I need a dollar dollar, a dollar is what I need (hey hey) — Contract “harvesting”

Are there financial payoffs in our performance management metrics where money can be recouped?

That certainly seems to be the case in the opinion of some contracting officers and program managers, particularly in a time of budgetary constraints and austerity.  What we are talking about are elements of the project, particularly in aerospace & defense work identified by control accounts within a work breakdown structure (WBS), that are using fewer resources than planned.  Is this real money that can be harvested?

Most recently this question arose from the earned value community, in which positive variances were used as the basis for “harvesting” funds to be used to either de-obligate funds or to add additional work.  The reason for this question lies in traditional methods of using earned value methods to reallocate funds within contract.

For example, the first and most common is in relation to completed accounts which have a positive variance.  That is, accounts where the work is completed and they have underspent their budgeted performance management baseline.  Can the resources left over from that work be reallocated and the variances for the completed accounts be set to 1.0?  The obvious answer to this is, yes.  This constitutes acceptable replanning as long as the contract budget base (CBB) is not increased, and there is no extension to the period of performance.  Replans are an effective means for the program team to rebaseline the time-phased performance management baseline (PMB) to internally allocate resources to address risk on those elements that are not performing well against the plan.  Keep in mind that this scenario is very limited.  It only applies to accounts that are completed where actual money will not be expended for effort within the original control accounts.  Also, these resources should be accounted for within the project by first being allocated to undistributed budget (UB), since this money was authorized for specific work.  Contracting officers and the customer program manager will then direct where these undistributed funds will be allocated, whether that be to particular control accounts or to management reserve (MR).

In addition to replanning, there are reprogamming and single point adjustment examples–all of which are adequately covered here and here.

But the issue is not one related to EVM.  The reason I believe it is not lies in the purpose of earned value management as a project management indicator: it measures the achievement (volume) of work against a financial plan in order to derive the value of the work performed at any particular stage in the life of a project.  It does this not only as an oversight and assessment mechanism, but also to provide early warning of the manifestation of risk that threatens the successful execution of the project.  Thus, though it began life in the financial management community to derive the value of work performed at a moment in the project plan, it is not a financial management tool.  The “money” identified in our earned value management systems is not real in the sense that it exists, other than as an indicator of progress against a financial plan of work accomplishment.  To treat this as actual money is to commit the fallacy of reification.  That is, to treat an abstraction as if it is the real thing.

The proper place to determine the availability of funds lies in the financial accounting system.  The method used for determining funds, particularly in government related contract work, is to first understand the terminology and concepts of funding.  Funds can be committed, obligated, or expended.  Funds are committed when they are set aside administratively to cover an anticipated liability.  Funds are obligated when there is a binding agreement in place, such as a contract or purchase order.  Funds are expended when the obligation is paid.

From a contracting perspective, commitments are generally available because they have not been obligated.  Obligated funds can be recovered under certain circumstances as determined by the rules relating to termination liability.  Thus, the portion of the effort in which funds are de-obligated is considered to be a termination for convenience.  Thus, we find our answer to the issue of “harvesting.”

Funds can be de-obligated from a contract as long as sufficient funds remain on the contract to cover the amount of the remaining obligation plus any termination liability.  If the contracting officer and program manager wish to use “excess” funds due to the fact that the project is performing better than anticipated under the negotiated contract budget base, then they have the ability to de-obligate those funds.  That money then belongs to the source of the funding, not the contracting officer or the program manager, unless one of them is the “owner” of the funds, that is, in government parlance, the budget holder.  Tradeoffs outside of the original effort, particularly those requiring new work, must be documented with a contract modification.

From an earned value management and project management perspective, then, we now know what to do.  For control accounts that are completed we maintain the history of the effort, even though the “excess” funds being de-obligated from the contract are reflected in positive variances.  For control accounts modified by the de-obligation in mid-effort, we rebaseline that work.  New work is added to the project plan separately and performance tracked in according to the guidance found in the systems description of the project.

One note of caution:  I have seen where contracting officers in Department of Defense work rely on the Contract Funds Status Reports (CFSR) to determine the availability of funds for de-obligation.  The CFSR is a projection of funding obligations and expenditures within the project and does not constitute a contractual obligation on the burn rate of funding.  Actual obligations and expenditures will vary by all of the usual circumstances that affect project and contract performance.  Thus, contracting officers who rely on this document risk both disrupting project management execution and running into an Anti-Deficiency Act violation.

In summary, apart from the external circumstances of a tight budgetary environment that has placed extra emphasis on identifying resources, good financial management housekeeping dictates that accountable personnel as a matter of course be diligent in identifying and recouping uncommitted, unobligated, and unexpended funds.  This is the “carry-over” often referred to by public administration professionals.  That earned value is used as an early indicator of these groups is a proactive practice.  But contracting officers and program managers must understand that it is only that–an indicator.

These professionals must also understand the nature of the work and the manner of planning.  I have seen cases, particularly in software development efforts, where risk did not manifest in certain accounts until the last 5% to 10% of work was scheduled to be performed.  No doubt this was due to front-loaded planning, pushing risk to the right, and some other defects in project structure, processes, and planning.  Regardless, these conditions exist and it behooves contracting and project professionals to be aware that work that appears to be performing ahead of cost and schedule plans may reflect a transient condition.

Note:  This content of this article was greatly influenced by the good work of Michael Pelkey in the Office of the Secretary of Defense, though I take full responsibility for the opinions expressed herein, which are my own.

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