5-1.1 Develop Cost Management Plan

The cost management plan is developed using the purchase plan and the following resources generated during USPS Supplying Practices Process Step 2: Evaluate Sources:

• SOW or other description of the contract requirement produced during the Start Request for Proposal Development topic of the Prepare Project task and the Review and Finalize Request for Proposals (RFP) topic of the Perform Solicitation-Related Activities task — indicates client expectations in terms of quantity and quality, both of which affect cost.
• The latest TCO estimates produced in Section 2-3, Update/Refine Total Cost of Ownership Analysis, estimates total contract cost.
• Funded budget as a result of the Formulate Project Budget and Request Funding topic of the Prepare Project task — provides the allowable cost (assuming that budget does not need to be changed)
• Results of ABC analysis performed during the Perform Value Chain Mapping and Analysis topic of the Prepare Project task — allows the pricing analyst to better allocate costs associated with specific cost drivers at various stages of the contract.
• Life-cycle support plan developed during the Develop Life-Cycle Support Plan topic of the Develop Sourcing Strategy task — clarifies the project’s lifespan and enables the Postal Service to reduce complexity, decrease life cycle costs, and focus all efforts toward providing best value to the client.

The cost management plan describes how CVs will be managed, should they occur. CV refers to the difference between AC and EV. The plan outlines the permitted range for cost deviation and response measures should cost deviate beyond the permitted range.

The cost management plan can be formal or informal, detailed or broad, depending on the complexity of the contract. The CO must review the cost management plan regularly to ensure that its guidelines continue to be appropriate throughout the duration of the contract.

5-1.1.1 Outline for Cost Management Plan

The following are suggested elements of a cost management plan:

• Introduction/Purpose — Describes the purpose of the cost management plan.
• Contract Management Costs — Summarizes contract management costs. Detailed cost calculations should appear as appendices.
• Potential Causes of Variances — Defines permitted range for variances, and lists the factors specific to the project that could lead to variances.
• Identification of Variances — Describes the procedures that will be used to identify variances.
• Response to Variances — Describes the mechanisms to be used to resolve CV problems, including contingency plans to cover increased costs.

5-1.1.2 Variance Definition

The pricing analyst is responsible for determining the range by which cost will be permitted to deviate from budget. CV is calculated by comparing the AC of the work with the EV. CV is typically expressed as a ratio or percentage. The formula is:

CV = [(EV — AC) / EV] x 100

If the result is positive, the project is experiencing an “underrun.” If the result is negative, the project is experiencing an “overrun.”

The permitted range of deviation of AC from budget, or EV, may be dependent on:

• Particular phase of the contract.
• Length of the contract phase.
• Length of the entire contract.
• Nature of the task or products being estimated.
• Perceived accuracy of the estimate.

Figure 5.1 illustrates the permitted range of deviation as falling between the AC and EV at any given point in the contract life cycle.

Figure 5.1

Permitted Range of Deviation

The permitted range of deviation may vary from project to project because of differences in scope and period of performance. For many purchases, variances are permitted to change over the contract duration because of the difficulty of forecasting costs accurately for long-term contracts. For manufacturing projects, allowed variances may be fixed over the duration of the project life cycle. For projects that involve R&D, for example, larger deviations may be allowed during the earlier phases of the project. However, in general, because the risk for any project decreases as time goes on, so should the allowed variance.

5-1.1.3 Response to Variances

The cost management plan outlines how variances should be managed. The four main options are to:

• Ignore the variances.
• Make functional modifications to the project.
• Replan the project.
• Redesign the product.

Whether a CV falls within the permitted range of deviation will dictate the response measures. The choices available to manage a CV vary in terms of how drastic they are, how much work they require, and how much they change the contract. Ignoring the variance or making functional modifications are mild solutions. These choices require little or no work and make minimal changes to the project, if any. Replanning or making changes to the product scope are more drastic solutions that require a great deal of work and make substantial changes to the project. The contract management plan should anticipate situations that may necessitate each of the above options. Figure 5.2 suggests when each option should be used.

Figure 5.2

Response to Variances

 

Action	Condition
Ignore the variance	CV falls within the permitted range of deviation and does not appear to be a sign of future cost problems.
Make functional modifications to the project	CV is within the permitted range, but could potentially grow or become a problem in the future. The modifications are small changes to the project that can save time and money.
Replan the project	CV is outside of the permitted range. The client or CO attempts to replan the project without changing the project scope. This means finding less-expensive ways of doing things (e.g., less-expensive resources, contracting out).
Redesign the product	Redesign only if replanning is not sufficient to bring variance back to the permitted range.

Project replanning and product redesign involve major changes to the project. Both approaches require an assessment of the impact on the overall product quality and its ultimate usability by the client. Taking either of these approaches too far could render the product or service substandard.

When AC deviates from EV, it may be necessary to change the budget, rather than adjusting costs to match a previously determined monetary ceiling.

The following are valid reasons to change the budget:

• Change to the product or service that will have an impact on cost.
• Change to the project scope that will have an impact on cost.
• Major, unforeseen changes to the costs of resources or materials.

The following are not valid reasons to change the budget:

• CVs that are normal and based on accurate estimations.
• CVs that are due to poor planning or poor estimating.
• Costs that would normally occur have been forgotten in the cost management plan.

The client must agree to the budget change request prior to seeking approval of additional funds.