Cost Health Check

Cost Health ChecksAug 2013

NAVY CEVM

#Welcome to the CEVM presentation on suggested Cost Health ChecksOutlineBCWP with no ACWPACWP with no BACCredibility of the Most Likely EACTimely detail planningMR healthActive Risk & Opportunity Management

#In this session, well review some basic cost health checks that should be conducted regularly to help ensure the quality of the baseline and accuracy of the performance and forecast data it supports.Well address:Identification of BCWP without ACWPIdentification of ACWP without BACCredibility of the Most Likely EACTimely detail planningMR healthand Active Risk and Opportunity Management2BCWP with no ACWPBCWP earned without incurred ACWP may indicate a failure to integrate cost and scheduleMay also indicate mischargingBoth cumulative and current month BCWP and ACWP should be reviewed monthly at the control account level

How can work be performed without expending any effort?

#The first recommended check is for the identification of BCWP incurred without ACWP.Performance claimed without any actual cost expenditure may be indicative of a failure to integrate cost and schedule. Both cumulative and current month BCWP and ACWP metrics should be reviewed monthly at the control account level to identify any potential misalignment or mischarging.3ACWP with no BACACWP incurred for un-budgeted effort represents a breakdown in the integration of budget, scope, and scheduleBoth cumulative and current month ACWP should be zero for any account or package with zero BAC.

Why would effort be expended if not for budgeted scope?

#The second recommended check is for instances of ACWP without BAC.ACWP should never be incurred for effort which has not been budgeted. Such charges represent a breakdown in the integration of budget, scope, and schedule. Both cumulative and current month ACWP should be zero for any account or package with zero BAC. 4Most Likely (ML) EAC CredibilityIf the EAC requires future cost efficiency that is significantly better or worse than incurred cost efficiency, then the forecast is probably unrealisticAt lower levels of the WBS, some examples of accounts with significant differences between incurred and forecast performance may exist and should be explained; however, instances should be limitedTo Complete Performance Index for the EAC (TCPIEAC) and cumulative Cost Performance Index (CPI) should be compared each month at the account and program levels to determine if they differ by 0.1 or more. If so, then the EAC in question is either extremely optimistic or pessimisticIs ML-EAC reasonable given incurred performance?

#The next check is for EAC credibility. If the EAC requires future cost efficiency that is either significantly better or worse than incurred cost efficiency, then the forecast should be questioned.

At lower levels of the WBS, the contractor may be able to justify some such instances, but generally speaking they suggest that the EAC is unrealistic. At the contract level such a situation would almost certainly invalidate the EAC.

For each account and at each roll-up level, the TCPI_eac and CPI should differ by less than 0.1. If they differ by 0.1 or more, then the EAC is assumed to be invalid unless reasonable justification is provided.5Timely Detail PlanningIf the contractor is unable to detail plan effort sufficiently far in advance of execution (per their system description requirement), it calls into question their planning capability and general level of baseline controlPotentially results in a situation where effort is being performed while the baseline is still being established. This undermines the objectivity of the baseline plan.Budgets in the defined freeze period should be reviewed each month to be sure that all planning package budgets have either been liquidated and detail planned or deferred to future months for subsequent planningAre work packages planned far enough in advance?

#The next check is for timely detailed planning.If the contractor is unable to detail plan effort sufficiently far in advance of execution, then it calls into question their overall planning capability and their level of baseline control. Most contractors have a defined near term freeze period for which no baseline changes may be processed.Each month the budget freeze period window should be reviewed to ensure that no planning package budgets exist within the window.6MR HealthIf the pace of MR distribution exceeds the pace of execution, then the contractor is likely to run out of MR for future risk mitigation and unknownsMonthly review of MR as a % of ETC is recommended to ensure that the contractor doesnt distribute all MR early in the contractMR transaction justifications should also be reviewed to ensure that MR is used in accordance with the system descriptionCan the program sustain the current level of MR use?

#The next check is for the general health of program management reserve.

Rather than MR balance, its the rate of MR use which can reveal a great deal about program cost health. If the pace of MR distribution exceeds the pace of execution, it raises concern that the contractor may quickly run out of MR for risk mitigation planning and unknowns. Each month, MR as a percentage of the ETC should be evaluated.Additionally, rationale or justification statements for MR distributions should be reviewed periodically to ensure that MR use is in accordance with the system description.7Active Risk & Opportunity ManagementIf the contractor does not actively manage and/or has not developed cost estimates for identified risks and opportunities, then the EAC is likely understatedRisk and Opportunity (R&O) Management Board minutes and the risk register/database should be reviewed to monitor:level of new/retired riskUpdated valuations and probabilities for active risks and opportunitiesEnsure that R&O estimates are accounted for in the Most Likely EAC positionIs the contractor actively managing and quantifying risk?

#The final check is for an active Risk and Opportunity Management process.If the contractor doesnt actively manage or has not developed cost estimates for identified risks and opportunities, then the EAC is most likely understated.

Each month R&OMB minutes or the risk register/database should be reviewed to monitor the level of new and retired risk and opportunity and the level of change in valuations and probabilities for active risks and opportunities8Point of ContactNavy Center for Earned Value Management

(703) 695-0510

http://acquisition.navy.mil/acquisition_one_source/cevm

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