Ch 4 - Forecasting Cost Overruns

• 4.0 - Chapter Introduction
• 4.1 - Identifying And Analyzing Cost And Schedule Variances
• 4.2 - Estimating Cost To Complete
• 4.3 - Resolving Potential Cost Overruns
• App 4A - Earned Value Management System Guidelines

4.0 Chapter Introduction

This chapter will examine methods that can be used to identify, analyze, and resolve contract cost and schedule variances.

Contract Surveillance (FAR 42.1103, FAR 42.1104, and FAR 42.1105). While the contractor is responsible for timely cost-effective contract performance, the Government is responsible for maintaining contract surveillance to the extent necessary to protect the Government's interests. Appropriate procedures for identification and analysis of cost and schedule variances should be a part of every contract surveillance plan.

As a contracting officer preparing a new contract, consider the information required for effective surveillance of contract performance as you define contract-reporting requirements. If you are the contracting officer responsible for contract administration, determine the contract surveillance requirements based on the criticality of the contract requirement to the Government and the circumstances affecting contract performance.

• Criticality to the Government. The contracting officer must assign a criticality designator to each contract following the guidelines in the table below. In general, the more critical the requirement is to the Government, the more attention you should be given to contract surveillance, including cost and schedule variance identification and analysis.

• Circumstances of the Contract. In general, the level of complexity of the contract will drive the level of contract surveillance. When analyzing contract complexity, consider:
  • Contract performance reporting. Cost-reimbursement, time-and-materials, and labor-hour contracts typically have stringent requirements for reporting progress and performance than fixed-price contracts.
  • Contract performance schedule. Contracts with longer or complex schedule requirements normally merit increased surveillance, because there may not be immediate indicators identifying a potential or active problem. In addition a contract with an ambitious or aggressive completion schedule will normally merit greater surveillance to ensure schedule milestones are met.
  • Contractor's history of contract performance. A contractor with a history of overruns, late completion of performance, or late deliveries will normally merit closer surveillance to ensure performance outcomes.
  • Contractor's experience supporting supplies or services contracts. A contractor with limited experience will normally merit closer surveillance.
  • Contractor's financial capability. A contractor with marginal financial capability will normally merit closer surveillance.
  • Any supplementary written instructions from the contracting office.

4.1 Identifying And Analyzing Cost And Schedule Variances

Uses for Information on Variances (FAR 52.232-7(c), FAR 52.232-20(a), FAR 52.232-22(a), FAR 52.243-1(b), FAR 52.243-2(b), FAR 52.243-3(b), and FAR 52.243-4(d))

Information on variances from cost and schedule projections can provide vital input to many contract administration decisions.

• Information on the contractor's progress toward timely contract completion is important for the administration of any contract. However, it is most important for cost-reimbursement, time-and-material, and labor-hour contracts. For these contracts, the contractor only agrees to put forth its best effort to complete the contract effort within funding, cost, or price limitations to the extent prescribed in the contract.
• Appropriate Government surveillance during performance will provide reasonable assurance that efficient methods and effective cost controls are used.
• Information on contractor cost and schedule performance is essential to negotiating an equitable adjustment that leaves the contractor in the same profit position as it was before the modification.
• Information on cost of the current contract can be a key element in projecting the cost of follow-on contracts awarded before the current contract is complete.

Consider Both Cost and Schedule Variances. To analyze variances, you need to be able to consider contractor cost and schedule variances from initial cost estimates. For example, a contractor in Month 4 of a 12-month contract is tracking perfectly with estimated costs through Month 4. However, the contractor is two months behind schedule. In other words, two months of actual performance have cost as much as four months were projected to cost. If we consider only cost, there does not appear to be a problem. However, if we consider both cost and schedule, there appears to be significant potential for a cost and/or schedule overrun.

Information Sources. You can use information from a variety of sources to monitor cost and schedule performance variance, such as:

• Contractually required cost/schedule analysis and reporting, including:
  • Contract Performance Reports under Earned Value Management System (EVMS) Guidelines; and
  • Cost/Schedule Status Report. (This is no longer a valid data item, but may still be in use on older contracts.
• Contractually required cost information, including:
  • Contract Funds Status Reports:
  • Progress payment requests;
  • Cost-reimbursement vouchers;
  • Contract progress reports; or
  • Limitation of cost/funds notices.
• Contractor production management reports and analyses, Including:
  • Integrated Master Schedule/Integrated Master Plan (IMP/IMS) required under EVMS criteria
  • Phase Planning or Gantt Charts
  • Production Flow Charts
  • Program Evaluation and Review Technique (PERT) network analyses
• Progress review meetings
• Observation by Government personnel

Points to Consider in Information Source Selection. The method that you select must be appropriate for the contract. When you have a complex or difficult contract for a requirement with a Criticality A Designator, you should consider contractually mandated analysis and reporting system (e.g., compliance with EVMS Guidelines for a major acquisition). The risk involved will likely merit the additional cost of the required system. In addition, you must also consider the cost of the contract when determining information sources. For example, EVMS is required on DoD cost or incentive contracts valued at $20,000,000 or more and is optional below $20,000,000 and is a risk based decision.

It is unlikely that a requirement with a Criticality C Designator would merit the added cost of any contractually mandated cost/schedule reporting. For low-value low-risk items, you would probably rely on routine observation by Government personnel, unless the contract value meets EVMS applicability thresholds ($20,000,000 for DoD contracts).

To be effective, the method selected must provide or permit you to develop:

• A cost baseline upon which the original contract cost was derived (usually the contractor's time phased budget or proposal). This is called the planned value in EVM terminology.
• A schedule baseline with an integrated, network schedule supporting the planned value.
• Actual costs incurred for completed work.
• An estimate to complete.

Earned Value Management Systems (OMB Circular A-11 Part 7 Capital Programming Guide, ANSI/EIA Standard-748-A-1998(R2002), MIL-HDBK-881A (30 Jul 2005), and DFARS 252.232-7001, DFARS 252.232-7002)

Surveillance (routine evaluation and assessment) of the EVMS is mandatory for all contracts that require supplier EVMS compliance—which is basically all contracts with an EVM requirements to comply with the 32 ANSI/EIA-748 EVMS guidelines. Appendix 4Apresents the 32 Industry Standard Guidelines for development and operation of Earned Value Management Systems (EVMSs). Under these guidelines, contract work is planned, budgeted, and scheduled in time-phased "planned value" increments to establish a cost and schedule measurement baseline. Actual cost and schedule performance is then compared to the established baseline.

• Compliance. Surveillance ensures that the supplier is meeting contractual terms and conditions and is in compliance with applicable policies and regulations. If changes are made to those terms and conditions, then a modification to the contract is required. Surveillance becomes mandatory through the inclusion of the Defense Federal Acquisition Regulation Supplement (DFARS) clause 252.234-7002. Requiring contractors to comply with EVMS Guidelines encourages them to use effective internal cost and schedule management control systems, and permits the Government to rely on timely data produced by those systems for determining product-oriented contract status. However, compliance should only be required when contract cost and complexity merit the cost of compliance with EVMS Guidelines.

For cost or incentive contracts and subcontracts valued at $20,000,000 or more, the earned value management system shall comply with the guidelines in the American National Standards Institute/Electronic Industries Alliance Standard 748, Earned Value Management Systems (ANSI/EIA-748).

For cost or incentive contracts and subcontracts valued at $50,000,000 or more, the contractor shall have an earned value management system that has been determined by the cognizant Federal agency to be in compliance with the guidelines in ANSI/EIA-748. For cost or incentive contracts and subcontracts valued at $20,000,000 or more, the earned value management system shall comply with the guidelines in the American National Standards Institute/Electronic Industries Alliance Standard 748, Earned Value Management Systems (ANSI/EIA-748); however is not required to be formally determined compliant by the cognizant Federal agency to be in compliance. For cost or incentive contracts and subcontracts valued at $50,000,000 or more, the contractor shall have an earned value management system that has been determined by the cognizant Federal agency to be in compliance with the guidelines in ANSI/EIA-748. (DFARS 252.234-7001, DFARS 252.234-7002).

In regards to DFARS 252.242-7001 and 252.242-7002, the contractor is required to have an EVMS that complies with ANSI/EIA-748; however, the Government will not formally accept the contractor’s management system (no compliance review).” While not required, if a risk-based decision is made to require EVM on cost or incentive contracts valued at less than $20 million or FFP contracts, the above paragraph should be included in the statement of work.

If you are assigned to another agency, consult agency guidance for contracting situations that require contractor compliance with EVMS Guidelines.

• Stipulating a Work Breakdown Structure.The framework for EVMS is the Work Breakdown Structure (WBS) and the contractor's baseline plan developed using that structure.
  • The WBS is a product-oriented family tree division of hardware, software, services, and other work tasks which organizes, defines, and graphically displays the product to be produced, as well as the work to be accomplished to achieve the specified product.
  • When you expect that the contract will require the contractor to comply with EVMS guidelines, the request for proposal should require the offeror to provide cost information based on a WBS identified in the solicitation. The offeror can provide more levels of information than required by the solicitation, but the firm cannot provide fewer.
  • The multiple levels of the WBS "explode" the work required down to identifiable work packages that relate costs to specific contract effort. In a common WBS:
    • Level 1 is the entire system;
    • Level 2 identifies the major elements of Level 1;
    • Level 3 identifies the major elements of Level 2; and
    • Each lower level provides increasingly detailed information.

The following table provides an example of a 3-level WBS structure. The example is for a missile system, but the concept can be applied to any large system. The program work breakdown structure provided to the contractor is typically to Level 3 of the WBS. According to DoD guidance, the top 3 Levels of the Program WBS must conform to the appropriate Appendix in MIL-HDBK-881Afor the particular type of system/effort. The contractor will then extend the WBS to the lowest level necessary for effective management. EVMS reporting typically occurs at Level 3, however, reporting can be required to a lower level of the WBS for those elements deemed higher risk to allow for more comprehensive oversight and analysis. The same WBS structure is required for the Contract Performance Report, the Integrated Master Schedule, and any other cost reports such as the Contractor Cost Data Reports (CCDR) (required on contracts >$50,000,000).

4.1 Identifying And Analyzing Cost And Schedule Variances (cont)

• Establishing A Contract Cost/Schedule Baseline. When the contract requires EVMS compliance, a multifunctional Integrated Baseline Review (IBR) must be conducted after contract award. Government participants in the review will normally include engineers, other technical personnel, EVMS support personnel, and program management personnel. Together with contractor representatives, this team will review the contractor's baseline plan to ensure all work has been planned appropriately, budgets are adequate for accomplishment of the planned work, and the appropriate method for claiming "earned value" has been identified. This will normally include work authorizations, schedules, work package budgets, and progress measurement methods.
• IBRs are intended to provide a mutual understanding of risks inherent in contractor's performance plans and underlying management control systems. An effective IBR:
  • Lays a solid foundation for mutual understanding of project risks;
  • Provides an invaluable opportunity to compare PMs'(government and contractor) expectations and to address differences before problems arise;
  • Provides project management teams with a thorough understanding of the project plan and its risks, allowing early intervention and the application of resources to address project challenges;
  • Increases confidence in the project Performance Measurement Baseline (PMB), which provides a powerful, proactive, program management capability to obtain timely and reliable cost and schedule projections.

The goal of a successful IBR is to ensure consistent understanding and expectations on the part of the government and contractor and that the contractor has a well-supported plan for successful contract performance. It is important to note that the IBR is not the end objective. It is one element of an iterative, continuing process that provides a structure for program management to openly discuss the project's plan, strengths, and risks.

• Comparing Actual Cost/Schedule With The Baseline. Each month during contract performance, the contractor will submit a Contract Performance Report (CPR) that compares actual performance with budgeted performance and establishes a common reference point for identifying variances. CPRs provide key information on:
  • Budgeted Cost of Work Scheduled (BCWS).BCWS is the amount budgeted for work scheduled to be accomplished. It is also called planned value. It is a time-phased expenditure plan, measurable for the current, cumulative-to-date, and contract completion time periods. When the BCWS is time-phased over the life of the contract, it becomes the Performance Measurement Baseline or PMB. The summation of all the BCWS for the program (BCWS cumulative) is equal to the Budget at Completion or BAC.
  • Budgeted Cost of Work Performed (BCWP).BCWP is the amount budgeted for that portion of the scheduled work that was actually performed (i.e., what the contractor planned or budgeted to spend for the work actually accomplished). This is also called earned value.
  • Actual Cost of Work Performed (ACWP).ACWP is the amount actually spent in the accomplishment of work performed. The amount actually spent includes direct costs (e.g., labor and material) and indirect costs (e.g., overhead and G&A expense).

The following example demonstrates how BCWS, BCWP, and ACWP can be used to identify contract cost/schedule variances:

In this example, the contractor has a positive schedule variance indicating the contract is ahead of schedule. BCWP is $11,000 greater than BCWS. That is almost 29 percent more work completed than was scheduled. However, for the work performed, the contractor has a negative cost variance indicating the contract is over budget. The ACWP is $8,000 more than the BCWP. That is approximately 16 percent over budget.

• Analyzing Reported Variances. Note that the calculations above identify an area where actual contract costs exceed budgeted costs but do not explain how the variances will affect the total contract. To permit more detailed analysis, a Contract Performance Report or CPR is required when EVM is required on the contract. The CPR includes five different presentation formats:
  • An analysis of performance by work breakdown structure (WBS) element. (Format 1)
  • An analysis of performance by organizational category (Format 2);
  • A time-phased contract budgeted cost baseline for contract completion (Format 3);
  • A time-phase manpower loading estimate for future contract completion (Format 4); and
  • A narrative explanation and analysis of significant variances (Format 5).

These five formats are required for contracts greater than or equal to $50,000,000. On contracts valued at or greater than $20,000,000 but less than $50,000,000, it is recommended that CPR and IMS reporting be tailored. Tailoring to the specific needs of the program is highly encouraged. For contracts less than $50,000,000, the formats can be tailored in certain areas based on a program risk assessment. Specific areas that can be tailored for contracts less than $50,000,000 include: Format 1 & 2 reporting levels, reporting frequency, submission dates, date of first and last reports, Format 5 variance reporting thresholds, fixed number of variances, percentage or dollar thresholds, specific variances, contractor format, or electronic data interchange format. More information on tailoring the CPR can be found in Paragraph 2.2.5.6.3 of the Earned Value Management Implementation Guide or EVMIG located on the DCMA website (http://www.dcma.mil/).

A key point to remember is that the data presented in the CPR is cost data, and does not include fee/profit. The CPR is required monthly, unless the reporting frequency is tailored.

When analyzing variances, you will normally need support from Government technical personnel to review the contractor's analysis in technical performance areas. This analysis will help determine the reason for, and the significance of, any cost variance.

• Example Of Performance Analysis By WBS Element. The table below presents key CPR information for several elements of the contract WBS.

Based on the above report, you could make the following observations:

• WBS Element 1.1.
  • Comparison of BCWS, BCWP, and the Cost-at-Completion Budgeted reveals that all are equal and the work is complete.
  • Comparison of BCWP and ACWP reveals that the element experienced a $10,000 cost overrun at completion.
  • Comparison of the Cost-at-Completion Budgeted, Estimated, and Variance columns also reflect the $10,000 cost overrun.
• WBS Element 1.2.
  • Comparison of BCWS with BCWP reveals that the work is behind schedule (SV=($5,000))
  • Comparison of BCWP with ACWP shows that the contractor is slightly underrunning budgeted cost. (CV=$1,000)
  • Comparison of the Cost-at-Completion Budgeted, Estimated, and Variance columns indicates that the work is expected to be on budget at completion.
• WBS Element 1.3.
  • Comparison of BCWS with BCWP reveals that the work is ahead of schedule. (SV=$150,000-$130,000=$20,000)
  • Comparison of BCWP with ACWP shows that the contractor is experiencing a slight overrun of $5,000 over budgeted cost.
  • Comparison of the Cost-at-Completion Budgeted, Estimated, and Variance columns indicates that the overrun is expected to grow to $10,000 at completion.
• WBS Element 1.4.
  • Comparison of BCWS with BCWP reveals that the work is on schedule.
  • Comparison of BCWP with ACWP shows that the contractor is experiencing an underrun of $15,000.
  • Comparison of the Cost-at-Completion Budgeted, Estimated, and Variance columns indicates that the underrun is expected to remain at $15,000 through completion.
• WBS Element 1.5.
  • Comparison of BCWS with BCWP reveals that the work is ahead of schedule. (SV-$10,000)
  • Comparison of BCWP with ACWP shows that the contractor is experiencing an overrun of $10,000. (CV=($10,000))
  • Comparison of the Cost-at-Completion Budgeted, Estimated, and Variance columns indicates that the overrun is expected to grow to $15,000 at completion.
• WBS Element 1.6.
  • Comparison of BCWS, BCWP, and the Cost-at-Completion Budgeted reveals that all equal and the work under is complete. (BCWScum=BAC)
  • Comparison of BCWP and ACWP reveals that the element experienced a $20,000 overrun at completion.
  • Comparison of the Cost-at-Completion Budgeted, Estimated, and Variance columns also reflect the $20,000 overrun.
• Subtotal.
  • Comparison of the Cost-at-Completion Budgeted, Estimated, and Variance Subtotals reveals a projected net overrun of $40,000. Since the contractor had set aside a management reserve of $50,000, the contract is still within the original Budgeted Cost baseline with $10,000 of management reserve remaining. There appears to be little need for in-depth technical analysis at this time because the contractor is still within the original Budget Cost baseline and the contract is 76 percent complete.

If the percent complete on the contract had been less, then further analysis would probably be warranted. Relying solely on the contractor's estimate at completion is risky. For this reason, the program will calculate their own Estimate at Completion using statistical methods and trend data to project costs at the end of the effort. This analysis can be augmented by evaluations into specific technical areas (or WBS elements) experiencing negative cost and/or schedule variances. For example, this technical evaluation can utilize an analysis of Technical Performance Measures or TPMs. For example, the TPM for fuel consumption shown below shows actual performance above the expected upper threshold limit, but it is trending toward the goal or objective. If WBS Element 1.5 in the CPR above was for the engine of the missile (ahead of schedule but over cost), we would analyze the TPMs that could be causing this situation and have our technical experts evaluate the contractor's narrative explanation for variances in Format 5 of the CPR.

More will be discussed later in this Chapter on calculating Estimates at Completion.

Cost/Schedule Status Reports. This is no longer a valid report based on the Mar 2005 changes to the DoD EVMS application thresholds and reporting requirements. You may, however, still see the C/SSR on contracts awarded prior to the 2005 change. Analysis of C/SSR cost/schedule data is consistent with the analysis described above for the Contract Performance Report (CPR).

Contract Funds Status Report (Defense Acquisition Guidebook, para 11.3.2.1). For flexibly-priced contracts, you may also consider requiring a continuing detailed report on the status of contract funding. You may require this report in addition to or instead of the type of cost/schedule reporting described above. One example of this type of reporting is the DoD Contract Funds Status Report (CFSR). The CFSR is reported at price rather than cost (includes fee or profit). This form should be reconciled with the CPR quarterly to evaluate the adequacy of program funding levels.

According to the Defense Acquisition Guidebook, the CFSR supplies funding data about defense contracts to program managers for:

• Updating and forecasting contract funds requirements;
• Planning and decision making on funding changes in contracts;
• Developing funds requirements and budget estimates in support of approved programs;
• Determining funds in excess of contract needs and available for de-obligation;
• Obtaining rough estimates of termination costs; and
• Determining if sufficient funds are available by fiscal year to execute the contract.

The program manager should obtain a CFSR (DD Form 1586) on contracts over 6 months in duration. The CFSR has no specific application thresholds; however, the program manager should carefully evaluate application to contracts valued at less than $1.5 million (in then-year dollars).

• Reporting. DID DI-MGMT-81468should be used to obtain the CFSR. The contracting officer and contractor should negotiate reporting provisions in the contract, including level of detail and reporting frequency. The program manager should require only the minimum data necessary for effective management control. The CFSR should not be applied to Firm-Fixed Price contracts unless unusual circumstances dictate specific funding visibility. The requirement for Contract Funds Status Reporting should be tailored to the specific contract involved. The CFSR is normally required quarterly and must provide enough information for Government personnel to compare the estimate of total funds required to complete authorized contract work with existing contract funding.

• Analyzing Report Information. These reports can be combined with cost information from contractor requests for progress payment or cost-reimbursement vouchers to obtain a general picture of contract progress compared to costs expended. If you identify an apparent problem, you should request a technical review of the contractor's physical progress toward contract completion.

Progress Payment Requests (FAR 32.503-4 and FAR 32.503-5). A contractor making a request for progress payments must complete a Standard Form (SF) 1443, Contractor's Request for Progress Payment. As part of the request, the contractor must identify total costs to date and estimated additional cost to complete the contract. The estimated additional cost to complete the contract may be the last estimate made, adjusted for costs incurred since the last estimate. However, the contractor must update the estimate at least semi-annually.

• Before making progress payments, you must establish the reliability of the contractor's accounting system and controls. Once you have done that, you may rely on the accounting system and the certification on the SF 1443 when making a progress payment.
• Normally, you should not request an audit of individual progress payment requests. However, you should consider requesting an audit if you have reason to:
  • Question the reliability or accuracy of the contractor's certification on the SF 1443, or
  • Believe that the contract will involve a loss.
• While you may rely on the contractor's accounting system and certification without prepayment review, you must make periodic reviews to determine the validity of progress payments already made or expected to be made. These post-payment reviews must include a number of elements including a determination that the contract price will be adequate to cover the anticipated cost of contract completion or that the contractor has adequate resources to complete the contract. A review of the contractor's actual physical progress should be a part of these post-payment reviews.

Cost-Reimbursement Vouchers (FAR 52.216-7(b)). Under cost-reimbursement contracts, the contractor can submit vouchers or invoices for payment of costs. Unlike the Contractor's Request for Progress Payment, the contractor is not required to submit an estimate of the cost to complete the contract with the cost-reimbursement voucher. However, the vouchers do provide an excellent record of the contractor's costs that can be coupled with other information such as production surveillance and reporting documents to identify potential cost overruns. The record includes:

• Those recorded costs that, at the time of the request for reimbursement, the contractor has paid by cash, check, or other form of actual payment for items or services purchased directly for the contract.
• Costs incurred, but not necessarily paid for, including:
  • Materials issued from the contractor's inventory and placed in the production process for use on the contract;
  • Direct labor;
  • Direct material;
  • Other direct in-house costs; and
  • Properly allocable and allowable indirect costs.
• The amount of progress payments that have been paid to the contractor's subcontractors.
• Contractor contributions to any pension or other post-retirement benefit, profit sharing, or stock ownership plan paid in accordance with contract requirements.

Limitation of Cost/Funds NoticeI. All cost-reimbursement contracts must include a contract clause limiting the Government's obligation to reimburse contractor costs. As shown in the table below, each of the clauses used to limit the Government's obligation also requires contractor notification that total costs are approaching that limit.

DO NOT expect contractor notification requirements to replace effective contract surveillance! You should be questioning significant variations long before contractor notification. By the time you receive contractor notification, it may be too late for the contractor to take corrective action. In fact, the contractor may fail to provide timely notice despite the contract requirement. There have been many contracts where the contractor did not provide notice until after all contract funds were expended. Using a CPR and CFSR can give warning of significant variations in cost so that planning can be accomplished in time to react to budget shortfalls.

Gantt or Phase- Planning Charts. One of the most common techniques for managing schedules for both supply and service contracts is the Gantt Chart (also known as the Phase-Planning Chart). The Gantt Chart provides a graphical representation of the start date, end date, and process time for each phase in the production process.

The Gantt chart above depicts the critical tasks required to develop a Management Information System (MIS) Plan. For each task:

• The estimated days required to complete the task are identified along with a graphic representation of the length of time required.
• In the graphic presentation, bars representing contract effort and a grid scaled to the indicated time (e.g., weeks in the example above) are used to indicate the estimated length of time required to complete each task.
• As the work is performed, the bars may be shaded to indicate the time worked.
• If more time than estimated is required to complete a task, the related bar is extended.
• When the task is completed, the actual days required are also annotated.

With some understanding of the effort required, you can use this Gantt chart to identify schedule problems that will affect the cost to complete the project. For example, the chart above shows that the performance specifications should be completed before work begins on the general system concept. If development of the performance specifications took 10 days instead of three, that delay could affect the entire project. The contractor would need to examine ways of shortening other tasks or performing tasks concurrently to meet the required schedule.

If the problems extend the time required to complete an activity on the critical path, the contractor must take action to identify cost effective ways to meet the original schedule. With a GANTT chart, identifying the critical path can be difficult since relationships between tasks and interdependencies aren't indicated. We will look at other scheduling techniques that do allow for the identification of the critical path for the project such at PERT or network schedules.

However, when there is a threat to the contract schedule or cost estimates, you should call upon Government technical personnel to examine the contractor's estimates.

Production Flow Charts. Production flow charts can be developed to more clearly define contract schedules. The production flow chart is developed using the major schedule milestones, production sequence, and projected manpower. The example below depicts the first unit flow chart for production of a new product.

The flow time for each of the assemblies is determined by utilizing the estimated labor-hours, crew sizes, and the operations shifts projected for contract performance.

With the overall sequence of the major activity defined, activities can be scheduled for completion to meet subsequent events which are dependent upon them. Start times for each activity will be determined by estimating when the activity must be completed and the estimated time required to complete the activity.

T&PP - Tools and Production Planning
PCR - Production Control Records
FTBO - Flow Time Between Orders
UBO - Unit Buy Off
PKG - Package
Tran - Transportation

All Flow Times are Shown in Days

Using this procedure, the entire schedule can be displayed on a single chart. All organizations can determine at a glance when their responsibilities start, the estimated time required, and the required completion time. The effect of any delay on the overall schedule becomes obvious.

In the chart above, if circuit card assembly and test required 22 days instead of 20, the overall project would not be delayed because of the 5-day flow time between orders. However, if circuit card assembly and test required 40 days because of production problems, contractor corrective action would be necessary to meet the original schedule.

With knowledge of the interrelated activities required for production, Government personnel could raise questions regarding contractor corrective actions. Contractor projected actions could be evaluated for effectiveness and potential effect on cost.

Program Evaluation and Review Technique. The Program Evaluation and Review Technique (PERT) takes the analysis of production flow one step further. PERT permits the contractor to analyze the relationships of all elements needed to complete a project and identify the critical path -- the path that defines the estimated time required to complete the project.

If an element requires more time than estimated, PERT permits analysis of the effect on timely project completion (the critical path). If the increased time required to complete the element does not affect the critical path, no management action may be required. If the completion schedule is affected, PERT permits analysis of alternative corrective actions and the cost associated with each action. An evaluation of the network schedule along with the CPR schedule variance can be used in conjunction to determine project schedule impacts.

• PERT Network Structure. To understand PERT analysis, you must first understand PERT network structure. The PERT network is composed of events and activities.
  • An event is a specific milestone that must be reached before a new activity can begin. For example, a foundation must be completed before a contractor can start erecting a building frame. On a PERT chart, events are typically shown as circles or nodes.
  • An activity is the work effort over a period of time required to achieve a specific event. On a PERT chart, activities are shown as the lines that connect the event circles, and in effect define the relationships of the activities and events required to complete a project.

• The figure below depicts a PERT network. Network events are labeled with letters (e.g., A, B, C, etc.). The activity that begins at A and ends at B is referred to as AB. Note that activities AB, BE, AC, CD, and DE, all must be completed before Event E can be achieved.
  
  

• Activity Times. The next thing needed to develop the PERT network is information on the length of time to accomplish each activity. PERT uses three estimates of the time required to complete each activity.

Where:

a = Optimistic time -- the completion time if everything
goes as well as can be expected.

m = Most likely time -- the completion time if everything
goes as expected.

b = Pessimistic time -- the completion time if the things
that may go wrong do go wrong.

To facilitate analysis and discussion, times for the activities in the network above are delineated in the following table.

• Early Start Times. If you assume that Event A is project start, you can work across the PERT network and determine how long it will take to complete the project. The times developed by working from the beginning to end are known as the Early Start Times or T_e. This is also called a "forward pass." When reading through the network below, note that:
  • The T_e entries are above the activity lines.
  • The format of the T_e entries is: Length of Time Required to Complete the Activity (Activity Start Time, Start Time Plus Length of Time Required to Complete the Activity). For example:
  • Activity AB reads "3(0,3)", which means the it will take three months to complete the activity, the activity can begin at project start (Month 0), and it will end at the end of Month 3.
  • Activity BE reads "2(3,5)", which means that it will take two months to complete the activity, the activity can begin at the end of Month 3, and it will end at the end of Month 5.
  • When more than one activity ends at an event, the earliest start time for the next activity is the latest time coming into the event. For example, DE is projected to be complete at the end of Month 3, but since BE is not projected to be complete until the end of Month 5, any activities beginning at E cannot start until the end of Month 5.
    
    

• Late Start Times. Based on the PERT network developed so far, the project should take sixteen months to complete. The next step is to determine T_l or Late Start Times -- the latest time that an event can start and still complete the project on time. The T_l is calculated the same way as T_eexcept the calculation is done from the end of the project back to the beginning. This is also called a "backward pass." When reading through the network below, note that:
  • The T_l entries are below the activity lines.
  • The format for T_l is similar to the format for T_e. For example
  • Activity HI reads "2(14,16)", which means that it will take two months to complete the activity. If the activity is to end at Month 16, it must start no later than Month 14.
  • Activity FH reads, "4(10,14)", which means that it will take four months to complete the activity, and if the activity is to end at Month 14, it must start no later than Month 10.
  • When more than one activity begins at an event, the earliest T_l is used to calculate the T_lfor activities prior to the event. For example, EF has a T_lof Month 7 while EG has a T_l of Month 5. The end time used to calculate BE and DE would be the earliest available T_l or Month 5.
    
    

• Critical Path. Given the information now available, you can identify the Critical Path. The longest of these paths (a-b-e-g-h-I) is sixteen days which is the shortest time in which the entire network can be completed. This is called the critical path of the network -- the path where the difference between T_e and T_l (slack time or float) equals zero. The following table and network show the critical path - AB, BE, EG, GH, and HI.

• Cost/Schedule Impact. With the critical path established, you can consider the impact of any activity time change.
  • Any increase or decrease in the time required to complete any activity on the critical path will increase or decrease the time to complete the entire project.
  • If the time required to complete Activity HI grew from two months to three months, then the entire project time would be increased by one month.
  • If there is a need to accelerate the project schedule, then management knows which activities must be shortened to shorten the project (critical path activities), and can evaluate the cost/schedule trade-offs.
  • For activities not on the critical path, changes do not impact the entire project time.
  • If the time required to complete Activity FH grew from four to five months there would be no increase in total project time because no activities beyond Event H can begin until all activities leading up to Event H have been completed. Activity FH would still be completed a full month ahead of Activity GH.
  • If the time to complete Activity FH were accelerated to three months, again there would be no effect on the time required to complete the project. Activity GI could still not begin until Activity FH is completed.

Precedence Diagram Method (Network Scheduling). This analysis can also be done using the Precedence Diagram Method which allows for the identification of Early Start/Finish, Late Start/Finish, float, and critical path.

There are four items that must be identified as part of the scheduling process: tasks, durations of tasks, order of tasks, and constraints. The tasks should include all the work and activities that need to be done to accomplish the work, and they should be traceable back to the Work Breakdown Structure (WBS). The duration of each task should be a measure of how long the work will take. It is most frequently measured in days, either calendar or work days. Once the durations have been identified, the order of the tasks must be determined along with the criteria for starting each task. For example, must Task A be completed before Task B can start or can they occur simultaneously? Finally, any constraints on resources must be highlighted and worked into the schedule. This is called resource loading and it can include facilities, such as test ranges, or manpower limitations.

When developing a network schedule, it is important to understand two key terms: baseline and schedule. The baseline is the original approved plan for accomplishing project objectives. In terms of EV, this will be the Performance Measurement Baseline or PMB. The schedule, on the other hand, reflects actual accomplishments and the planned projections for completing remaining objectives. The figure below shows several different baseline vs. schedule relationships that must be understood in order to analyze schedule performance.

The blue line is time now and it is used to evaluate actual accomplishment against the baseline. The green lines represent the baseline for each task, the black lines represent actual or planned performance, and the black progress bar denotes the percent complete of each task. By evaluating each task, you can determine whether the task is on schedule or has slipped, and whether the duration has remained the same or increased. For example, the duration of Task A has increased (schedule line is longer than the baseline) and it has slipped because the end date is beyond the original baseline completion date. For Task B, the duration appears to be the same length, however, the task has slipped. All of the tasks on this schedule appear to be related because as Task A slipped, it affected the start/finish of the remaining tasks. In order to more fully evaluate the impact of slips, we can use the precedence diagram method.

Early Start and Early Finish, as determined by the "forward pass," are shown at the top of the box. Late Start and Late Finish, as determined by the "backward pass," is reflected at the bottom of the box. The task duration (typically # of days) is annotated in the top right corner of the box.

PDM is similar to PERT, however, it allows for multiple task relationships to be used in the development of the schedule. A fundamental understanding of scheduling techniques revolve around the task and its relationship to other tasks. There are three main task relationships: Finish-to-Start, Finish-to-Finish, and Start-to-Start. The following three figures demonstrate these three primary task relationships in the PDM format and how they would be presented in Microsoft Project.

Finish-to-Start

Finish-to-Finish

Start-to-Start

Given a combination of task relationship types, the next step is to recognize the "time" factor or the lag in the relationship of one or more tasks to every other task in the project. Many tasks will not have any lag built into the relationship; the follow-on task can begin as soon as the preceding task is completed. However, some tasks may have a "wait" time necessary before the follow-on task can start. The relationship lag allows for the optimum application of resources to accomplish the tasks in a complex project. An example of this relationship may be painting a room. You cannot start to hang pictures until 1 day after painting is complete; this allows the paint to dry completely.

When performing a schedule analysis, we have to determine the critical path. We begin by calculating the earliest finish time (EFT), latest finish time (LFT), and float. Float is defined as the amount of time an activity can be delayed or expanded before it impacts the project finish time (LFT-EFT=Float). Critical path items are those items that have zero float. This means that when a task on the critical path slips, the entire schedule slips.

Schedule analysis and identification of the critical path are key components of a robust analysis of contract status. EVM metrics, along with the schedule analysis, provide a more complete picture of contractor performance. For example, a negative schedule variance (SV) indicates the contractor is behind schedule, however, we cannot really tell whether the contract will finish late without determining whether the tasks with the negative schedule variance are on the critical path. If they are not on the critical path, then we still have float in the schedule and may still complete the contract on time. If the tasks are on the critical path, then we know a negative SV will mean an overall schedule slip.

To obtain detailed contractor schedule information, we will use the Integrated Master Schedule (IMS). An IMS is required within DoD when EV is required on a contract (>$20,000,000). It is provided by the contractor monthly as a Contract Data Requirements List (CDRL) deliverable. DI-MGMT-81650 is the IMS data item included in the CDRL. For contracts between $20,000,000 and $50,000,000, the IMS can be tailored for degree of networking, report frequency, submission dates, date of 1^stand last reports, frequency of schedule risk analysis, and electronic data interchange format. More information on tailoring the IMS can be found in Paragraph 2.2.5.7 of the Earned Value Management Implementation Guide or EVMIG located on the DCMA website (http://www.dcma.mil/).

Problem Analysis. If the problems extend the time required to complete a task, the contractor must determine the effect on the remaining schedule. If timely performance is affected, the contractor must take action to identify cost effective ways to shorten the critical path to meet the original schedule. Without an integrated network schedule, the manager must evaluate the various arguments on an almost daily basis as to where to apply limited resources. This frequently results in management emphasis being pulled away from the actual time drivers on the schedule that would have been visible with a network analysis and could result in unforeseen program slips. With network analysis, crisis management is reduced because management will know which items can slip and which cannot without major impact to the master program schedule. When there is a schedule or cost risk to the Government, you should request Government technical personnel to examine the contractor's analysis and projected action to correct the problem.

Progress Review Meetings. Regularly scheduled progress review meetings provide an excellent forum for the identification and resolution of contract problems that may affect contract cost and performance. Many contracts include a requirement for periodic review meetings. When there is no contract requirement and you feel that such meetings would be beneficial, consider suggesting an informal review program to the contractor as a forum for sharing concerns, before they become problems.

• Management Review Meetings. Management review meetings typically include key members of the contractor and Government contract teams (e.g., program management, contracting, technical, quality assurance, and others).
  • Together, you can evaluate overall contract status, including the identification and resolution of problems that may be affecting contract cost or schedule.
  • The contractor may be required to submit a contract status report as a Contract Data Requirements List (CDRL) deliverable prior to each review. Those status reports then become the basis for conference analysis and discussion.
  • You should encourage open discussion to identify problems that may affect contract schedule or cost as early as possible so that action can be taken to resolve them and minimize their effect.
• Technical Team Meetings. Periodic meetings between Government and contractor technical personnel provide a forum to discuss technical questions that may affect contract cost and schedule. These technical meetings can be used to supplement or replace the management team meetings described above.
  • As a supplement, these meetings can be used to resolve technical questions too complicated to be resolved at management team meetings.
  • As an alternative, these meetings provide a vital forum for the exchange of information and ideas.

Caution all participants in such meetings that contract changes can only be accomplished through written contract modification issued by the contracting officer. Agreements at the meetings cannot change the contract terms.

• Caution Government personnel not to issue direction to the contractor that is outside their authority under the contract. Remind them that they may be held personally responsible for any unauthorized commitment -- constructive change -- unless the commitment is ratified by the Government. Ratification by the government must be approved by the Head of the Contracting Agency. If a constructive change happens, it could lead to other complications such as an Anti-Deficiency Act violation if sufficient funds are not available to fund the change.
• Caution contractor personnel to notify the contracting officer immediately of any action by any Government personnel that they interpret as a change to the contract.

Routine Observations by Government Personnel. Even with all the available reports and management analyses, the first indication of potential cost/schedule problems often comes from routine observations by Government technical personnel.

• Encourage Observation. Routine observations by Government personnel could identify a variety of indicators of problems affecting timely and cost effective contract performance, such as:
  • Selection of work methods that are not suited to the contract effort;
  • Problems in completing critical tasks or production processes;
  • Inadequate personnel training or experience;
  • Labor unrest (i.e., dissatisfaction that could cause a slowdown in operations);
  • Inadequate tooling or equipment;
  • Excessive work in process inventory;
  • Excessive scrap rates; or
  • Comments about cost/schedule problems made by contractor personnel.
• Encourage Reporting. The biggest problem with routine observations as a source of information on potential overruns is that the observations are often not reported to the contracting officer. To benefit from this source of information, you must foster the team concept and make every effort to keep the lines of communication open between yourself, the auditor, and such Government technical personnel as the user, Contracting Officer Representative (COR), Contracting Officer Technical Representative (COTR), Industrial Specialist, or Quality Assurance Representative (QAR). These specialists form the core of the acquisition team. They approach the contract from different perspectives but with one goal, effective and efficient contract performance. The Defense Contract Management Agency (DCMA) is also a key player in oversight of the contractor and can provide valuable assistance in identifying problems early.
• Foster Communication. By fostering communication between Government Acquisition Team members, you can benefit from the picture that is created when different pieces of the puzzle are brought together.
  • On a manufacturing contract, a QAR notes a large number of rejects from a particular process. At the same time, the Industrial Specialist notes that a shop responsible for that process is not meeting schedule commitments. Together, these bits of information paint a picture of a contractor that has significant quality problems that are affecting production and contract cost.
  • On an engineering services contract, the COTR feels that the Contractor Team Leader has only minimal experience in performing the type of work required by the contract. A Government Project Engineer feels that the Team Leader is putting unreasonable constraints on contractor personnel and these constraints are hampering contract operations. It may be that the contractor's failure to hire a qualified Team Leader is putting the contract schedule and cost performance in jeopardy.

4.2 Estimating Cost To Complete

Support for Estimating Cost to Complete the Contract. Whenever you suspect a cost overrun, remember that the contracting officer is ultimately responsible for monitoring contractor performance and estimated cost to complete the contract. However, the contracting officer should actively seek support from other members of the Government Acquisition Team.

• Assistance from Government technical personnel is essential in analyzing contract progress to date and estimating the amount of effort required to complete the contract.
• The auditor is the Government expert on contract cost. Audit assistance can be invaluable in verifying the actual contract cost incurred and validating data offered by the contractor to support projections of the cost to complete the contract.
• The requiring activity can provide valuable insight to the analysis process. As the organization responsible for managing funds, they must be involved in any decision to increase contract price or any decision to modify contract requirements to contain costs.
• Support from the acquisition integrated product team to include the program manager and EV analyst are key components to successful analysis of contract cost and schedule performance.

Procedure for Estimating the Cost to Complete the Contract. When developing an estimate of the cost to complete a contract:

• Determine the progress toward contract completion to date.
• Determine the cost of the contract work completed to date.
• Determine the reasons for variances from initial estimates.
• Estimate the amount of work remaining to be completed.
• Estimate the cost of the work remaining to be completed.

Progress Toward Contract Completion. Normally, the most difficult element of developing an estimate to complete the contract is determining the amount of work completed to date. It is relatively easy to determine the number of hours worked, wages paid, and material purchased, but those are measures of input --not measures of progress toward contract completion. It is not always easy to determine how these inputs have contributed to completing the work required by the contract.

To determine the work completed to date, you must rely on the sources and types of information identified in the previous section of this chapter:

• Contractually required cost/schedule analysis and reporting;
• Contractually required cost information;
• Contractor production management reports and analyses;
• Progress review meetings; or
• Observation by Government personnel.

Normally, the more detailed the information provided by the data source, the more valuable it is as a basis of estimating the cost to complete the contract. Contract progress reports typically provide a general overview of contract performance and specific detail only on a limited number of special interest items. However, detailed contractor CPR data would normally be more valuable than general contract production management reports, because the BCWS, BCWP, and ACWP data presented in the CPR provide detailed information on the contractor's cost/schedule performance. As the Performance Measurement Baseline (PMB) is developed (remember this is the time-phased BCWS), the contractor must identify methods to "take credit" for work completed. These measures range from subjective to more objective; the greater the understanding of these methods and how they affect the assessment of work completed, the better your estimate to complete will be as a forecast. A thorough understanding of earned value data will significantly enhance the value of the data used to project the cost to complete the effort.

As you analyze available information, you should request support from the using activity and Government technical personnel. They are the experts on Government requirements and contractor progress. When you request analysis support, establish an "as of" date for the analysis. That date can then be used for the collection of data on both contract work completed and the cost for completing that work.

Cost of Work Completed to Date (FAR 32.503-4(b)). In determining the cost of work completed, rely on contractor submissions and input from involved members of the Government Acquisition Team. Normally, the cognizant auditor plays a key role in evaluating cost information submitted by the contractor. However, others can play key roles, particularly when the contractor has implemented a management system that complies with EVMS Guidelines.

If the auditor has identified deficiencies in the contractor's accounting system, consult with the auditor to determine how those deficiencies may affect the contractor's recording of contract costs. You should also consult with DCMA to determine if any deficiencies have been identified, through routine surveillance, with the contractor's EVMS system (if validated). These deficiencies can also affect the validity, accuracy, and usefulness of reported data.

Determine Reasons for Variances From Initial Estimates. Before you can estimate the cost to complete the contract, you must determine the reason for the overrun.

• Gather Information. Solicit opinions from the contractor and Government Acquisition Team experts concerning the reasons for the overrun. Ask questions such as:
  • Why do actual costs differ from the original estimates?
  • Have circumstances outside the contract affected costs? For example, has a major reduction in business volume increased indirect cost rates and inflated contract costs?
  • Does the Government have any responsibility for the increased costs?
  • What can be done by the contractor and/or the Government to bring costs back into line?

If EV is required on the contract, the contractor must submit a Variance Analysis in Format 5 of the CPR. This narrative should address the reasons for the variance, the root cause, and any corrective actions planned to correct the problem. This is a good tool to keep overruns from becoming a surprise, and if done correctly, can provide valuable insight into the reasons for cost or schedule issues.

• Identify The Reason. The overrun could result from many possible reasons, including:
  • Conflicting interpretations of contract requirements; (however these should be resolved as part of the Post Award contract or the Integrated Baseline Review so they don't become an issue during contract execution)
  • One or more specific contract performance problems; or
  • Generally poor contractor management of contract operations.
• Evaluate Current Status. Evaluate available information to establish whether the situation that caused the overrun has been resolved.

Estimate Amount of Work Remaining. Once you have determined the amount of contract effort completed to date, it is relatively easy to estimate the tasks that remain to be completed. Again, you should request support from other members of the Government Acquisition Team as you perform your analysis. They can provide invaluable support in developing and evaluating both cost and schedule estimates for contract completion. Work remaining in EV terms is calculated as follows:

Budget at Completion - Budgeted Cost of Work Performed
(BAC - BCWP = Work Remaining).

Once you have identified how much work remains, you need to decide if the contractor will continue to perform as they have so far on the contract or if issues have been resolved and performance will improve. Of course, there is also the alternative that performance will continue to decline. Trend analysis should be performed using cumulative EV data from CPRs.

Cost of Work Remaining to be Completed. Once you have determined the amount of work remaining and the causes for cost growth, you can estimate the cost to complete the contract. Given this information, estimating the cost to complete the contract is much like estimating the cost of a new contract.

• Select estimating methods and quantitative techniques based on the information available. You can develop estimates using any appropriate method -- round-table, comparison, or detailed. However, as the contractor progresses toward contract completion, you should expect more reliance on comparison and detailed estimates and less on round table estimates.
• Consider contract cost history along with other available data in estimate development. For example, where there has been a history of schedule delays and cost overruns, it may not be reasonable to assume that future contract effort will be completed as projected.
• Where there has been a history of schedule delays or cost overruns, it may not be reasonable to assume that future effort will be as projected.
• If there are cost or schedule constraints, develop several cost estimates based on different completion scenarios, such as:
  • Complete contract to original contract specification and schedule requirements.
  • Complete the contract to original specification requirements but allow additional time.
  • Complete the contract to original schedule requirements but reduce contract specification.
  • Adjust both the contract specification and schedule requirements.

This type of "bottoms-up" estimate will typically be developed by the contractor (at least an annually). The contractor will provide, as part of the CPR, a most likely cost to complete the project. The program office, however, will develop their own Estimate At Completion (EAC), typically using a formula-based approach based on trend analysis. There is a basic formula for calculating an EAC:

EAC = Actuals to Date + [(Remaining Work)/(Efficiency Factor)].

Actuals to Date = ACWP

Work Remaining = BAC - BCWP

The efficiency factor can vary depending on the determination of future contractor performance. Common efficiency factors include: cumulative CPI, 3 period average CPI, 6 period average CPI, composite index (CPI*SPI), or a weighted index (0.8CPI + 0.2 SPI).

If the reason for the overrun has been resolved, you can be much more certain of your estimate of the work required to complete the contract. If the issues have been resolved, the contractor could work at the original planned efficiency or continue at the current efficiency level. In this case, using the cumulative CPI as the efficiency factor would be appropriate. Within the DoD, the "rule of thumb" is that this efficiency factor generates the "best case" EAC projection. If the issues leading to the overrun have not been resolved, you must consider possible solutions and related risks as you develop your estimate. In this situation, you would need to choose an efficiency factor that best captures the performance expected and anticipated risks. For more information on Estimates At Completion (EAC) calculations, you can reference the Defense Acquisition University EVM Gold Card. It contains Earned Value Management terms, metrics, calculations, and policy information. It can be accessed at https://acc.dau.mil/evm.

4.3 Resolving Potential Cost Overruns

Course of Action. Once the actual cost of work completed and estimates to complete have been identified, a course of action must be determined.

Fixed-Price Contracts. A cost overrun in a firm fixed-price contract, fixed-price economic price adjustment contract (unless the adjustment is based on actual cost), or fixed-price contract with prospective price redetermination contract will not affect contract price. A cost overrun on a fixed-price incentive contract or fixed-price contract with price redetermination may affect overall contract price, but the Government's contract obligation will be limited by the contract ceiling price.

While the effect on contract price will be limited, a cost overrun may have a substantial effect on contract performance. Additional costs will reduce profits and may result in a contract loss. Contractor efforts to control costs may result in decisions that affect the quality of contract performance. Accordingly, with fixed-price contracts, your primary efforts should generally be directed toward:

• Monitoring contract performance more closely to assure that all work is being accomplished in accordance with contract requirements, and
• Considering the need for adjustment in the liquidation rate for any progress payments based on cost.

Cost-Reimbursement Contracts. For cost-reimbursement contracts, you must determine the most appropriate action considering that the Government is responsible for reimbursing the contractor for all allowable costs up to the cost and funding limits established in the contract. The most common alternatives for action include:

• Withhold action until more information is available.
• Provide additional funds/time to complete the contract as is.
• Redefine the contract effort to fit existing funds.
• Allow the contract to continue without change.
• Terminate the contract.

As you determine the appropriate course of action, you should consider contract cost and other factors including: contract schedule, probable impact of not completing the contract, alternatives to completing the contract (e.g., terminate and reprocure from another source), availability and sources of funding, and many more.

Withhold Action. In situations where your analysis has identified cost or schedule variances, you may wish to stand pat (i.e., take no action until you can obtain additional information).

• Consider this course of action when:
  • You are not sure that the contractor cannot recover from current cost or schedule variances to complete the contract within the original cost and schedule.
  • You are awaiting additional information that may affect contract cost and schedule.
  • A major program management decision is in progress and the decision will affect the action you will take on the contract.
  • Funding is uncertain.
• When you withhold action awaiting more information, inform the contractor. Failure to put the contractor on notice can result in the Government assuming additional liability through constructive consent. Consider the following general steps to put the contractor on notice that the Government intends to withhold action pending further fact-finding:
  • Acknowledge that the Government is considering whether to add funds or increase the estimated contract cost.
  • Point out that the contractor is entitled to stop work when the contract dollar limit has been reached.
  • Admonish the contractor that any work done beyond the dollar limit will be at the contractor's own risk.

Provide Extra Funds/Time to Complete the Contract. When additional funding is available, the need exists, and the increase in cost is justifiable, the most logical course of action may be to continue contract performance following the original contract technical and schedule requirements.

You should consider schedule relief, with or without extra funding, when contract problems have affected the contractor's ability to complete the contract on time.

Consider the following points when implementing a decision to add funds and/or change the contract schedule:

• Obtain necessary approvals for your proposed course of action.
  • If you are planning to increase contract cost, establish the amount of additional funds required and obtain a funded purchase request from the requiring activity. This will require coordination with the Business Financial Manager to confirm sufficient funds are available for the correct fiscal year. If they are not, then funds may need to be reprogrammed from another program or requested through the Planning, Programming, Budgeting, and Execution (PPBE) system. Reprogramming is an option if funds are needed in the current fiscal year; PPBE if funds are needed in future years. The timing and amount of the shortfall are critical aspects to determine the flexibility in meeting increased funding requirements.
  • If you are planning to change the contract schedule, obtain concurrence on any proposed delivery date changes from the requiring activity. In addition, many schedule changes will also require additional funding so this must be considered.
  • If either of these changes will occur in a program, you should coordinate with the Program Manager. If either cost or schedule adjustment is significant, the PM will need to determine whether the changes will cause a breach of the Acquisition Program Baseline and additional reporting through the acquisition approval chain.
• Meet with the Contractor to review contract requirements and verify the remaining tasks, then negotiate the cost/time changes needed to complete the contract.
• Negotiate adequate consideration to the Government for increasing contract cost or revising the contract schedule (e.g., a reduction in potential contract fee).
• Execute and distribute a bilateral contract modification.

Redefine Contract Requirements to Fit Existing Funds. Redefining contract effort to fit available funds -- sometimes called downscoping -- can be a viable option for research contracts, as well as supply and service contracts with multiple line items. This option is particularly attractive when additional funds are not available, but it can also be employed when the requiring activity determines that marginal elements of the contract are not worth the additional money. Descoping the contract will have to be coordinated with the Program Manager to ensure user requirements are met and/or requirements documents are updated to reflect the change. If the descoping is within existing trade space, coordination with the PM may be adequate.

To implement a decision to reduce contract scope, use either a deductive contract modification or a partial termination for convenience. As you decide which one to use, consider the guidance presented in the paragraphs below. However, consult with your agency legal counsel before making a final decision on which approach is appropriate in your situation.

• Deductive Contract Modification. In general, you should use a deductive modification when the redefinition of contract requirements is within the scope of the original contract.
  • For example, you can use a contract modification under the Changes clause to downsize requirements in a variety of ways, including changes in:
  • Specifications, drawings, or designs for supplies.
  • Description of services.
  • Method of shipping or packing.
  • Place of delivery or performance.
  • However, none of the Changes clauses available for cost reimbursement contracts provide for changes in quantity. Such changes are normally considered to change the scope of the contract.
• Partial Termination for Convenience. In general, a partial termination for convenience is appropriate when the redefinition of contract requirements will change the scope of the original contract. You should use a partial termination when:
  • You are redefining contract requirements by eliminating items from the contract.
  • The redefinition of other requirements (e.g., the description of services) is so substantial as to change the scope of the contract.

Allow the Contract to Continue Without Change. If you select this alternative, allow the contract to continue until funds expire.

• Consider this alternative when:
  • Additional funds are not available but continued contract performance will benefit the Government.
  • Most of the vital elements of the contract will be accomplished within current requirements and funding.
  • The cost of contract redefinition or termination will be greater than the cost of simply allowing the contractor to use available funds and then halting contract performance.
• If you select this alternative, it is absolutely critical that you:
  • Advise the contractor that additional funds will not be added to the contract.
  • Advise the contractor that any contract performance beyond current contract dollar limits will be at the contractor's expense.
  • Not suggest that the contractor perform beyond current contract dollar limits.

Terminate the Contract. If you believe that the Government's best interests will be served by ending the contract immediately, terminate the entire contract for convenience.

Appendix 4A, Earned Value Management System Guidelines

Organization.

0. Define the authorized work elements for the program. A work breakdown structure (WBS), tailored for effective internal management control, is commonly used in this process.
0. 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.
0. 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.
0. Identify the company organization or function responsible for controlling overhead (indirect costs).
0. 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.

Planning, Scheduling, and Budgeting.

0. 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.
0. Identify physical products, milestones, technical performance goals, or other indicators that will be used to measure progress.
0. 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 undefinitized 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.
0. Establish budgets for authorized work with identification of significant cost elements (labor, material, etc.) as needed for internal management and for control of subcontractors.

• 10. To the extent it is practicable to identify the authorized work in discrete work packages, establish budgets for this work in terms of dollars, hours, or other measurable units. 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.
• 11. Provide that the sum of all work package budgets plus planning package budgets within a control account equals the control account budget.
• 12. Identify and control level of effort activity by time-phased budgets established for this purpose. Only that effort which is not measurable or for which measurement is not practicable may be classified as level of effort.
• 13. Establish overhead budgets for each significant organizational component of the company for expenses which will become indirect costs. 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.
• 14. Identify management reserves and undistributed budget.
• 15. Provide that the program target cost goal is reconciled with the sum of all internal program budgets and management reserves.

Accounting Considerations.

• 16. Record direct costs in a manner consistent with the budgets in a formal system controlled by the general books of account.
• 17. 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.
• 18. 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.
• 19. Record all indirect costs which will be allocated to the project.
• 20. Identify unit costs, equivalent units costs, or lot costs when needed.
• 21. For EVMS, the material accounting system will provide for:

• a. Accurate cost accumulation and assignment of costs to control accounts in a manner consistent with the budgets using recognized, acceptable, costing techniques.

• b. 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.
• c. Full accountability of all material purchased for the project including the residual inventory.

Analysis and Management Reports.

• 22. 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:
• a. Comparison of the amount of planned budget and the amount of budget earned for work accomplished. This comparison provides the schedule variance.
• b. Comparison of the amount of the budget earned and the actual (applied where appropriate) direct costs for the same work. This comparison provides the cost variance.
• 23. 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 variances in the detail needed by program management.
• 24. 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.
• 25. 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 project.
• 26. Implement managerial action taken as the result of earned value information.
• 27. 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.

Revisions and Data Maintenance.

• 28. Incorporate authorized changes in a timely manner, recording the effects of such changes in the budgets and schedules. In the directed effort prior to negotiation of a change, base such revisions on the amount estimated and budgeted to the program organizations.
• 29. 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.
• 30. Control retroactive changes to records pertaining to work performed that would change previously reported amounts for actual costs, 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.
• 31. Prevent revisions to the program budget except for authorized changes.
• 32. Document changes to the performance measurement baseline.