[This article was first published in Army Sustainment Professional Bulletin, which was then called Army Logistician, volume 3, number 3 (May–June 1971), pages 4–7, 38–39. The text, including any biographical note, is reproduced as faithfully as possible to enable searchability. To view any images and charts in the article, refer to the issue itself, available on DVIDS and the bulletin’s archives at asu.army.mil/alog/.]
Most military project managers have not been trained to understand the basic need for the “budgeted value of work performed” or how to use this information.
ARE PROJECT MANAGERS asking the right questions of contractors? Many project managers have excellent technical backgrounds but may have limited training or experience in business management practices. As a result, they often request too little, too much, or unnecessary financial information in their attempts to compare costs with progress and identify problems in time to take corrective action. In the absence of knowing specifically what kind of financial information is needed, some project managers request costly and excessively detailed information and subsequently find themselves surrounded by mountains of incomprehensible detailed computer reports on man-hours and dollars.
Project managers are repeatedly faced with four major questions calling for financial information:
• Are sufficient funds available for the project during the next few months, and does the long-term budget contain the funds required to complete the project?
• Are funds being obligated and spent on the project at the budgeted rate?
• Is progress being achieved on the project at a cost higher or lower than budgeted?
• Are present and projected deviations from plans being identified soon enough to consider alternatives other than simply providing additional funds or making major reductions in the project?
The first two questions pertain to funds control and the others to cost control.
As a result of Congressional interest in authorizing programs and appropriating funds annually, Government project managers over the past two decades have developed a series of funds control techniques. These techniques are often prescribed for project managers by higher levels of management. They simply require collection of financial information by months and the comparison of the budgeted versus the actual rate of obligating and expending funds by months. The traditional display device used by project managers for funds control is a chart (fig. 1) showing the budgeted and actual cumulative obligations or expenditures for a project by months. In most cases, project managers have one chart covering their total project and one for each contractor working on the project. Although usually unnecessary, Government project managers often request one of the charts for each detailed functional category within a contractor’s plant.
While the project manager’s attention to funding questions is essential, it is also important to remember that funding represents only a part of the financial management task for which a project manager is responsible. The difference between funds control and cost control should be highlighted.
Some Differences
Funds control includes the information needed and actions taken to insure that funds are spent at a rate no faster or slower than budgeted. Cost control includes the information needed and actions taken to insure that progress is being achieved at a cost no higher than budgeted, and lower if possible. In the sphere of financial management, funds control is a primary concern of the comptroller, whereas cost control is or should be a primary concern of the line manager.
Unfortunately, many project managers believe they have no need for financial information other than that required for funds control. When faced with questions pertaining to cost control, project managers often erroneously believe the information required for funds control can also satisfy the informational needs for cost control. This is simply not the case. These project managers hope to obtain the answers to cost control questions by correlating project milestone charts with rate of expenditure curves, and possibly supplementing this information with engineering estimates of “percentage of the total project work completed” to date. While this approach to cost control occasionally identifies the financial impact of current or impending problems, it more often fails to identify the financial impact of significant problems, particularly on large, long-duration projects. This failure occurs for two reasons.
Examine the chart shown in figure 1. This chart shows a simplified project of nine months’ duration requiring the total expenditure of $1,500,000 and six major milestones scheduled to occur during the nine-month period. The project manager plans to correlate costs with progress by tracking the budgeted versus the actual rate of expenditure with the planned versus the actual accomplishment of milestones. The chart shows that at the end of the first three months, $500,000 has been spent as budgeted, and two major milestones have been accomplished on schedule. Hence, this chart would lead a project manager to believe that work is being accomplished commensurate with by dollars being spent — as budgeted. The chart in figure 1 should, and does, satisfy the requirement of the project manager for funding information since the project manager can learn from the display that dollars are not being spent any faster or slower than budgeted.
A further examination of the work actually being performed, however, often reveals that the planned progress is not being achieved for the dollars that are being spent and significant overruns are occurring undetected by the project manager. To observe how this can occur, examine figure 2. This figure shows the four detailed tasks and the dollars budgeted to accomplish the design of subsystem X.
In the first task, $50,000 is budgeted to accomplish the first major milestone, and $50,000 is budgeted for work remaining beyond the milestone in the first three months.
In the second task, $100,000 is budgeted to accomplish the work culminating in the milestone shown at the end of the three-month period. In the third and fourth tasks, $150,000 is budgeted for each task during the first three months, but no major milestones are scheduled during this period.
Figure 3 shows the manner in which the dollars were actually spent. In the first task, $50,000 was spent as budgeted to accomplish the first major milestone, and $50,000 was spent as budgeted during the remaining weeks of the first quarter. In the second task, problems were encountered in accomplishing the first major milestone. In order to accomplish the milestone on schedule, $250,000 was spent rather than the budgeted $100,000. In solving the problems encountered in task 2, manpower was applied to task 2 that had previously been planned for tasks 3 and 4. This action resulted in task 3 consuming only $50,000 and task 4 consuming $100,000 — rather than the $150,000 planned for each of these tasks.
A total of $500,000 was spent as budgeted despite the changes in the application of the funds among the individual tasks. However, while $500,000 was spent as budgeted, the budgeted value of the work performed is only $350,000. This occurs because the progress achieved in task 2 was budgeted to cost $100,000 but actually cost $250,000.
This situation can occur again during the second quarter and still go undetected by the project manager. At the end of the second quarter, $1 million is likely to be spent and the major milestones are likely to occur. If the project manager is not aware of the budgeted value of the work performed to date, he will not be aware of the significant deviations from the budget occurring in the first or second quarter. The need for additional funds on the project is not likely to come to his attention until long after the problems have occurred. As the project approaches the middle of the third quarter, it will be clear that insufficient funds are available to complete the required work. The shifting of resources among the tasks will no longer be possible at that point. The project manager will then have no alternative except to find additional funds to spend on the project or make a precipitous reduction in the work to be performed.
Value of Work Performed
The $150,000 problem which occurred during the first quarter could have been identified early in the project if the project manager had the visibility provided by one additional bit of information — namely, a figure representing the summation of the budgeted value of the work actually performed to date. With this information, he would be able to see at the end of the first quarter that $500,000 had been spent at the budgeted rate but the budgeted value of the work performed was only $350,000.
The example shown in figures 1 to 3 is representative of a type of problem that is continually facing project managers of large development programs. For simplicity, the illustration is limited to a project of nine months’ duration requiring $1.5 million in funds. It is true that the financial impact of the problem discussed might have been identified by the project manager had he monitored more than six summary milestones during the nine-month period. While an appraisal of the financial impact of the problem may be possible for a relatively short (nine-month) project, it is usually impractical or impossible with larger, more complex, and more costly projects.
Estimates Unreliable
Experience makes it clear that project managers are simply unable to make reasonable estimates of percentage of work completed or the budgeted value of work performed by reviewing hundreds of milestones and attempting to evaluate the current financial status of work performed with some milestones behind schedule, some ahead of schedule, and some completed on schedule.
The basic information needed to identify the budgeted value of work performed exists at the working level in most well-managed commercial and Government projects. In commercial projects this information is summarized for successively higher levels of management. On most defense projects, however, there has been no requirement to collect or summarize this information for Government project managers and, hence, the information usually remains at the working level in a contractor plant as raw data.
No changes are necessary in a contractor’s accounting system to provide this information for higher level contractor or Government managers. A change may be necessary in the contractor’s budgeting system if he does not already maintain budgets for the tasks to be performed at the working level and to summarize these budgets periodically for the work that has actually been performed. An obvious requirement to be placed on these budgets is that they not exceed the contract price. Unfortunately, on some Government projects, the sum of the contractor internal budgets assigned at the working level exceed the contract price by a significant amount.
Unlike commercial project managers, many defense project managers do not have figures available on the budgeted value of work being performed. This deficiency exists because of a number of practices that need immediate correction.
Most military project managers have not been trained to understand the basic need for the “budgeted value of work performed” or how to use this information. As a result, most of them have not asked contractors for this information. Both the Army and the Air Force now have the beginnings of training programs to correct this deficiency.
A number of harmful practices have developed in the weapons acquisition process over the past two decades.
Retroactive changes in project financial plans are made so that the budgeted amount for the work performed to date is repeatedly changed retroactively throughout the course of the program to be identical to whatever was the actual experience to date. This practice effectively obscures any cost problems at a time when corrective action can and should be taken.
Many contractors employ a practice, acceptable to the Department of Defense until recently, of maintaining two or more sets of cost records — one in dollars, subject to audit, and maintained at a summary level; and one or more in man-hours and material dollars usually maintained by first-line managers and not subject to audit. Frequently a program’s status as portrayed by these various sets of books is widely divergent. This practice has not been illegal or contrary to Government regulations in the past. Department of Defense Instruction 7000.2 now makes this practice unacceptable.
Nonintegrated work breakdown structures exist in which the sum total of the budgeted dollars at a lower level frequently exceed the dollars assigned to the summary item at the next higher level. This practice causes substantial overruns to be inherent in programs from the beginning without the project manager’s knowledge.
Many contractors redistribute budgeted resources reserved for work planned in the distant future to solving problems associated with work in the present. While this redistribution of budget is often appropriate, it should not occur in any significant degree without the knowledge of the customer project manager who is paying the bill. In practice today, however, the customer is often not notified of the budget transferral in the optimistic hope there will be a brighter day in the future and future work will require fewer dollars than were originally budgeted.
An estimate of “percent complete” is often a seat-of-the-pants optimistic guess rather than a formal method of totaling the budgeted value of work accomplished and the budgeted value of work remaining. Here again, excessive optimism usually prevails, and problems go unreported to the project manager until it is too late to correct them.
Avoid Overoptimism
Many contractors fail to develop or maintain plans or budgets for specific short-term work packages at the working level in their organization. Again, this practice allows for excessive optimism in appraising the amount of work being accomplished and the budgeted value of this work.
In the absence of information about the budgeted value of work completed, project managers often rely on estimates of “percentage completed” as an indicator of whether or not the planned progress is being achieved for the dollars being spent. Unfortunately, higher level contractor managers who make the estimates of percentage completion often do not have information on the budgeted value of work accomplished. As a result, the estimate of percentage of work completed is usually determined by dividing the value of the dollars spent by the total dollars on the contract. This practice renders the resulting figure of percentage completed useless for purposes of identifying any deviations from plans.
Even when estimates of percentage of work completed are developed by individuals familiar in detail with the work being accomplished, they have an understandable tendency to be optimistic about their own performance. The fact that the estimate of percentage completed is being passed to higher levels of management for appraisal purposes also influences the estimate significantly on the optimistic side. Individuals understandably want as much time as possible to work out their own problems without inquiries and interference from higher level management. Bad news rarely travels very fast through formal information systems that are heavily dependent on individual judgments for inputs.
When an individual begins a project and experiences problems, he naturally hopes and believes there will be a brighter tomorrow and he will make up the lost time and dollars. Unfortunately, he is rarely able to do it. The time to solve a problem is when it arises and valid information on which to base a management decision is necessary.
Project managers have a requirement for two distinctly different types of financial information on a recurring basis. The first type results from requirements for funds control which can be satisfied by monitoring the budgeted versus the actual monthly rate of consuming funds. This type of information is well understood and widely collected, often in more detail than necessary.
The need for the second type of financial information results from the requirement that the contractor and the Government maintain cost control. This information is often independent of the monthly rate of consuming funds. The type of information required for cost control can be satisfied by a figure representing the actual dollars spent to date, and by a figure representing the budgeted value of the work performed to date. The summation of all budgeted values for the work packages to be performed in the project must equate to the contract price, less any contingency set aside for problem areas.
Require Internal Budget
Department of Defense directives now require contractors to maintain internal budgets for the work to be performed which are equal to the contract price, less any contingency for problems. As work proceeds, the contractor is required to collect and report the totals of the budgeted value of the work performed to date. Without this information, the project manager must rely, as he has in the past, on often unreliable estimates of “percentage completion” to identify significant deviations from plans. The comparison of a milestone chart with a rate of expenditure curve usually fails to identify problems in time to take corrective action or examine alternatives in the future. Conversely, if the project manager knows the budgeted value of work being performed throughout the course of the project, he is better prepared to identify significant deviations from plans early enough to examine a variety of alternatives other than simply placing additional funds on the contract.
Dr. J. Ronald Fox was the Assistant Secretary of the Army (Installations and Logistics) on a leave of absence from the Harvard University faculty. A former Deputy Assistant Secretary of the Air Force, he was responsible for many systems improvements in management and was presented the Exceptional Civilian Service Award. Dr. Fox was graduated from LeMoyne College and did his graduate study at Harvard University, earning master of arts, master of business administration, and doctor of philosophy degrees.
