4.1 INTRODUCTION

4.1.1 The Organisation section of the Criteria established the basic framework for defining and organising the work to be performed. The Planning and Budgeting section deals with the requirements for program scheduling and budgeting. Generally, it requires that all work to be performed under the contract (authorised work) be scheduled and that budgets be assigned to identified manageable units of effort.

4.2 PLANNING

4.2.1 General. Assignment of budgets to scheduled segments of work produces a time-phased plan against which actual performance can be compared. The establishment, maintenance and use of this plan are extremely important aspects of performance measurement. Good planning demands thoroughness and discipline at the outset with continuing discipline required in the maintenance and operation of the plan. This does not mean that the system must be inflexible but that changes to the time-phased budget plan must be rigorously controlled and documented.

4.2.2 Detailed Planning at Lower Levels. While planning is required at all levels of management, it becomes progressively more detailed and finite at lower levels of the organisational structure and the CWBS.

4.2.3 Initial Division. All of the work for a given contract cannot usually be planned in detail at the outset. But it can, and should, be initially divided into larger segments so that the entire contract requirement may be viewed as a sum of identified parts. On some development contracts, due to work scope and funding uncertainties, it may be impractical to identify future work beyond a significant contract phase or event (milestone); eg, Preliminary Design Review or Critical Design Review.

4.2.4 Summary Level Planning. When it is clearly impractical to plan authorised work in cost accounts, budget should be identified to effort at higher CWBS levels for further sub-division at the earliest opportunity. The budget for this effort must be identified specifically to the work for which it is intended, be time-phased and have controls established to ensure that it is not used in performance of other work. Eventually, all the work to be performed will be planned by specific organisational elements to the appropriate level of detail. The key point pertaining to summary level planning is that it is no substitute for early and definitive planning. Without timely and adequate work definition and budget allocation, the validity of the entire performance measurement baseline is questionable.

4.2.5 Authorised Unpriced Work (AUW). For work authorised and performed by the contractor outside the scope of the contract (typically in advance of a formal contract amendment), it is acceptable for the contractor to plan and budget near-term effort in cost accounts, with the remaining effort and budget planned at a higher level or maintained in undistributed budget. Upon issue of the formal contract amendment, the remaining effort will be planned and budgeted within cost accounts as soon as practicable to ensure disciplined baseline planning.

4.2.6 Work Authorisation. Before work actually begins, the work authorisation system should define and identify the work to be done and the organisational elements responsible. Schedules and budgets should be established for all work at appropriate levels within the framework of the CWBS. Task authorisations, work orders or other appropriate means may be used for this purpose.

4.3 SCHEDULING

4.3.1 General. The scheduling system should provide for all specified work to the lowest defined element of the CWBS in a way compatible with contract milestones and be meaningful in terms of the technical requirements of the contract. It should provide schedules so that actual progress can be related. Such schedules should identify key milestones and activities which recognise significant constraints and relationships. Scheduling should interface with other planning and control systems to the extent necessary for measurement and evaluation of contract status. The scheduling system should provide current status and forecasts of completion dates for scheduled work. The contractor's summary and detailed schedules should enable a comparison of planned and actual status of program accomplishment based on milestones or other indicators used by the contractor for control purposes.

4.3.2 Flexibility. The Criteria do not require the use of any specific scheduling system or methodology. Various scheduling techniques are available which will satisfy these requirements. These techniques may be employed at the summary and detail level but must remain consistent with, and supportive of, the master schedule. Clear and adequate relationships between the techniques employed at various levels must be maintained, including vertical traceability.

4.3.3 Requirements. Basically, the Criteria require the scheduling system to be formal, complete, and consistent. The scheduling system should contain a summary or master schedule and related subordinate schedules (intermediate and/or cost account) which provide a logical sequence and show interdependencies from the summary to the detailed work package levels.

4.3.4 Work package documentation does not have to contain specific calendar dates; it must, however, always contain either the month, week or day, whichever is appropriate.

4.4 BUDGETING

4.4.1 Planning Package Budgets. The planning and scheduling procedures serve as the basis for developing budgets and work authorisations. As the work is progressively defined in greater detail, budgets for the planned work should be concurrently assigned. When planning packages are established within a cost account, the contractor's system should provide for sufficient control of cost account budgets to avoid a situation at the end of the cost account where there is inadequate budget remaining for the work left to be performed. This means that budgets must be related to, and be part of, the planning package from which the budget originated.

4.4.2 Units. Budgets may be stated either in dollars, man-hours, or other measurable units. Budgets for cost accounts and higher levels are normally expressed in dollars. The Criteria do not require that any specific currency basis (ie Base date, current, etc.) be used.

4.4.3 Rates Usage. Average (level) labour, overhead and other rates for the life of the contract or cost account, in excess of one year in length, normally cause too much distortion in cost performance and are not acceptable. Monthly, quarterly, half-yearly or annual rates are acceptable, and should result in a valid time-phased estimate of cost for the task(s) to be accomplished. It is desirable to use the most recent rates, but when this is not feasible, it is acceptable to use rates that provide a valid estimate of costs for the effort to be accomplished during a particular period. At all times, BCWP must be based on the same rates as used for BCWS. Internal replanning of remaining portions of the performance measurement baseline to account for significant changes in the anticipated labour, overhead and other rates is desirable, but not mandatory.

4.4.4 In general, budget systems should provide for the following:

a. Direct budgets allocated to organisations performing the planned work identified to elements in the CWBS.

b. Indirect budgets allocated to specific organisations having responsibility for controlling indirect costs.

c. Identification of any management reserves and undistributed budget.

Normally, the total of direct and indirect budgets and management reserves equals the negotiated contract cost plus the estimated cost of authorised unpriced work.

4.4.5 Assignment of Budget. Since primary budget assignments may be made to functional organisations rather than to pieces of hardware or tasks, the level at which the organisational and CWBS elements are integrated may be the first point at which budgets are specifically assigned to CWBS elements. This is not always the case. Certain elements of the CWBS may be priced products or services with budgets assigned at the summary level and then subdivided as the work is broken down into manageable units of effort. Regardless of the budgeting technique, all work eventually receives a budget.

4.5 MANAGEMENT RESERVE

4.5.1 General. In most major acquisition contracts, particularly in the development phase, there is considerable uncertainty regarding the timing, CWBS elements involved, or magnitude of future difficulties. The Criteria permit the use of a management reserve provided that adequate identification and controls are maintained. Management reserve budget and its use must always be accounted for at the total contract level, although in some cases it might be distributed to and controlled at lower management levels.

4.5.2 Negative MR. In any case, management reserve budget is maintained separately from undistributed budget. There is no such thing as negative management reserve. If the contract is budgeted in excess of contract budget base (the contract target cost plus the estimated cost for authorised unpriced work), the provisions applicable to formal reprogramming apply.

4.5.3 Changes. Management reserve is not to be used as a contingency which can be eliminated from contract prices during subsequent contract change negotiations or used to absorb the cost of contract changes. Neither should the contractor be required to use existing management reserve to provide funds for authorised unpriced work or other modifications to authorised contractual efforts except as indicated in paragraph 4.5.4 below.

4.5.4 AUW. The contractor may, if the documented management system permits, use management reserve to provide temporary budgets for authorised unpriced work; however, it must remain clear to both parties that the management reserve budget was derived from costs previously negotiated for the contractual effort authorised prior to the change in process. Negotiation of contract changes may result in establishing a new level of management reserve reflecting the revised effort. This new level may exceed prior reserves.

4.6 UNDISTRIBUTED BUDGETS

4.6.1 Definition. Budgets applicable to contract effort, which cannot be specifically identified to CWBS elements at or below the level specified for reporting to Defence, are referred to as undistributed budgets (UB).

4.6.2 Use of UB. The establishment of an undistributed budget may be necessary when contract changes are authorised. For example, reporting deadlines may preclude the planning of newly authorised work prior to report preparation. However, since budgets for all authorised contract work must be accounted for, some provision for the budget applicable to contract changes must be made. In such cases, undistributed budgets identified to the specific contract changes may be established. Except as provided below, the budget should be distributed to appropriate CWBS elements and cost accounts by the end of the next reporting period.

4.6.3 UB - AUW. For authorised unpriced work, the contractor may maintain budgets in an undistributed budget account until negotiations have been concluded, allocating budget only to that work which will start in the interim. Upon approval of the formal amendment, the remaining budget should be allocated appropriately to form a revised contract target cost. Both before and after negotiations, budgets may be allocated as additions to the scope of existing cost accounts, or when appropriate, allocated to separate cost accounts.

4.7 CONTRACT BUDGET BASE

4.7.1 CBB - Cost & Incentive Contracts. The original budget established for those elements of the CWBS identified as priced products and services in the contract should constitute a traceable basis against which contract growth can be measured. The starting point or base on which these original budgets are built is the negotiated contract cost. For CSCSC purposes, this is called the Contract Budget Base (CBB). The CBB or decreases only as a result of:

a. formal contract amendments;

b. authorised unpriced work; and

c. price and exchange variation, if applicable.

For contract changes, the CBB changes by the amount negotiated, for those changes less profit. For authorised unpriced work, the CBB changes by the amount of cost estimated by the contractor for that effort. After issue of a formal contract amendment, the CBB is adjusted to reflect that amendment. The CBB, therefore, is a dynamic amount, changing as the authorised work under the contract changes. It cannot be changed by the contractor except as a result of authorisation by the Project Authority.

4.7.2 CBB in Fixed Price Contracts. Normally, when a contract is negotiated on a Fixed Price basis, only the price is established and agreed to by Defence and the contractor. In those instances, the contractor should unilaterally establish the CBB for internal management control purposes (and for reporting to Defence where required) by subtracting the value of the fee/profit he wishes to achieve from performing the effort from the original negotiated contract price. As in cost plus and incentive contracting, once established and initially reported to the Project Authority, it should not be changed by the contractor except as a result of authorisation by the Project Authority. This is the preferred methodology with regard to the Criteria; however, should instances arise where "price" reporting is desired as part of the contracted provisions, the Project Authority in consultation with the Review Director will negotiate specific provisions with the contractor.

4.8 PRICE AND EXCHANGE VARIATION

4.8.1 Where the terms of the contract permit agreed variations to the contract cost or price arising from changes in exchange rates and/or economic conditions or other factors specified in the contract, any increase or decrease in the contract cost or price so arising shall be appropriately reflected in the CBB as if those increases or decreases resulted by formal amendment to the contract. Distribution of these increases or decreases to performance measurement baseline elements or to management reserve shall be formally documented and reported.

4.8.2 As the contract proceeds, the CBB may be adjusted to reflect these changes and also to reflect the contractor's latest estimated cost adjustments. Thus, the performance measurement baseline may reflect the price and exchange conditions contained in the contract, and performance may be measured against a more realistic plan.

4.8.3 It is recognised that there are several different methods available to contractors with regard to price and exchange rate variation effects on baseline planning maintenance, and reporting. As long as the chosen method is documented and accepted by the Review Team, and the contractor can reconcile reports to the PA back to base (effective) date dollars, any method is acceptable. It is suggested that minor revisions to the CBB as a result of these variations be effected to/from management reserve in order to lesson the paperwork burden on the contractor.

4.9 PERFORMANCE MEASUREMENT BASELINE (PMB)

4.9.1 PMB - Development. As the contract effort is defined within the CWBS and identified to responsible organisational elements, the basis for budget assignments to identified tasks is provided. Eventually, each work package will have a budget. Since all work packages cannot normally be planned at the beginning of a contract, initial planning may consist of larger segments of work assigned to designated organisational elements. These organisational work assignments frequently serve as cost accounts in addition to their role in the planning function. Budgets assigned to cost accounts are time-phased according to the schedule for performing that work, thus forming the major portion of the time-phased budget baseline; that is, the performance measurement baseline which is used in the measurement of both task and organisational performance. Further budget assignments to work packages are made as detailed planning proceeds. When all work packages are planned within a cost account, the sum of the assigned budgets plus LOE and apportioned effort should equal the total cost account budget or Budget at Completion (BAC) for the cost account.

4.9.2 Cost Account Budgets. All cost accounts must contain a budget, schedule, and scope of work and should realistically represent the manner in which work is assigned and budgeted to the organisational units. The cost account budget should include all direct costs for the total of work with separate identification of cost elements (labour, material, other direct costs). Establishing and maintaining control at the cost account level permits flexibility in the management of resources at the lower detail levels through work package replanning.

4.9.3 Cost Account Length. Since cost account budgets and schedules also establish the constraints required for baseline control, cost accounts should not be exorbitantly long, or additional controls may be needed. When cost accounts average about a year in length replanning within cost accounts can be accommodated without the need for rigid constraints. It is not intended to limit cost accounts to one year in length, but to ensure that budgeting procedures prohibit budget planned for far-term work from being used in the near term. Therefore, cost accounts which exceed a year in length must be disciplined by budget allocation constraints and/or procedures that prohibit the premature use of budget planned and required for far-term effort within these accounts.

4.9.4 Cost Account Replanning. Replanning of work packages within cost accounts is sometimes necessary to compensate for internal conditions which affect the planning and scheduling of remaining work. Such replanning should, however, be accomplished within the constraints of the previously established cost account schedule and budget. When more extensive replanning of future work is necessary and the total cost account budget must be changed, management reserves may be used to increase or decrease the cost account budgets if done in a formal, documented manner.

a. If replanning requires that work and associated budget be transferred between cost accounts, this transfer must also be documented. Except for correction of errors and accounting adjustments, no retroactive changes will be made to budget for completed work. Replanning actions designed to reduce costs, improve or reflect improved efficiency of operations, or otherwise enhance the completion of the contract, are encouraged.

b. Replanning actions which significantly affect the time-phasing of the performance measurement baseline should be clearly auditable by review of contractor records and should be shown in applicable reports to Defence. Maintenance of a performance measurement baseline is required to ensure that deviations from plan are visible and can be examined to determine their causes. Replanning of manufacturing work packages is discussed in CHAPTER 11.

4.9.5 PMB - Relation to Contract Cost. The initial establishment of the performance measurement baseline should be tied to the contract cost (paragraphs 4.7.1 and 4.7.2). As new work is authorised on the contract, the contract cost and the performance measurement baseline are increased accordingly.

4.9.6 Total Allocated Budget Definition. Normally, the total allocated budget (the performance measurement baseline plus management reserve) should not exceed the negotiated contract cost plus the estimated cost of authorised but unpriced work (the CBB). All amendments made to the Performance Measurement Baseline must be auditable.

4.9.7 Internal Operating Budgets. Nothing in the criteria prevents the contractor from establishing an internal operating budget which is less than or more than the Total Allocated Budget. However, there must be controls and procedures to ensure that the Performance Measurement Baseline is not distorted.

a. Operating budgets are sometimes used to establish internal targets for rework or added in-scope effort which is not significant enough to warrant formal reprogramming. Such budgets do not become a substitute for the cost account budgets in the performance measurement baseline, but should be visible to all levels of management as appropriate. Cost account managers should be able to evaluate performance in terms of both operating budgets and cost account budgets so as to meet the requirements of internal management and for reporting to Defence.

b. Establishment and use of operating budgets should be done with caution. Working against one plan and reporting progress against another is undesirable and the operating budget should not differ significantly from the cost account budget in the performance measurement baseline. Operating budgets are intended to provide targets for specific elements of work where otherwise the targets would be unrealistic. They are not intended to serve as a completely separate work measurement plan for the contract as a whole.

4.9.8 Baseline Greater than CBB - Reprogramming. Any increase which results in a total allocated budget in excess of the CBB constitutes formal reprogramming and must be formally submitted by the contractor and formally recognised by the Project Authority. This includes documented reconciliation from the old baseline. It should be clearly understood that such changes are not acceptable on a frequent basis, such as quarterly or semi-annually. The total Allocated Budget should represent a mutually agreeable plan between the Project Authority and the contractor upon which meaningful contract cost and schedule performance can be measured.

4.9.9 Consequences of a Revised Plan. When a contractor formally notifies Defence of a total allocated budget in excess of the CBB and the revised plan is accepted for reporting performance to Defence, then it should also be recognised that this condition may be an indicator to Defence that progress payments and liquidation rates may require review for appropriate adjustment.

4.10 CRITERIA

4.10.1 General. The remainder of this CHAPTER is devoted to discussion of the Planning and Budgeting Criteria. The objective is to clarify the requirements of the Criteria as an aid to interpretation for both Review Teams and contractors. Criterion Planning & Budgeting 9 deals with Indirect Costs and is discussed in CHAPTER 6. Further amplification is found in the Evaluation/Documentation Review Checklist in ANNEX D which contains check-list questions used by Review Teams to evaluate performance measurement systems.

SCHEDULE THE AUTHORISED WORK IN A MANNER WHICH DESCRIBES THE SEQUENCE OF WORK AND IDENTIFIES THE SIGNIFICANT TASK INTERDEPENDENCIES REQUIRED TO MEET THE DEVELOPMENT, PRODUCTION, AND DELIVERY REQUIREMENTS OF THE CONTRACT.

This criterion is the only one which deals specifically with the need to schedule work. Primarily, it requires that a formal (via written System Description and internal operating procedures) scheduling system be established and used consistently to ensure discipline in the sequencing of work throughout the life of the contract. Secondly, it requires that these procedures be followed as a means of documenting, in writing, the complete schedule plan of work. These schedules normally consist of summary or master schedules and related subordinate schedules which provide a logical sequence from the summary to the detailed work package levels. In so doing, the schedules should provide for the interdependent sequencing of all work authorised on the contract in a manner compatible with the contract milestones and the technical requirements of the contract. The end goal of such schedules is that they provide a vehicle for evaluating actual progress (in time) against established milestones of achievement. However, it does not require the contractor to use any specific type of scheduling technique. PERT/Critical Path, Line-of-Balance, Gantt, and Milestone charting are all effective scheduling techniques; and any one or combination of these (or others) may be employed.

IDENTIFY PHYSICAL PRODUCTS, MILESTONES, TECHNICAL PERFORMANCE GOALS, OR OTHER INDICATORS THAT WILL BE USED TO MEASURE OUTPUT.

Criterion 1 requires sequential scheduling that will identify task interdependencies. This Criterion requires identification of interim goals by which to measure work accomplishment. Once the schedule is established, the contractor should devise a methodology for tracking actual accomplishment of the scheduled work, to avoid subjective guessing of work accomplishment. Identification of milestones to the schedule makes it possible to place an objective value of the amount of work required to meet that milestone goal and in addition, as work can be proven to have been accomplished, the contractor can proceed on to the next task in the scheduled sequence.

ESTABLISH AND MAINTAIN A TIME-PHASED BUDGET BASELINE AT THE COST ACCOUNT LEVEL AGAINST WHICH CONTRACT PERFORMANCE CAN BE MEASURED. WHERE APPLICABLE INITIAL BUDGETS ESTABLISHED FOR THIS PURPOSE WILL BE BASED ON THE NEGOTIATED TARGET COST. ANY OTHER AMOUNT USED FOR PERFORMANCE MEASUREMENT PURPOSES MUST BE FORMALLY RECOGNISED BY BOTH THE CONTRACTOR AND DEFENCE.

This Criteria establishes the requirement for cost account managers to establish a standard vehicle for the comparison with work accomplishment. That vehicle is the Performance Measurement Baseline. It represents the formal plan of each cost account manager to do all the work assigned to him in the amount of time allotted and within the amount of budget authorised to accomplish that work. Given this a baseline, cost account managers can then report performance with respect to it.

ESTABLISH BUDGETS FOR ALL AUTHORISED WORK WITH SEPARATE IDENTIFICATION OF COST ELEMENTS (LABOUR, MATERIAL, ETC.)

An integral part of the planning process and of the construction of a Performance Measurement Baseline is the establishment of budgets for all the work authorised on a contract. Earlier in the planning stages, after each of the CWBS elements was broken down into subordinate cost accounts, the Cost Account Managers were tasked with breaking down their assigned scopes of work into the individual and specific work tasks (work packages and planning packages). Part of that task was a determination on the part of the cost account manager (CAM) as to what amount of skill (in terms of labour) would be needed to do the tasks and how much of this labour would be required. The CAM also had to determine what materials would be needed to do these tasks and he had to plan for any other company services (such as computer use, etc.) that he would need.

This criterion requires the contractor to apply budgetary values to the labour, material, and other direct charge requirements for which he planned. It further requires that the same total of these budgetary values should be constrained to match that CAM's proportionate share of the budget value contractually allocated to the contract. It is within this total budget parameter that all the work has been defined. Hence all work tasks to be accomplished must be budgeted within this parameter. Throughout the CWBS then, from the highest level down through the Cost Account, and even at the work package level, there will be a budget entity that has been set aside to do each entity of work. Further, each entity of work (at any level) can be further defined as to amount of labour, material, and other direct charges that will be required to accomplish it.

TO THE EXTENT THE AUTHORISED WORK CAN BE IDENTIFIED IN DISCRETE, SHORT SPAN WORK PACKAGES, ESTABLISH BUDGETS FOR THIS WORK IN TERMS OF DOLLARS, HOURS, OR OTHER MEASURABLE UNITS. WHERE THE ENTIRE COST ACCOUNT CANNOT BE SUBDIVIDED INTO DETAILED WORK PACKAGES, IDENTIFY THE FAR TERM EFFORT IN LARGER PLANNING PACKAGES FOR BUDGET AND SCHEDULING PURPOSES.

Work packages are basic building blocks of the cost account and are used by the contractor in planning, controlling, and measuring performance. "Work Package" is a generic term for the work tasks with definable end-results that collectively comprise, along with planning packages, each cost account's scope of work. The Australian Defence Standard DEF(AUST)5655 identifies the characteristics of a Work Package.

These include:

a. It has a budget or assigned value expressed in terms of dollars, man-hours, or other measurable units; and

b. It's duration is limited to a relatively short span of time or it is subdivided by discrete value milestones to facilitate the objective measurement of work performed.

The requirement for work packages to be of short duration is a key feature of the criteria from the standpoint of evaluating accomplishment. It is not intended to force contractors to make "arbitrary" cut off points simply to have short-term work packages. Work packages should be the natural subdivisions of the planned effort within a cost account; their subdivision of the scope of work should reflect the actual way in which work will be done. When work packages are of short duration, little or no subjectivity will go into the assessment of work progress; the evaluation of contract status is possible mainly on the basis of work package completions. The longer the work package, however, the more difficult and subjective the progress assessment becomes. For longer work packages, it is strongly urged that they be subdivided by objective indicators of progress, such as discrete, interim milestones with preassigned budget values and scheduled completion dates.

PROVIDE THAT THE SUM OF ALL WORK PACKAGE BUDGETS PLUS PLANNING PACKAGES WITHIN A COST ACCOUNT EQUALS THE COST ACCOUNT BUDGET.

The intent of this criterion is to check the discipline in assigning budget to the cost accounts. At any point in time the contractor must be able to account for all the budget authorised on the contract. Also, with the exception of management reserve, all budget must be specifically associated with a scope of work. In order to ensure adherence to these two principles the contractor must start at the lowest level of work/budget assignment, the cost account. The Cost Account Managers (all of them) must be able to verify the amount of budget that is associated with each work package and planning package of their cost account. The Cost Account Manager must also be able to verify the intended usage of every bit of budget assigned to his account. The logical way to satisfy the above requirement is to assign all of the authorised budget to the work and planning packages that comprise the cost account. At no time should a Cost Account Manager have an amount of budget that is not assigned to a segment of work. Such an amount would constitute a management reserve and management reserves should never exist at the cost account level. The above practice being true and adhered to by the Cost Account Manager, the CAM should always be able to verify that the sum of the work package budgets plus the sum of the planning package budgets within the cost account equals the cost account budget authorised for that scope of work. If the above can be verified for all cost accounts within the CWBS/OBS, then the budgetary basis for the Performance Measurement Baseline can be considered valid as well.

IDENTIFY RELATIONSHIPS OF BUDGETS OR STANDARDS IN UNDERLYING WORK AUTHORISATION SYSTEMS TO BUDGETS FOR WORK PACKAGES.

Criterion 4 required the contractor to identify what part of the budget was for labour, what part was for material, and what part was for other direct charges. This criterion goes one step further. It requires that the contractor be able to substantiate how he arrived at the budgetary amounts assigned to each Cost Account Manager. In other words, if a CAM has a labour budget of $50,000, a material budget of $35,000, and an ODC budget of $15,000, we want to know how he arrived at those figures. For the scope of work the CAM has to do, how does he know how much labour will be needed and at what skill level these labourers must be? How does he know what materials will be needed and in what quantity? How does he know what other direct charges he will have? The answer from the contractor may be that he is basing his estimates on some type of standards: engineering standards, historical standards, industry-wide standards, geographic standards, independent technical testing standards, etc. But specifically, every Cost Account Manager should be able to explain what standards he used to come up with the budget distribution he is reflecting for each work package and planning package within his purview.

Lastly, this criterion requires that the work authorisations, which formally tie each scope of work to each amount of budget, also be based upon the same standards as were the cost accounts' work and planning package budget/work relationships. This having been done the contractor (and the system reviewer) can evaluate the contractor's actual progress as work is done. They can say, "On the one hand our engineered standard showed we would need "X" hours of "Y" skill level to do this job. On the other hand, in practice we found that instead we needed either X + Z hours of "Y" skill level, or "X" hours of skill level "W" to do the job. It is the underlying standards that force budgets to be constructed validly. And it is the budgets that are used in the Performance Measurement Baseline to measure the contractor's performance against.

IDENTIFY AND CONTROL LEVEL OF EFFORT ACTIVITY BY TIME-PHASED BUDGETS ESTABLISHED FOR THIS PURPOSE. ONLY THAT EFFORT WHICH CANNOT BE IDENTIFIED AS MEASURED EFFORT OR AS APPORTIONED EFFORT WILL BE CLASSED AS LOE.

All directly costed effort on a contract falls within one of three categories of effort: discrete work packages, apportioned effort, or level of effort activities. The prerequisites of a discrete work package have been previously defined, but generally they are the increments of work which have a definable end product when completed, which are specifically budgeted by element of expense in accordance with underlying standards, and which are specifically scheduled, to the day, for opening, interim milestone measurement, and completion. Apportioned effort can be just as discretely defined as discrete work packages. But apportioned effort tasks are unique because they bear a close association of dependence upon another discrete work package. If this degree of association can be identified and quantified then the apportioned effort can be planned and measured for progress as a proportionate factor of its base work package's plan and progress. The last type of effort is called "Level of Effort" (LOE). It adheres to some of the same budgeting requirements as discrete effort. Like discrete effort, LOE also has to be scheduled, to the day, for opening and completion. However, LOE activities are characterised by having no innate, interim milestones which could otherwise be used for progress evaluation purposes. LOE activities have no definable end product which can be evaluated for adequacy upon completion. An example of an LOE activity might be a Cost Account Managers job. His task is to manage but at the completion of his task he has, himself, turned out no end product - he has just managed others who may have turned out an end product. At any point in time it is difficult to ascertain his progress in the total management effort. One could have counted his phone calls, letters written, meetings attended, and counselling sessions held, but all of these together would not be capable of indicating the amount of the total management effort that had been accomplished. This type of effort, then, is vary hard to measure with any precision. All we know about it is how much the CAM is budgeting for his own management effort each month and what day his management effort begins and ends.

Consequently, the rule of thumb for LOE activities is to not even try to measure their progress. Their progress measurement is based, simply, on the passage of time; they will always get credit for doing what they planned (BCWP = BCWS). A schedule variance will never be possible, then, in an LOE task. If a CAM has an assistant one month that he had not previously planned for, he will incur a cost variance by virtue of having to claim two salaries against his cost account that month instead of just his own. Because of the assumption of work progress that is given to LOE tasks, it is essential to minimise the categorisation of work as LOE to only those tasks which cannot be identified as discrete or apportioned. And because of the immeasurability of LOE as to scheduled work progress, it is important to keep track of the performance measurement of LOE activities separate from the discrete and apportioned work packages.

IDENTIFY MANAGEMENT RESERVES AND UNDISTRIBUTED BUDGET.

The intent is to ensure that, through alignment identification (identification in terms of amount and location), MR and UB will be separately controlled. The importance of this segregation and control lies in the definitions and uses of MR and UB. MR is that portion of the total Contract Budget Base (CBB) that is withheld by the contractor (ie. not distributed) for management control purposes. Contractors normally withhold management reserves for two purposes. The first is to provide incentive to the lower-level managers to do the job as cheaply as possible. Rather than distribute all the budget along with all the work authorised on the contract, a certain amount is withheld as MR. Wishing to keep their jobs secure, the lower-level managers will try to get their jobs done for the amount of budget distributed to them. Hence MR can be used for incentive purposes.

The second use of MR is as a contingency fund, to provide budgeting goals for unanticipated program requirements that will impact the future effort. Looking back historically, most contractors can document for each contract the cost of problems and other program requirements that were unknown at the time of contract award. Using this as a valid experience, after each new contract is negotiated, an amount of that contract value is withheld from distribution. It is called a management reserve and represents an amount of budget that the contractor is pretty sure he will have to spend before the contract is complete but he doesn't know on what he will spend it. Hence MR may be a contingency fund. In reality, MR serves both purposes at the same time. Once withheld from the CBB, it provides an incentive to do the job for less and at the same time provides management with a contingency fund for future unknown requirements. Since MR is withheld from distribution and maintained at the higher management levels, it is not a part of the time-phased Performance Measurement Baseline. By formula, the value of MR can be determined as follows: CBB - Budget at Completion (BAC) of PMB = MR.

Undistributed Budget (UB) is budget that is applicable to specific contractual effort which has not yet been identified to CWBS elements at or below the lowest level of reporting to Defence. UB classically exists as a transient amount. It is part of the negotiated value of a contract or contract change (that is for the accomplishment of a specific scope of work) but which for some reason has not yet been distributed below reporting level. For the period of time that this scope of work remains undistributed, its associated budget will be classed as Undistributed Budget (UB). Once distributed below the reporting level of the CWBS/OBS it ceases to be UB and instead is incorporated in the budget of the responsible organisation for that scope of work. UB is always considered a part of the BAC of the PMB. Specific attention must be given by the contractor to adequately define and describe what constitutes MR and UB so that they cannot be confused by the managerial staff. Further, every attempt must be made to be able to totally identify all budgetary amounts classed as MR and UB; this identification must include the amount of budget involved, where it is located (which CWBS element or OBS element is responsible for it), and when used, full disclosure of its use must be made.

PROVIDE THAT THE CONTRACT TARGET COST PLUS THE ESTIMATED COST OF AUTHORISED BUT UNPRICED WORK IS RECONCILED WITH THE SUM OF ALL INTERNAL CONTRACT BUDGETS AND MANAGEMENT RESERVES.

Criterion 6 requires that the sum of all work package budgets plus planning packages within each cost account equals that cost account's budget. This criterion builds upon that requirement and goes from the cost account level to the total contract level. Once it can be ascertained that each cost account budget is accurately established as a finite total, it is then necessary to be able to sum all cost account budgets along with any intermediate level budgets and UB to the total that is known as the Budget at Completion of the Performance Measurement Baseline (BAC of the PMB). Having thus validated the sum of the internal budgets it must be ascertained that this value plus that of the MR equals the value known as the Contract Budget Base (CBB).