One of the process areas we frequently help our clients with is establishing time-phased estimate to complete (ETC) data to be able to produce credible estimates at completion (EACs) during the execution phase of a project. The intent of the ETC data is to provide a realistic plan to complete the remaining work. Adding the cumulative to date actual costs to the estimate to complete provides an indication of the likely total expenditures for the project – the estimate at completion. The EAC is compared to the budget at completion (BAC) at the various levels of detail to identify and analyze areas of concern.
EAC Relationship to Financial Objectives
The estimate at completion matters because it represents real money. Will the company make a profit or not on the contract? Exceeding a contractual target price creates a financial liability for the company. The magnitude of the liability can be significant depending on the value and type of contract.
When a company’s actual costs are consistently higher than anticipated, this has a cumulative negative impact on the company’s balance sheet. The root cause of those negative impacts frequently begins in the proposal phase. Proposal teams often lack access to historical data or are unable to put together quantifiable backup data to produce data-driven, verifiable basis of estimates they need to consistently produce quality proposal estimates.
In other instances, companies make the choice to price their proposal to win the work knowing they may lose money on the contract should they win. In the best-case scenario, the company has the quantifiable data to determine whether they will make a profit or they consciously decided to take a loss and calculated that into their overall business strategy.
When a company is able to produce proposals with high quality, data-driven basis of estimates, they have the foundation to produce a realistic and executable budget baseline after contract award. When the budget plan provides a more accurate model of how the work is performed and actual costs are incurred, this increases the likelihood the company’s target profit margins are met.
Creating Credible ETCs and EACs
Producing data driven basis of estimates and creating executable budget baselines takes effort. Maintaining the ETC data for the life of a project also takes effort. Proposal and project control teams need a repeatable process they can follow supported with the right tools that help them do their job.
A properly maintained estimate to complete provides visibility into the current schedule, cost factors, realized or emerging risks, and resource requirements to complete the project’s objectives as well as meet financial objectives. This helps the project manager to make timely and informed decisions.
- Are there any critical labor resource, material, or subcontractor issues they need to be aware of?
- Do they need to make staffing adjustments?
- Do they need to change a make or buy decision?
- Did the price of commodity items significantly increase because of a change in economic conditions?
- Is there a problem with a subcontractor’s performance or quality of the product they are providing?
- Is there anything the customer needs to be aware of that could impact the project’s funding constraints?
All parties need to be aware of any situation where the estimate to complete and estimate at completion exceeds the funding profile. Management needs to be aware of any potential impacts on the anticipated profit margin for the project.
EAC Relationship to Financial Objectives
Unfortunately, what we often see is the estimate to complete process gets hijacked along the way. The purpose of the estimate to compete and estimate at completion gets lost in the day-to-day pressures of executing the work.
The two most common scenarios:
- The project control teams are given a target estimate at completion number for their elements of work. This could be a given level of the work breakdown structure (WBS), control accounts, or work packages. They are expected to “shoehorn” their estimate to complete the remaining work to match the target number. This may be a valid what-if exercise when management wants to challenge work teams to meet higher performance goals or the customer has just reduced funding. When done arbitrarily, it destroys the value of the ETC data to manage the remaining work on the project and prevent any financial surprises.
- Project control teams take the shortcut route. They either don’t bother creating the ETC data in the first place or decide not to maintain the data on a regular basis. They may enter an EAC number so they don’t show an at completion variance, or they use options in the software so the EAC number doesn’t change from month to month. This again destroys the value of the ETC data. Case in point: when the Integrated Program Management Report (IPMR) Data Item Description (DID) time-phased historical and forecast cost Format 7 was introduced, government customers quickly found out contractors didn’t have the time-phased ETC data – they were simply plugging in EAC numbers. Why that surfaced: the older Contract Performance Report (CPR) DID didn’t require contractors to electronically submit the time phased estimate to complete data.
The Right Process and Tools Can Make a Difference
That’s where the right process, procedures, and tools can help proposal teams as well as project control teams do the right thing. A previous blog, Benefits of an End-to-End Solution for Proposal and Earned Value Management, walks through the process of producing a data driven cost estimate, quickly establishing the budget baseline after contract award using the cost estimate data, easily transitioning to the execution phase, and managing baseline changes.
Maintaining the estimate to complete data is just as important as creating that initial budget data. Don’t make it harder than it needs to be. Maintaining the ETC should be a routine part of the status and analysis cycle to ensure the time phased ETC data reflects the current schedule, updates to resource assignments, actions implemented to handle risks, and approved changes. This helps the project manager because they have verifiable detail source data for the elements of work. They can then assess other factors that can impact the project level estimate at completion such as changes in overhead rates. This also helps to prevent unpleasant financial surprises for upper level management. With reliable source data, management can routinely calculate profit and loss margins on the project or a portfolio of projects.
Call or schedule a demo today to see how BOEMax and EVMax can help proposal teams create data driven cost estimates and project control teams establish and maintain quality budget as well as ETC data.