Key Steps of the Overtarget Budget-Overtarget Schedule Process

While it is the primary responsibility of the contractor to ensure that a meaningful performance measurement baseline is established, every control account manager should develop new work plans that can be reasonably executed. The program manager and supporting business staff should have open lines of communication and a clear review process to ensure that the baseline is reasonable and accurate, and that it reflects known risks. Thus, the overtarget budget-overtarget schedule implementation process involves multiple steps and processes toward establishing a new performance measurement baseline, illustrated in figure 37.

Figure 37: Steps Typically Associated with Implementing an Overtarget Budget

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Note: OTB = overtarget budget; OTS = overtarget schedule; ETC - estimate-to-complete; EVM = earned value management; CAM = control account manager; PMB = performance measurement baseline.

The key steps include (1) planning the approach, (2) developing the new schedule and making new cost account plans, and (3) senior management’s reviewing the costs and schedule. Each step assumes early involvement and frequent interaction between the contractor and government program office.

Planning the Overtarget Budget-Overtarget Schedule Approach

When developing a plan for an overtarget budget, certain factors should be considered, including:

• What issues or problems resulted in the need for one? How will the new plan address them?
• Can the overtarget budget be accomplished within the existing schedule? If not, then must an overtarget schedule also be implemented? Conversely, does an overtarget schedule require an overtarget budget or can the revised schedule be managed within the existing budget?
• How feasible is the estimate to complete? Does it need to be updated?
• Are cost and schedule variances being eliminated or retained? Will future reporting include historical data or begin again when the new plan is implemented?
• What is the basis for the overtarget budget management reserve account? Is it adequate for the remaining work?
• To what extent are major subcontractors affected by the overtarget budget? How will it affect their target cost and schedule dates?
• Were any EVM system discipline issues associated with the need for an overtarget budget? If so, how were they resolved?

If the new baseline is to provide management with a more accurate program status, a decision about whether to eliminate variances will have to be made. A single point adjustment—that is, eliminating cumulative performance variances, replanning the remaining work, and reallocating the remaining budget—results in a new performance measurement baseline that reflects the plan of the remaining work and budget. Because existing variances can significantly distort progress toward the new baseline, a single point adjustment is a common and justifiable modification to an overtarget budget. Table 29 describes options for treating historical cost and schedule variances when performing a single point adjustment.

Table 29: Options for Treating Variances in Performing a Single Point Adjustment

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Variance option	Description
Eliminate
All variances	Eliminate cost and schedule variances for all work breakdown structure (WBS) elements by setting budgeted cost of work scheduled (BCWS) and budgeted cost of work performed (BCWP) equal to actual cost of work performed (ACWP). The most common type of variance adjustment, this normally generates an increase in BCWP and sometimes results in an adjustment to BCWS.
Schedule variance only	Cost variance is considered a valid performance measurement. The new performance measurement baseline retains the cost variance history but eliminates schedule variance by setting BCWS equal to BCWP, allowing revised planning for the remaining work and associated budgets.
Cost variance only	While rare, in some situations cost variance drives an overtarget budget but schedule information is valid. Cost variance is eliminated by setting BCWP equal to ACWP. The cumulative BCWP value is adjusted to match the cumulative cost variance. To preserve the existing schedule variance, the cumulative BCWS should be changed by the same amount as the BCWP. The contractor performance report will reflect positive adjustments to both in the current period following the overtarget budget.
Selected variances	If one WBS element or a subcontractor shows performance out of line with the baseline, management may implement an overtarget budget for only that portion of the contract. All other variances remain intact.
Retain
All variances	A contractor may have been performing fairly well to the baseline plan with no significant variances, but additional budget is necessary to complete the work. Or, the contractor has large variances warranting an overtarget budget, but management wants to retain them. In both situations, cost and schedule variances are left alone but budget is added to cover future work in the overtarget budget process.

Source: GAO analysis of OSD’s Over Target Baseline and Over Target Schedule Guide (Arlington, VA: December 5, 2012). | GAO-20-195G

While cost and schedule variances can be adjusted in various ways, under no circumstances should the value of actual cost of work performed (ACWP) be changed in the overtarget budget process. The value of ACWP should always be reconcilable to the amount shown in the contractor’s accounting records. In addition, management reserve to be included in the final overtarget budget should be addressed in the overtarget budget planning step—the amount will depend on how much work and risk remain. Reviewing how management reserve was consumed prior to the overtarget budget may offer important insights into the amount to set aside. A realistic management reserve budget should be identified and available for mitigating future risks. These two issues—keeping ACWP integrity and setting aside adequate management reserve—must be considered in making the new plan, regardless of whether the single point adjustment option is used. Figure 38 shows how a single point adjustment results in a change to the performance measurement baseline.

Figure 38: Establishing a New Baseline with a Single Point Adjustment

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Note: TAB = total allocated budget; CBB = contract budget baseline; OTB = overtarget budget; ACWP = actual cost of work performed; BCWP = budgeted cost of work performed; BCWS = budgeted cost of work scheduled; CV = cost variance; SV = schedule variance; MR = management reserve; PMB = performance management baseline.

In figure 38, the performance measurement baseline (BCWS) is shifted upward to align with actual costs to date (ACWP). The new baseline continues from this point forward, and all new work performed and corresponding actual costs will be measured against this new baseline. The revised budget is also at a higher level than the original budget and the schedule has slipped. Finally, all variances up to the overtarget budget date have been eliminated and the management reserve amount has risen above the new performance measurement baseline.

As work is performed against this new baseline, reliable performance indicators can be used to identify problems and implement corrective actions. However, because all variances have been eliminated, it may take several months after the single point adjustment for trends to emerge against the new baseline. During the following few months, management should monitor the use of management reserve to determine whether realistic budgets were estimated for the remaining work or new risks occurred after the overtarget budget.

However, single point adjustments should not be made regularly and not solely to improve contract performance metrics. Because a single point adjustment masks true performance, frequent use tends to cause varied and significant problems such as:

• distorting earned value cost and schedule metrics, resulting in unreliable index-based EAC calculations;
  
• turning attention away from true cost and schedule variances; and
  
• hindering the ability of EVM data to accurately predict performance trends.

In other words, single point adjustments should be used sparingly to foster successful use of EVM information to manage programs.

Planning the New Schedule and Control Accounts

Even if only an overtarget budget is required, some level of schedule development or analysis should be performed. The revised schedule should be complete, integrated, realistic in duration, and coordinated among key vendors and subcontractors. Further, the schedule logic should be complete and activity durations should represent the effort associated with the remaining work. Any effect on schedules for government-furnished equipment or resources should also be considered before the integrated schedule is validated and considered realistic.

The government program office and the contractor should review and come to a mutual understanding of the remaining scope, resources, and risk in the new schedule. They should agree that it is integrated vertically and horizontally, activity durations are backed by historical data, schedule reserve is adequate, and achieving the overall schedule is likely.

Once the revised schedule for the remaining work has been established, it is used to determine the budget for the remaining cost accounts. A detailed estimate to complete the remaining work should be based on a bottom-up estimate to reflect all costs: staffing, material, and travel.

Senior Management Review of Cost and Schedule

While an overriding goal of the overtarget budget-overtarget schedule process is to allow the contractor to implement an effective baseline in a timely manner, the government program office plays a key role in determining whether the contract can be executed within the constraints of program funding and schedule. Three key activities the government program office should consider in the final review of the new baseline are:

• perform an IBR to verify that the value and associated schedule determined in the overtarget budget-overtarget schedule process have been established in the new baseline;

• determine to what extent EVM reporting requirements will be suspended or reduced, given the time needed to implement the new baseline—a best practice is to continue reporting against the old baseline until the new one is established, keeping EVM reporting rhythm in place and maintaining a record of the final change; and

• select meaningful performance indicators to monitor contractor efforts to implement and adhere to the new baseline.