Plans for Reducing the Number of EVMS Certification Reviews

FAR (Federal Acquisition Regulations) 34.2 requires contractors that receive awards for major acquisitions for development to have an EVMS (Earned Value Management System) that complies with ANSI/EIA (American National Standards Institute/Electronic Industries Alliance) Standard 748. The idea here is that if implemented properly, the EVMS will provide an early warning of cost overruns and schedule delays.

Contractors required to implement ANSI/EIA compliant EVMS however know full well that the cost of compliance is significant. By OFPP's (Office of Federal Procurement Policy) own estimate, the cost of certification can exceed $1 million. In addition, some contractors are finding that once they achieve certification of its system from one agency, find that other agencies will not recognize that certification and will insist on performing their own certification at additional cost to the contractor (and to the Government program).

Contractors have observed that the certification processes used by some agencies are very similar. They should be because they all work off of essentially the same "audit" program. Last year's Open Dialogue on Improving Federal Procurement raised many concerns over eliminating or reducing duplicative processes as one avenue for improving the Federal procurement process. Chief among those concerns was the repetitive and expensive EVMS certification processes borne by contractors.

To reduce such repetitive and expensive certifications, the OMB's Office of Federal Procurement Policy, is encouraging agencies to share the details and results of their EVMS certifications and enter into reciprocal agreements with other agencies and to post their EVM processes and procedures on their public websites. Sharing such information should help identify redundancy in the certification processes. If an agency determines that its certification process is substantially similar to the certification process of another agency, the agency should consider whether it is feasible to enter into an agreement with the other agency for the mutual recognition of the EVMS certification.

There is a role for contractors in this new procedure. The procedure does not establish a central repository for EVMS certifications and agencies are not likely to poke around in other agencies websites to determine whether any certifications have been completed. Therefore, contractors need to alert pending EVMS certification teams if a previous certification has been completed and ask that they consider relying on the results of that certification.

OMB's guidance on this matter can be found here.


. , These observations have reached the attention of the OMB's Office of Federal Procurement

Earned Value Management System Compliance Review Threshold Increased

Last week the Department of Defense raised the Earned Value Management System (EVMS) compliance review threshold from $50 million to $100 million - good news for some contractors. This change affects only DoD contracts and does not affect other agencies such as NASA or the Department of Energy.

The new $100 million threshold applies to cost or incentive contracts and subcontracts for which the contractor is required to have an earned value management system that has been determined by the Government - typically by the Defense Contract Management Agency (DCMA) - to be compliant with EIA-748,

The new compliance review threshold does not increase the threshold for EVMS requirements. That threshold still sits at $20 million. It does mean that no compliance surveillance activities will be routinely conducted by DCMA on cost or incentive contracts and subcontracts valued between $20 million to $100 million.

In its announcement of the increased threshold, DoD warned that it reserves the right to review contractor EVM systems if the EVM reporting data quality "appears suspect" such as when a contracting officer, program office, or buying command asks for DCMA assistance due to concern about the quality of EVM data reported on a given contract, or when the EVM data is not in compliance with one or more of the 32 EIA-748 guidelines.

You can read more about this subject by clicking here.

Government Withholding Payments for Inadequate Business System

Aviation Week and Space Technology reported this week that the Defense Contract Management Agency (DCMA) has increased the amount being withheld from Lockheed Martin on the F-35 program from two to five percent because the company has not made satisfactory progress in correcting deficiencies in its EVM (Earned Value Management) system.

EVMS is one of the six business systems that must be adequate or contractors face potential withholds on their billings to the Government. The other five are accounting, estimating, purchasing, MMAS and Government property (in the hands of contractors).

Lockheed was awarded a $4 billion LRIP (low rate initial production) contract for 30 F-35 aircraft last December. The contract included the EVMS clause which requires compliance with 32 different EVM guidelines. The Government's review of Lockheed's compliance with those guidelines disclosed significant deficiencies in 19 of them. Lockheed had promised to have them corrected by June. In June however, the Government found that Lockheed had not made sufficient progress in correcting the deficiencies which led to the 5 percent withhold.

Five percent is a significant withhold. One estimate we read stated it would cost Lockheed $2 million per month. That might be underestimating the amount since the contract is $4 billion. Regardless, it represents a significant amount and is sure to affect the company's bottom line.

This incident is evidence that the Government is serious about enforcing the business system requirements laid out in the DoD FAR Supplement and is willing to invoke the withhold provisions when significant deficiencies go uncorrected.

DCAA Jettisons More of its Workload

In a recent memorandum , DCAA (Defense Contract Audit Agency) instructed its staff to no longer initiate EVMS (Earned Value Management Systems) audits. The DCMA (Defense Contract Management Agency) has been designated the Agency responsible for compliance and validation of contractors' EVMS systems. If DCMA decides that it needs DCAA assistance, it must make a formal request for such. However, any request for assistance will be limited to eight (or fewer) of the 32 EVMS criteria identified in the FAR (Federal Acquisition Regulations). These eight criteria include:

• Criteria 13 - establish overhead budgets for each significant organizational component of the company for expenses which will become indirect costs.
• Criteria 16 - record direct costs in a manner consistent with the budgets in a formal system controlled by the general books of account
• Criteria 17 - when a work breakdown structure (WBS) is used, summarize direct costs from control accounts into the WBS without allocation of a single control account to two or more WBS elements
• Criteria 18 - summarize direct costs from the control accounts into the contractor's organizational elements without allocation of a single control account to two or more organizational elements
• Criteria 19 - record and allocate indirect costs
• Criteria 20 - identify unit costs, equivalent units costs, or lot costs when needed. or lot costs
• Criteria 21  - the material accounting system will provide for accurate cost accumulation and assignment of costs to control accounts in a manner consistent with the budgets using recognized, acceptable, costing techniques.
• Criteria 30 - control retroactive changes to records pertaining to work performed that would change previously reported amounts for actual costs, earned value, or budgets.

At companies with contracts requiring EVMS implementation, surveillance and compliance activities represented a sizable workload for DCAA. Perhaps this will free up resources for other audit activities.

NASA Proposes to Remove EVMS Requirements from Firm Fixed Price Contracts

Here's something very rare - the Government is proposing to remove a regulation.

On February 9, 2011, NASA issued a proposed rule (with request for comment) that would eliminate the mandatory requirement for contractors to establish and maintain an Earned Value Management System (EVMS) for firm-fixed-price (FFP) contracts. NASA has finally recognized the inherently low risk to the Government associated with FFP contracts and intends to relieve contractors from unnecessary reporting burdens and unnecessary cost. We can only hope that other agencies take note and do likewise. This proposed rule would not affect cost-reimbursable or fixed-price-incentive contracts.

Under the revised rule, cost-reimbursable and fixed-price incentive contracts greater than $50 million must have an adequate EVMS system as determined by the cognizant federal agency (usually the Defense Contract Management Agency or DCMA). Cost-reimbursable and fixed price contracts between $20 and $50 million must have adequate EVMS systems as determined by the contracting officer. Cost-reimbursable and fixed-price-incentive contracts under $20 million need EVMS systems only when the contracting officer determines there is sufficient risk to justify the need. EVMS for fixed-priced contracts of any amount is "discouraged".

Earned Value Management (EVM) is a performance-based tool that gives agency managers an early warning of potential cost overruns and schedule delays during the execution of their investments. EVM requires agencies to integrate information about the scope of work with cost, schedule, and performance information so that they may compare planned spending with actual spending, isolate the source of performance problems, and take corrective actions in a timely manner.

EVMS Compliance - What's Going On?

Last week there was a flurry of news articles concerning the decertification of Lockheed's EVMS system. EVMS (Earned Value Management System) is a standard used by contractors to provide data on the progress of large Government contracts. In 2007, the Defense Contract Management Agency (DCMA) reviewed Lockheed's EVMS system and found it deficient in more than half of the 32 EVMS standards. In a recent followup review, DCMA found that Lockheed had not made sufficient progress on its corrective action plan, hence the decertification.

In today's news, another defense contractor has been found to have EVMS issues. DCMA is on the verge of issuing a report citing Northrop Grumman of significant deficiencies in a number of EVMS standards.

There is obviously a renewed emphasis on EVMS. DCMA (as well as DCAA) is focusing a lot of resources these days to ensure that these systems are functioning properly and provide valid, accurate, and current information on the status of major programs. This would be a good time for contractors to assess the adequacy of their own EVMS implementations - before the Government arrives.

Business System Requirements - Earned Value Management

In 1996, DoD accepted Industry Guidelines for Earned Value Management (EVM) replacing DoD's Cost/Schedule Control System Criteria (C/SCSC) program. The industry guidelines adopted by DoD are the ANSI/EIA EVM Standards (ANSI/EIA-748-1998). The guidelines represent the framework for an integrated management system that provides for:

• Planning the timely performance of work
• Budgeting resources
• Accounting for costs and measuring actual performance against plans, and
• Replanning resources needed to complete the contract when significant deviations from plans are identified.

EVM requirements apply to contracts over $20 million but may apply to contracts under that threshold if the contracting officer determines its necessity (based on risks).

A contractor's management system must meet 32 guidelines organized into the following five major categories. Unlike the other business system posts, we will not list out all 32 guidelines but they can be accessed here:

• Organization
• Plannig, Scheduling, and Budgeting
• Accounting Considerations
• Analysis and Management Reports
• Revisions and Data Maintenance

EVM surveillance is conducted jointly by DCAA, DCMA, and representatives from the buying command (procurement office).