On a Cost-Reimbursable project, should schedule and other delays outside of Contractor control be considered a basis for a Change Order that is added to the Approved Budget, or are these simply items that should be added to the Forecast (EAC) as a Variance?
To begin with, I would argue that the situation that you have described here is, by definition, a variance. The work schedule and cost, for whatever reason, has "varied" from the original plan and therefore constitutes a variance. All variances are supposed to be added to the Estimate at Completion (EAC). And, depending on how the contract’s Earned Value Management (EVM) reporting requirements are spelled out in the contract, the reasons for the variance, as well as the "get well plan," should be explained in the Format 5 of the Contractor Performance Report (CPR).
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The reason for the variance, however, can make a fairly significant difference in how it is handled within the context of EVM. It can also make some difference with regards to how much fee a contractor can make on a Cost-Reimbursable Contract depending on the specific type of contract and how it is written. If the variance were strictly the contractor’s fault, then the schedule and cost variances would be built straight into the EAC and would constitute a Program overrun. If the schedule and cost issues are truly outside of the contractor’s control they get handled a little differently.
In the case where it is truly out of the contractor’s control, then that is what is known as "an unknown-unknown." These are why the contractor is supposed to set aside some of the funding that is obligated on the contract as budget in Management Reserve (MR) account. The MR funding is on the contract but not included in the original Performance Measurement Baseline (PMB) for the effort. When an "unknown-unknown" happens, work packages are developed by the Control Account Managers (CAMs) to cover work to rectify the issue (i.e. re-work of defective parts). These new work packages will then get added to the PMB. These work packages will have schedule and budget. The budget for them will come from the MR account on the contract. Please be very careful to recognize that budget, for EVM purposes, does not directly correlate to funding on the contract. Budget and funding for EVM are two different things.
As a side note, I am always skeptical whenever I hear a contractor, or Program Office, say that an issue is outside of the contractor’s control. Should the contractor have known about it and built in risk mitigating time and money into the original effort? Just saying, I didn’t do it!" does not necessarily alleviate the contractor from some responsibility for managing and or mitigating the impact of the delays, both with respect to schedule and cost. To be sure, sometimes true "unknown-unknowns" do occur, but too often they are convenient excuses for a prime contractor who does a poor job of selecting and managing its subcontractors (just to give an example).
This is a Cost-Reimbursable Contract and the DoD will pay all reasonable and allowable contractor costs, subject to the Limitation of Funds Clause. Just because an issue that is outside of the contractor’s control has occurred, does not necessarily require that a Change Order adding funding to the contract be executed. However, it absolutely is a variance and has to be treated as such either as an overrun or use of MR.