Thursday, May 7, 2015

Earned Value EVM and Level of Effort - Yes You Can

Oscar Wilde would have made a great program manager.

"Nowadays, people know the price of everything and the value of nothing" - Oscar Wilde.

We saw in an earlier post that you can do EVM with Fixed Price after all. In a true fixed price contract, the number of resources and working arrangements are not under the buyer's control; the vendor just gets the job done somehow.  You can still work EVM into it (see the prior post at the link above).

It is ironic that so much of the contract work for the government, which advocates very strongly for using EVM has migrated very rapidly from the much-maligned cost basis to LOE. Why is this a problem?  Because it appears to be unaccountable.  The team comes aboard to ... well, to do what?  Whatever needs to be done, meaning whatever the contract monitor wants done, which of course is a personal services contract and would therefore be illegal (in government), which no doubt explains why so many of them are in place in Washington.  But there they are, and we have to deal with it.

People think you cannot use EVM with LOE because there are no real deliverables and the planned and actual costs are always the same.  The "official" solution is that level-of-effort activities don't contribute to specific work packages and should be held in a separate line of accounting from the work packages.  Then they just accrue costs as the calendar passes; but they do not earn value. They are part of the project cost baseline but not the performance baseline. This is a good way to account for project-wide overhead costs, which contribute more or less equally to all ongoing work packages (or impede them, depending on your point of view!)

What happens if the level-of-effort people are working on the actual deliverables?  You can't exempt 95% of the project labor from the EVM metrics.  For true LOE contracts, whether on their face or disguised as fixed-price contracts, the people just show up to work ... and do what?.  Since it is illegal to award an actual personal services contract, you don't often see one that actually says "just give us xx bodies and we'll tell them what to do". What you see instead is a "fixed price" contract that is really level-of-effort: the vendor is to deliver a defined number of hours (conveniently 1980) of various labor categories, with a statement of work that is either very vague or quite specific but will be completely ignored.

At a very basic level, if the vendor fails to provide the agreed resources (a common occurrence), then you can show a delta between planned cost and actual cost.  The philosophical problem here is that no backlog of work builds up: customers may be poorly served at the time, but there is no way to go back and serve them later when the resource does show up.  That, of course, raises the uncomfortable question of what value was lost by the work not done, and if you use that math then you have to extend it to question whether any much more value is gained from the work that was done.
    As to the so-called "fixed price" contracts to provide labor-hours, that's no different at all from other cost-based contracts; there's just less paperwork needed to establish the actual cost.  Many contract monitors prefer not to crack the whip, or don't know how, but since it is nothing but a typical cost-based contract you can give guidance on the deliverables to be produced and the hours (costs) needed to do it.  If it gets done sooner or cheaper, you are ahead of the game; if it takes longer or more work, then you are behind the plan.  Voila: we have EVM!

    Let's suppose that the contract does provide for a real LOE and real (if vague) deliverables.  The very latest thing in this arena is agile-type work (especially Scrum, the most popular brand) in which a team assembles on a near-full-time basis to do whatever work they can get done to deliver for each sprint.  Despite the popular impression that Agile is just a license to throw all oversight away, there is actually a rich body of knowledge on Agile metrics.  Just as with a true fixed price effort, it is entirely possible to establish intermediate milestones for longer-term efforts (such as a release) in which the earned value might be as simple as a completed sprint and may be more complex to address the planned and actual velocity.  an even more sophistical scoring method can address the velocity at which delivered features are meeting value priorities.

    Just as with the true fixed price scenario, the important thing is to separate the concepts of "value" and "cost".