OMB pushes measurement of contract costs, performance

Government contracts are about to involve a lot more math.

The Office of Management and Budget is expected to publish in the next few weeks a proposed rule in the Federal Register that will specify when agencies are required to use earned value management, a method of checking performance against expectations and cost. The federal acquisition world has given the method increased attention lately, largely because OMB has been focusing on performance measures in contracts.

The proposed rule, which will include a 60-day comment period, will standardize the earned value management process, according to an OMB official. Agencies are currently required to use earned value management in large contracts for developmental projects, and OMB rates how well they use the tool in the President's Management Agenda score card.

Defense also has been clarifying its earned value requirements. Last week, acting undersecretary Michael Wynne sent a memo to more than a dozen Pentagon officials specifying that earned value management must be used in certain contracts valued at over $20 million and that it is optional in contracts valued at less than that.

Earned value management compares actual cost, planned cost and output, also called earned value, which is estimated based on the amount of work completed. Cost variance-a calculation based on what should be done versus what is actually done-is computed based on those numbers. High variance, where actual cost exceeds earned value, indicates a problem.

The method cannot easily be applied to contracts where the output is effort, such as time and materials contracts, because output and cost are the same. The Wynne memo specified that the earned value approach should not be used on contracts that are based on providing a certain level of effort. Similarly, applying the method to operational projects, where costs can be accurately predicted, is not as useful as using it on a developmental project, where there is likely to be more variance.

At an earned value management conference Monday, Jerry Harper of the Commerce Department's Office of Information Policy said that the method works best when a contract can be broken down into discrete parts, which allows output to be measured. Companies often collect this information anyway, he said, but may not be eager to share it with agencies.

A contractor, he said, "wants to say, 'Don't bother me.' " Companies may be concerned with sharing confidential information.

Still, Harper urged contracting officials to require contractors to share the data needed to compute earned value before the contract is signed. "Earned value," he said, "will give you an early warning when something's going south."

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