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Earned Value Management: Measuring Government Contracts

Originally published March 7, 2012

A contract is an agreement between two or more parties to accomplish certain things in exchange for some form of payment or compensation. Contracts always include specific terms and conditions, and their validity is bracketed by some dates delimiting the relevant timeframe. The principal reason for a contract is to memorialize, for all the parties involved, what it is that they have actually accorded to do, in exchange for what, under what conditions and in what period of time. In effect, Webster’s dictionary defines a contract as “a binding agreement between two or more persons or parties; especially: one legally enforceable.”

The government uses contracts as a preferred vehicle for acquiring the goods and services it needs to do its job. While acquiring commodities can appear to be fairly straightforward – 100 gallons of gasoline at $3.20 per gallon – there are many situations when acquiring goods or services can be extremely complex. Consider, for example, how we contract the acquisition of a new weapons system, the space shuttle, or even a steady supply of fuel over a long period of time. In many cases, the acquisition includes design, development and  implementation all in one contract. This means that we are acquiring both goods and services in the same agreement, and that makes it even more complicated.

In any case, we want to focus on measuring the performance of contracts to address an important point and identify an opportunity for business intelligence (BI) experts to make a contribution.

If you have a contract to deliver goods or services, the preferred way to evaluate what you get out of it is through earned value management (EVM), an approach that integrates schedule and cost into an assessment of performance. It attempts to answer the fundamental question, “What we did get for our money?”

Technically, EVM is a project management system, and hence it is focused on projects and not contracts. But most service contracts embody one or many projects and we often refer interchangeably between a project and the contract that authorizes and enables it. 

EVM emerged from the Department of Defense’s requirement to handle complex defense programs in the 1960s. In the 1990s, the Office of Management and Budget (OMB) set out to search for best practices to use throughout the federal government, found EVM and adopted and transformed it. Today EVM is used fairly broadly by federal agencies. Furthermore, the Department of Defense has continued to refine the methodology, now distilled into 32 specific criteria, and packaged it into the Earned Value Management System (EVMS) that provides substantial additional support to the application of EVM including a reporting module.

In EVM we have a fairly objective technique to measure progress and performance accomplished in any task, and hence it’s a good tool that is often mandated in government contracts.

Think of EVM in three steps. First, a project earns value as the service is done or the work is completed. Second, you can compare that earned value to both planned and actual costs. Third, the relationship of planned vs. actual allows us to measure current performance and predict future trends. Additionally, the fact that we can measure the earned value as well as both actual and planned costs in dollars makes it easy to compare and understand.

It’s outside the scope of this column to do a tutorial on EVM, but we do need to give the reader enough of an understanding to make some points. Hence, here is a lightning round of “EVM for Dummies with Attention Deficit Disorder.”

There are the following three basic building blocks of EVM that are recorded regularly on some periodic reporting date.  It also entails that a detailed work breakdown structure (WBS) has been developed from where the baselines and planned dates and values are taken.

  1. Planned value (PV): PV is the total cost of the work planned, based on the WBS, as of a specific reporting date. It is calculated as: Total Hours Planned * Hourly Rate. Since a project may have many line items involved, PV is the sum of all the PVs of the line items involved.

  2. Actual cost (AC): AC is the total cost it has taken to complete the work as of a reporting date. It is calculated as: Total Hours Spent * Hourly Rate. And as above, AC is the sum of all the ACs of the line items involved.

  3. Earned value (EV): EV is the total cost of the work completed as of a reporting date. It is calculated as: Baselined Cost * % Complete Actual

The fact that you can now determine the percent actually completed versus what you had planned to complete becomes powerful in determining where you are and then calculating both cost and schedule variances. These provide a project manager with indicators of how far a project may be off from the original budget and schedule.

In large and complex projects/contracts there are ever-increasing opportunities for business intelligence (BI) practitioners to develop new and better ways of providing insights for management. For example, there already are several widely used indices within EVMS. The ratio of EV to PV gives us the Schedule Performance Index (SPI) which can quickly tell whether a project is ahead of schedule (SPI > 1). And the Cost Performance Index (CPI), EV/AC, can directly tell us whether we are under budget (CPI > 1) or over (CPI < 1).

But there are many more useful metrics and ratios that can be creatively developed within the EVM framework, and this is an area where business intelligence is poised to make a contribution. Furthermore, the present environment brings a series of new challenges that Earned Value Management must address, for example: how to handle agile development, how to deal with virtualization and how to handle the cloud. These are important opportunities for BI practitioners to engage in, for both fun and profit.

  • Dr. Ramon BarquinDr. Ramon Barquin

    Dr. Barquin is the President of Barquin International, a consulting firm, since 1994. He specializes in developing information systems strategies, particularly data warehousing, customer relationship management, business intelligence and knowledge management, for public and private sector enterprises. He has consulted for the U.S. Military, many government agencies and international governments and corporations.

    He had a long career in IBM with over 20 years covering both technical assignments and corporate management, including overseas postings and responsibilities. Afterwards he served as president of the Washington Consulting Group, where he had direct oversight for major U.S. Federal Government contracts.

    Dr. Barquin was elected a National Academy of Public Administration (NAPA) Fellow in 2012. He serves on the Cybersecurity Subcommittee of the Department of Homeland Security’s Data Privacy and Integrity Advisory Committee; is a Board Member of the Center for Internet Security and a member of the Steering Committee for the American Council for Technology-Industry Advisory Council’s (ACT-IAC) Quadrennial Government Technology Review Committee. He was also the co-founder and first president of The Data Warehousing Institute, and president of the Computer Ethics Institute. His PhD is from MIT. 

    Dr. Barquin can be reached at rbarquin@barquin.com.

    Editor's note: More articles from Dr. Barquin are available in the BeyeNETWORK's Government Channel

     

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