c15.

qxd

1/21/09

7:24 PM

Page 709

709

Case Studies

back at the beginning of the follow-on work. Good project office personnel are always in
demand.
Jerry estimated that he needed $40,000 per month during the bathtub period to support
and maintain his key people. Fortunately, the bathtub period fell over Christmas and New
Years, a time when the plant would be shut down for seventeen days. Between the vacation
days that his key employees would be taking, and the small special projects that his people
could be temporarily assigned to on other programs, Jerry revised his estimate to $125,000 for
the entire bathtub period.
At the weekly team meeting, Jerry told the program team members that they would have
to tighten their belts in order to establish a management reserve of $125,000. The project
team understood the necessity for this action and began rescheduling and replanning until a
management reserve of this size could be realized. Because the contract was firm-fixed-price,
all schedules for administrative support (i.e., project office and project team members) were
extended through February 28 on the supposition that this additional time was needed for final
cost data accountability and program report documentation.
Jerry informed his boss, Frank Howard, the division head for project management, as to
the problems with the bathtub period. Frank was the intermediary between Jerry and the general manager. Frank agreed with Jerrys approach to the problem and requested to be kept
informed.
On September 15, Frank told Jerry that he wanted to book the management reserve of
$125,000 as excess profit since it would influence his (Franks) Christmas bonus. Frank and
Jerry argued for a while, with Frank constantly saying, Dont worry! Youll get your key people back. Ill see to that. But I want those uncommitted funds recorded as profit and the
program closed out by November 1.
Jerry was furious with Franks lack of interest in maintaining the current organizational
membership.
a. Should Jerry go to the general manager?
b. Should the key people be supported on overhead?
c. If this were a cost-plus program, would you consider approaching the customer with
your problem in hopes of relief?
d. If you were the customer of this cost-plus program, what would your response be for
additional funds for the bathtub period, assuming cost overrun?
e. Would your previous answer change if the program had the money available as a result
of an underrun?
f. How do you prevent this situation from recurring on all yearly follow-on contracts?

FRANKLIN ELECTRONICS
In October 2003 Franklin Electronics won an 18-month labor-intensive product development
contract awarded by Spokane Industries. The award was a cost reimbursable contract with a
cost target of $2.66 million and a fixed fee of 6.75 percent of the target. This contract would be
Franklins first attempt at using formal project management, including a newly developed project management methodology.

Franklin had won several previous contracts from Spokane Industries, but they were
all fixed-price contracts with no requirement to use formal project management with

c15.qxd

1/21/09

7:24 PM

Page 710

710

COST CONTROL

earned value reporting. The terms and conditions of this contract included the following
key points:

Project management (formalized) was to be used.

Earned value cost schedule reporting was a requirement.
The first earned value report was due at the end of the second months effort
and monthly thereafter.
There would be two technical interchange meetings, one at the end of the
sixth month and another at the end of the twelfth month.

Earned value reporting was new to Franklin Electronics. In order to respond to the
original request for proposal (RFP), a consultant was hired to conduct a four-hour seminar
on earned value management. In attendance were the project manager who was assigned
to the Spokane RFP and would manage the contract after contract award, the entire cost
accounting department, and two line managers. The cost accounting group was not happy
about having to learn earned value management techniques, but they reluctantly agreed in
order to bid on the Spokane RFP. On previous projects with Spokane Industries, monthly
interchange meetings were held. On this contract, it seemed that Spokane Industries
believed that fewer interchange meeting would be necessary because the information necessary could just as easily be obtained through the earned value status reports. Spokane
appeared to have tremendous faith in the ability of the earned value measurement system
to provide meaningful information. In the past, Spokane had never mentioned that it was
considering the possible implementation of an earned value measurement system as a
requirement on all future contracts.
Franklin Electronics won the contact by being the lowest bidder. During the planning
phase, a work breakdown structure was developed containing 45 work packages of which
only 4 work packages would be occurring during the first four months of the project.
Franklin Electronics designed a very simple status report for the project. The table
below contains the financial data provided to Spokane at the end of the third month.
Totals at End of Month 2

Totals at End of Month 3

Work
Packages

PV

EV

AC

CV

SV

PV

EV

AC

CV

SV

A
B
C
D

38K
17K
26K
40K

30K
16K
24K
20K

36K
18K
27K
23K

<6K>
<2K>
<3K>
<3K>

<8K>
<1K>
<2K>
<20K>

86K
55K
72K
86K

74K
52K
68K
60K

81K
55K
73K
70K

<7K>
<3K>
<5K>
<10K>

<12K>
<3K>
<4K>
<26K>

Note: BCWS
PV, BCWP
EV, and ACWP
AC.

A week after sending the status report to Spokane Industries, Franklins project manager
was asked to attend an emergency meeting requested by Spokanes vice president for engineering, who was functioning as the project sponsor. The vice president was threatening to
cancel the project because of poor performance. At the meeting, the vice president commented, Over the past month the cost variance overrun has increased by 78 percent from
$14,000 to $25,000, and the schedule variance slippage has increased by 45 percent

c15.qxd

1/21/09

7:24 PM

Page 711

711

Case Studies

from $31,000 to $45,000. At these rates, we are easily looking at a 500 percent cost overrun
and a schedule slippage of at least one year. We cannot afford to let this project continue at
this lackluster performance rate. If we cannot develop a plan to control time and cost any better than we have in the past three months, then I will just cancel the contract now, and we
will find another contractor who can perform.

QUESTIONS
1. Are the vice presidents comments about cost and schedule variance correct?
2 What information did the vice president fail to analyze?
3. What additional information should have been included in the status report?
4. Does Franklin Electronics understand earned value measurement? If not, then what
went wrong?
5. Does Spokane Industries understand project management?
6. Does proper earned value measurement serve as a replacement for interchange
meetings?
7. What should the project manager from Franklin say in his defense?

TROUBLE IN PARADISE
As a reward for becoming Acme Corporations first PMP, Acme assigned the new PMP, Wiley
Coyote, the leadership role of an important project in which the timing of the deliverables was
critical to the success of the project. A delay in the schedule could cost Acme a loss of at least
$100,000 per month. Wiley Coyotes first responsibility as project manager was the preparation
of a solicitation package for the selection of an engineering contractor.

Eight companies prepared bids based on the solicitation package. Wiley Coyote
decided to negotiate only with the low bidder, who happened to be at a significantly lower
final cost than the other bidders. The contractors project manager, Ima Roadrunner, would
be handling the negotiations for the contractor. This was a contractor that Wiley Coyote
had never worked with previously. Wiley Coyote reviewed the critical information in the
proposal from the contractor:

All work would be accomplished by engineering.

Total burdened labor was 2000 hours at $120/hour.
The duration of the project would be approximately 6 months and would be
completed in 2006 (labor rates might be different in 2007).
The contractors overhead rate applied was 150 percent for engineering.
All of the assigned workers would be at the same pay grade and would be
assigned full time for the duration of the project.
Profit requested was 12.5 percent, but subject to negotiations.
Ima Roadrunners salary would be included in the overhead structure.
No materials were required.

During negotiations, Ima Roadrunner provided Wiley Coyote with the salary structure
for engineering, shown in Exhibit 151.