Advancing EVM and government contracting efficiencies

Defense AT&L, Sept-Oct, 2009 by Daniel A. Zosh

Earned value management processes and software tools are only as good as the system and the data for which they are implemented. Consideration of underlying contractor motives will lead to a better understanding today as to why EVM is not embraced by the majority even if there is belief that EVM tools are the answer to maximizing efficiency gains and promoting cost-saving benefits.

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Focusing on the Department of Defense weapons system acquisition process, let's begin with a few age-old questions: Why do DoD contracts overrun on a consistent basis? Why are contractors motivated to add scope of work to existing contracts? Why isn't EVM embraced as the best project management tool for advancing government contracting management efficiencies?

EVM system guidelines and procedures have been a part of the weapons system acquisition process for more than 45 years. Over the years, it had different labels--Cost\Schedule Control Systems Criteria, or CSCSC, is one--but its base philosophy has not changed. What has changed is the introduction of incredibly efficient software tools used to implement EVM practices. At no other time in the history of government defense systems acquisition have there been such advanced capabilities to manage risk, reduce cost, and maximize contracting efficiencies. So what's wrong? Why aren't we beginning to see government contracts underrun instead of overrun?

A Simple Concept

Following government-required guidelines for EVM implementation can be a rather elaborate endeavor for contractors; however, the concepts of EVM are really quite simple. EVM is most effective when applied in its purest state: in a commercially profit-motivated environment where project management efficiency needs to be maximized to reduce costs and increase profits. Depending on whether it's for government, oil and gas companies, big pharmaceutical companies, construction, high-tech/new-tech industries, or the automotive industry, the project management tracking structure may be called something different and may not use the same terms as we use in EVM, but the concepts are the same.

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Management systems are structured to track progress against a formulated baseline, with deviations from that baseline calculated to express variances; and those variances are assessed and prioritized for management action to mitigate risk. The question is whether the contractor is motivated to produce a superior product ahead of schedule and under cost, That will dictate whether EVM is used to manage the effort or is simply exercised to satisfy government requirements for data delivery and adherence to EVM guidelines.

The Right Way

Successful execution of an EVM system, validated or not, depends heavily on whether the system is used to report data or to manage the project. The system should always be used to manage the project, with data being used to verify integrity of the project to mitigate technical, cost, and/or schedule risk through identification of problem areas and to adopt management decision-making processes to:

* Realign resources (if required)

* Correct systemic issues

* Check schedule logic

* Re-evaluate trade space

* Recommend technical tradeoffs using cost as an independent variable, or CAIV, principles

* Reprogram work, budget, or resource mix

* Implement other management actions.

The Problem

In a typical DoD weapons system procurement, much of the cost of the system is expended during research and development and, therefore, there's a large amount of profit consideration given to the contractors' developing systems that exist only on paper as technical specifications. The government customer typically takes on the predominant amount of risk at that stage of a weapons system life cycle because it is paying the contractor to develop the system with a profit margin included based on the size of the contract. On a $1 billion contract with an 8 percent negotiated fee, the contractor profits $80 million. If the contract grows (via amendments) to $1.5 billion, the contractor profits $120 million. Therefore, the contractor has an underlying motivation to grow the value of the contract with additional scope of work.

Without cost and schedule performance incentives, the contractor profits the most by adding more requirements and scope of work to the contract and delivering the product on time and on budget. That doesn't necessarily equate to developing a product with maximum efficiency in an attempt to deliver ahead of schedule and under budget. It also gives us a perspective as to why government contractors are not particularly interested in underrunning contracts unless there is a specific incentive agreement that generously rewards doing so.

Extending this thought, let's review some examples that highlight the underlying problem:

Scenario 1

Original contract base value is $100 million, 8 percent fee, and a share ratio over/under of 80/20. The contractor underruns 10 percent. Fee is $8 million plus $8 million underrun (80 percent share of $10 million underrun) equals $16 million profit for performance of 0.90 cost performance index (CPI). (This is phenomenal performance by today's standards, and it rarely, if ever, happens.)