1: From a corporate perspective, the money from an early pay discount is being credited to the project, forcing the project to record the transaction in project reports. Is this correct? What is the alternative?
2: Also, when some of the contracts being managed are lump sum, are we not obliged to reduce the ACWP since this is part of the negotiated price?
Any discount extended by a contractor to the government, whether it is the result of payment terms, a discount for prompt/early payment, or an overall discount in the pricing of an item or service, relates to the “price” of that end item or service -- not its cost. This distinction between price and cost is critical when applying earned value management (EVM) to a project, in that EVM is, by definition, a program management tool based on “cost” (NOT price).
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As such, any payment discount offered should have no effect on EVM nor its actual cost of work performed (ACWP) component. Instead, any discount is most correctly applied during the invoicing and payment process of a contract in the accounts receivable segment of a contractor’s accounting system, and as subsequently paid by the Defense Finance and Accounting Service (DFAS). Conceptually, the payment of a discount and its relation to EVM (and by extension ACWP) is similar to the fee or profit on a cost-plus contract, which are also not components of EVM, and also do not impact EVM or its components (including ACWP). It is in that same vein that you might think of a discount being applied to a contract; just as fee or profit has no impact on the ACWP actually recorded, neither does a discount, since both would generally be recorded in a similar fashion (i.e., on top of cost or ACWP).
Another similar example would be a payment withhold (such as one by DFAS or the Contracting Officer for, say, a noncompliant EVM system in violation of DFARS clause 252.242-7005, Contractor Business Systems) which also wouldn’t impact EVM or ACWP, but most certainly would have an impact on the amount of money, or price, that a contractor actually received.
You also ask in question 2, “are we not obliged to reduce the ACWP since this is part of the negotiated price”. Again, please remember that EVM, and as such ACWP, reflects “cost” which is not the same as the negotiated price, in that cost does not include the fee, profit, or discount that makes up price (by definition, price = cost + fee or profit - any discount (if applicable)).
In summary, any discount offered by, or applied to, a contractor should not be reflected in ACWP. Cost is cost, so it's appropriate for that cost to be true, not only for proper EVM analysis and metrics, but also for future reference and use by cost estimators. The discount should be handled in the billing/invoicing process, much the same way as fee or profit is, which never matches the ACWP or EVM data without reconciliation. (Note that this response is consistent with a sampling of experienced EVM professionals, the definition of ACWP, the Defense Contract Management Agency’s (DCMA) EVM Implementation Guide (EVMIG), the National Defense Industrial Association (NDIA) Program Management Systems Committee (PMSC) ANSI/EIA-748-A Standard for Earned Value Management Systems Intent Guide (specifically, guideline 16), and DoD’s Financial Management Regulation (FMR)).
References and Definitions:
- Per DCMA’s EVMIG:
o Actual Cost of Work Performed (ACWP): The actual cost of work performed, or ACWP, is the cost incurred and recorded for performance measurement purposes within a given time period and is accumulated over time. The ACWP is reported by the contractor’s accounting system in accordance with generally accepted accounting procedures. Simply stated actuals are actuals.
o Earned Value Management (EVM): A program management tool that integrates the work scope, schedule, and cost parameters of a program, in a manner providing objective performance measurement and management.
- Per NDIA PMSA ANSI/EIA-748-A:
o Guideline 16: Record direct costs in a manner consistent with the budgets in a formal system controlled by the general books of account. Accumulate direct costs in the formal accounting system in a manner consistent with the way the related work is planned and budgeted. Actual cost reported in the performance reports agrees with the costs recorded in the general books of account (accounting system).