In our parent company, we have a lot of (fixed price) sub contracts. Though we know the total cost ( i.e. contract value), from experience we know that subcontract cost-breakdowns are really artificial and have more to do with terms of payment than actual costs. ( we do the same ourselves). Any thoughts on how to integrate suppler contracts into Earned Values? Saving Changes...
Senior Projects Manager | Field & Marten AssociatesNew Westminster, British Columbia, Canada
You should be able to easily integrate those as supplier contracts monthly payment should be reflective of actual progress on the project regardless of terms of payment.
...
1 reply by Roland Vander Straeten
Sep 05, 2022 4:06 PM
Roland Vander Straeten
...
Sorry, I should have been more specific: I did not mean typical consulting contracts where the value is easily deduced. (e.g. hours billed weekly or monthly) Other non-fixed price contracts could be for example bags of sand billed every week, etc. I was referring to fixed price contracts where the ($) value of a payment is not necessarily related to an actual value in the context of Earned Values. Our (sub) contracts could be in the million dollar range with 3 or 4 payments over the span of one year or so, and the terms of payment may not be relatable to an actual value. ( whatever that actual value is for Customer or Supplier-it may be a different value for each)
Saving Changes...
Peter RapinSubject Matter Expect; Project Delivery| Independent ConsultantOntario, Canada
People regularly confuse cost with value. The question is not what something costs to deliver but what is its value on delivery. In most cases the value is not realized until total delivery (half a wall has no value to the project owner). Where ever possible the value of supplier contracts should be recognized on completion of the deliverable - progress payment being an advance towards the final contract price.
Where there is a need to attach Earned Value to supplier progress (significant contribution to the overall project), that value should be determined by the owner not the supplier. Don't have the supplier tell you the value of partial performance, consider what value does it have to you!
Value of an uncompleted wall to the supplier is an ability to ask for a progress payment. Value of an uncompleted wall to the owner is possibly the reduced cost of hiring someone else to complete the wall. Completely different numbers.
...
1 reply by Roland Vander Straeten
Sep 07, 2022 7:55 AM
Roland Vander Straeten
...
"Where there is a need to attach Earned Value to supplier progress (significant contribution to the overall project), that value should be determined by the owner not the supplier."
In our case, we have a design/build turnkey contract with a customer, and we in turn have a turnkey contract with one of OUR suppliers. In other words relatively we are the owner, and we assign a value for our own purposes. That value could be completely different from the value that supplier assigns to that same contract. We would not even ask our suppler the question. it is not relevant. And that leads to the question: How is that value going to be used, for what purpose? And if you want to let EV's percolate up to the project level (by a summation of EV's down the chain) you need to use the same units of measurement, i.e. dollars. And then you ask the question: is it worth all the effort to arrive at a EV?
You should be able to easily integrate those as supplier contracts monthly payment should be reflective of actual progress on the project regardless of terms of payment.
Sorry, I should have been more specific: I did not mean typical consulting contracts where the value is easily deduced. (e.g. hours billed weekly or monthly) Other non-fixed price contracts could be for example bags of sand billed every week, etc. I was referring to fixed price contracts where the ($) value of a payment is not necessarily related to an actual value in the context of Earned Values. Our (sub) contracts could be in the million dollar range with 3 or 4 payments over the span of one year or so, and the terms of payment may not be relatable to an actual value. ( whatever that actual value is for Customer or Supplier-it may be a different value for each)
...
1 reply by Peter Rapin
Sep 05, 2022 4:33 PM
Peter Rapin
...
At the risk of being repetitive, cost is not necessarily value. Value is NOT deduced by hours billed, or for that matter any billing model. Value is typically based on the percentage or portion of the work completed of the total value of the task. If the task is 50% complete the value is 50% of the final value of that work regardless of the effort (cost) to produce that 50%. Value to the owner is not necessarily the suppliers billing which is based on standardTerms of Payment. That is the appeal of the Earned Value concept, the ability to compare what you got for the effort applied (cost). If as an owner you wish to applied Earned Value to a fixed price contract you have to measure what value you have received to date.
It is wise to tie in the concept of 'value provided' in a contract's Terms of Payment but with that you need to set the value measurement process in the agreement. Earned Value only works with a good measurement program.
With a fixed price contract, you normally wouldn't worry about cost variance and the focus would be on schedule variance only. So, you'd be looking at comparing how much has been earned (e.g. number of payment milestones completed) against what should have been earned by a given point in time (e.g. number of payment milestones which should have been completed by the status date).
Kiron Saving Changes...
Peter RapinSubject Matter Expect; Project Delivery| Independent ConsultantOntario, Canada
Sep 05, 2022 4:06 PM
Replying to Roland Vander Straeten
...
Sorry, I should have been more specific: I did not mean typical consulting contracts where the value is easily deduced. (e.g. hours billed weekly or monthly) Other non-fixed price contracts could be for example bags of sand billed every week, etc. I was referring to fixed price contracts where the ($) value of a payment is not necessarily related to an actual value in the context of Earned Values. Our (sub) contracts could be in the million dollar range with 3 or 4 payments over the span of one year or so, and the terms of payment may not be relatable to an actual value. ( whatever that actual value is for Customer or Supplier-it may be a different value for each)
At the risk of being repetitive, cost is not necessarily value. Value is NOT deduced by hours billed, or for that matter any billing model. Value is typically based on the percentage or portion of the work completed of the total value of the task. If the task is 50% complete the value is 50% of the final value of that work regardless of the effort (cost) to produce that 50%. Value to the owner is not necessarily the suppliers billing which is based on standardTerms of Payment. That is the appeal of the Earned Value concept, the ability to compare what you got for the effort applied (cost). If as an owner you wish to applied Earned Value to a fixed price contract you have to measure what value you have received to date.
It is wise to tie in the concept of 'value provided' in a contract's Terms of Payment but with that you need to set the value measurement process in the agreement. Earned Value only works with a good measurement program. Saving Changes...
Roland,
If you have a 4 payment plan vs. a lump sum agreement, the only difference to EVM is whether you see a step-function change in the CPI, or a smoother line. An abrupt change can cause concern to key stakeholders watching the CPI and suddenly the needle moves, but explaining a one time charge is pretty easy.
EVM is all about relating expense of cost/hours/energy to reach the expected goal. While I disagree with Peter on a few points, I do think CPI should not be confused with cash flow. EVM is really about whether the expected output of work and money is achieving the planned objectives.
For evaluating progress to plan of FFP contracts, I would relate the value more to progress than cost. Example: 10% at RFI 20% at RFP, 30% at RFQ, 50% at contract signed, 100% at delivery.
When the payments are due does not relate to when the actual work is completed, so if it's not telling you anything, account for it in the easiest way you can in terms of accounting and reporting.
I don't track whether the vendor payments occurred on-time. I focus more on OUR work to get the vendor on contract, and delivery date that fits into the larger project plan.
People regularly confuse cost with value. The question is not what something costs to deliver but what is its value on delivery. In most cases the value is not realized until total delivery (half a wall has no value to the project owner). Where ever possible the value of supplier contracts should be recognized on completion of the deliverable - progress payment being an advance towards the final contract price.
Where there is a need to attach Earned Value to supplier progress (significant contribution to the overall project), that value should be determined by the owner not the supplier. Don't have the supplier tell you the value of partial performance, consider what value does it have to you!
Value of an uncompleted wall to the supplier is an ability to ask for a progress payment. Value of an uncompleted wall to the owner is possibly the reduced cost of hiring someone else to complete the wall. Completely different numbers.
"Where there is a need to attach Earned Value to supplier progress (significant contribution to the overall project), that value should be determined by the owner not the supplier."
In our case, we have a design/build turnkey contract with a customer, and we in turn have a turnkey contract with one of OUR suppliers. In other words relatively we are the owner, and we assign a value for our own purposes. That value could be completely different from the value that supplier assigns to that same contract. We would not even ask our suppler the question. it is not relevant. And that leads to the question: How is that value going to be used, for what purpose? And if you want to let EV's percolate up to the project level (by a summation of EV's down the chain) you need to use the same units of measurement, i.e. dollars. And then you ask the question: is it worth all the effort to arrive at a EV? Saving Changes...
Community Champion
