project cash flow

Post-Workshop Talking Blues — No Bucks, No Buck Rogers: Cashflow Analysis in Projects (Somewhat Wonkish)

When I used this analogy the week before last during the last Integrated Project Management Workshop in the D.C. area I was accused of dating myself–and perhaps it is true. For those wondering the quote was popularized by the 1983 movie The Right Stuff, which was based on the 1979 book written by Tom Wolfe of the same title. The book and movie was about the beginnings of the U.S. space program culminating in the creation of NASA and the Project Mercury program.

A clip from the movie follows:

It goes without saying that while I was familiar as a boy with Project Mercury and followed the seven astronauts as did the rest of the country, transfixed on the prospect of space exploration during the days of the New Frontier, Buck Rogers was from the childhood of my father’s generation through, at first, its radio program, and then through the serials that were released to the movie theaters during the 1930s.

The point of the quote, of course, is that Project Mercury’s success was based on its ability to obtain funding and, no doubt, the Mercury 7 astronauts so inspired the imagination of the nation that even the most parsimonious Member of Congress could not help but provide it with sufficient funding for success. That this was also the era of the “space race” with the Soviet Union, which also helped to spur funding.

The lesson of “No Bucks, No Buck Rogers” also applies to project management, but not just in the use of imagery and marketing to gain funding. Instead, the principle applies through a more mundane part of the discipline: financial management and the relationship between cash flow and project performance.

What I am referring to as cash flow is not the burn rate of expenditures against an end point, but the intersection of sufficient money at the right time programmed in accordance with the project plan (in alignment with both the IMS and PMB), and informed by project performance.

To those unfamiliar with this method it sounds similar to earned value management, but it is not. EVM informs our decision, but the analysis is not the same.

First, in using this analysis the cumulative actual cost of work performed (ACWP in earned value) should be compared to accrued expenditures for the project. These figures will not be exact, but will provide an indication whether accruals to date have been in line with what was forecasted. In government contracting and project management, these figures will also be somewhat off because earned value figures do not include fee or profit, while financial management figures will include fee or profit. Understanding the profit center from which the financial expenditures are being accrued will allow for a reconciliation of these differences.

Secondly, if projected accruals against the project plan begin to deviate, it is an early indication of programmatic risk being manifested in the physical expenditures of the project. For example, if management anticipates that there will be a delay in project execution in some area, they may decide to defer acquisition of spare parts used in the construction of a component, or they may delay the award of a subcontract that was meant to augment staff in an area requiring specialized expertise.

Third, and conversely, deviations of expenditures for needed materials or manpower may adversely affect project execution, and provide an early warning that such shortages or misalignments will move project accomplishment to the right. For example, a company may have underestimated the combined Procurement Action Lead Time (PALT) and delivery of critical materials, which will now arrive much later than anticipated. This misalignment will cascade through the schedule and future planned work.

For both of these previous conditions, the proper determination of cause-and-effect is essential, since either may appear to suggest the opposite cause.

Fourth, variances in performance either in earned value achievement or schedule performance may require an adjustment to the type of money being provided. For example, when a project fails to execute and risk is manifested in terms of cost and/or schedule, financial management and budgeting personnel, always under pressure to apply excess funds to more immediate needs, may mistakenly believe that a budget mark (a decrease) is appropriate since the allocated money will not be executed in the current time-frame.

But this is not necessarily the case. Performance management data tracks the performance measurement baseline (PMB) for the life of the project, but funding has a finite period in which it can be executed. In government contracting it is not uncommon for there to be different “colors” of money: Research, Development, Test & Evaluation (RDT&E), Procurement, Operations and Maintenance (O&M), and others. Furthermore, these types of appropriations have different expiration dates: two years in terms of RDT&E, three years for procurement, and one year for O&M. The financial management plan takes into account the life of money allocated to the project, as well as the costs of activities necessary to project execution. The time frame for financial execution is shorter and, therefore, more sensitive to risks or variances than project plans that are projected across a longer period of time.

For an R&D program experiencing risk during a particular portion of its PMB, for example, a variance this year may require not only a steady funding profile, but a larger expenditure to handle risk. Marking two-year RDT&E money in its first year in this case would be a mistake, of course, but *not* properly anticipating the proper level of risk adjusted expenditures to handle risk may exacerbate the ability of the project to recover and execute, causing it to fall into a spiral of compounding misalignments and variances from which it may never recover.

Thus, what we can see is that, oftentimes, the availability of cash–and the right kind of cash at the right time–will have as much impact on project execution as the factors of technical and engineering risk. Furthermore, tracking and reconciling the financial plan against actual accomplishment will provide a very detailed early indicator into project performance since it is sensitive to deviations in the fiscal plan.

Postscript.

For those not savvy about the cultural reference to Buck Rogers what follows is a sampling of the first of what became a movie serial in the 1930s, which originated as a radio “space opera”. Later it became a TV series in 1950 as well. For the record, I was not around yet when these were popular, though I did watch the reruns on Saturday mornings in the 1960s and early 1970s.

 

 

 

 

 

 

 

 

 

 

Go With the Flow — What is a Better Indicator: Earned Value or Cash Flow?

A lot of ink has been devoted to what constitutes “best practices” in PM but oftentimes these discussions tend to get diverted into overtly commercial activities that promote a set of products or trademarked services that in actuality are well-trod project management techniques given a fancy name or acronym.  We see this often with “road shows” and “seminars” that are blatant marketing events.  This tends to undermine the desire of PM professionals to find out what really gives us good information by both getting in the way of new synergies and by tying “best practices” to proprietary solutions.  All too often “common practice” and “proprietary limitations” pass for “best practice.”

Recently I have been involved in discussions and the formulation of guides on indicators that tell us something important regarding the condition of the project throughout its life cycle.  All too often the conversation settles on earned value with the proposition that all indicators lead back to it.  But this is an error since it is but one method for determining performance, which looks solely at one dimension of the project.

There are, after all, other obvious processes and plans that measure different dimensions of project performance.  The first such example is schedule performance.  A few years ago there was an attempt to more closely tie schedule and cost as an earned value metric, which was and is called “earned schedule.”  In particular, it had many strengths against what was posited as its alternative–schedule variance as calculated by earned value.  But both are a misnomer, even when earned schedule is offered as an alternative to earned value while at the same time adhering to its methods.  Neither measures schedule, that is, time-based performance against a plan consisting of activities.  The two artifacts can never be reconciled and reduced to one metric because they measure different things.  The statistical measure that would result would have no basis in reality, adding an unnecessary statistical layer that obfuscates instead of clarifying the underlying condition. So what do we look at you may ask?  Well–the schedule.  The schedule itself contains many opportunities to measure its dimension in order to develop useful metrics and indicators.

For example, a number of these indicators have been in place for quite some time: Baseline Execution Index (BEI), Critical Path Length Index (CPLI), early start/late start, early finish/late finish, bow-wave analysis, hit-miss indices, etc.  These all can be found in the literature, such as here and here and here.

Typically, then, the first step toward integration is tying these different metrics and indicators of the schedule and EVM dimensions at an appropriate level through the WBS or other structures.  The juxtaposition of these differing dimensions, particularly in a grid or GANTT, gives us the ability to determine if there is a correlation between the various indicators.  We can then determine–over time–the strength and consistency of the various correlations.  Further, we can take this one step further to conclude which ones lead us to causation.  Only then do we get to “best practice.”  This hard work to get to best practice is still in its infancy.

But this is only the first step toward “integrated” performance measurement.  There are other areas of integration that are needed to give us a multidimensional view of what is happening in terms of project performance.  Risk is certainly one additional area–and a commonly heard one–but I want to take this a step further.

For among my various jobs in the past included business management within a project management organization.  This usually translated into financial management, but not traditional financial management that focuses on the needs of the enterprise.  Instead, I am referring to project financial management, which is a horse of a different color, since it is focused at the micro-programmatic level on both schedule and resource management, given that planned activities and the resources assigned to them must be funded.

Thus, having the funding in place to execute the work is the antecedent and, I would argue, the overriding factor to project success.  Outside of construction project management, where the focus on cash-flow is a truism, we see this play out in publicly funded project management through the budget hearing process.  Even when we are dealing with multiyear R&D funding the project goes through this same process.  During each review, financial risk is assessed to ensure that work is being performed and budget (program) is being executed.  Earned value will determine the variance between the financial plan and the value of the execution, but the level of funding–or cash flow–will determine what gets done during any particular period of time.  The burn rate (expenditure) is the proof that things are getting done, even if the value may be less than what is actually expended.

In public funding of projects, especially in A&D, the proper “color” of money (R&D, Operations & Maintenance, etc.) available at the right time oftentimes is a better predictor of project success than the metrics and indicators which assume that the planned budget, schedule, and resources will be provided to support the baseline.  But things change, including the appropriation and release of funds.  As a result, any “best practice” that confines itself to only one or two of the dimensions of project assessment fail to meet the definition.

In the words of Gus Grissom in The Right Stuff, “No bucks, no Buck Rogers.”

 

Don’t Be Cruel — Contract Withholds and the Failure of Digital Systems

Recent news over at Breaking Defense headlined a $25.7M withhold to Pratt & Whitney for the F135 engine.  This is the engine for the F35 Lightning II aircraft, also known as the Joint Strike Fighter (JSF).  The reason for the withhold in this particular case was for an insufficient cost and schedule business system that the company has in place to support project management.

The enforcement of withholds for deficiencies in business systems was instituted in August 2011.  These business systems include six areas:

  • Accounting
  • Estimating
  • Purchasing
  • EVMS (Earned Value Management System)
  • MMAS (Material Management and Accounting System), and
  • Government Property

As of November 30, 2013, $19 million had been held back from BAE Systems Plc, $5.2 million from Boeing Co., and $1.4 million Northrop Corporation.  These were on the heels of a massive $221 million held back from Lockheed Martin’s aeronautics unit for its deficient earned value management system.  In total, fourteen companies were impacted by withholds last year.

For those unfamiliar with the issue, these withholds may seem to be a reasonable enforcement mechanism that sufficient business systems are in place in order to ensure that there is traceability in the expenditure of government funds by contractors.  After all, given the disastrous state of affairs where there was massive loss of accountability by contractors in Iraq and Afghanistan, many senior personnel in DoD felt that there needed to be teeth given to contracting officer, and what better way to do this than through financial withholds?  The rationale is that if the systems are not adequate then the information originated from these systems is not credible.

This is probably a good approach for the acquisition of wartime goods and services, but doesn’t seem to fit the reality of the project management environment in which government contracting operates.  The strongest objections to the rule, I think, came from the legal community, most notably from the Bar Association’s Section of Public Contract Law.  Among these was that the amount of the withhold is based on an arbitrary percentage within the DFARS rule.  Another point made is that the defects in the systems in most cases are disconnected from actual performance and so redirect attention and resources away from the contractual obligation at hand.

These objections were made prior to the rule’s acceptance.  But now that the rule is being enforced the more important question is the effect of the withholds on project management.  My own anecdotal experience from having been a business manager in a program management staff is that the key to project success is oftentimes determined by cash flow.  While internal factors to the project, such as the effective construction of the integrated master schedule (IMS), performance management baseline (PMB), risk identification and handling, and performance tracking against these plans are the primary focus of project integrity, all too often the underlying financial constraints in which the project must operate is treated as a contingent factor.  If our capabilities due to financial constraints are severe, then the best plan in the world will not achieve the desired results because it fails to be realistic.

The principles that apply to any entrepreneurial enterprise also apply to complex projects.  It is true that large companies do have significant cash reserves and that these reserves have grown significantly since the 2007-2010 depression.  But a major program requires a large infusion of resources that constitutes a significant barrier to entry, and so such reserves contribute to the financial stability necessary to undertake such efforts.  Profit is not realized on every project.  This may sound surprising to those unfamiliar with public administration, but this is the case because it sometimes is worth breaking even or taking a slight loss so as not to lose essential organizational knowledge.  It takes years to develop an engineer who understands the interrelationships of the key factors in a jet fighter: the tradeoffs between speed, maneuverability, weight, and stress from the operational environment, like taking off from and landing on a large metal aircraft carrier that travels on salt water.  This cannot be taught in college nor can it be replaced if the knowledge is lost due to budget cuts, pay freezes, and sequestration.  Oftentimes, because of their size and complexity, project start-up costs much be financed using short term loans, adding risk when payments are delayed and work interrupted.  The withhold rule adds an additional, if not unnecessary, dimension of risk to project success.

Given that most of the artifacts that are deemed necessary to handle and reduce risk are done in a collaborative environment by the contractor-government project team through the Integrated Baseline Review (IBR) process and system validation–as well as pre-award certifications–it seems that there is no clear line of demarcation to place the onus of inadequate business systems on the contractor.  The reality of the situation, given cost-plus contracts for development contracts, is that industry is, in fact, a private extension of the defense infrastructure.

It is true that a line must be drawn in the contractual relationship to provide those necessary checks and balances to guard against fraud, waste, or a race to the lowest common denominator that undermines accountability and execution of the contractual obligation.  But this does not mean that the work of oversight requires another post-hoc layer of surveillance.  If we are not getting quality results from pre-award and post-award processes, then we must identify which ones are failing us and reform them.  Interrupting cash flow for inadequately assessed business systems may simply be counter-productive.

As Deming would argue, quality must be built into the process.  What defines quality must also be consistent.  That our systems are failing in that regard is indicative, I believe, in a failure of imagination on the part of our digital systems, on which most business systems rely.  It was fine in the first wave of microcomputer digitization in the 1980s and 1990s to simply design systems that mimicked the structure of pre-digital information specialization.  Cost performance systems were built to serve the needs of cost analysts, scheduling systems were designed for schedulers, risk systems for a sub-culture of risk specialists, and so on.

To break these stovepipes the response of the IT industry twofold, which constitutes the second wave of digitization of project management business processes.

One was in many ways a step back.  The mainframe culture in IT had been on the defensive since the introduction of the PC and “distributed” processing.  Here was an opening to reclaim the high ground and so expensive, hard-coded ERP, PPM, and BI systems were introduced.  The lack of security in deploying systems quickly in the first wave also provided the community with a convenient stalking horse, though even the “new” systems, as we have seen, lack adequate security in the digital arms race.  The ERP and BI systems are expensive and require specialized knowledge and expertise.  Solutions are hard-coded, require detailed modeling, and take a significant amount of time to deploy, supporting a new generation of coders.  The significant financial and personnel resources required to acquire and implement these systems–and the management reputation on the line for making the decision to acquire the systems in the first place–have become a rationale for their continued use, even when they fail at the same high rate of all IT development projects.  Thus, tradeoff analysis between sunk costs and prospective costs is rarely made in determining their sustainability.

Another response was to knit together the first wave, specialized systems in “best-of-breed” configurations.  In this case data is imported and reconciled between specialized systems to achieve integration needed to service the cross-functional nature of project management.  Oftentimes the estimating, IMS, PMB, and qualitative and quantitative risk artifacts are constructed by separate specialists with little or no coordination or fidelity.  These environments are characterized by workarounds, special resource-heavy reconciliation teams dedicated to verifying data between systems, the expenditure of resources in fixing errors after the fact, and in the development of Access and MS Excel-heavy one-off solutions designed to address deficiencies in the underlying systems.

That the deficiencies that are found in the solutions described above are mimicked in the findings of the deficiencies in business systems marks the culprits largely being the underlying information systems.  The solution, I think, is going to come from those portions of the digital community where the barriers to entry are low.  The current crop of software in place is reaching the end of its productive life from the first and second waves.  Hoping to protect market share and stave off the inevitable, new delivery and business models are being deployed by entrenched software companies, who have little incentive to drive the industry to the next phase.  Instead, they have been marketing SaaS and cloud computing as the panacea, though the nature of the work tends to militate against acceptance of external hosting.  In the end, I believe the answer is to leverage new technologies that eliminate the specialized and hard-coded nature of the first example, but achieve integration, while leveraging the existing historical data that exists in great abundance from the second example.

Note: The title and some portions of this post were modified from the original for clarity.