that add cost to the project A chronological list of tasks that add schedule duration to the project An approved change control management system that documents authorized scope, schedule, and budget additions or revisions to an established approved project baseline A chronological list of items used to justify claims against the contract
4. Which statement best describes the disadvantage of using the RFI correspondence to execute a change order? A. B. C. D.
Document accounting billing or accrual entry errors Document causes and effects of cost overruns on a project Document internal and external changes during the execution of a project, but the original contract base scope and schedule remain the same Document a request for additional funding to cover increased labor cost
167
Solutions to Problems for Section 5.1: 1.
C
Client direction to do additional work, and there providing funding and time to complete.
2.
B
Client directed a change of material.
3.
C
An approved change control management system that documents authorized scope, schedule, and budget additions or revisions to an established approved project baseline.
4.
C
RFIs are requests but not directives or approvals. This requires a formal change, with the RFI as a basis for the change.
168
Section 5.2 Reconciliation Introduction Reconciliation documentation requires a correct and updated data base for calculation of cost and schedule (CPI and SPI) factors. If any portion of the project accounting database used in calculating CPI and SPI is from an external source, a periodic review of the data posted to the accounting system should be accomplished by an independent audit. Current budget and baselines must be reconciled to prior budgets in terms of authorized changes to work scope and internal re-planning to match current management plans. Reconciliation efforts encompassing financial accounting data will be accomplished by that department. To satisfy any shortcomings before publishing a report, the following actions are appropriate: • Validate and verify that software programs (both internal and external) are current. • Control retroactive accounting changes to past reporting periods. • Change the PMB per approved scope review and approval documentation. • Accrue accounting data to reflect actual project invoices. • Enumerate budget changes to the original estimate. • Enumerate schedule data updates to the original schedule. • Verify that subcontractor performance matches reported period work in-place, either by field superintendents’ signature or by independent management audit. • Anticipate and address conditions that might lead to perceptions of report inconsistency, if statements or data really do not contradict other entries, but they might appear to the client to do so. All concerned should be very sensitive to the possibility of reporting errors. If discrepancies are discovered by the client after the report is published, confidence in the EVMS and the professionals running it will inevitably degrade. It takes much work to regain the client’s confidence. In repeated circumstances, the errors might be viewed as a breach of contract. Terms to Know • • • • • •
Validation; Database information; Progress measurement; Accruals; Indirect rates; and, Audits.
Key Points for Review 1. Explain the difference between the data date and baseline schedule date. 2. Locate the source of an indirect rate. 3. Explain the difference between an accrual and invoice payment.
169
170
Sample Problems for Section 5.2: 1. What is the nationally recognized method to validate a project’s financial data? A. B. C. D.
Preparation of business taxes for the Internal Revenue Service (IRS) Audits Request for proposal from an owner or client Procurement contracts
2. Which statement best describes the definition of an accrual? A. B. C. D.
Invoice payment Performance measurement technique The projected cost of completed work by the performing service provider, before the accounting department receives an invoice An independent cost estimate of schedule work
3. What term best describes the resolution of current budget and baseline budget in terms of authorized changes to work scope and internal re-planning to match current management plans? A. B. C. D.
Reconciliation Best management practice Audit Baseline change proposal (BCP)
4. Which statement best describes the definition of burden when considering financial data? A. B. C. D.
Indirect rates Escalation factor Wage rates Sales tax
171
Solutions to Problems for Section 5.2: 1.
B
Audits. They are used in both commercial and government projects.
2.
C
Accruals are the projected cost of completed work by the performing service provider, before the accounting department receives an invoice.
3.
A
Reconciliation is to review and confirm that expenditures and planned are in line, noting any discrepancies for remedy.
4.
A
Indirect rates that place a percentage burden on the direct costs.
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Section 5.3 Document Control Introduction The scope of document control has increased considerably, both in size and importance, over the past few years. In prior years, document control activities mostly concentrated on filing and logging correspondence, requesting quotations, requesting information, as well as issuing revised contract drawings to prime and subcontractors. Recent contract claims discovery requests from law firms have called for “all project correspondence” encompassing both paper and electronic media files. These discovery requests require considerable effort and have resulted in some embarrassment when the directed agencies or firms have not been able to fully comply. Thus, projects have been forced to re-evaluate the function of document control to the extent of setting up separate electronic servers-one for the prime contractor, and an entire separate electronic server for the subcontractors. There is the very strong future probability that all correspondence, paper, and electronic data, will be issued over the signature of the assigned contract administrator. This procedure will ensure that replies being sent to a prime and subcontractor do not include any documents concerning other projects. The same would hold true for RFI responses, as well. No parties at the inception of a given project contemplate that any contract claim will ever occur; however, it would be prudent for a project manager to discuss with the owner and his legal department, the scope of the electronic data system for network, collecting, storing and recovery of large amounts of contract documentation data [relating to possible/potential contract claims. This would assure that state-of-the-art electronic project servers will be used to collect, log, and--most important of all--recall large quantities of data over the lifetime of the project. This might be years after final completion, thus including long-term document storage aspects. Terms to Know • • • • •
Request for quotation (RFQ); Request for information (RFI); Electronic database system; Records management; and, Database query.
Key Points for Review 1. 2. 3.
The importance of the electronic media. Know ANSI-748A documentation requirements. Describe the purpose of a records management system.
173
174
Sample Problems for Section 5.3: 1. Which term best describes the document when it has a recorded copy number stamped on the cover and is issued to an employee for some business purpose? A. B. C. D.
Official document revision Controlled copy Duplicate document For information only
2. Which statement best describes the term used in the records management department, if key words or phrases are entered into a computer search engine to locate a one or more documents, which are part of a larger collection of stored electronic media? A. B. C. D.
File search Database query Document lookup Spell check
3. Which statement best describes the major reason document control and media storage have become important functions in a construction business enterprise? A. B. C. D.
They create more employment opportunities They are necessary components of computer age and technology business They permit legal mitigation of construction claims They are required by ANSI Standard 748A
4. An emphasis on records management is due to recent contract claims discovery requests from law firms calling for “all project correspondence” encompassing both paper and electronic media files when addressing legal mitigation. A. B.
True False
5. Which statement best describes the definition of an archival process? A. B. C. D.
All records shredded annually All records stored in boxes All records scanned and indexed, with paper destroyed every 3 years All records scanned and files stored in cabinets in office
6. Documentation should only be kept till the end of project, when it can be destroyed. A. B.
True False
7. How should official project records be authorized and verified? A. B. C. D.
Document number, stamped only Scanned and electronically approved Documents should have original signatures, unique document number, stored and archived per approved procedure. Kept by individual groups with unique numbers for each department. 175
Solutions to Problems for Section 5.3: 1.
B
Once logged with a number, it should also be stamped as a control document.
2.
B
When searching for data, a query is the best option for which to find data. Once input into a true document control system, you have the ability to sort by word or filed in a document.
3.
C
Claim mitigation is only effective when started at the beginning of the project process.
4.
A
All project documents are required. This does become an issue with regard to proprietary data, which must be reviewed at contract development phases.
5.
C
A document retention system identifies the system in which records are retained and destroyed, per a valid approved system.
6.
B
Documents should be stored based upon the retention system; industry recommendation is at least three years after project final completion, and longer if it appears that litigation has begun during that time.
7.
C
Documents should be originals with signature, date, number, revision to identify as a unique document.
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Section 5.4 Performance Measurement Baseline (PMB) Authorization Introduction PMB authorization is based upon a bilateral approval of the PMB by the client and customer. This requires formal notification, and all changes must be implemented via a change management program. The PMB is defined as the time-phased budget plan against which contract performance is measured. The program budget must balance with the sum of the budgets assigned to scheduled cost accounts and any applicable indirect accounts. All budget values must be planned but not necessarily to the cost account level. The PMB also includes budgets assigned to higher-level CBS elements, as well as any UB, since the PMB equals the total allocated budget, minus any management reserve. Terms to Know Baseline Performance baseline (PB) Performance measurement system Undistributed budget (UB) Cost work breakdown structure (CWBS) Authorization Key Points for Review 1. 2.
Recognize the authorization process. PMB authorization documentation.
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Sample Problems for Section 5.4: 1. Which statement best describes the basis of PMB authorization? A.
Approval by management of scope, cost, and schedule.
B.
Official notification by client of baseline approval.
C.
Official notification by client and contractor of baseline approval.
D.
For information only.
2. The PMB authorization document contains what following information? A.
Summary date and cost with client and contractor approval.
B.
Time-phased budget, resources, and schedule with client approval.
C.
Summary and detail budget time phased from baseline schedule.
D.
Time-phased budget, resources, and schedule with contractor approval.
3. The PMB authorization is continually revised to meet the scope of work? A.
True.
B.
False.
4. A PMB authorization is directed by the project manager. A.
True.
B.
False.
179
Solutions to Problems for Section 5.4: 1.
C.
2.
A.
3.
B.
4.
B.
180
Section 5.5 Retroactive Changes Introduction and Learning Objectives There is no program for a retroactive change in the EVMS. History cannot be changed and should not be changed. Any authorized change to the baseline must be applied in the current reporting period and the variance or anomaly must be explained, even if the change was due to a historical event. This will impact the current period, but the cause can be explained in a variance report. If a change in history were allowed, it would generally invalidate the current period, since most actions and records are considered closed after the business month end date. Terms to Know Business month end Variance analysis Historical data Reporting period
Key Points for Review 1. 2.
How can a retroactive change can be implemented? When and where should you explain a retroactive change?
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182
Sample Problems for Section 5.5: 1. Your cost engineer discovers a set of invoices missed and not in your accruals from three months earlier. How would you correct the problem? A. B. C. D.
Official revision and reissue of past three months reports Incorporate into current period and make notation in report Revise the number in the prior period and note in report Incorporate into the to-date summary and make notation in report
2. Where would you explain a retroactive change? A. B. C. D.
Correction box at beginning of report Variance analysis section Monthly write-up Executive summary (EXSUM)
3. Which statement best describe the major reason for the methodology of retroactive change? A. B. C. D.
Document all history Corrections in proper time Accuracy in data management It is required by ANSI Standard 748A
4. Retroactive changes are a common occurrence in project reporting, so there is no need to make a special issue. A. B.
True False
183
Solutions to Problems for Section 5.5: 1.
B
Per guidelines of not changing historical data, you make an adjustment in current period and explain the basis for the odd period.
2.
B
An adjustment is a variance notation, as it a normal part of the process.
3.
C
The adjustments and notations reflect accuracy in data management.
4.
A
There is no perfect system, so adjustments are continual, but a validated and documented system is the best practice to resolve the problem.
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APPENDICES
APPENDIX A EVMS TERMS OF SPECIAL INTEREST TO EARNED VALUE MANAGERS
APPENDIX A:
EVMS TERMS OF SPEICAL INTEREST TO EARNED VALUE MANAGERS
For the definitions of EVMS terms, the student is directed to the most recent version of AACE International’s Recommended Practice (RP) 10S-90, Cost Engineering Terminology, available online at www.aacei.org/technical/rps/10S-90.pdf.
Activity Activity Description Activity Duration Actual Cost of Work Performed (ACWP) Actual Finish Date Actual Start Date Arrow Diagramming Method (ADM) Backward Pass, See Forward Pass Bar Chart Baseline Budget Budgeted Cost of Work Performed (BCWP) Budgeted Cost of Work Scheduled (BCWS) Calendar Unit Constraint Contingency Contract Control Control Account Plan Control Account Manager (CAM) Control Gate
Cost Performance Index (CPI) Cost Variance (CV) Critical Path Critical Path Method (CPM) Duration Early Finish Date (EF) Early Start Date (ES) Earned Value (EV) End Item Estimate Estimate-at-Completion (EAC) Estimate-to-Complete (ETC) Finish Date Forward Pass Free Float (FF) Functional Manager Gantt Chart Hammock Input Milestone Interim Deliverables Late Finish Date (LF)
Late Start Date (LS)
Planned Finish Date
Level of Effort
Planned Start Date
Leveling. See Resource Leveling
Planning
Link
Precedence Diagramming Method (PDM)
Logic
Predecessor
Logical Relationship
Product
Major Milestone
Progress Milestones
Milestone
Project
Milestone Dictionary
Project Management
Milestone Level
Project Manager (PM)
Milestone, Payment
Project Schedule
Milestone Plan
Remaining Duration
Milestone Report
Resource Leveling, See Leveling
Milestone Schedule
Risk Event
Matrix Organization
Risk Identification
Monitoring
Risk Management
Monte Carlo Analysis
Risk Quantification
Network
Schedule
Order-of-Magnitude Estimate
Schedule Performance Index (SPI)
Organizational Breakdown Structure (OBS)
Schedule Update
Original Duration
Schedule Variance (SV)
Path
Scheduling
Percent Complete
Scope
PERT (Program Evaluation and Review Technique)
Scope Change Scope Change Control
Scope Verification Start Date Status Successor Target Completion Target Schedule Target Finish Date Target Start Date Total Float (TF) Trend Variance Variance Analysis Work Breakdown Structure (WBS) Work Package Work Unit
APPENDIX B EARNED VALUE MANAGEMENT SYSTEM IMPLEMENTATION SELF-ASSESSMENT
APPENDIX B:
EARNED VALUE MANAGEMENT SYSTEM IMPLEMENTATION SELFASSESSMENT
The following is a list of the 32 criteria that are defined and required to be met under a formally certified Earned Value Management System (EVMS). Note: There are five main categories within which each of the 32 criteria are uniquely categorized: organization; planning, scheduling, and budgeting; accounting considerations; analysis and management reports; and revisions and data maintenance. Every criterion is assessed to be in one of three status categories: meets standard; not demonstrated; or action item. 1. ORGANIZATION 1.1.
Define the authorized work elements for the program. A work breakdown structure (WBS), tailored for effective internal management control is commonly used in the process. Requirement / Check: WBS structure and dictionary
1.2.
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. Requirement / Check: OBS structure and/or organizational chart
1.3.
Provide for the integration of the company’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. Requirement / Check: Contract and/or Modification(s), RAM, CAP, CAWA, Cost loads
1.4.
Identify the company organization or function responsible for controlling overhead (indirect costs). Requirement / Check: DCMA letter showing billings rates, Government Compliance letter showing current forecasted OH rates.
1.5.
Provide for integration of the program work breakdown structure and the program organizational structure in a manner that permits cost and schedule performance measurement by elements of either or both structures as needed. Requirement / Check: RAM
2. PLANNING, SCHEDULING, & BUDGETING 2.1.
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. Requirement / Check: schedule, cost loads (Primavera to EVMS), CAWA, CAP
2.2.
Identify physical products, milestones, technical performance goals, or other indicators that will be used to measure progress. Requirement / Check: CAP, cost loads (Primavera to EVMS), Primavera, Schedule
2.3.
Establish and maintain a time-phased budget baseline, at the control account level, against which program performance can be measured. Initial budgets established for performance measurement will be based on either internal management goals or the external customer negotiated target cost including estimates for authorized but undefined work. Budget for far-term efforts may be held in higher level accounts until an appropriate time for allocation at the control account level. On government contracts, if an over-target baseline is used for performance measurement reporting purposes prior notification must be provided to the customer. Requirement / Check: CAP (detail and summary)
2.4.
Establish budget for authorized work with identification of significant cost elements (labor, material, subcontracts, other directs, etc.) as needed for internal management and for control of subcontractors. Requirement / Check: CAP, CAWA
2.5.
To the extent it is practical to identify the authorized work in discrete work packages, establish budgets for this work in terms of dollars, hours, or other measurable units and 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. Requirement / Check: CAP
2.6.
Provide that the sum of all work package budgets plus planning package budgets within a control account equals the control account budget. Requirement / Check: CAP
2.7.
Identify and control level of effort (LOE) activity by time-phased budgets established for this purpose. Only that effort which is immeasurable or for which measurement is impractical may be classified as LOE. Requirement / Check: CAP
2.8.
Establish overhead budgets for each significant organizational component of the company for expenses which will become indirect cost. 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. Requirement / Check: government compliance letter showing current forecasted OH rates, DCMA letter showing billing rates
2.9.
Identify management reserves and undistributed budget. Requirement / Check: contract budget baseline (CBB) log, CPR format #1
2.10.
Provide that the program target cost is reconciled with the sum of all internal program budgets and management reserves. Requirement / Check: CPR format #1 and by control account, CBB log
3. ACCOUNTING CONSIDERATIONS 3.1.
Record direct cost in a manner consistent with the budgets in a formal system controlled by the general books of account. Requirement / Check: CAP
3.2.
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. Requirement / Check: WBS structure – looking for pure integration, no low level cost should rollup to multiple higher level accounts and no cost duplication should be present.
3.3.
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. Requirement / Check: RAM, Organizational chart
3.4.
Record all indirect costs which will be allocated to the contract. Requirement / Check: WBS structure and dictionary
3.5.
Identify unit costs, equivalent unit costs, or lot costs when needed. Requirement / Check: Estimate, Cost Control System
3.6.
For Earn Value Management System (EVMS), the material accounting system will provide for: 3.6.1. Accurate cost accumulation and assignment of costs to control accounts in a manner consistent with the budgets using recognized, acceptable, costing techniques. Requirement / Check: material status report (MSR), P3, Cost Control System 3.6.2. 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. Requirement / Check: material status report (MSR), P3, Cost Control Tool
3.7
Full accountability of all material purchased for the program including the residual inventory. Requirement / Check: material status report (MSR), P3, Cost Control System
4. ANALYSIS AND MANAGEMENT REPORTS 4.1.
4.2.
At least on a monthly basis, generated 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. 4.1.1.
Comparison of the amount of planned budget and the amount of budget earned for work accomplished. This comparison provides the schedule variance. Requirement / Check: CPR format #1, VAR
4.1.2.
Comparison of the amount of the budget earned and the actual (applied where appropriated) direct costs for the same work. This comparison provides the cost variance. Requirement / Check: CPR format #1, VAR
Identify, at least monthly, the significant differences between both planned and actual schedule performance and planned and actual cost performance and provide the reasons for the variance in the detail needed by program management. Requirement / Check: VAR
4.3.
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. Requirement / Check: government compliance letter showing current forecasted O/H rates, DCMA letter showing billing rates.
4.4.
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. Requirement / Check: PCMS, CAP, VAR
4.5.
Implement managerial actions taken as the result of earned value information. Requirement / Check: CPR format #1, VAR corrective action log
4.6.
Develop revised estimates of cost at completion based on performance to date, commitment values for material, and estimates of future conditions. Compare this information with the performance measurement baseline to identify variances at completion important to company management and any applicable customer reporting requirements including statements of funding requirements. Requirement / Check: CPR format #1 and/or contract funds status report
5. REVISIONS AND DATA MAINTENANCE 5.1.
Incorporate authorized changes in a timely manner, recording the effects of such changes in budgets and schedules. In the directed effort prior to negotiation of a change, base such revision on the amount estimated and budgeted to the program organizations. Requirement / Check: CBB log, Contract and/or Modification(s)
5.2.
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. Requirement / Check: CBB log, Contract and/or Modification(s)
5.3.
Control retroactive changes to records pertaining to work performed that would change previously reported amounts for actual cost, earned value, or budgets. Adjustments should be made only for correction of errors, routine accounting adjustments, effects of customer or management directed changes, or to improve the baseline integrity and accuracy of performance measurement data. Requirement / Check: CBB log
5.4
Prevent revisions to the program budget except for authorized changes. Requirement / Check: CBB log, PWA, CPR format #1
5.4.
Document changes to the performance measurement baseline. Requirement / Check: CBB log, PWA
See the references in the Introduction to this EVP
Certification Study Guide
