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Information Technology and Aerospace and Defense Contractor by li39023

VIEWS: 150 PAGES: 10

     and                         Defense

     BY Scot t c laY ton

34   Contract Management | August 2009
  The impact of IT
  advances on cost
management systems
      in aerospace
      and defense.

           Contract Management | August 2009   35
     InformatIon technology and aerospace and defense contractor managerIal accountIng systems

     Managerial accounting in the U.S.
     aerospace and defense industries generally
     consists of the following elements: cost
     estimating, proposal pricing, cost control/
     earned value measurement, and cost history
     retention and analysis. In 1957, the
     industry started down a different path
     from the rest of American industry when
     the U.S. Navy introduced the “Program
     Evaluation and Review Technique” to
     support the development of the Polaris
     missile program. The systems have evolved
     from their paper and pencil origins,
     and have been dramatically affected by
     advances in information technology (IT).

     Over the past 50 years, the methods, tools,   resulted in profound improvements in error       systems led to a number of applications
     and staffing levels employed in those func-   reduction, and staff productivity.               seeking to meet that need.
     tions have undergone dramatic change. The
     advent, introduction, and growing power                                                        The level of investment in software ap-
     and sophistication of IT drove the change.     Managerial                                      plications varies widely from company
     The IT tools for such change have included:    Accounting                                      to company. Many companies, large and
                                                   “Managerial accounting” in the aerospace         small, try to employ general use software—
     ƒ   The ubiquitous use of personal comput-     and defense contractor industries consists      typically Microsoft Excel—for demanding
         ers throughout organizations,              of synergistically connected processes. The     functions such as cost estimating, analysis,
                                                    flow in FIGURE 1 on page 38 is a simplified     and proposal pricing. Other companies have
     ƒ   The local and wide area networking of      depiction of the system and the individual      made substantial IT investments in special-
         those personal computers,                  processes.                                      ized software applications.

     ƒ   The use of general purpose spreadsheet    The effectiveness of each process in the
         and word processing software, and         system depends on the effectiveness of its       Estimating
                                                   predecessor process. When one or more            System
     ƒ   The development and acceptance of         of the processes are ineffective, the entire     Considerations
         special purpose applications on net-      system suffers.                                  An organization’s estimating system is
         work file servers.                                                                         defined as the “policies, procedures, and
                                                   The level of commercial-off-the-shelf (COTS)     practices for generating cost estimates
     Every aerospace and defense contractor has    specialty software applications for these        which forecast costs based on informa-
     undergone dramatic changes in the ways        processes varies widely from process to          tion available”1 It is an integral part of the
     they perform cost management processes.       process. For example, few companies have         organization’s overall managerial, technical,
     Thirty years ago, the processes relied on     a clearly defined organization or a system-      operations, and financial systems.
     hand-completed hard-copy forms and            atic process to collect and analyze program
     mainframe computer applications. Today,       cost history. In the absence of demand,          Ideally, estimates to perform projects are
     general use and specialized software appli-   few, if any, commercial software applica-        founded on:
     cations have enabled dramatically reduced     tions are designed specifically for that func-
     staffing levels, shortened the cycle times    tion. Conversely, the contract requirement       ƒ    Detailed project schedules for product
     of cost management system processes, and      to implement earned value measurement                 development, testing, and production;

36   Contract Management | August 2009
     InformatIon technology and aerospace and defense contractor managerIal accountIng systems

     ƒ     Facility capacity planning and iden-       While IT advances have contributed to            Round Table Estimating
           tification of new or additional plant      the productivity improvements in the cost       This type of cost estimating involves the
           requirements;                              estimating functions, additional require-       interaction of functional groups such as
                                                      ments are imposed on large contractors          engineering, manufacturing, purchasing,
     ƒ    Analysis of the prospective project         doing business with the U.S. Department of      quality, and project management. Based
          in conjunction with the company’s           Defense (DOD). Defense Federal Acquisition      on experience and product knowledge, the
          current backlog and other prospective       Regulation Supplement (DFARS) 215.407-5         representatives develop estimates as a
          projects;                                   and 252.215-7002 require large contractors      group exercise. This method of estimating
                                                      to have an “acceptable” estimating system       has the advantages of speed and low cost
     ƒ    Strategic analysis in regard to market      and charges the Defense Contract Audit          and the disadvantages of inconsistency, ir-
          position, sales volume, and return on       Agency (DCAA) to audit and provide opinions     reproducibility, and subjectivity. Often, the
          investment; and                             to contracting officers on the adequacy of      estimates are developed without the benefit
                                                      those systems.                                  of detailed drawings, bills of material, or
     ƒ     Consistency with the company’s                                                             performance specifications. Changes in IT
           accounting methods and procedures.         However, different industries, different        have had little impact on round table esti-
                                                      companies in the same industry, and even        mating beyond storage media and flow.
     It may be obvious to most, but accurate          different tasks within a proposal use differ-
     estimates of the resources required to           ent means to prepare estimates. The four
     perform future work is a critical factor for a   most commonly used methods include:              Estimating By Comparison
     company’s financial success. If the estimat-                                                     “Comparison estimating” usually involves an
     ing system underestimates the required           ƒ    Round table,                                analyst, or estimator, acting on behalf of
     resources, the organization will lose money.                                                      the functional departments. A known prod-
     If the resource estimates are too high, its      ƒ    Comparison,                                 uct is selected as the baseline for developing
     competitive position will be degraded and it                                                      estimates of the product under consider-
     will lose business. In any event, an effective   ƒ    Detailed, and                               ation. Based on analysis of the new product
     estimating system is the foundation for pro-                                                      in comparison with the known product,
     posal pricing decisions and the source for the   ƒ    Parametric.2                                elements of material and labor are added or
     metrics of cash flow, return on investment,                                                       subtracted from the baseline to produce the
     plant capacity, demand, and competition.                                                          estimate. This method is used where end
                                                                                                       items or processes are sufficiently similar
                                                                                                       within a given product line to enable valid
         FIGURE 1
                                                                                                       comparisons. The method is generally quick
                                                                                                       and inexpensive, although less so than
                                                                                                       round table estimating. Spreadsheets are
                                                                                                       the usual tool for storing cost history and
                                                                                                       generating the comparisons.
                              Cost                                     Pricing
                            Estimating                                Proposal

                                                                                                       Detailed Estimating
                                                                                                      “Detailed estimating” involves thor-
                                                                                                       ough, detailed analyses of all the inputs
                                             Managerial                                                required to produce the product. Labor,
                                             Accounting                                                materials, special tooling and equipment,
                                              System                                                   plant facilities, logistics, and warehous-
                                                                                                       ing are all considered and result from this
                                                                                                       method. Each component or service to be
                                                                                                       delivered or performed is analyzed. Some
                               Cost                              Cost Control
                                                                                                       require drawings, bills of material, specifi-
                              History                            and Earned                            cations, manufacturing work station flow
                                                                                                       and staffing analysis, detailed end item
                                                                                                       production schedules, plant capacity and
                                                                                                       assembly line balancing, new capital in-
                                                                                                       vestment, special tooling and equipment,
                                                                                                       and the impact on indirect expenses, busi-

38   Contract Management | August 2009
                      InformatIon technology and aerospace and defense contractor managerIal accountIng systems

ness base, and forward pricing rates. Ad-      Parametric Estimating                            and software. The equations describe how
ditional elements include labor efficiency,    “Parametric cost estimating” involves the        a product’s physical, performance, and
labor learning, line loss, production           extrapolation of analogous historical           programmatic characteristics affect its cost
setup, and knock-down, rework, warranty         relationships to estimate the resources re-     and schedule.”3
and material scrap, waste, spoilage, and        quired to produce new products or services.
destructive testing.                            These “cost models” may be simple ratios,       The advantages of parametric cost esti-
                                                known as “cost estimating relationships,”       mating techniques are speed, reproduc-
Publication of detailed cost data books by      or complex multivariate input applications      ibility, and objectivity. The disadvantages
RSMeans, Richardson, and others for the         based on software vendor- and government-       are management acceptance of “black
commercial architecture, engineering, and       funded manufacturing and programming            box” numbers and that the nature of the
construction industry predates the advances     cost research.                                  systems’ output does not support the
in IT. Those voluminous annual publications                                                     downstream business system (i.e., it’s
contain extensive and wide-ranging labor,      Cost estimating relationships are used           hard to use a parametric cost estimate as
equipment, and material cost estimate          for a wide variety of resource forecasting       a high-level performance measurement
data for the construction segments and me-     tasks. Examples include line supervision         baseline).
chanical, electrical, and process equipment.   labor as a percentage of touch labor, design
These immense collections of data were ripe    engineering labor per drawing, print shop
for automation and a number of sophis-         service center costs as a percentage of total    Combination of Procedures
ticated cost estimating applications are       cost, travel cost as a percentage of salaried    Many companies use a combination of the
available for those disciplines. The absence   labor cost, or freight-in cost as a percentage   four basic types of cost estimating depend-
of similar aerospace and defense industry      of raw materials cost. At the other end of       ing on needs and timing of the project, to
cost data publications left companies to       the parametric cost estimating spectrum          be estimated. For example, in the concept
develop in-house estimates, applications,      are sophisticated mathematical analyses          definition phase of a project industrial
and processes.                                 that “employ equations that describe             parametric cost estimating models provide
                                               relationships between cost, schedule, and        quick, inexpensive, order of magnitude cost
                                               measurable attributes of systems, hardware,      estimates. As the program matures, and

                                                                                                            Contract Management | August 2009   39
     InformatIon technology and aerospace and defense contractor managerIal accountIng systems

     an estimate to complete is required, more
     detailed cost estimating practices are used.

     Pricing System
     Proposal pricing in the aerospace and
     defense industries is a complex and demand-
     ing function. More than simply applying
     rates and factors to resource estimates, the
     function is typically required to analyze
     alternative program plans and schedules,
     prospective project cash flows and returns
     on investments, satisfy internal manage-
     ment review requirements, and respond to
     varied and complex customer requests for
     proposals requirements.
                                                    ƒ    Automatically calculating cost estimat-     mid 1980s, Welcom, Microframe, Artemis,
     Many companies rely on in-house–                    ing relationships, such as freight-in and   Primavera, and other companies introduced
     developed spreadsheets and general use              touch labor supervision;                    project scheduling and earned value pro-
     database applications to perform proposal                                                       gram management software applications
     pricing. COTS specialty applications to per-   ƒ    Having a tool set of utilities to factor,   for mainframe and personal computers. As
     form proposal pricing have been available           substitute, and time-slip data;             network, personal computer, and program-
     for more than 25 years. Initially, those                                                        ming software technology advances were
     applications were mainframe hierarchi-         ƒ    Managing indented bills of materi-          introduced, the migration from in-house
     cal database applications such as Boeing            als; and                                    developed mainframe applications to COTS
     Computer Services’ “Executive Informa-                                                          client-server applications to COTS client-
     tion System—Proposal Pricing System.”          ƒ    Integrating and/or interfacing with         server applications accelerated.
     In-house–developed mainframe applica-               other business management systems
     tions were developed in the 1970s. These            through import/export or direct access      In December 1996, Under Secretary of
     systems were later applications ran on              of data files.                              Defense for Acquisition and Technology
     networked personal computers and relied                                                         Dr. Paul Kaminski signed a policy memo-
     on proprietary databases, such as Microf-                                                       randum which replaced the 35 DOD C/
     rame’s “Award.” Modern proposal pricing        Project Cost                                     SCSC with 32 earned value management
     software applications require powerful         Management                                       system (EVMS) guidelines. The change in
     personal computers, are browser-enabled,       Considerations                                   DOD’s attitude was as important as the
     and rely on powerful network file servers      In the early 1970s, most aerospace and           changes in the text. In the 1980s, industry
     operating open-architecture relational         defense contractors with the contractual         complained that the C/SCSC had become
     databases, such as Executive Business          requirement to comply with the cost/sched-       an end in itself, rather than a means to the
     Services’ “ProPricer” and Mainstay Corpo-      ule control system criteria (C/SCSC) em-         end of effective program cost and schedule
     ration’s “PPAS” installed on Oracle or SQL     ployed large numbers of cost and schedule        management.4
     server databases.                              analysts to support cost account managers.
                                                    Those analysts relied primarily on in-house–     With the change came the following results:
     A few of the functional requirements for       developed software running on mainframe
     proposal pricing software include:             computer systems. Input was often pro-           ƒ   Government and industry reconciled
                                                    vided from keypunch cards, and the output            their program management practices,
     ƒ    Summarizing, analyzing, and reporting     was paper “tab runs” several feet thick.
          data in work breakdown structures;                                                         ƒ   The number and cost of contractor
                                                    With mixed results, several software                 system demonstrations and subsequent
     ƒ    Applying indirect rates and factors to    vendors developed mainframe applications             application reviews that were previously
          direct cost elements;                     that attempted to address the aerospace              required on every major new contract
                                                    and defense requirements for earned value            were dramatically reduced, and
     ƒ    Handling monthly time-spread data;        program management. In the late 1970s to

40   Contract Management | August 2009
                       InformatIon technology and aerospace and defense contractor managerIal accountIng systems

ƒ   The number and variability of project      earned value, scheduling, cost control, and   ƒ   “Artemis” (—
    cost control system software applica-      proposal pricing software. The list is not         multi-user, multi-platform enterprise
    tions increased.                           comprehensive nor does inclusion imply             application for managing time, resourc-
                                               endorsement.                                       es, schedules, and costs in support of
                                                                                                  earned value.
Conclusion                                     ƒ   “Software Applications for Estimating
The combination of changing government              System Processes for the Aerospace       ƒ   “Business Engine” (Business Engine
regulation of contractor management                 and Defense Industry” (Advanced Man-          Software Corp., www.microframe.
systems and the implementation of dramati-          agement Solutions, www.amsrealtime.           com)—resource optimization applica-
cally improved software applications run-           com)—integrated project, cost, and            tion for project-driven enterprises.
ning on greatly advanced and less expensive         resource management software for PC,
hardware resulted in substantial improve-           Unix, and Mac.                           ƒ   Calypso Software Systems (
ments in cost analysis staff productivity by                                           —software to help
aerospace and defense contractors.5 Today,     ƒ   “PMWorks Cost Management” (Ap-                government contractors and agencies
a much smaller aerospace and defense cost           plied Integration Management (AIM),          obtain the full benefit of performance
analyst workforce satisfies more require- —a software                 measurement environments by improv-
ments in less time with more accuracy at a          product that gives decision-makers           ing the quality of variance analysis
lower cost.                                         the information they need for ac-            assessments.
                                                    curate decision-making: managers
                                                    can improve project performance by       ƒ   “Cost Manager” (http://costmanager.
Software Applications for                           accurately tracking costs, identify-—application that can
Estimating System Processes                         ing cost drivers and improvement              post your financial data directly to the
The following list provide the company              opportunities, and integrating with           Web for your organization to see. Cost
name, Web site, and a brief description of          and enhancing planning/scheduling             Manager can create work authorization
software vendors servicing the aerospace            systems.                                      documents, variance analysis reporting,
and defense industries with estimating,                                                           and many other types of online report-

                                                                                                        Contract Management | August 2009    41
     InformatIon technology and aerospace and defense contractor managerIal accountIng systems

          ing. Cost Manager has no license fees        ƒ   “SEER” estimation tools (Galorath Inc.,     ƒ    “Planisware OPX2” (www.planisware.
          for government contracts.               —estimation tools             com)—enterprisewide project control,
                                                            that derive cost, schedule, and staffing       cost and earned value, schedule, re-
     ƒ   “EZ-Quant” (DCAA,                    estimates by assessing the impact of           sources, and consolidations.
          ezquant.htm)—free of charge, EZ-                  product, organizational, and operation-
          Quant performs simple and multiple                al variables using parametric methodol-    ƒ   “E-Business Suite,” “PeopleSoft,” and
          least squares linear regression analysis,         ogy coupled with knowledge bases.              “JD Edwards” application suites (Oracle,
          statistical sampling, and improvement                                                   —integrated and scal-
          (learning) curve calculations.               ƒ   “Milestones Professional 2000” (KIDASA           able full function accounting, human
                                                            Software Inc.,—an               resources, supply chain management,
     ƒ    Dekker Ltd. (—                easy to use tool that produces presen-          and project contracts application suites.
          a resource for tools for scheduling,              tation-ready milestone schedules with
          budgeting, EVM, activity-based cost               integrated cost data.                      ƒ    PRICE Systems (www.pricesystems.
          management, risk analysis, and Web-                                                               com)—a global software licensing
          based collaboration.                         ƒ   Kildrummy Technologies Ltd. (www.                and professional services business
                                                 —designed, developed,              providing Fortune 1000 companies
     ƒ    Deltek Systems Inc. (www.deltek.                 and supported by project professionals,          with enterprise cost management and
          com)—a provider of enterprise                    Kildrummy® solutions are used in over            analysis solutions.
          management software for project-                 40 countries in every continent across
          focused organizations, Deltek’s                  the globe to manage projects worth          ƒ   Primavera Systems (www.primavera.
          applications include full function ac-           over $100 billion.                              com)—provider of enterprise software
          counting, project management, hu-                                                                solutions for earned value project
          man resources, time and attendance,          ƒ   Mainstay Corporation (www.mainstay.             management that support planning,
          payroll, project revenue recognition,            com)—provides a family of proposal              scheduling, time reporting, portfolio
          project costing and control, and                 products including PPAS, STAR, and              management, earned value manage-
          project billing.                                 ParaModel. Each functional module               ment, and complex cost management.
                                                           can operate by itself or as an integrat-
     ƒ   “Project Data Quick Tool” (PDQTool)               ed part of the family.                      ƒ   “Project Control Software” (Project
          (Dynetics, Inc.,—a                                                              Control Software, www.projcontrol.
          software product that facilitates evalu-     ƒ   “HeavyBid,” “HeavyJob,” “The Dis-                com)—a multi-user, multiple project
          ation of scheduling and earned value              patcher,” “Bidhistory,” and “FuelerPlus”        management system that integrates
          snapshots that solves the schedule and            (HCSS Construction Software Solutions,          with the accounting system and allows
          earned values problems of rapid com-    —software applications             organizations to consolidate their Mi-
          parison of reporting period-to-reporting          to support infrastructure contractors.          crosoft Project and/or Primavera files
          period data snapshots, and providing                                                              and do timesheets, resource workloads
          one file that contains historical data for   ƒ   Integrated Management Concepts                   and management, multiple project
          future reference.                                (—produces                  reports, and earned value.
                                                           project control products for pricing, es-
     ƒ   “ProPricer” (Executive Business Services,         timating, “what-ifs,” proposals, earned     ƒ   “Rational Concepts,” “I-Schedule,” “I-
—a COTS solution               value analysis, and reporting.                   Cost,” “Proj-Net,” and “Proposal-Net”
          for proposal pricing, cost analysis, and                                                          (Rational Concepts, www.rationalcon-
          source selection.                            ƒ   MicroPlanning International (www.      —Web-based project man-
                                                 —an Australian company                agement software, including multi-
     ƒ   “Journyx Timesheet” (Journyx, www.                with strong scheduling and earned                project critical path schedulers, EVMS
—allows you to track                 value tools for multiple platforms.              solutions, enterprise repositories and
          time and expenses for project manage-                                                             project evaluation and analysis tools,
          ment and project billing from any loca-      ƒ   Mincom (—designs                  and proposal and basis of estimates
          tion via the Internet, runs on multiple          and delivers total enterprise appli-             management systems.
          platforms and integrates easily with             cations solutions for capital asset-
          existing project management pro-                 dependent companies in the utilities,       ƒ   Relevant Business Systems Inc. (www.
          grams, and includes an optional audit            transportation, mining, oil, and gas  —develops and markets
          trail. It is enterprise ready and is free        industries, as well as the government           enterprise software for manufacturers
          for up to 10 users.                              and defense industries.                         who use a work breakdown structure
                                                                                                           and require earned value management.

42   Contract Management | August 2009
                       InformatIon technology and aerospace and defense contractor managerIal accountIng systems

ƒ   “Risktrak” (Risk Services & Technology,       contract cost and schedule perfor-         About the Author—network-based              mance measurement reporting.               SCOTT CLAYTON, CPCM, is a consultant
     tool for integrated management of                                                       with Executive Business Services Inc. in
     cost, schedule, and technical risk.      ƒ   Super Tech (—            Sandy, Utah. He is a member of the Great Salt
                                                  specialists in computer-based project      Lake Chapter of NCMA. He can be contacted
ƒ   Sage Timerline (www.sagenorthamer-            management systems and technology,         at—supports accounting, opera-          providing a wide variety of services,
    tions, customer management, human             including project management
    resources, time tracking, merchant            consulting, planning and scheduling,
    services, and the specialized needs of        cost estimating and control, project
    the construction, distribution, health-       management education, and project
                                                                                             1.   DCAA Contract Audit Manual, 5-1201.1, Defense
    care, manufacturing, nonprofit, and           management software and support.
                                                                                                  Contract Audit Agency (DCAA) (January 2004).
    real estate industries.
                                                                                             2.   Paul R. McDonald, Financial Management and
                                              ƒ   VitalThought (www.vitalthought.                 Pricing of Government Contracts and Subcon-
ƒ   SAP Solutions (—pro-              com)—a full-service provider of project         tracts, Volume 1 (Procurement Associates, Inc.,
    vides a comprehensive range of enter-         management consulting, training and
    prise software applications, including        software.                                  3.   International Society of Parametric Analysts,
                                                                                                  accessed at
    full function accounting, supply chain
                                                                                             4.   The 1996 guidelines were issued by Aerospace
    management, and enterprise resource       ƒ   WinEstimator Inc. (—             Industries Association, the Electronic Indus-
    planning systems that integrate cost,         an internationally recognized construc-         tries Association, the National Security Indus-
    schedule, and technical performance.          tion estimating software solution               trial Association, the American Shipbuilding
                                                                                                  Association, and the Shipbuilders Council of
                                                  provider providing a family of powerful,        America.
ƒ   SPAR Associates Inc. (www.sparusa.            integrated, and flexible estimating and
                                                                                             5.   Although relevant industry data could not be
    com)—marketer of software and                 bidding software solutions. CM                  found for this article, it appears clear that the
    services for earned value management                                                          number of program cost and schedule analysts
                                                                                                  employed today in the aerospace and defense
    that integrate cost estimating with
                                                                                                  industries is much less than 20 years ago.

                                                                                                          Contract Management | August 2009           43

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