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EAC Evaluation Methods: Do They Work On Post-A12 Contracts

References. Christensen, David S. and Carl Templin. EAC Evaluation Methods: Do They Still Work?" Acquisition Review Quarterly (forthcoming)Christensen, David S., and David A. Rees. Is The CPI-based EAC a Lower Bound to the Final Cost of Post-A12 Contracts?" Journal of Cost Analysis and Managemen

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EAC Evaluation Methods: Do They Work On Post-A12 Contracts

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    1. EAC Evaluation Methods: Do They Work On Post-A12 Contracts?

    2. References Christensen, David S. and Carl Templin. “EAC Evaluation Methods: Do They Still Work?” Acquisition Review Quarterly (forthcoming) Christensen, David S., and David A. Rees. “Is The CPI-based EAC a Lower Bound to the Final Cost of Post-A12 Contracts?” Journal of Cost Analysis and Management (forthcoming) Earned value literature bibliography: http://www.suu.edu/faculty/christensend/ev-bib.html

    3. Background A-12 cancellation – a catalyst for change The A-12 EAC was too low Realistic EACs were suppressed DOD-wide epidemic (Beach 1992) DoD policy changes to achieve cost realism Have not worked previously (Drezner et al 1993) Will they work this time?

    4. Background Current reform initiatives are improving cost performance (Coopers and Lybrand 1997) Methods to evaluate EACs which assume deteriorating cost performance may no longer be valid

    5. EAC Evaluation Rules The final cost variance (in dollars or as a percentage) will be worse than the cost variance at the 20 percent completion point The cumulative cost performance index (CPI) will not change by more than 0.10 from its value at the 20 percent completion point, and in most cases only worsens The EAC computed using the cumulative CPI is a reasonable lower bound to final cost Based on observations made by OUSD; validated by researchers at AFIT on contracts completed in 1970s and 1980s; cited by Beach A12 Example CV20 = -$459M Estimated Final Cost Variance = -$354M CPI20 = 0.765 To Complete Performance Index = 1.043 CPI-based EAC = $5,292M Contractor EAC = $4,400M

    6. Hypotheses The final cost variance will be worse than the cost variance at the 20% completion point CV$final – CV$20 < 0 CV%final – CV%20 < 0 CV$ = Earned Value – Actual Cost CV% = (CV$ / Earned Value) x 100

    7. Hypotheses The cumulative CPI will not change by more than 0.10 from its value at the 20% completion point, and in most cases only worsens |CPIfinal – CPI 20| < 0.10 CPIfinal – CPI 20 < 0 CPI = Cumulative Earned Value / Cumulative Actual Cost

    8. Hypotheses The EAC computed using the cumulative CPI is a reasonable lower bound to final cost CPI-based EAC < Final Cost To control for differences in contract size, DAC < 0 EAC = (BAC – Earned Value)/ Cum CPI + Actual Cost Deviation at completion (DAC) = (EAC – Final Cost) / Final Cost

    9. More Definitions CV20 = Cumulative CV at 20 percent completion point CVfinal = Cumulative CV at end of contract CPI20 = CPI at end of contract CPIfinal = CPI at end of contract Percent Complete = Cumulative Earned Value / BAC

    10. Hypothesis testing Averages of the differences were computed and hypotheses were tested at alpha of .05 using paired-t test Sensitivity of results were tested across Contract phase (development versus production) Contract type (fixed price versus cost reimbursable Managing service (Army, Air Force, Navy)

    11. The data DAES database Based mostly on CPR data Its reliability is controlled via EVMS Criteria Every completed contract was included with actual cost, earned value, and BAC at 20% complete and at completion, resulting in 147 pre-A12 contracts (finished before A12 cancellation) 52 post A12 contracts (started after A12 cancellation) 42 “transition period” contracts (started before and finished after A12 cancellation) 31 Dec 91, about one year after the A-12 cancellation, was chosen as the cut-off date

    12. Results Cost variances did not worsen significantly on Post-A12 contracts from the 20% completion point The cumulative CPI is a reasonable floor to final cost in the early and middle stages of contract life on Post-A12 contacts Cost performance during the Transition period contracts was worse than cost performance during Pre-A12 and Post-A12 periods Results generally insensitive to contract size, contract phase, and military service

    16. Conclusion Cost performance on post-A12 contracts is improving The A-12 cancellation changed the acquisition culture The EAC evaluations should continue to be used Acquisition reform initiatives can adversely affect cost performance of on-going contracts

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