Single Point Adjustments: a New Definition with Examples
Total Page:16
File Type:pdf, Size:1020Kb
Single TUTORIALPoint Adjustments SINGLE POINT ADJUSTMENTS: A NEW DEFINITION WITH EXAMPLES David C. Bachman Disciplined maintenance of the Performance Measurement Baseline is essential for Earned Value Management. A stable baseline provides the earned value (EV) analyst with the metrics needed to bound a project’s Estimate at Completion (EAC) range. A single point adjustment (SPA) is made when a contract’s existing cost and/or schedule variances are set to zero and all the remaining work is replanned with the goal of completing the project on schedule and on budget. The SPA obscures past performance, collapses the EAC range, and makes the resulting EAC unreliable. The origin of SPA, four recent project SPAs, and the SPA effect on the project’s EACs are examined. A new SPA definition is recommended for EV glossaries that currently omit this topic. recently joined the Ballistic Missile Completion (EAC), and recommend a Defense Organization (BMDO) as an new SPA definition for earned value glos- Earned Value Senior Program Analyst. saries that currently omit this topic. Al- One of my first BMDO assignments was though I review the Earned Value Man- to explain a term I was unfamiliar with agement (EVM) estimate at completion — single point adjustment. The term concept, I do not provide extensive review single point adjustment (SPA) is not de- of basic EVM concepts that can be found fined in current versions of the Defense in the Earned Value Guidebook (DCMA, Contract Management Agency’s (DCMA) 2000). Earned Value Management Implementa- tion Guide (DCMA, 2001), the Earned Value Guidebook (DCMA, 2000) or the SINGLE POINT ADJUSTMENTS Defense Systems Management College’s HISTORICAL DEFINITION (DSMC) Earned Value Management Text- book (DSMC, 1999). In this paper I will The origin of the term single point share the historic origin of the term, the adjustment is found in historic U.S. Air effects that contractor-initiated SPAs have Force (USAF) Cost/Schedule Control had on actual BMDO contract Earned System Criteria (C/SCSC) documentation Value (EV) metrics and the Estimate at (USAF, 1986). The term single point 177 Acquisition Review Quarterly — Fall 2001 adjustment describes an event when a variances at other than a single contract’s existing variances (Schedule point in time (current period).” Variance [SV],1 Cost Variance [CV]2) are Because of this requirement, the zeroed in a single reporting period and question concerning this “single the remaining portion of contractual work point adjustment” became part is rebudgeted to establish a new perfor- of the lexicon of C/SCSC. mance measurement baseline (PMB3) (Finefield, 2000) (Finefield, 2000). Unlike an over-target baseline, the goal of an SPA is to develop a new PMB RECURRING THEMES IN that completes EARNED VALUE MANAGEMENT “A character trait all the remain- shared by many ing work using Three recurring themes are found program managers only the re- throughout much of the published works is a belief they will dealing with Earned Value Management: complete their maining bud- project on schedule get from the 1) program managers are optimists; 2) within budget.” original PMB. programs don’t improve; and 3) general- No additional izations are made about a contract’s EAC (over-target) range based upon selection of specific budget is added to the new PMB. Like- EAC equations (or performance factors). wise, SPA differs from a classic rebase- All three themes help explain the effect lining because the new PMB includes no that single point adjustments have on new work scope and is completed with- BMDO earned value metrics and the out a schedule slip. Tony Finefield pro- resulting estimate at completion calcula- vides a historic origin for the term in an tions. Office of the Secretary of Defense (OSD) A character trait shared by many pro- Earned Value Management Noteboard gram managers is a belief they will com- posting: plete their project on schedule within bud- get. This optimism often leads to advo- The term evolved from a state- cacy and the suppression of unfavorable ment in Air Force Regulation estimates at completion. In the wake of 800-6/AFSC Supplement 1, dated the Navy’s A-12 Program, D.S. Christen- 31 December 1986. In the discus- sen examined 64 contracts to evaluate cost sion concerning Over Target overrun optimism (Christensen, 1994). He Baselines [OTB], this supplement found both government and contractor describes the conditions where estimates at completion to be overly opti- Headquarters AFSC [Air Force mistic, with the average under estimate Safety Center] concurrence in the ranging from 4 to 8 percent. In the same establishment of an OTB was re- paper, Christensen quoted a finding from quired. One of these conditions the A-12 Administrative Inquiry (Beach, was stated as: “If the contractor 1990). C.P. Beach opined that the need to proposes making adjustments to present an optimistic picture was a current or past cost and schedule dominant consideration for suppressing 178 Single Point Adjustments more realistic estimates and that this was and McKinney, 1995). an “abiding cultural problem” for ma- Index-based methods are a very com- jor defense programs. In later research, mon technique for computing EACs, Christensen demonstrated that govern- and they are the primary technique used ment and contractor EACs were corre- by BMDO. The disciplined mainte- lated to the lower bound of an EAC nance of the PMB is essential for accu- range and the higher and traditionally rate index-based EACs. Essentially, all more accurate EACs were ignored index-based EACs are derived from one (Christensen, 1996). equation (Abba, 1991): A strong argument for Earned Value Management is the ability to project EAC4 = ACWP5 + [(BAC6 – BCWP7)/PF]. trends. When a contract is more than 15 (Formula 1) percent complete, two highly researched and generally accepted assumptions can Where ACWP is the sum of actual di- be made: 1) Overrun at completion will rect costs, plus indirect costs allocable to not be less than overrun incurred to date; the contract, and [(BAC - BCWP)/ PF] and 2) Percent overrun at completion will represents the estimated direct and indi- be greater than percent overrun incurred rect costs for the remaining authorized to date (W. Abba, personal communica- work. An EAC range is established by tion, September, 1992; Christensen, 1989; applying different performance factors Heise, 1991; Wilson, 1991). (PF) to the EAC equation. The cost per- A primary function of the earned value formance index (CPI)8 and the schedule analyst is to evaluate program cost, sched- performance index (SPI)9 are the primary ule, and technical trends to generate an EV metrics associated with EAC PFs. Estimate at Completion. Options available Performance factors are derived from the for computing EACs fall into three broad CPI (Table 2, Formula 2) and the SPI categories: 1) risk-based EACs; 2) regres- (Table 2, Formula 3) and take one of three sion-based methods; and 3) index-based forms: formulas. Risk-based EAC research is not as extensive as the other two categories. 1. single indexes (e.g., CPIcum, CPI3mth, Risk-based EACs look forward rather than SPIcum); backward by computing a most-likely cost applying probabilities of best- and worst- 2. weighted indexes (called composite case outcomes. After implementing risk- index in some papers, e.g., [0.8 CPIcum based EACs, Boeing Corporation realized + 0.2 SPIcum], [0.3 CPImanufacturing + 0.4 big gains in the quality of analysis, EAC CPItest + 0.3 CPIprocurement]); or accuracy, and the overall usefulness of EVM (Pakiz, 1998). Regression-based 3. composite indexes (called schedule methods use complex regression analysis to cost index [SCI] in some papers, i.e., model curvilinear cumulative cost growth. [CPIcum x SPIcum], [CPI6mth x SPIcum]). No overall superiority of this approach has Selecting the proper PF determines the been established when compared to index- ultimate management value of any based formulas (Christensen, Antolini, EAC. 179 Acquisition Review Quarterly — Fall 2001 EAC, and the CPIcum PF generates the I selected the three PFs identified in lowest EAC. the DSMC EVM textbook to evaluate the EAC range: CPIcum; (0.8 CPIcum + 0.2 METHODOLOGY SPIcum); and (CPIcum x SPIcum). The re- sults of two EAC studies indirectly sup- The data in this paper are normalized port the condition that using CPIcum as the performance factor establishes a to standardize results and conceal actual lower bound for the final contract cost program identities. BMDO has 13 active (Christensen and Heise, 1993; Haydon, projects providing earned value manage- 1981). For contracts with unfavorable ment data. Four of those programs have (less than 1.0) SPIs and CPIs, the com- been selected to highlight different types of single point adjustments. The project posite performance factor (CPIcum x descriptions are generic in nature and ac- SPIcum) establishes an upper bound. Re- view of 64 contracts shows this PF to tually apply to a number of different be the best predictor of actual final cost BMDO efforts. The earned value metrics (Christensen, 1996). This leaves the of BCWS,10 BCWP, and ACWP are rep- weighted performance factor (0.8 resented by Percent Scheduled11 (Table 2, Formula 4), Percent Complete12 (Table 2, CPIcum + 0.2 SPIcum) to hold the middle position. Formula 5) and Percent Spent13 (Table 2, The Head- Formula 6), respectively. These metrics quarters Air normalize the data and indicate where in “The data in this the project SPAs were made. PMB paper are normal- Force Material changes appear as step functions in the ized to standardize Command’s, the results and to Guide to Percent Scheduled, Percent Complete and conceal the actual Analysis of Percent Spent metrics. EACs are repre- program identities.” Contractor sented by the Percent Variance At Com- Cost Data rec- pletion14 (VAC) metric (Table 2, Formula ommends us- 7).