Part 1 – Preparing for Variance Analysis Reporting
Variance analysis is a critical component of an Earned Value Management System (EVMS) project. It is important to understand the value of the analysis from the contractor’s perspective to properly conduct variance analysis.
First, we will tackle how to prepare for variance analysis reporting.
There is typically a requirement for variance analysis reporting via the EIA-748 EVM Guidelines and contract. The analysis provides the contractor with a wealth of information regarding the status of the project as well as valuable information regarding the contractor’s EVMS implementation.
As a result of the analysis, the contractor can make appropriate adjustments to improve the system’s implementation and/or corrections to improve the project’s performance.
Assessing Variances During Project Execution
During the execution of the project, the contractor will periodically, typically monthly, assess progress in achieving cost and schedule objectives agreed to by the customer.
- Cost variances occur when the actual costs of achieving an approved work plan are more, or less, than that agreed to in the original plan.
- Schedule variances occur as a result of the actual work accomplished being more, or less, than the approved plan.
Variances can be either positive, indicating that the project is under costs and/or ahead of schedule, or negative, indicating that the project is over costs and/or behind schedule.
If variances are significant, that is, they exceed the established thresholds (i.e., a fixed dollar amount and/or percentage of the control account value) than a formal variance analysis report (VAR) is required. This is typically accomplished by completing the CPR/IPMR Format 5 and submitting the report monthly. We’ll discuss the Format 5 in subsequent articles.
Conducting Variance Analysis
Variance analysis should be conducted for both the current period data and on a cumulative basis. Both provide useful information for management.
The cumulative data is particularly important in identifying trends in the data, either positive or negative. The data may also indicate on-going problems that have not been corrected, and thus need extra attention, or that the EVMS implementation is inadequate in producing accurate and timely performance results.
In addition to monthly data analysis, the contractor should review the data that generates the forecasted completion costs of the contract: the estimate at completion (EAC) and the variance at completion (VAC). It is critical that the contractor know the current performance status and also what impact the current performance will have on future outcomes.
Preparing to Write the VAR
The submission of the CPR/IPMR, including Format 5, is driven by contractual requirements for end of month reporting. So, it is to the benefit of the contractor to prepare in advance to avoid the last-minute crunch to meet the submission deadline. Proper preparation for writing the VAR will enhance the contractor’s ability to write an effective, meaningful report as well meet the submission requirements.
Often, due to the limited time available between month end closeout and report submission requirements, the contractor is faced with the challenging dilemma of VAR quality versus contract submission requirements. Which is worse: getting written-up for the VAR’s poor quality or failure to meet the contractual requirements? Usually the contractual requirements, i.e., the submission date, wins that debate.
Creating a Quality Report, on Time
Perhaps there is a better mean for the contractor to meet both requirements. Let’s explore the possibilities.
The Control Account Manager (CAM) with assistance from the project controls team is responsible for writing the VAR. A central question associated with this process is when to start the writing process.
Contractors have well defined process timelines (a monthly business calendar), but these may not be adequate to meet the VAR submission requirements. All the pertinent data needs to be available, but that information becomes available at different times.
Typically, the schedule performance data is available (assuming the schedule is statused weekly) before the cost data which lags because of end of month close out. If the CAM is monitoring the control account performance information weekly, technical issues resulting in scheduling issues would be known.
At this point, the CAM can make significant headway in completing the Format 5 by writing to the known technical/schedule issues that are causing the variance. The cost data associated with these issues can be incorporated and written to later when they become available. By adopting this methodology, the CAM may gain additional time to devote to writing a more accurate VAR.
Preparation is a critical component to the VAR process. The writing of the VAR can be improved by giving some consideration to the following:
CAM/Project Control Actions
- Prior to month-end close out
- Enter estimated actuals and validate accruals
- Ensure BCR packages are submitted for management approval
- Perform schedule realism; ensure schedule status is up to date
- Perform material and subcontracting analysis
- After month-end close out; prior to VAR development
- Finalize schedule performance and “earned value” calculations
- Finalize forecast dates
- Review/Update ETCs as required
- Run cost and schedule health metrics
- CAM reviews all pertinent EVM Reports generated by the Project Controls staff
- Applies to both current period and historical data (looking for trends)
- Understand the control account situation and potential impacts to the program
If the CAM role is performed properly there should be no surprises. The CAM should be completely aware of concerns and potential issues and may have already taken the appropriate corrective actions prior to the submission of the IPMR Format 5.
The key to understanding the program big picture so that VARs – and all reports – are accurate and as insightful as possible is to communicate with other CAMs to be aware of what they are involved with regardless of whether there is a direct impact.
Next month in part 2 of this series we will look at how to write an effective variance analysis report that will provide useful management information to both the contractor and the government customer.