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HHS Interim Acquisition Guidance Concerning Earned Value Management

APM 200 8-02  
10/1/2008

ACQUISITION POLICY MEMORANDUM NO. 2008 – 02

To:                 Heads of Contracting Activity
                      Executive Officers

From:             Martin J. Brown /s/
                      Senior Procurement Executive

Subject:          HHS Interim Acquisition Guidance Concerning Earned Value Management

Effective Date: October 1, 2008

1.  Purpose:  The purpose of this memorandum is to set forth the specific implementation parameters for the application of Earned Value Management (EVM) to contracts issued by the Department of Health and Human Services (HHS), consistent with the flexibility and discretion allowed by the Federal Acquisition Regulation (FAR).  Please treat this memorandum as interim acquisition guidance, pending formal incorporation in the HHS Acquisition Regulation.

2.  Background:  Earned value management is a program management tool and technique that facilitates systematic planning for, and monitoring of, high-value, complex projects.  It integrates a project’s scope of work with the related budget and schedule to permit detailed assessment of overall performance during the life of the project.

Several government-wide guidance documents govern the definition and use of EVM systems. Guidelines outlining the qualities and characteristics of an EVM system (EVMS) are set forth in American National Standards Institute/Electronic Industries Alliance (ANSI/EIA) Standard-748.[1] More detailed and specific guidance and direction is contained in OMB Circular A-11, Preparation, Submission and Execution of the Budget, specifically in Part 7 of that Circular, Planning, Budgeting, Acquisition, and Management of Capital Assets, and its supplement, the Capital Programming Guide.  Based on this collective OMB guidance, EVMS is intended to be used on those parts of acquisitions[2] that will involve developmental effort.  This would include not only those acquisitions designated by the agency as major systems but also those acquisitions that include significant developmental, modification, or upgrade efforts during the operational or steady-state phase of a program.

The FAR rule on EVMS became effective on July 5, 2006.[3]  Its purpose is to implement EVMS policy in accordance with OMB Circular A-11.  Prior to that action, there was no specific coverage of EVMS in the FAR.  Because the new FAR coverage applies throughout the executive branch and to agencies with disparate definitions of and processes and procedures for major systems acquisitions, the FAR Council decided against a “one-size-fits-all” approach and left several significant aspects of the detailed implementation up to the discretion of each covered agency.  For example, the final FAR rule does not establish specific dollar-value thresholds or set universal EVMS applicability criteria.  Similarly, with respect to integrated baseline reviews (IBRs)—an essential element and step in the application of EVMS at the program and/or contract level—the final rule does not mandate their use in the pre-award phase and leaves to the agency’s discretion whether to pay offerors for preparation for, and participation in, pre-award IBRs conducted as part of the source selection process.  Also, although the final FAR rule contains two solicitation provisions and a contract clause addressing EVMS, agencies were given the flexibility to develop provisions and clauses for their own use as long as they are substantially the same as those contained in the FAR.

3.  Analysis and Discussion:  EVM principles and techniques provide program managers with timely, accurate, and detailed cost, schedule, and performance status information with which to make informed decisions during the life of a program.  However, using EVM on contracts involves added time, cost, and effort on the part of both vendors and the Government.  For vendors, there are costs associated with establishing EVMS in accordance with the ANSI/EIA standard, setting the basic budget and schedule parameters for specific contract efforts, and preparing and submitting periodic reports of progress and status.  For the Government, there are costs associated with evaluating offerors’ and contractors’ EVMS and with receiving, reviewing, and analyzing periodic EVM reports. Because of this workload, EVM should be used only when the benefits of applying its tools and techniques are deemed by the agency to outweigh the associated costs.  To establish these parameters, the HHSAR coverage sets a contract value floor below which the application of EVM is not mandatory and any planned requirement for its use must be approved in advance by the HCA.  For contracts with values exceeding the floor, this HHSAR coverage makes a distinction, also based on contract value, between contracts that require the use of EVM techniques and those that require that the successful offeror’s EVMS be reviewed and approved by the Cognizant Federal Agency (CFA) as being in conformance with the full requirements of ANSI/EIA Standard-748.

Several considerations in addition to contract value should apply when determining whether to use EVM.  Among the most important of these considerations are the proposed contract type and the subject matter of the underlying effort.  Failure to address these considerations could result in the use of EVM to achieve results that other potentially equally effective and less costly tools and techniques could provide.  Among the primary indicators of performance status that EVM provides are estimates of cost and schedule variances from the performance plans, at the detailed work package level, established during contract formation. This is done by comparing three specific values: the budgeted cost of work scheduled (BCWS); the budgeted cost of work actually performed (BCWP); and the actual cost of work performed (ACWP).  At any point, to the extent that BCWP varies from BCWS, a positive or negative schedule variance exists. Schedule deviation or variance could just as easily be determined merely by comparing planned activities with those actually performed over any time interval using tools other than EVM – e.g., Microsoft Project or a similar schedule tracking application.  Similarly, to the extent that ACWP varies from BCWP, a positive or negative cost variance exists. 

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If the type of contract does not expose the Government to any cost risk of performance, the existence of a cost variance is of no actionable concern to the Contracting Officer’s Technical Representative (COTR) or the Contracting Officer (CO).  For example, under a firm-fixed-price contract, the amount the Government will pay for the supplies or services has been established at the time of contract formation, and as long as no changes are made or requested in the work to be performed, the final price to be paid will not be affected by the amount of costs the contractor incurs in performing the contract.  However, if the amount the Government may pay for the contracted performance could vary or if the amount of performance actually received could be affected by the level of cost being incurred, then the existence of a cost variance is, and should be, of interest to the COTR and the CO.  This would be the case if a cost-reimbursement or fixed-price-incentive type contract is being used.  Also, for term form contracts (i.e., when the contracted performance is defined as a set level-of-effort), time-and-material and labor-hour contracts, and commercial contracts under FAR Part 12, the existence of a cost variance is not an actionable condition for either the COTR or CO because the contracted performance required is measured in terms of labor hours for which a fixed price, estimated cost limit, or ceiling price accompanied by fixed hourly rates has been established.  Therefore, depending on the contract type, the HHSAR coverage permits either full or partial EVM. Under full EVM both the cost and schedule aspects of a contract are tracked and reported whereas, under partial EVM, tracking and reporting is limited to only the schedule aspects of the contract. The coverage also contains language prohibiting the selection of a particular contract type merely to avoid the application and use of full EVM.

The table below summarizes the applicability of EVMS consistent with the specific content of the interim guidance.

CategoryContract ValueContract TypeEVMS
Major acquisitions for development (per OMB Circular A-11) and
> Acquisitions for development, modernization, or upgrade (non-major)
$ 10 millionAny typeOptional with HCA Prior Approval
Major acquisitions for development (per OMB Circular A-11) and
> Acquisitions for development, modernization, or upgrade (non-major)
=/> $10 million to $25 millionCost Reimbursement/Fixed Price
Incentive (with incentive based on cost)
Full (Cost and Schedule) EVM Required*
Major acquisitions for development (per OMB Circular A-11) and
> Acquisitions for development, modernization, or upgrade (non-major)
=/> $10 million to $25 millionFirm-fixed-price, Time-and-Materials, Labor-hour, and Term formPartial (Schedule Only) EVM Required*
Major acquisitions for development (per OMB Circular A-11) and
> Acquisitions for development, modernization, or upgrade (non-major)
> $25 millionCost Reimbursement/Fixed Price
Incentive (with incentive based on cost)
Full (Cost and Schedule) EVM Required**
Major acquisitions for development (per OMB Circular A-11) and
> Acquisitions for development, modernization, or upgrade (non-major)
> $25 millionFirm-fixed-price, Time-and-Materials, Labor-hour, and Term formPartial (Schedule Only) EVM Required**
Acquisition of non-developmental services, routine services, steady state operations, basic and applied research, or commercial items (in accordance with FAR Part 12)Any value

Any type

Not Required

 

Once a decision is made to apply EVM (whether full or partial) to a proposed contract, other related decisions will also have to be made.  Among them is the choice of when to establish the performance measurement baseline (PMB).  One of the first and most important steps in applying EVM techniques to an acquisition is the establishment of baseline planned schedule and/or budget parameters (the PMB) at the work package level.  When the baseline has been established, all future EVM reporting of cost and/or schedule status is accomplished with respect to that plan.

The meeting to establish the PMB can take place either before award (as part of the competitive process), or after award and only with the successful offeror.  In either case, it is a joint responsibility of the Project Officer (PO) (who performs technical/programmatic responsibilities in a pre-award environment), the CO, and the offeror(s)/contractor.  This process is referred to as the integrated baseline review (IBR).  The decision of when to conduct an IBR can have significant cost and time implications for both vendors and the Government.  As a consequence, the proposed HHSAR coverage treats pre-award IBRs as an exceptional item requiring advance approval and specific funding.  When pre-award IBRs are conducted, all offerors will incur added bid and proposal costs, the cost for the Government to conduct multiple IBRs can be significant, and the source selection and award phase of the acquisition may be delayed. Government personnel will need to review and establish several baselines and also assess the compliance of several offerors’ EVMS with the ANSI/EIA standard.  The use and implications of pre-award IBRs in the source evaluation and selection process must be clearly set forth in both the acquisition plan and the solicitation.

The use of performance-based contracting techniques presents yet another issue with respect to pre-award IBRs.  In a performance-based acquisition, each offeror’s submission is likely to be significantly different in areas such as approach, content, and detailed schedule, along with the expected differences in offered prices and, therefore, associated budgets.  As a result, establishing an acceptable budget and/or schedule baseline with each offeror is likely to be a more resource-intensive activity for the Government.  Alternatively, when an IBR is conducted after contract award, it involves only the successful offeror and thus the time and cost impact will be reduced.  In fact, even when pre-award IBRs have been conducted, a post-award IBR is often still necessary to incorporate any changes that may have resulted from negotiations with the successful offeror.  Also, the use of pre-award IBRs may adversely affect the desire or ability of small business concerns to compete effectively for business opportunities.

Therefore, the interim HHSAR coverage places significant limitations on the decision to use pre-award IBRs and requires that offerors be compensated for preparing for and participating in them.

4.  Impact on HHSAR:  This interim acquisition guidance has an impact on two parts of the HHSAR:

HHSAR 334.2—Earned Value Management System (EVMS):  It adds a new subpart that addresses the implementation of earned value management within HHS.  This new subpart sets forth the contract value thresholds for EVMS use, establishes criteria for applying either full or partial EVMS based upon the contract type used, states policy with respect to the decision to use pre-award IBRs, and prescribes the use of two solicitation provisions and two contract clauses addressing EVMS.

HHSAR 352.234-X—Solicitation Provisions and Contract Clauses:  It adds two solicitation provisions—one to be used in contract solicitations when pre-award IBRs are contemplated and one to be used when only a post-award IBR is contemplated.  Further, it adds two contract clauses to be used in solicitations and contracts that, depending upon contract type, will require the use of either full or partial EVM.  The FAR provisions and contract clause are not used because of unique HHS EVM applicability and implementation issues, which can be addressed more effectively and efficiently using the HHSAR-specific provisions and clauses.

5.  Regulatory Language:  Attached is the interim regulatory language to address EVM.

cc:   ASRT/OCIO  (Phil Clark)
       ASAM/OFMP  (Diane Stewart)
       ASPR/BARDA  (Michael Blumenfeld)

Attachment: HHSAR Changes for Interim HHSAR Guidance - Earned Value Management

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[1] OMB Circular A-109, Major System Acquisitions, was the first government-wide policy on the acquisition of major systems. Although that Circular has not been officially rescinded, it is no longer available in other than hard-copy form by special request to OMB.
[2] It should be noted that OMB policy on the use EVM applies to major acquisition programs generally. Thus, EVM is to be applied not only to contracts with the private sector but also to intra-governmental activities. This HHSAR case addresses only the use of EVM on contracts. It will be supplemented by companion policy guidance on the application of EVM to acquisition programs that may involve intra-governmental agreements, in house efforts, and/or consist of a series of contracts which individually may not invoke EVM (because the individual contract values do not exceed the thresholds).
[3] The final FAR rule (in case 2004-019) was issued as a part of Federal Acquisition Circular (FAC) 2005-11. The full text of the final version of the rule can be found at: https://www.acquisition.gov/far/FAC/fac2005-11_federal_register.pdf