Earned Value Management has been an important topic in the USA for decades, especially because the US government explicitly demands EVM from its suppliers for large contracts. Not only does it require EVM for projects of a certain size, but it also validates the Earned Value Management system with its subcontractors after the project has started. You will learn the key fundamentals regarding EVM on government contracts and what you need to know about validating an EVMS in this article. Read on to learn the details.
The Contract Size Determines the Effort
The DoD and other government agencies in the U.S. were the first systematic users of EVM decades ago. Thereafter, EVM spread continuously across various industries. Either DoD contractors in industry were mandated to use EVM, or companies themselves realized the great benefits of this method.
In October 2015, U.S. government procurement regulations were amended including EVM requirements described therein. For example, the new EVM requirements specify new limits at which an EVM strategy must be applied to be eligible for a contract. The threshold at which a validated EVMS must be applied has been increased from $50 million to $100 million. The result could be: No EVM implementation – no order!
The following figure shows an overview of how EVM is applied in the USA. On the left side, you see the smaller and larger companies, especially from private industry. Here, there are often no specifications as to the level of detail in which EVM is to be applied. There is a tendency for smaller companies to keep the effort lower, while larger companies will define more extensive regulations. However, for very large, high-risk projects, clear regulations should be defined.
On the right side of the figure you can see how EVM is applied at DoD. For projects >$20 million and a duration of more than 12 months, clear reporting rules are defined. One of the main elements is the Cost Performance Report with format 1 and 5. Additionally, an EIA-748 compliant EVMS has to be applied. High-risk projects must also report below this amount according to these regulations. Very large projects with costs >$100 million have to apply a compliant and validated EVMS according to EIA-748 and report with the Cost Performance Report (CPR) with formats 1 to 5.
Accept the Cost Risk or Apply a Compliant EVMS
For government contracts $100M or larger, you must use a compliant and validated EVMS per EIA-748. After project work has started, the EVMS will be audited and validated by the government.
Below is a description of what the requirements are for a fully compliant EVMS and how to prove that you are implementing them.
Let’s assume your company receives a Request for Proposal (RFP) and wishes to bid on it. The RFP contains the clause DFARS 252.234-7001 if the U.S. Government project is expected to cost more than $20 million. What choice as a company do you have here? You can ignore this clause and submit your bid as a Fixed Price (FFP). However, by doing so, your company will bear the entire cost risk, especially if the project scope is not precisely known and cannot be “routinely” produced. The risk will not be acceptable to you.
For all other contract types, your company must use an EVMS. Specifically, if the project cost exceeds $100M, the DFARS clause requires you to use a fully compliant Earned Value Management System as defined in EIA-748. If your system has not yet been validated, that is, accepted by the Government, then the proposal must specify how validation will be achieved.
This includes a description of the proposed system:
- An annotated checklist that addresses each of the 162 management system criteria.
- Proposed changes to the existing system
- Resumes of personnel designing and implementing the compliant system
- A description of how the Guideline requirements will be met, including a description of subcontractor compliance and a schedule for achieving EVMS compliance.
Review existing control system and make management decision
Step 1: Familiarize the organization with the requirements of the EIA-748 Guideline and get full buy-in from senior management.
Step 2: Review the existing management control system, including the existing software and verify how it supports the full EVM requirements. This information is the basis for the implementation plan and for the cost of the customization.
Step 3: Management Decision:
- Review cost benefit of EVMS and possibly change the bid strategy to a Firm Fixed Price (FFP) bid and stop an EVMS implementation without significant investments.
- Decide to implement an EVMS step by step or
- Do not submit an offer
The Steps to Implement a Validated EVMS
Below you will find the most important steps to implement a validated EVMS:
- Review the existing management system and subsystems in detail and identify corresponding weaknesses and deficiencies. Identify solutions to these, develop the final system design and a revised implementation plan, and get this approved by management.
- Develop an EVMS compatible system description, processes and associated instructions. This describes how the system implements the EIA-748 requirements. Implement the processes in software and tools. Develop training materials.
- Train all levels of management, Control Account Managers, Project Managers, etc. in the operation and use of the EVM system.
- Apply the EVM system, ideally to the project where one has bid and won the contract. Normally three months of system data and reporting are required before the next step is to review and validate the EVMS system.
- At least one visit by the contracting officer’s EVMS representative (Defense Contract Management Agency representative for DOD contracts) verifies that the system is being implemented according to the description provided.
If the company has subsequently completed the Self Assessment, the Review Agency may be requested for a Validation Review. This is carried out approx. 12 months after the start of the contract, is very time-consuming and employs 15 to 20 reviewers for at least 2 weeks! The company has to provide any support, e.g. rooms, computers, printers. The Validation Review will always end with various items that need to be improved. As soon as these are done, the “System Acceptance Letter” is issued.
- The last step is the Surveillance Review, which checks whether the implemented system is also being used in accordance with the EIA-748 Guideline. This is carried out because experience shows that the application of EVM systems decreases over time, the management commitment decreases, short cuts are made and a laissez-faire attitude often prevails. For longer lasting projects, the Surveillance Review is conducted several times, e.g. annually.
Is all this effort worth it? For projects with the scale of more than $100M it is, for smaller projects definitely not.
Here You Can Find More Knowledge
Would you like to learn more about how to make your projects more successful with Project Control and Earned Value Management? My book “Earned Value Management – Fast Start Guide” takes you an important step further!
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