Earned Value Management Affect Profitability? Term Paper

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S. Air Force. During the heyday of defense contracting in the 1950s and 1960s, it became apparent to the Defense Department that as projects get larger and more complex, it becomes increasingly difficult to track what is happening on them. This problem is compounded by the fact that these large projects are being carried out in multiple contractor organizations, each of which employs its own peculiar planning and control system (Frame, 2002).

By the early 1960s, it became increasingly apparent that the Defense Department was no longer able to track the efforts of its contractors with accuracy. It decided that contractors on large, complex projects should be required to report their project efforts in a consistent fashion. It worked to develop rules for reporting project progress and in 1967 issued Department of Defense Instruction (DODI) 7000.2, known also as the Cost/Schedule Control System Criteria (C/SCSC). In 1972, the Defense Department issued its Joint Implementation Guide, which gave practical advice on how to implement DODI 7000.2.The focus of the earned value system was the development of consistency and management discipline in contractor organizations in five areas:

Organization. Instructions are provided on the development of work breakdown structures and organizational breakdown structures.

Planning. Key planning requirements are highlighted -- for example, the establishment of performance baselines.

Accounting. Requirements are specified for the collection and maintenance of cost accounting data.

Analysis. Guidance is offered on use of earned value techniques for reporting budget variance, schedule variance, and EAC.

Reporting. Instructions are given on reporting project status through cost performance reports (CPRs), which are required on very large projects, or cost and schedule status reports (C/SSRs), which are less burdensome to generate than CPRs and are required on smaller projects.

In the 1990s, the earned value approach as promulgated by the Defense Department underwent a number of modifications. In 1991, DODI 7000.2 was superseded by DODI 5000.2, which was in turn was superseded by DOD Regulation (DODR) 5000.2-R in 1996. The Joint Implementation Guide was revised and replaced by a document titled Earned Value Management Implementation Guide in 1997. The current version of the earned value management system is designed to be less bureaucratic than its predecessors. It focuses less on mandating certain actions and more on providing guidelines (Frame, 2002).

According to Straight, Lawler and Schwartz (2003), earned-value management is not a new concept; however, the newly revised Office of Management and Budget (OMB) Circular a-11, Preparation, Submission, and Execution of the Budget may represent the first opportunity many government managers have had to work with these techniques. In this regard, Frame (2002) advises that, "In the 1990s, the earned value approach as promulgated by the Defense Department underwent a number of modifications. In 1991, DODI 7000.2 was superseded by DODI 5000.2, which was in turn was superseded by DOD Regulation (DODR) 5000.2-R in 1996. The Joint Implementation Guide was revised and replaced by a document titled Earned Value Management Implementation Guide in 1997" (p. 290). The current version of the earned value management system that is in place was intended to be less bureaucratic than its predecessors and concentrates less on mandating certain actions and more on providing guidelines (Frame, p. 290).

Because of the big-project focus of the Defense Department's approach to earned value management, coupled with many managers' unfamiliarity with the process, organizations outside of the defense community were unaware of its potential usefulness on nondefense projects. This situation began to change in the late 1980s. The earned value approach can be used effectively on small projects when bureaucratic requirements -- such as those found in DODI 7000.2, DODI 5000.2, and DODR 5000.2-R -- are stripped away. Today, most project management leaders in high-performing organizations acknowledge the great contribution the earned value method can offer them in planning, executing, and controlling their projects (Frame, 2002).

For federal agencies, Circular a-11 requires the use of an earned-value approach them to monitor and manage their capital asset projects' information technology, buildings, structures, major rehabilitation, land, vehicles, furniture, and equipment. In addition, Circular a-11 requires agencies to submit, as part of their annual budgets, a capital asset plan and business case (see proforma Exhibit 300 at Appendix ____) for each capital asset project. Completing the exhibits requires calculating the earned value for each project (Straight et al.). In this regard, Circular a-11 states that, "Earned value management (EVM) is a project (investment) management tool effectively integrating the investment scope of work with schedule and cost elements for optimum investment planning and control.

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The qualities and operating characteristics of earned value management systems (EVMS) are described in American National Standards Institute (ANSI)/Electronic Industries Alliance (EIA) Standard -748-1998, Earned Value Management Systems, approved May 19, 1998. It was reaffirmed on August 28, 2002" (p. 579).

Table 1.

Performance Management Thresholds

Contract Total Estimated Value, Then-Year $ (Note 1)

EVM Implementation (Notes 2,3,4,5,6,7,8)

CPR

Data Item

Note 9)

IMS

Data Item (Note 9)

CFSR

Data Item

Note 10)

CWBS

Data Item

Note 11)

Subcontractor Flow Down

50M and greater

Required

Reporting thresholds for a subcontract must flow down consistently from the contract

20M and greater but less than $50M

Required

Required if CCDRs are required; optional otherwise (at discretion of PM or Cost Working IPT)

Less than $20M

Optional (at discretion of PM)

Required if PM elects to require EVM

Required

Required if CCDRs are required; optional otherwise (at discretion of PM or Cost Working IPT)

Notes Regarding Preceding Performance Management Thresholds Table

Note 1. Thresholds are in then-year dollars and refer to total estimated contract value including options.

Note 2. For procurements equal to or greater than $20M but less than $50M, the contractor must comply with the guidelines in ANSI/EIA-748, but a validated Earned Value Management System (EVMS) is not required.

Note 3. For procurements equal to or greater than $50M, the contractor must have a validated EVMS that complies with the guidelines in ANSI/EIA-748.

Note 4. Integrated Baseline Reviews (IBRs) are required whenever Earned Value Management (EVM) is required (contracts equal to or greater than $20M).

Note 5. The application of EVM is discouraged on Firm-Fixed Price (FFP) (including FFP with economic price adjustment) contracts, subcontracts, intra-government work agreements, and other agreements, regardless of dollar value. In cases where cost/schedule visibility is required, such as for development work equal to or greater than $20M, the program manager must obtain a waiver for individual contracts from the Milestone Decision Authority. The program manager will prepare a business case that includes rationale for why a cost reimbursable or fixed price incentive contract is not an appropriate contractual vehicle. Considerations for applying EVM in these situations may be found in the DoD Earned Value Management Implementation Guide (EVMIG).

Note 6. The application of EVM to work efforts that are not discrete in nature (non-schedule based), such as level of effort, time and materials, and services, should be considered on a case-by-case basis. In cases where the nature of the work does not lend itself to the meaningful use of EVM, it may be appropriate to waive the EVM requirement. When EVM is waived, the program manager will implement an alternate method of management control.

Note 7. The application of EVM on cost or incentive efforts less than $20M is optional and is a risk-based decision that is at the discretion of the program manager. A cost-benefit analysis should be used as a basis for the decision to implement EVM. Considerations for applying EVM in these situations may be found in the DoD EVMIG.

Note 8. The application of EVM is not required on contracts of less than 12 months in duration.

Note 9. A Contract Performance Report (CPR) (Data Item Description (DID) number DI-MGMT-81466A) and an Integrated Master Schedule (IMS) (DID number DI-MGMT-81650) are required whenever EVM is required (contracts equal to or greater than $20M).

Note 10. No specific application thresholds for Contract Funds Status Reports (CFSRs) are established; however, application to contracts of less than $1.5M in then-year dollars should be evaluated carefully to obtain only the minimum information required for management control. CFSRs should not be applied to FFP contracts or contracts of less than 6 months in duration.

Note 11. A product-oriented Work Breakdown Structure (WBS), in accordance with the DoD WBS Handbook (MIL-HDBK-881A) and the Contract Work Breakdown Structure (CWBS) DID (DID number DI-MGMT-81334C), is mandatory when EVM is implemented and a CPR and an IMS are required. For contracts that require Contractor Cost Data Reports (CCDRs), the CWBS will be developed, approved, and maintained in accordance with DoD 5000.04-M-1, Cost and Software Data Reporting Manual, and the CWBS DID (EVM contract requirements checklist, 2008).

The Electronic Industries Alliance (EIA) has issued a standard for EVMSs (EIA-748-a, January 2002), in accordance with the American National Standards Institute (ANSI). According to their organizational Web site, "The Electronic Industries Alliance (EIA) is a national trade organization that includes the full spectrum.....

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