Performance-Based Earned Value ®

PBEV = EVM + Quality
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Q: When is Earned Value Management similar to a Ponzi Scheme?

A: See Ponzi Scheme Characteristics and table below.

DOD and the Congress have recognized that EVM is not working. Policy memoes, reports and legislation (links at Dept. of Defense tab) cite the following deficiencies:  

  • DoD:
    • Use of EVM in program management, department-wide, is insufficient

    • Unfavorable audit findings indicate EVM is not serving its intended function in the internal control process
    •  Many instances of inappropriate changes

      o  Arbitrarily changing past variances

      o  Moving budgets to mask overruns

      o Making changes that were not properly authorized

  • Navy:
    • Broad deficiencies in EVM compliance
    • Intentional masking of cost and schedule variances
    • Inadequate reporting of Estimates at Complete (EAC)

    • Lack of integration across the cost, schedule, and work authorization systems (technical)
  • DCMA Lockheed Martin EVMS Compliance Report
    • Using Management Reserve (MR) to alter internal and subcontractor performance levels and   overruns

    • Inappropriate EV techniques used for assessment of material, subcontracts, and rework

    • Cost and schedule integration problems undermine validity of data

The broad deficiencies in EVM compliance have triggered a Congressional oversight reaction. In May, the President signed the Weapons System Acquisition Reform Act of 2009 (WSARA). Sen. Collins, a sponsor, stated in the conference report that:

  • GAO observed that contractor reporting on EVM often lacks consistency, leading to inaccurate data and faulty application of the EVM metric.
  • “In other words, garbage in, garbage out.”
  • “With improved EVM data quality, both the government and the contractor will be able to improve program oversight, leading to better acquisition outcomes.”

WSARA directed DoD to provide recommendations to improve EVM and it implementation. A link to DoD's Report to Congress is at the Dept. of Defense tab.

Ponzi Scheme Characteristics

There are striking similarities between the erroneous EV information that is reported to the Government and the financial status that is reported to Ponzi scheme victims (before they know they are victims).

  • Contractors may overstate EV (and CPI) when they base EV only on the “quantity of work" completed and fail to report true schedule variances with regard to achieving planned technical performance (Quality).
  • Contractors may budget an unrealistic baseline by assuming efficiency targets (such as hours per drawing or lines of code, reduced number and quality of tests, no rework) that have no justification based on past performance or new processes.
  • Later, after the Preliminary Design Review (PDR) or the Critical Design Review (CDR) when the design fails to meet requirements or other success criteria of the Integrated Master Plan (IMP), MR is used to budget "new" rework that should have been completed to meet those requirements. MR is sometimes similarly used when test objectives are not achieved.
  • DoD reported to Congress that contractors misused MR to mask true performance and cost overruns .
  • If MR  is used to budget future rework (that should have been planned and completed earlier), then EV is earned in new work packages. If the previous work packages had been linked to IMP success criteria, they would still be open and behind schedule.
  • There is a “Quality Gap” in the EVMS Standard which allows contractors to ignore technical performance. Read more about it in articles on the Advance EV:PBEV tab:   
    •  Applying EVM to Software Intensive Programs

    • Integrating Systems Engineering with EVM     

The following table includes Ponzi scheme characteristics as compared with similar conditions that may result from the misuse of EVM.

 

 Symptom

Ponzi Scheme,

per Wikipedia

EVM Similar to

 Ponzi Scheme

Profit, ROI

Overstated

Pays returns to investors from their own money rather than from actual profit earned  

Govt is deceived by:

1. Overstated EV and CPI

2. Understated EAC

3. Overstated schedule progress

4. Misuse of Management Reserve (MR) to pay for rework and other cost overruns 

Truth,

Eventually

Destined to collapse because the earnings, if any,

are less than the payments  

Destined to collapse when:

1. Program fails to meet PDR and CDR success criteria but had reported no significant variances prior to those milestones.

2. EV taken based on actual vs. planned number of "iterations" during test or design instead of setting technical performance planned values. EV "held" at 90% until technical objectives are met. EV never reduced to reflect true progress. Eventually, program confesses there are many months to go (and costs) because of  known technical deficiencies.

3. Program finally  reveals:

 a. Amount of rework was low-balled in Performance Measurement Baseline

 b. MR was depleted to pay for rework that should have been either in the PMB or reported as a cost overrun. 

4. Program must now disclose:

 a. Real technical, schedule, and cost performance

 b. Realistic completion dates

 c. Most likely EAC

5. Conditions that had been reported as "risks" should have been defined as issues from the beginning.  

Increased Funding

Perpetuation of the returns that a Ponzi scheme  advertises and pays requires an ever-increasing flow  of money from investors in order to keep the scheme going  

When true EV, CPI, and EAC are finally known, the Govt, not new investors, must increase funds to keep the program going.  

Bailouts

Knowingly entering a Ponzi scheme, even at the last round of the scheme, can be rational in the economic sense if a government will probably bail out those participating in the Ponzi scheme  

Govt often bails out the contractor with recognition of higher EAC and approval of  Over Target Budget, Over Target Schedule,  and more funding.  

The FBI website offers advice to investors to avoid Ponze schemes:

§  As with all investments, exercise due diligence in selecting investments and the people with whom you invest.

§  Make sure you fully understand the investment before you invest your money

Similar advice to avoid Ponzi-like results should be considered by DoD (or any Customer who depends on the validity of EV reports):

  • Exercise due diligence to define a technical baseline that can be implemented within realistic cost and schedule objectives.
  • Verify that the Contractor has integrated EVM, program management, and systems engineering procedures and is compliant with them.
  • Establish success criteria for major technical reviews (System Functional Review, PDR, CDR, System Verification Review) in the IMP.
    • Technical reviews and criteria are defined in Systems and Software Engineering Defense Acquisition Program Support Methodology (DAPS). See Dept. of Defense tab.

  • Use the Integrated Baseline Review (IBR) to verify that criteria and milestones exist for completion of the technical baselines (Functional, Allocated, Product Baseline) and that EV is linked to :
    • TPMs
    • Success criteria for major technical reviews
    • Completion of Systems Engineering work products (trade studies, validated requirements baseline, requirements traceability matrix) 
  • Use the IBR to verify that assumptions and estimates for efficiency and rework are realistic and that the Performance Measurement Baseline is achievable
  • Constantly review variances, the program's "most likely" EAC, and use of MR
    • Verify that schedule variances and impacts are consistent between the IMS, EV, and TPM reports 
  • Use Performance-Based Earned Value® guidelines as benchmarks to improve program oversight, leading to better acquisition outcomes.”