United States General Accounting Office

GAO Report to the Subcommittee on

Acquisition and Technology, Committee

on Armed Services, U.S. Senate

May 1997 MAJOR

ACQUISITIONS

Significant Changes

Underway in DOD’s

Earned Value

Management Process

GAO/NSIAD-97-108

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-276406 

May 5, 1997

The Honorable Rick Santorum

Chairman

The Honorable Joseph I. Lieberman

Ranking Minority Member

Subcommittee on Acquisition and Technology

Committee on Armed Services

United States Senate

Despite the regularity with which defense acquisition programs have

experienced cost overruns and schedule delays, the Department of

Defense (DOD) does have an extensive system intended to provide program

managers and others with early warnings of cost and schedule problems.

In 1967, DOD issued a set of cost/schedule control system (CS2

) criteria that

it required defense contractors to meet. However, it has become widely

accepted by DOD and the defense industry alike that this process is in need

of reform. This report addresses the problems facing the CS2

 process, the

progress DOD has made with reforms, and the challenges DOD faces in

fostering and managing potentially significant changes.

Background DOD’s CS2

 was established in 1967 as a tool to measure the value of work

performed as compared to the actual costs, a concept referred to as

earned value. Earned value goes beyond the two-dimensional approach of

comparing budgeted costs to actuals. It attempts to compare the value of

work accomplished during a given period with the work scheduled for that

period. By using the value of work done as a basis for estimating the cost

and time to complete, the earned value concept should alert program

managers to potential problems sooner than expenditures alone can.

To illustrate, assume a contract calls for 4 miles of railroad track to be laid

in 4 weeks at a cost of $4 million. After 3 weeks of work, only $2 million

has been spent. By analyzing planned versus actual expenditures, it

appears the project is underrunning the estimated costs. However, an

earned value analysis reveals that the project is in trouble because even

though only $2 million has been spent, only 1 mile of track has been laid;

thus, the contract is only 25 percent complete. Based on the value of work

done, the project will cost $8 million ($2 million to complete each mile of

track) and the 4 miles of track will take a total of 12 weeks (3 weeks for

each mile of track) to complete instead of the originally estimated 

4 weeks.

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The communities that have a vested interest in earned value generally and

CS2 specifically are the (1) program managers, who are charged with

overall management responsibility for acquisition programs;

(2) contractors, who are responsible for successful execution of the

contract; and (3) overseers, such as acquisition executives, financial

managers, contract surveillance officials, and cost estimators who are

tasked with tracking and estimating program costs. For earned value to be

effective, it must serve the basic needs of all these users. An engineer

might consider its most useful output to be technical status information on

particular components. An accountant may view its most important

product to be the cost versus budget information it provides. A program

manager may share both views or may value the scheduling data the most.

Thus, regardless of the system or process used to record information,

earned value should provide insightful information to all three

communities.

In its 1967 financial management regulations, DOD issued 35 CS2

 criteria that

were to be applied to most major weapon acquisitions (see app. I for a

listing of the criteria). The criteria are not an accounting system per se, but

rather general management or internal control guidelines to be used on

flexibly priced1

 contracts. The criteria require that the contractor’s

management control system provide data that (1) relate time-phased

budgets to specific contract tasks; (2) indicate work progress; (3) properly

relate cost, schedule, and technical accomplishment; (4) are valid, timely,

and auditable; (5) supply managers with summary level information; and

(6) are derived from the same internal management control systems used

by the contractor.

Over the years, the basic criteria were supplemented by additional

guidance and procedures for contractor system reviews and reporting,

which have become “de facto” requirements. For example, the government

conducted a series of implementation and surveillance reviews of

contractors’ management control systems to ensure they complied with

the criteria. In 1972, DOD developed a Joint Implementation Guide to

standardize CS2

 implementation procedures. The guide contained a

checklist of about 160 specific questions, which were referred to as

subcriteria, to be covered with contractor employees during the

implementation reviews. These requirements converge with other

requirements in determining how a contractor designs its management

1

Flexibly priced contracts include all types of cost reimbursable contracts and those fixed-price

contracts with incentive fee arrangements. Contracts not having such arrangements are called firm

fixed price. The CS2 requirement must be imposed on flexibly priced contracts with a value of

$70 million in research, development, test, and evaluation and $300 million in procurement.

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control system. For example, DOD independent cost estimators have

required a different breakout of contractor cost information than the CS2

did and have specified that cost data be collected in uniform or consistent

categories. The contractor’s system must be elaborate enough to satisfy all

of these data requirements, regardless of their source or purpose.

Results in Brief The core concept of the CS2

 process—earned value—is recognized as a

sound way to measure progress on major acquisition programs. Over the

years, however, the process has evolved to where the needs of some of its

key users are being satisfied, while others are not. Specifically, DOD

program managers are not satisfied with the timeliness of the CS2 reports.

Because the data contained in the reports are typically up to 2 months old,

the reports do not function as an early warning system needed by program

managers. Moreover, the process has not fully integrated cost, schedule,

and technical data as intended. The want of such information can invite

subjective and potentially optimistic judgments to fill the void.

Contractors maintain that accommodating extensive government

certification reviews, collecting and arraying data in prescribed categories,

and preparing detailed reports requires significant effort and cost to the

government and draws some of their engineering resources away from

program execution. Commercial firms that use earned value systems

produce reports more frequently, more quickly, and in less detail than the

CS2 process. Users outside the program offices—such as financial

managers and cost estimators—find that the data generally meets their

needs. These users generally place more value on consistency among cost

categories and less value on timeliness than program managers.

DOD has acknowledged the problems with CS2 for a decade, but reforms

have proceeded slowly mainly because responsibility for the process has

resided with the oversight organizations that have been its architects. DOD

attempted to effect change in 1989 by transferring top-level responsibility

for the system from the comptroller staff to the acquisition staff. Despite

this transfer, little progress was made because execution of CS2

 at the field

level remained within the comptroller community. Nonetheless, DOD has

embarked on several reforms that could dramatically change the CS2

process. Recently, DOD accepted industry’s earned value management

criteria as a replacement for the government’s long-standing CS2

 criteria.

DOD has also transferred responsibility and control over the process from

the services to the Defense Contract Management Command (DCMC),

which currently provides the on-site interface between the government

program office and the contractor. Another reform underway involves

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giving DOD program managers latitude to tailor their contract data to the

specific needs of their program—such as the categories and the level of

detail. In many cases, program managers are using direct (on-line) access

to obtain data from the contractors’ internal management information

systems.

These recent steps to reform the CS2

 process have potent implications. For

example, adopting the industry criteria could result in less burdensome

and more useful contractor management information systems, but could

also lessen the government’s ability to oversee defense programs. In light

of both the day-to-day demands of managing the process on individual

contracts and implementing recent reforms, DCMC faces a significant

challenge as it takes over stewardship of the process. Service officials are

concerned about how quickly it can meet these demands, given its decline

in staffing over the last several years. Ultimately, DCMC will have to ensure

that the process meets the basic needs of all its key users—program

managers, contractors, and oversight personnel.

The CS2 System Has

Served Oversight

Needs Better Than

Program Management

Needs

An earned value system faces stiff and somewhat competing demands

from its users: (1) providing the right analyses in time for program

managers to use; (2) enabling adequate oversight and analysis of multiple

programs beyond the program office level; and (3) minimizing the effort

required of the contractor to provide the necessary systems, data, and

analysis. DOD policy states that earned value is an integrated program

management tool, but because it has historically been a comptroller

function, CS2

 has been viewed by other users as a compulsory and

burdensome financial reporting system. Moreover, it has not fully satisfied

the needs of many program managers for up-to-date and integrated

information on cost, schedule, and technical progress.

Program Managers:

Timeliness of CS2

 Data

Limits Its Utility

Government program managers are responsible for managing the cost,

schedule, and technical performance of their weapon acquisition

programs. The CS2

 process was designed to integrate these three

parameters into an effective early warning tool. However, program

managers have historically expressed concerns that CS2

 data, as reported,

are too late and too voluminous to be useful for day-to-day program

management. The primary CS2

 report, the cost performance report, can be

up to 60 days old and can contain over 100 pages of detailed information.

We confirmed that many program managers still see data timeliness as an

issue. According to some managers, using CS2

 data is like “managing by

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looking through a rear view mirror.” DOD acknowledged some of these

issues in the 1987 preface to the Joint Implementation Guide.

We contacted managers of Acquisition Category 1D2

 programs in

engineering and manufacturing development to evaluate whether the CS2

data met their needs. Their comments disclosed that while they strongly

support the concept of earned value, the timeliness of the data is still a

significant concern. Ten of the 15 program managers who responded

believed that the data were delivered too late to be an effective real-time

management tool. Twelve of these managers responded that the cost

performance reports did not contain problems they were not previously

aware of. One manager stated that because the reports are between 

30 and 90 days old, he usually winds up addressing long resolved issues,

which creates unnecessary work for him. Another expressed the concern

that by the time the report reaches him, the problem is usually worse. Part

of the problem is that the CS2

 system is driven by users in an oversight, not

in a program execution role, another stated.

When the CS2

 reporting requirements were initially generated in 1967, the

data were as timely as commonly available technological tools would

allow. The work was broken out into short, discrete work packages and

grouped into cost accounts. Engineers in the contractor’s plant were often

made responsible for managing and reporting on these cost accounts each

month. This information was accumulated, consolidated at the

contractor’s plant, and mailed to a variety of offices within DOD. Financial

analysts within DOD then reviewed and entered this data into software

applications for further analysis. By this time, the data were at least 

2 months old.

Technological advances have eliminated the need for government analysts

to manually enter the data; nevertheless, many program offices still rely on

the mail to obtain the report in hard copy or on a diskette. Program

managers are not satisfied with the timeliness of these reports. With the

advent of readily accessible real-time communication tools like personal

computers, electronic mail, and the Internet, however, program managers

are unwilling to wait 2 months for program status information. Because of

this time delay, program managers generally use other means to satisfy

their needs for information, like integrated product teams. With

2

An acquisition category 1 program is defined as a major defense acquisition program with estimated

expenditures of over $355 million in research, development, test, and evaluation, or over $2.135 billion

in procurement (in fiscal year 1996 dollars). A category 1D program is monitored by the defense

acquisition executive, not a service executive. At the time of our review, there were 16 category 1D

programs in engineering and manufacturing development.

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technological advances in communication, program managers can directly

access contractor data on a real-time basis. This type of access allows the

government program manager to analyze and react to the same vintage

information the contractor is using to manage.

In addition to timeliness problems, the CS2

 reports emphasize the cost and,

to some extent, the schedule data without fully integrating technical

information. Assessment of technical risks is left to subjective, often

optimistic judgments of program personnel. One of the managers we

surveyed pointed out that CS2

 does not show if the technical performance

is being achieved or if the work on the critical path is being done on time

or within cost. In other words, even though a discrete work segment may

be completed, CS2

 data do not directly inform a manager of the success or

quality of the work. Instead, the standard cost performance report

attempts to assign a cost value to schedule data. Thus, if a particular

design task has fallen behind schedule, the standard report would assign a

cost to the delay and present that cost. While this format may be ideal for a

cost analyst, it cannot by itself facilitate the timely management of a

technical problem, nor can it highlight the potential impact on critical path

schedules.

Another limitation is that the detailed data collection categories may not

correspond to individual program structures. Although the need for overall

reporting consistency is critical to the oversight community, program

managers are willing to accept progress information presented in the same

categories and format that the contractor uses to manage the program.

Most program managers we surveyed were interested in obtaining

real-time data directly from the contractor in whatever format the

contractor used, as long as the format remained consistent and the data

could be verified. According to DOD officials, program managers have had

the flexibility to modify reporting requirements for many years, but the

needs of the oversight community for consistent reporting formats and

categories have taken precedence. Many of the program managers we

contacted are now taking advantage of this flexibility to tailor their

reporting requirements. DOD officials stated that these limitations reflect

more on how the CS2

 criteria and cost estimating requirements have been

implemented than on the criteria themselves. They noted that the CS2

criteria allow such flexibility but that subsequent reporting and

certification procedures have led to rigid implementation practices.

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Contractors: CS2 Validation

and Reporting Are

Burdensome

Although contractors generally recognize the basic CS2 criteria as sound

management principles, they believe DOD’s implementation process

contains many burdensome requirements. Independent studies have found

that CS2

 reporting was too detailed, repetitive, and voluminous to be used

effectively as a management tool either by the government or by industry.

Further, they found that the requirement may actually undermine program

performance by diverting the time and attention of the company program

manager.

The formal reports represent only the end product of what is required in

CS2. Perhaps more significant are the cost and management control

systems the contractors must have in place to record the required

information and the government reviews of those systems to certify their

acceptability. To facilitate cost estimating, DOD guidance specifies a

structure for breaking the work down on developing a major weapon into

uniform categories or segments. At the most basic level, CS2

 guidance

requires that the work is broken down into discrete short-span work

packages, which are consolidated into a cost account. A cost account is a

management control point at which actual costs can be accumulated for

an element of work. Table 1 illustrates an excerpt of a work breakdown

structure for an ongoing aircraft program.

Table 1: Work Breakdown Structure for

an Aircraft Program

Level 1: Aircraft

Level 2: Air vehicle

Level 3: Avionics

Level 4: Communication/navigation/identification

Level 5: Navigation software

Level 6: Individual cost accounts

Source: DOD.

Cost accounts on complex weapon programs can number over 1,000.

While these costs have to be recorded and tracked by the contractor at

some level, cost-estimating requirements in conjunction with CS2

implementation practices have dictated how the accounts are defined and

at what level of detail. For example, if a contractor’s internal management

system differs from the cost-estimating structure, the contractor may have

to track costs one way to satisfy cost-estimating requirements and another

way to match how it actually manages. This requires more engineering

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effort by the contractor because it is the technical staff who typically

manage the cost accounts.

For example, in aircraft programs, DOD requires contractors to record and

report earned value information for the aircraft sections. However, they

could be managing by aircraft ribs (structural components that strengthen

larger airframe sections). To satisfy DOD’s requirements, these contractors

would have to artificially segregate costs for ribs going to the fuselage

from those going into the wings and tail sections. They would also have to

prepare lengthy CS2

 variance reports, which takes them away from their

engineering duties and provides information that does not directly relate

to how the program is being managed.

The standardization that work breakdown categories provide may

facilitate government analysis and oversight above the program level, but

may not aid—and in fact could inhibit—program management. DOD policy

has given program managers the flexibility to modify the level of detail in

CS2 reports and more recently, the prescribed work breakdown categories.

Program managers have used this latitude in modifying their CS2

 reporting

requirements and are tailoring their reporting requirements. However, the

contractors still track costs according to the standardized work

breakdown structure to satisfy the cost estimators’ needs for data

consistency. Recently, the Cost Analysis Improvement Group, an

organization that provides independent program cost estimates to the

Secretary of Defense, has taken steps to clarify the needs of the

cost-estimating community with respect to those of CS2

. The group, which

relies on actual cost data from contractor accounting systems, has

reemphasized the need for consistent cost reporting while reducing the

burden on contractors. Accordingly, the group is in the process of

improving its reporting systems to allow contractors to report in their own

formats and appropriate level of detail, using a common data format that

in turn enables DOD to convert the data into the format needed by the

cost-estimating group.

The requirement to have management control systems that comply with

CS2 criteria is contained in the basic weapons system contract. However,

the detailed requirements for these systems have been established through

an extensive certification process. During the certification reviews, the

government used a checklist of 158 specific questions to assess

compliance at all levels of the contractor organization. The various

reviews conducted on the contractor system during the life of a contract

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are summarized in table 2 below, along with estimates of the resources

involved.

Table 2: Traditional CS2 Compliance

Reviews Review title Purpose of review Days Staff

Implementation visit Contractor plans to implement CS2 2-3 4-5

Readiness assessment CS2 implementation progress 5 5-15

Demonstration review Compliance of contractor management

control systems

15-20 10-25

Extended subsequent

application review

Revisions to management control

system

10-15 10-25

Subsequent application

review

New contract application of CS2

requirements

5 6-10

Baseline review Proper implementation of contract

baseline

3 4-6

Source: Cost/Schedule Control System Criteria, The Management Guide to C/SCSC;

Quentin W. Fleming; 1992.

The time and staff required for these reviews can vary, depending upon the

complexity of each contract. In addition to the government personnel

required to perform these reviews, an even larger number of contractor

personnel may be required to support the reviews, which adds to the cost

of a contract. For example, cost account managers are interviewed during

the demonstration review, using the checklist of 158 questions. Because

the CS2

 implementation guidance dictates that work be segregated into

small, short work packages, this could entail numerous contractor staff. In

addition, once a contractor’s system has been validated by the

government, it is then subject to periodic surveillance reviews that are

performed throughout the life of the contract. Contractors ultimately

viewed the government-approved management system as one that the

government had imposed upon them. They could not redesign or modify

such a system without first getting government approval. If a change were

approved, the government would initiate another system review to

revalidate the revised system. Contractors would thus shun system

improvements to avoid the additional reviews.

Financial Management: CS2

Is Satisfactory

Because the financial management community has presided over the

evolution of CS2

 for most of the past 30 years, the system has been

optimized to meet its needs. The initial regulation governing CS2

 policy, DOD

Instruction 7000.2, was issued by the DOD Comptroller as part of the

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financial management regulations.3 It was implemented and administered

by an infrastructure of DOD financial managers. This infrastructure

permeates all levels of DOD. At the program office level, analysts review the

reports, participate in contractor system reviews, and monitor contract

progress. At the buying command and at service headquarters, financial

managers were in charge of the various contractor system reviews,

analyzing the reports, and projecting trends and estimates to complete. At

the Office of the Secretary of Defense, cost analysts and program oversight

personnel still review this data in support of major milestone decisions

and through periodic oversight reports like the Defense Acquisition

Executive Summary. At the contractor’s plant, DCMC representatives

participate in the system reviews, provide on-site surveillance and review

the reports for accuracy. Until December 1995, the Performance

Measurement Joint Executive Group, comprised of financial management

experts, was the chief decision-making body for CS2

 issues.

The role played by the financial management community is somewhat

unique to the federal government. Unlike the commercial world, where the

company developing a new product funds the development with its and/or

investors’ money, weapon system development is funded by the

government—the customer. The government acts as an agent for the

public trust and therefore has a responsibility to oversee the expenditure

of those funds. The cost performance report, as one of the main reports to

assist the government in that responsibility, provides auditable data from

which an analyst can generate independent estimates at completion and

may also project trends based on contract performance. Historical cost

data from the contractor’s systems also enable estimators to develop

parametric models from which future weapon systems’ cost can be

estimated. Consistent with these needs, the financial management

community, in its stewardship over the CS2

 process, has placed a premium

on reliable and consistent cost data.

The cost analyses performed on weapon acquisition programs are an

important internal control that can highlight performance problems that

program managers, as advocates, may overlook. The controversy and

subsequent cancellation of the Navy’s A-12 aircraft illustrates the value of

CS2 data being available to organizations outside the program manager’s

office. According to the 1990 administrative inquiry conducted for the

Secretary of the Navy, the cost performance data from the A-12

contractors clearly indicated significant cost and schedule problems. The

3

In 1991, DOD Instruction 7000.2 was canceled and its requirements included in DOD Instruction

5000.2, Defense Acquisition Management Policies and Procedures. This regulation was superseded in

1996 by DOD Regulation 5000.2-R, Mandatory Procedures for Major Defense Acquisitions.

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results of an oversight review of the cost performance reports disclosed

that the A-12 contract would probably exceed its ceiling by $1 billion.

However, neither the contractors nor the Navy program manager relied

upon this data; instead, they used overly optimistic recovery plans and

schedule assumptions. The inquiry concluded that the government and

contractor program managers lacked the objectivity to assess the situation

and they disregarded financial analysts who surfaced the problems.

Commercial Firms

Use Streamlined

Earned Value Process

Commercial firms are increasingly adopting the concept of earned value

for development projects but are applying it in a more streamlined manner

than DOD has historically. Company managers are getting real-time

progress information in formats consistent with how they manage. Major

defense contractors are also overwhelmingly emphasizing up-front

technical planning and scheduling as opposed to traditional cost and

schedule monitoring. United Defense Limited Partnership, a major defense

contractor, has inserted earned value concepts throughout its entire

management structure. A senior official from that company stated that a

successful program hinges on good technical planning and scheduling, and

for earned value to succeed, it must be useful to everyone, not just a

requirement imposed onto one functional group by another. It must also

be used to manage internally or it will not be taken seriously by those

operating it.

Motorola is also convinced that technical planning and scheduling is

paramount to a successful project. It is using earned value to manage its

multi-billion dollar satellite communication system, IRIDIUM, with

streamlined data accumulation, reporting, and oversight mechanisms. For

example, technical and schedule data are monitored at very detailed levels

whereas costs are not included until much higher levels of reporting are

reached. Similarly, Lockheed-Martin Missiles and Space has announced it

is adopting earned value for all its contracts, regardless of whether the

customer is military or commercial. Lockheed-Martin has benchmarked its

processes and identified the best practices in program management. It

estimates that by adopting these practices for each contract, it could

reduce its non-value added activities by almost two-thirds.

When a firm like Motorola makes large investments in a major

development like IRIDIUM, detailed information requirements are

essential, and in many ways, similar to DOD’s. According to the firms we

spoke with who are funding major product developments and are using an

earned value system, they produce internal status reports more frequently,

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with less detail, that are more current than what the traditional CS2 process

has provided to DOD. They also place emphasis on technical and schedule

planning. Moreover, the manner in which the data is organized and

reported is typically aligned with the way the companies manufacture.

Government program managers we contacted indicated that this is

precisely what they want—real-time information presented in a manner

that mirrors how the contractor manufactures.

The major differences between commercial earned value practices and

traditional defense practices are shown in table 3.

Table 3: Comparison of Commercial

Earned Value to Traditional Defense

CS2 Implementation Practices

Characteristic Commercial program Traditional DOD program

Frequency of status reports Weekly/bi-weekly Monthly

Age of information Real-time/weekly Up to 60 days after

reporting period ends

Method of data dissemination Direct access to database Mailing of reports on paper

or disk

Work breakdown structure Level 3 Level 3-7

Variance analysis reporting Critical path items All elements

Management focus Technical and schedule Costs

As indicated, commercial firms obtain data much more frequently than

DOD programs typically do. Program status information was available to

commercial managers on either a real-time basis or as close as the

companies’ computer capabilities would allow. Another significant

difference is that variance analysis reporting is much less detailed in

commercial firms. Companies set tolerance limits within appropriate

manufacturing processes and report on breaches of those limits as

opposed to reporting on all variances regardless of the element. If the

element is not critical to meeting technical progress, schedule, or cost, it

may be monitored but not necessarily reported.

Management emphasis differs between the two groups, as well. We found

that on commercial programs, the manufacturers tended to focus on

adherence to schedule as opposed to costs. They do not forsake the other

benefits of earned value but focus on technical and schedule goals before

costs. Their philosophy is that focusing on key technical accomplishments

per the planned schedule will cause planned costs to fall in line. For

example, in the IRIDIUM program, Motorola did not add costs to the

program status reporting until almost halfway up the reporting channel, a

much higher level of aggregation than a typical DOD program. Company

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management reasoned that because engineers and program managers on

the manufacturing floors are concerned with meeting technical and

schedule accomplishment, recording earned value information at that level

is more informative in terms of labor hours than in terms of dollars. DOD

officials believe that the CS2 criteria and basic guidance allow defense

programs the flexibility to manage earned value information in a similar

manner, but in practice, this flexibility has been limited by over

implementation of the guidance.

Some Early Reforms

Have Made Limited

Impact

Despite DOD’s acknowledgement of CS2 implementation problems, until

recently, little progress has been made in resolving them. Fundamentally,

this is because the CS2

 data was responsive to the financial management

community that managed how the CS2

 process was implemented. Most of

the reforms that have been undertaken have made improvements, but have

not alleviated the more significant problems with CS2

. The integrated

baseline review, however, may prove to be an exception because it has

resulted in a marked reduction in traditional CS2

 oversight reviews thus far.

The 1987 Joint Implementation Guide clarified the objectives of CS2

 as “For

contractors to use effective internal cost and schedule management

control systems, and for the government to be able to rely on timely and

auditable data produced by those systems for determining

product-oriented contract status.” It went on to stress that improved

communication between the government and contractors could reduce

improper implementation of the CS2

 criteria. To stimulate reform, DOD

transferred the responsibility for CS2 policy from the DOD Comptroller to

the Under Secretary of Defense for Acquisition in August 1989. This

top-level organizational change was not mirrored in the three services,

however. As a result, CS2

 implementation was fragmented, with top-level

policy being managed by the Office of the Secretary of Defense acquisition

community and day-to-day implementation being managed by the services’

financial management community. The Performance Measurement Joint

Executive Group, comprised of financial management personnel,

maintained central oversight of the CS2

 process.

In October 1993, the Under Secretary of Defense for Acquisition &

Technology undertook an initiative to return earned value to its original

purpose: a tool to integrate cost, schedule, and technical performance

management. This initiative attempted to reduce the review burden and

limit reporting requirements. In addition, to change the emphasis from

government oversight to contractor responsibility, it encouraged industry

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to develop its own management standards. About a year later, after limited

progress, the Office of the Secretary of Defense requested that the Service

Acquisition Executives personally revitalize CS2

 reform under the

Integrated Program Management Initiative. A top-level Executive Steering

Group was formed to reengineer earned value implementation among the

services. This group noted that while there were no exceptions to the CS2

requirement, there was broad latitude to change implementation practices.

DOD and recent service policy memoranda have consistently stressed the

need to streamline traditional CS2

 reporting requirements by reducing the

detailed information required, such as minute categories for reporting and

tailoring other report formats. In December 1993, DOD initiated a major

effort to revise the Joint Implementation Guide. After multiple iterations

and coordination difficulties, it was finally reissued in December 1996.

To provide more timely information to program managers, DOD is requiring

all new contracts to use electronic data interchange (EDI) as a data transfer

method. Under the EDI concept, the contractors will make the cost

performance reports, along with other reports, electronically accessible to

program managers, financial analysts, and other users like DCMC staff. To

ensure that the cost performance report data can be transmitted and

received in common data formats, DOD has developed a standardized data

set for contractors to use when transmitting their reports.

One of the benefits of using EDI for cost performance reporting is the time

saved by electronically transmitting data to customers instead of

physically mailing written reports. The time savings has been estimated at

about 1 to 2 weeks, which includes time associated with re-keying

information into the customers databases so they can perform their

analyses. Notwithstanding some of the problems that are being

encountered with electronic transfers of data, we believe the time savings

associated with this method of communication is not likely to make the

reports more useful. At best, the reports will still be received by the

program offices and other interested users about 30 to 45 days after the

end of a reporting period.

One of the more successful initiatives to date is the integrated baseline

review (IBR), which DOD implemented in 1994. The IBR focuses on the

development of a detailed and achievable technical, cost, and schedule

baseline for a program. The objectives of the IBR are twofold: to improve

the use of cost performance data by contractor and government program

managers and to reduce the number of CS2

 reviews. As part of the overall

risk assessment process, the IBR is intended to integrate the technical

Page 14 GAO/NSIAD-97-108 Earned Value Management
B-276406 

content of the work with cost and schedule parameters. It is planned and

executed by a multi-functional government and contractor team composed

of engineering, logistics, manufacturing, contracting, and financial

personnel. Unlike traditional CS2

 baseline reviews, the IBR is led by the

program manager, not a financial manager. By involving the program

manager directly in this review, the process highlights the merits of using

earned value to track progress. It has also reduced the number of CS2

compliance reviews. For example, CS2 reviews have decreased from 56 in

1993 to 5 in 1995 while the number of IBRs have increased from 3 in 1993 to

29 in 1995. The program managers that we surveyed strongly supported

the IBR as a valuable program management tool.

Recent Reforms Have

Major Implications for

CS2

 Process

DOD has recently taken a three-pronged approach to reform the CS2

process. This approach includes an internal organizational realignment to

override cultural resistance to change, the recognition of commercial

industry criteria to return the management of the system to the contractor,

and direct electronic access by program managers to contractor

information to improve the timeliness of CS2

 data. These changes may have

significant impact on the extent, type, and number of CS2

 system reviews

that occur; the interpretation of how the criteria/guidelines will be

implemented; and the extent and timeliness of data received by

government managers.

Organizational

Restructuring Shifts CS2

Stewardship Away From

Financial Management

Community

In December 1995, DOD disbanded the Performance Measurement Joint

Executive Group and made DCMC the executive agent for CS2

 issues. Policy

matters are now handled by the Executive Steering Group, which includes

representatives from the Service Acquisition Executives and the DCMC

Commander, to provide a program management orientation. In

October 1996, the Under Secretary of Defense for Acquisition and

Technology formally transferred CS2

 compliance responsibility from the

services to DCMC. This latest decision completes the transfer of virtually all

CS2 policy, reform, and compliance decisions away from the financial

management community. Nonetheless, members of the various

communities will continue to be involved in the day-to-day operations of

CS2. How their roles, practices, and interaction with one another will

change under the aegis of DCMC remains to be seen.

This transfer has significant repercussions for DCMC. Service

representatives have expressed concern that because of its recent

downsizing, DCMC may not have the resources to adequately perform its

Page 15 GAO/NSIAD-97-108 Earned Value Management
B-276406 

increased responsibilities. In addition, about 85 percent of the CS2 field

staff dedicate only part of their time to cost performance monitoring. DCMC

officials are aware of these concerns and are working on a strategy to

accomplish its newly expanded mission. Since it is likely that DCMC will not

receive more than 6 additional billets to supplement its current level of

approximately 150 cost performance monitors, DCMC is reengineering its

approach to CS2

 implementation along the lines of statistical process

control measurement techniques. This would represent a

management-by-exception approach to CS2

 reviews. This may be a less

costly and burdensome approach that could have potential for reducing

the resources and infrastructure associated with traditional CS2

implementation practices, especially when coupled with the streamlined

industry earned value criteria discussed below. How well such an

approach meets the basic needs of all the communities is yet unknown.

DCMC has begun to work with contractors to change the surveillance focus

from the traditional oversight role to one based on what DOD refers to as

insight—the ability to identify problems through process-based indicators

such as the number of retroactive changes to cost accounts or the

frequency of replanning actions. Each major defense contractor will work

with DCMC to identify appropriate process and control objectives.

Ultimately, once each contractor designates its unique control limits, DCMC

staff would only be required to review those processes that are out of

tolerance. In addition, DCMC plans to work with industry to encourage

firms to assume responsibility for their management systems and

processes.

Industry Standard

Developed by Contractors

In August 1996, five industry associations published an industry standard,

Industry Standard Guidelines for Earned Value Management Systems

(EVMS), as a replacement to the current government CS2

 criteria. DOD

formally recognized the guidelines in the industry standard in

December 1996. The Director, Defense Procurement, has issued an interim

rule to enable contractors to begin using the EVMS without having to wait

for the formal regulatory change process. The long-range plan is for the

standard to be approved by the American National Standards Institute4

4

The American National Standards Institute serves as the administrator and coordinator of the U.S.

private sector voluntary standardization system. It promotes and facilitates voluntary consensus

standards.

Page 16 GAO/NSIAD-97-108 Earned Value Management
B-276406 

and the International Standards Organization5. This would formally move

earned value into common usage worldwide. In addition, Australia,

Canada, and the United States have signed a memorandum of

understanding concerning common cost and schedule management for

their acquisitions.

The EVMS contains 32 criteria, which are similar to the DOD criteria in

principle. For example, both sets of criteria are divided into five broad

categories: organization; planning, scheduling, and budgeting; accounting;

analysis and management reports; and revisions and data maintenance.

Each category describes the internal controls that should exist to facilitate

proper program management. They also contain provisions for breaking

out work into discrete work packages, documenting changes to the

performance baseline, and measuring cost, schedule, and technical

accomplishment. The industry standard gives the contractor the flexibility

to revise the system as needed to reflect work consistent with internal

management structures and to track costs at a higher organizational level

than the level typically tracked in DOD programs. (See app. I for a more

detailed comparison.)

Despite their general similarities, the two criteria have significant

differences that could affect government oversight. One such difference is

that the government may no longer have the same review and approval

authority over contractor management systems that it had in the past. DOD

does not accept the self-certification provisions of the EVMS standard.

Instead, it would like to find some middle ground between

self-certification and traditional government certification. DOD’s goal is to

encourage contractors to conduct self-evaluations with the government

acting as an observer. However, DOD’s recently revised implementation

guidance does not preclude a government review, when warranted, or a

third-party certification arrangement. The third-party certification concept

represents the standard industry practice for quality assurance systems.

Although not required by the International Standards Organization—the

industry organization responsible for the quality assurance standards—it is

a generally accepted practice to get a third-party certification in order to

meet its quality standards. This approach may mitigate some potential

risks of the self-evaluation process and prove to be less burdensome than

DOD’s traditional review and certification process.

5

The International Standards Organization is a nongovernmental entity whose mission is to promote

the development of standardization and related activities in the world. Its focus is to facilitate the

international exchange of goods and services and to develop intellectual, scientific, technological, and

economic cooperation.

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Other differences associated with the EVMS standard include the absence of

specific requirements for access to data by the customer (in this case, DOD)

for oversight purposes and the fact that program baseline and contractor

management systems may be changed as needed, with notification of, but

not approval by, the customer. Use of this standard on future

procurements should give the contractor greater ability to manage and

improve its processes. However, it could impede government oversight

unless DOD is able to obtain accurate and timely information on contract

performance. Therefore, acquisition program managers will have to ensure

that access to data and reporting provisions are included on individual

contracts. Likewise, the increased flexibility to revise the program

baseline may make it more difficult to track divergences from original

program goals.

Technology Advances Can

Improve Data Timeliness

and Quality

Current technology offers improvements that could enhance the timeliness

of the CS2

 data as well as integrate cost and schedule performance with

technical performance. For several years, DOD has recognized the need to

improve data timeliness and has focused on developing EDI capability. We

found that several program managers have experimented with getting

direct access via personal computers to contractor databases. This permits

them to see at the same time the same data the contractor uses to manage

the program. The government program managers who have used these

systems are very pleased with the quality and timeliness of the

information. We spoke to managers in several program offices who believe

that having direct access to the same data the contractor uses to manage is

critical.

For example, the Joint Stand-Off Weapon system program has a direct

access system that was custom built for the program. It contains cost,

schedule, manufacturing, test, and engineering/technical information using

a variety of displays. The system uses commercially available software and

the data is updated twice a month. Cost data is available only to the

program manager and two others to protect the contractor’s proprietary

rate information. Similarly, the Sea-Launched Attack Missile Extended

Range program is using a direct access system that enables its technical

staff to pull up weekly status data by component or subsystem. Each

integrated product team also reports progress each week. Information is

displayed in terms of labor hours, not cost. Cost data is consolidated and

presented at a high level. Improvements in the direct-access processes are

being made to allow subcontractor data to be included and also to include

such items as indirect charges to the contract and overhead.

Page 18 GAO/NSIAD-97-108 Earned Value Management
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These practices represent a departure from the traditional implementation

of CS2

, but technically have always been permissible under the basic 35

criteria. Nonetheless, using the streamlined direct access process has not

been universally accepted. Some DOD officials have expressed concerns

about the potential for inaccurate data in these systems that a monthly

cost performance report review and audit would pick up. In addition, the

direct access may only provide detailed data on the prime contractor

status, and summary level information on subcontractor status. Another

concern is that the cost information may not include full overhead

charges. To implement this approach, the government may need to install

special high-speed transmission or “trunk lines” that could be expensive

and prohibit small programs from using it. Because of these concerns, DOD

has not endorsed this approach, but is focusing on EDI implementation.

Managers of these two programs believe that direct access systems are

very beneficial and have found work-arounds for some of these concerns.

According to the author of the EDI cost performance report data set, the

ultimate goal is to standardize the data format in reports. The author

believes that the optimal solution would be to standardize to a common

data format so that DOD could reach into a contractor’s database to access,

download, and analyze information. This would allow a program office to

monitor the progress of a contractor’s performance, using the currently

accepted reporting formats, on a near real-time basis. This standardization

would also allow for the almost instantaneous analysis by the users of this

information no matter what software or hardware the contractor or the

government use. This capability would eliminate some of the concerns to

unique direct access systems while still giving the program manager the

flexibility to design a system that meets the needs of his particular

program.

Another promising effort is a technical risk assessment process being

developed and tested by the Navy’s Program Executive Office for Air

Anti-Submarine Warfare, Assault, and Special Mission Programs. This

effort is intended to work in tandem with the CS2

 information to enable the

manager to integrate technical progress with cost and schedule data. In an

early test, it was able to highlight and quantify technical risks on one

program much earlier than the CS2

 process did. The process requires that

the critical technical performance and schedule drivers be identified at the

start of the program. By developing specific risk curves and progress plans

for each parameter, the program manager can obtain insights not just into

work progress, but also technical success. This provides an early warning

of technical problems, permitting the manager to mitigate cost and

Page 19 GAO/NSIAD-97-108 Earned Value Management
B-276406 

schedule impacts. For example, in a retrospective analysis of an aircraft

cockpit program, the software predicted problems more than a year before

the CS2

 process did because the CS2 process, as applied, emphasized cost

and schedule integration without adequate regard for technical

performance. This software is currently being tested by the Federal

Aviation Administration and is scheduled to be used on the H-1 Helicopter

Upgrade program.

Conclusions and

Recommendations

DOD has taken major steps to create an organizational environment that

can facilitate making needed changes to the CS2

 process. DCMC faces a

number of challenges as it begins its stewardship of the process. These

include implementing initiatives to improve its utility to program managers

and to streamline certification and reporting requirements, determining

how best to manage the certification review process, and deciding on a

number of proposed improvements. To be successful, DCMC will need to

understand the resource implications of these challenges.

Another challenge DCMC faces, perhaps more subtle than the above

reforms, is to better balance the needs of the different communities that

depend on earned value information. A common understanding of these

basic needs will be instrumental to DCMC’s ability to protect each user’s

basic needs from others’ secondary desires. Specifically, as DCMC

endeavors to make CS2 more responsive to program managers, it will have

to guard against basic oversight needs going unmet. We recommend that

the Secretary of Defense (1) promulgate the basic needs of the

organizations that depend on earned value information in some manner,

such as in the implementing guidance for EVMS and (2) take steps to ensure

that the “wants” of one organization do not encroach upon the basic needs

of other organizations that depend on earned value information as the

management of the CS2

 process transitions to DCMC and as DCMC makes

decisions on reforms in the future.

In addition, several initiatives relevant to the CS2

 process are ongoing,

including EDI, IBRs, direct access, technical risk assessment,

self-certification, and the application of statistical process control

techniques to the surveillance process. Some of these are being

demonstrated in varying degrees on different programs, while others are

still in the policy stage. It is important that DOD ensures that as these

initiatives are tested on individual programs, data is captured in a

disciplined enough manner to support decisions on what to implement and

how. Such data will not only help get the most out of each initiative, but

Page 20 GAO/NSIAD-97-108 Earned Value Management
B-276406 

will also make it easier to recognize possible interactions among

initiatives.

Agency Comments DOD generally concurred with our conclusions and recommendations. It

agreed with the need to make sure that the “wants” of one organization do

not outweigh the needs of another. It cited the establishment of two

groups that will help ensure that the needs of all organizations that use

earned value information are met. These are (1) the Integrated Program

Management Initiative Executive Steering Group, which includes

representatives from the Office of the Secretary of Defense, the services,

DCMC, and other organizations; and (2) the Performance Management

Advisory Council under DCMC, which will have service representatives

from the earned value community and from the project management or

acquisition communities. According to DOD, the Council will also

participate in a contractor cost data reporting initiative, along with the

cost-estimating community. DOD agreed that the relationships among the

organizations as well as their information needs should be made clear in

its EVMS guidance.

In the draft of this report, we recommended that DOD rebaseline the basic

needs of the organizations that depend on earned value information. DOD

believed that it did not need to formally rebaseline these needs because it

had developed a good understanding of them in arriving at the significant

reforms it is currently making to CS2

 and in identifying the earned value

skills needed by business, cost-estimating, and financial management

specialists. We agreed to delete the recommendation from the final report

with the proviso that DOD would reassess its progress on earned value

reform and on meeting the needs of the key organizations. Accordingly,

DOD stated that the Integrated Program Management Initiative Executive

Steering Group would assess such progress. DOD also stated that the group

will coordinate all earned value management improvement efforts with

other initiatives, such as electronic access and risk management.

Scope and

Methodology

To develop information for this report, we contacted, interviewed, and

obtained documents from officials of the Office of the Secretary of

Defense and DCMC because of the policy-making responsibilities and

reform initiatives occurring at these levels. In addition, we obtained

information from officials at the Office of Management and Budget; the

Federal Aviation Administration; the Office of the Secretary of Defense

Cost Analysis Improvement Group; service headquarters; Army Materiel

Page 21 GAO/NSIAD-97-108 Earned Value Management
B-276406 

Command; Navy Air Systems Command; Program Executive Office for Air

Anti-Submarine Warfare, Assault, and Special Mission Programs; Air Force

Materiel Command; Aeronautical Systems Center; and Defense Plant

Representative Office personnel from General Electric, Lynn, Mass;

Boeing, Seattle, Wash; Lockheed Martin, Sunnyvale, Ca; and McDonnell

Douglas, St. Louis, Mo. We contacted all program managers responsible

for Acquisition Category 1D programs in engineering and manufacturing

development. We received responses from all but 1 of these 16 programs.

We also contacted officials from the governments of Australia and Sweden

to obtain information on their requirements for cost schedule control

systems.

To obtain industry’s perspective on policy issues and implementation

practices, we contacted representatives from the following industry or

professional associations: National Security Industrial Association,

Aerospace Industries Association, Performance Management Association,

and Project Management Institute. We also discussed these issues with

representatives from the following commercial and military contractors:

Boeing, General Electric, Lockheed Martin, Loral, Magnavox, McDonnell

Douglas, Motorola, Northrop/Grumman, Raytheon, Supply Tech, Inc.,

Texas Instruments, Textron, and United Defense Limited Partnership.

To address historical information and obtain independent views on how

current policy initiatives could affect future implementation practices, we

contacted representatives from the Massachusetts Institute of Technology

and Wright State University and the following consulting groups: Coopers

& Lybrand LLP, KPMG Peat Marwick LLP, Humphreys & Associates,

Fleming Management Consultancy, and Write Concepts. We also obtained

historical information from the Management Systems Deputy, Air Force

Assistant Secretary for Financial Management and Comptroller.

We performed our review from June 1996 to March 1997 in accordance

with generally accepted government auditing standards.

Page 22 GAO/NSIAD-97-108 Earned Value Management
B-276406 

We are sending copies of this report to other interested congressional

committees; the Secretary of Defense; the Commander, DCMC; and the

Director of the Office of Management and Budget. We will also make

copies available to others upon request.

Please contact me at (202) 512-4383 if you or your staff have any questions

concerning this report. The major contributors to this report were Paul

Francis, Rae Ann Sapp, and Jeff Hunter.

Katherine V. Schinasi

Associate Director

Defense Acquisitions Issues

Page 23 GAO/NSIAD-97-108 Earned Value Management
Appendix I 

Comparison of DOD and Industry Criteria

DOD’s Criteria Industry’s Criteria

 Organization Organization

1. Define all authorized work and related

resources to meet the requirements of the

contract, using the framework of the

contract work breakdown structure.

Define the authorized work elements for

the program. A work breakdown structure,

tailored for effective internal management

control, is commonly used in this process.

2. Identify the internal organizational

elements and the major subcontractors

responsible for accomplishing the

authorized work.

Identify the program organizational

structure, including the major

subcontractors responsible for

accomplishing the authorized work, and

define the organizational elements in which

work will be planned and controlled.

3. Provide for the integration of the

contractor’s planning, scheduling,

budgeting, work authorization, and cost

accumulation systems with each other, the

contract work breakdown structure, and the

organizational structure.

Provide for the integration of the

company’s planning, scheduling,

budgeting, work authorization, and cost

accumulation processes with each other,

and as appropriate, the program work

breakdown structure and the program

organizational structure.

4. Identify the managerial positions

responsible for controlling overhead

(indirect costs).

Identify the company organization or

function responsible for controlling

overhead (indirect costs).

5. Provide for integration of the contract

work breakdown structure with the

contractor’s functional organizational

structure in a manner that permits cost and

schedule performance measurement for

contract work breakdown structure and

organizational elements.

Provide for integration of the program work

breakdown structure and the program

organizational structure in a manner that

permits cost and schedule performance

measurement by elements of either or both

structures as needed.

 Planning & budgeting Planning, scheduling, & budgeting

6. Schedule the authorized work in a manner

that describes the sequence of work and

identifies the significant task

interdependencies required to meet the

development, production, and delivery

requirements of the contract.

. . . . interdependencies required to meet

the requirements of the program.

7. Identify physical products, milestones,

technical performance goals, or other

indicators that will be used to measure

output.

Identify physical products, milestones,

technical performance goals, or other

indicators that will be used to measure

progress.

(continued)

Page 24 GAO/NSIAD-97-108 Earned Value Management
Appendix I 

Comparison of DOD and Industry Criteria

DOD’s Criteria Industry’s Criteria

8. Establish and maintain a time-phased

budget baseline at the cost account level

against which contract performance can be

measured. Initial budgets established for

this purpose will be based on the negotiated

target cost. Any other amount used for

performance measurement purposes must

be formally recognized by both the

contractor and the government.

Establish and maintain a time-phased

budget baseline, at the control account

level, against which program performance

can be measured. Budget for far-term

efforts may be held in higher level

accounts until an appropriate time for

allocation at the control account level.

Initial budgets established for performance

measurement will be based on either

internal management goals or the external

customer negotiated target cost including

estimates for authorized but undefinitized

work. On government contracts, if an over

target baseline is used for performance

measurement reporting purposes, prior

notification must be provided to the

customer.

9. Establish budgets for all authorized work

with separate identification of cost elements

(labor, material, etc.).

Establish budgets for authorized work, with

identification of significant cost elements

(labor, material, etc.) as needed for

internal management and for control of

subcontractors.

10. To the extent the authorized work can be

identified in discrete, short-span work

packages, establish budgets for this work in

terms of dollars, hours, or other measurable

units. Where the entire cost account cannot

be subdivided into detailed work packages,

identify the far-term effort in larger planning

packages for budget and scheduling

purposes.

To the extent it is practical to identify the

authorized work in discrete work

packages, establish budgets for this work

in terms of dollars, hours, or other

measurable units. Where the entire control

account is not subdivided into work

packages, identify the far-term effort in

larger planning packages for budget and

scheduling purposes.

11. Provide that the sum of all work package

budgets plus planning packages within a

cost account equals the cost account

budget.

Provide that the sum of all work package

budgets plus planning package budgets

within a control account equals the control

account budget.

12. Identify relationships of budgets or

standards in underlying work authorization

systems to budgets for work packages.

No comparable provision.

13. Identify and control level of effort activity

by time-phased budgets established for this

purpose. Only that effort which cannot be

identified as discrete or as apportioned

effort will be classed as level of effort.

. . . . Only that effort which is

unmeasurable or for which measurement is

impractical may be classified as level of

effort.

(continued)

Page 25 GAO/NSIAD-97-108 Earned Value Management
Appendix I 

Comparison of DOD and Industry Criteria

DOD’s Criteria Industry’s Criteria

14. Establish overhead budgets for the total

costs of each significant organizational

component whose expenses will become

indirect costs. Reflect in the contract

budgets, at the appropriate level, the

amounts in overhead pools that will be

allocated to the contract as indirect costs.

Establish overhead budgets for each

significant organizational component of the

company for expenses that will become

indirect costs. Reflect in the program

budgets, at the appropriate level, the

amounts in overhead pools that are

planned to be allocated to the program as

indirect costs.

15. Identify management reserves and

undistributed budget.

Same.

16. Provide that the contract target cost plus

the estimated cost of authorized but

unpriced work is reconciled with the sum of

all internal contract budgets and

management reserves.

Provide that the program target cost goal

is reconciled with the sum of all internal

program budgets and management

reserves.

 Accounting Accounting considerations

17. Record direct costs on an applied or

other acceptable basis in a formal system

that is controlled by the general books of

account.

Record direct costs in a manner consistent

with the budgets in a formal system

controlled by the general books of account.

18. Summarize direct costs from cost

accounts into the work breakdown structure

without allocation of a single cost account to

two or more work breakdown structure

elements.

When a work breakdown structure is used,

summarize direct costs from control

accounts into the work breakdown

structure without allocation of a single

control account to two or more work

breakdown structure elements.

19. Summarize direct costs from the cost

accounts into the contractor’s functional

organizational elements without allocation of

a single cost account to two or more

organizational elements.

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.

20. Record all indirect costs that will be

allocated to the contract.

Same.

21. Identify the basis for allocating the cost

of apportioned effort.

No comparable provision.

22. Identify unit costs, equivalent unit costs,

or lot costs, as applicable.

. . . or lot costs when needed.

23. The contractor’s material accounting

system will provide for:

 a. Accurate cost accumulation and

assignment of costs to cost accounts in a

manner consistent with the budgets using

recognized, acceptable costing techniques.

For earned value management systems,

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.

 b. Determination of price variances by

comparing planned versus actual

commitments.

No comparable provision.

(continued)

Page 26 GAO/NSIAD-97-108 Earned Value Management
Appendix I 

Comparison of DOD and Industry Criteria

DOD’s Criteria Industry’s Criteria

 c. Cost performance measurement at the

point in time most suitable for the category

of material involved, but no earlier than the

time of actual receipt of material.

. . . but no earlier than the time of progress

payments or actual receipt of material.

 d. Determination of cost variances

attributable to the excess usage of material.

No comparable provision.

 e. Determination of unit or lot costs when

applicable.

No comparable provision.

 f. Full accountability for all material

purchased for the contract, including the

residual inventory.

Full accountability for all material

purchased for the program, including the

residual inventory.

 Analysis Analysis and management reports

24. Identify at the cost account level on a

monthly basis using data from, or

reconcilable with, the accounting system:

 a. Budgeted cost of work scheduled and

budgeted cost of work performed.

 b. Budgeted cost of work performed and

applied (actual where appropriate) direct

costs for the same work.

 c. Variances resulting from the above

comparisons classified in terms of labor,

material, or other appropriate elements

together with the reasons for significant

variances.

At least on a monthly basis, generate the

following information at the control account

and other levels as necessary for

management control using actual cost

data from, or reconcilable with, the

accounting system:

1. Comparison of the amount of planned

budget and the amount of budget earned

for work accomplished. This comparison

provides the schedule variance.

2. Comparison of the amount of the budget

earned with the actual (applied where

appropriate) direct costs for the same

work. This comparison provides the cost

variance.

25. Identify on a monthly basis, in detail

needed by management for effective

control, budgeted indirect costs, actual

indirect costs, and variances along with the

reasons.

Identify budgeted and applied (or actual)

indirect costs at the level and frequency

needed by management for effective

control, along with the reasons for any

significant variances.

26. Summarize the data elements and

associated variances listed in [24] and [25]

above, through the contractor organization

and work breakdown structure to the

reporting level specified in the contract.

Summarize the data elements and

associated variances through the program

organization and/or work breakdown

structure to support management needs

and any customer reporting specified in

the contract.

27. Identify significant differences on a

monthly basis between planned and actual

schedule accomplishment and the reasons.

Identify, at least monthly, the significant

differences between both planned and

actual schedule performance and planned

and actual cost performance, and provide

the reasons for the variances in the detail

needed by program management.

28. Identify managerial actions taken as a

result of criteria items [24] through [27]

above.

Implement managerial actions taken as the

result of earned value information.

(continued)

Page 27 GAO/NSIAD-97-108 Earned Value Management
Appendix I 

Comparison of DOD and Industry Criteria

DOD’s Criteria Industry’s Criteria

29. Based on performance to date, on

commitment values for material, and on

estimates of future conditions, develop

revised estimates of cost at completion for

work breakdown structure elements

identified in the contract and compare these

with the contract budget base and the latest

statement of funds requirements reported to

the government.

Develop revised estimates of cost at

completion based on performance to date,

commitment values for material, and

estimates of future conditions. Compare

this information with the performance

measurement baseline to identify

variances at completion important to

company management and any applicable

customer reporting requirements,

including statements of funding

requirements.

 Revisions and access to data Revisions and data maintenance

30. Incorporate contractual changes in a

timely manner, recording the effects of such

changes in budgets and schedules. In the

directed effort before negotiation of a

change, base such revisions on the amount

estimated and budgeted to the functional

organization.

Incorporate authorized changes in a timely

manner, recording the effects of such

changes in budgets and schedules. In the

directed effort prior to negotiation of a

change, base such revisions on the

amount estimated and budgeted to the

program organizations.

31. Reconcile original budgets for those

elements of the work breakdown structure

identified as priced line items in the

contract, and for those elements at the

lowest level of the DOD program work

breakdown structure, with current

performance measurement budgets in terms

of (a) changes to the authorized work and

(b) internal replanning in the detail needed

by management for effective control.

Reconcile current budgets to prior

budgets in terms of changes to the

authorized work and internal replanning in

the detail needed by management for

effective control.

32. Prohibit retroactive changes to records

pertaining to work performed that will

change previously reported amounts for

direct costs, indirect costs, or budgets,

except for correction of errors and routine

accounting adjustments.

Control retroactive changes to records

pertaining to work performed that would

change previously reported amounts for

actual costs, earned value, or budgets.

Adjustments should be made only for

correction of errors, routine accounting

adjustments, effects of customer or

management directed changes, or to

improve the baseline integrity and

accuracy of performance measurement

data.

33. Prevent revisions to the contract budget

base except for government-directed

changes to contractual effort.

Prevent revisions to the program budget

except for authorized changes.

34. Document internally, changes to the

performance measurement baseline and

notify the procuring activity expeditiously

through prescribed procedures.

Document changes to the performance

measurement baseline.

35. Provide the contracting officer and the

contracting officer’s authorized

representatives with access to the

information and supporting documents

necessary to demonstrate compliance with

the cost/schedule control system criteria.

No comparable provision.

Page 28 GAO/NSIAD-97-108 Earned Value Management
Appendix II 

Comments From the Department of Defense

Page 29 GAO/NSIAD-97-108 Earned Value Management
Appendix II 

Comments From the Department of Defense

See p. 21.

Page 30 GAO/NSIAD-97-108 Earned Value Management
Appendix II 

Comments From the Department of Defense

See p. 21.

See p. 21.

(707153) Page 31 GAO/NSIAD-97-108 Earned Value Management
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