DELAY AND DISRUPTION A FINANCIAL PERSPECTIVE Phillip M' Kohn

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• DELAY AND DISRUPTIONA FINANCIAL
  PERSPECTIVEPhillip M. Kohn

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DELAY AND DISRUPTIONA FINANCIAL
PERSPECTIVEPhillip M. Kohn
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OVERVIEW

• Essential elements of a DD claim
• Delay costs
• Disruption costs
• Schedule issues
• Warning signs
• Key factors of a successful resolution

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ESSENTIAL ELEMENTS

• Entitlement A legal basis for recovery
• Quantum - Identify and measure costs associated
  with the actions giving rise to the claim
• Causation - Demonstrate linkage, cause and
  effect, between the entitlement and the costs.
• All three elements must exist for the contractor
  to effectively and successfully recover increased
  performance costs.

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ENTITLEMENT

• Directed Changes
• Is there agreement on the scope of direction?
• Has the total impact been priced?
• Constructive Changes
• Any customer caused change in the scope of work
  should be identified.
• Changes in work sequence and changes in the
  distribution of manpower are common.
• Disrupted In-Scope Labor
• Lost Productivity and reduced efficiency
  frequently occur.
• Diversion of key resources can effect timely
  performance.

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QUANTUM

• Schedule Delay Costs (Time driven)
• Labor Escalation
• Material Escalation
• Sustaining Personnel
• Unabsorbed or extended overhead
• Acceleration Costs
• Overtime
• Material expediting
• Disruption Costs (Process driven)
• Decreased Productivity
• Postponement of anticipated process improvements

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DELAY

• Common methods of estimating schedule delay.
• Impacts of delay.
• The cost and schedule baseline.

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DELAY

• Common Methods Of Estimating Delay
• Critical Path Method (CPM)
• For most major programs this is already done and
  is the most common method. However, it often
  poorly structured at the outset and when
  periodically provided to the customer could be a
  obstacle to recovery.
• Time interval analysis
• Analyze fixed time intervals and determine what
  was accomplished. This is a more simple approach
  but less flexible.
• Milestone analysis
• Similar to time intervals but with a focus on
  accomplishments such as CDR, PDR or first
  production unit.
• Line of Balance - Best suited for those projects
  that are composed of activities of a linear and
  repetitive nature.

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DELAY

• Impacts Of Delay
• Labor Escalation
• Material Escalation
• Sustaining Personnel
• Unabsorbed Overhead
• Acceleration Costs
• Overtime
• Material expediting
• Loss of learning, particularly when work is
  suspended

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DELAY

• The Cost And Schedule Baseline
• Establishing a supportable baseline is the
  foundation of quantum methodology. What extra
  costs can be recovered are measured from this
  point.
• The baseline is the amount of time and money that
  should have been required to perform the work
  as-planned. Not just in duration but also in
  sequence and skill level.
• Common evidence used to support the baseline
  include the original bid, BAFO documents and
  pre-delay EACs.
• Baseline adjustments are often needed to allow
  for negotiated adjustments or management
  challenges.

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THE EICHLEAY FORMULA

• Benefits Most common method accepted by BCA.
• Drawbacks Yields poor results if work has not
  really started or is substantially complete.
• Eichleay Corp., ASBCA No. 5183, 60-2 BCA par.
  2688 61-1 BCA par. 2894

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DISRUPTION

• The increased costs to perform in-scope work.
• Impacts are often subtle, have unexpected
  results, and are seldom immediately apparent.
• Single most common error in recovery of
  disruption costs is the failure to establish a
  causal linkage between events and the resulting
  impacts.

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DISRUPTION

• Common Causes
• Work re-sequencing.
• Software or hardware upgrades.
• Diversion of engineers from planned activities.
• Late GFE or GFI.
• Diversion of test resources.
• Diversion of supervisory or management personnel
  to deal with directed changes.
• Incremental changes to the design baseline.
• Excessive inspection and/or slow approval by
  customer.
• Subcontractor issues.
• Anything that alters the as-planned work.

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DISRUPTION
Production Flow
Materials Components
Assembly
Test
Inspection
Acceptance
Rework
Rework
Rework
Rework
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QUANTIFYING DISRUPTION

• No single correct approach to measuring
  disruption.
• Its best to work within existing performance
  measurement systems that are compatible with
  normal program management techniques.
• Examples
• Learning curve analysis
• Machine hours per unit
• Average days in production cycle
• Lines of software code per man-week
• Apply an objective methodology when allocating
  disruption costs to customer causes.
• Look to non-impacted performance periods when
  possible.
• Document and explain the actual and planned
  workflow.
• Using Discrete Cost Accounts
• For complex problems they are of limited use.
• As a prerequisite people must know they are
  affected.

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QUANTIFYING DISRUPTION

• Information Commonly Used In Support Of
  Disruption Claims
• Operating plans
• Work authorization documents
• Program evaluations
• Statement of work
• Production records including the support for
  standard rates and factors
• Cost accounting records

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SCHEDULE ISSUES

• The Cost And Schedule Baseline
• Defined - The amount of time and money that
  should have been required for performance as
  planned.
• Essential characteristics - supportable and
  credible.
• Sources - original bid, BAFO, and estimates made
  prior to significant changes.
• Adjustments to the performance baseline to allow
  for compensated changes.
• Final baseline must reconcile to contract award.

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SCHEDULE ISSUES

• Concurrent delay
• The most common reason contractors do not prevail
  on delay claims.
• The most common defense raised by the customer.
• Sometimes a benefit. You cant get them but they
  cant get you.
• Formal versus informal recognition of delay.
• Contractors are generally required to provide
  some form of schedule information to the
  customer.
• There is a strong tendency to avoid recognition
  of schedule slip by the contractor. This can
  limit cost recovery later on.

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POTENTIAL WARNING SIGNS

• Customer
• Has customer taken a heightened interest in
  performance?
• Extra plant visits?
• Unscheduled status reviews?
• Has there been a heightened level of contractual
  correspondence?
• Has the customer started pointing out your
  deficiencies?
• Are design, schedule or cost concessions being
  requested?
• Is there decreased access to the buyer/user?

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POTENTIAL WARNING SIGNS

• Internal Challenges
• What contracts are potentially outside your
  companies known area of expertise?
• What contracts were priced using large blanket
  reductions in the proposal phase? Were multiple
  BAFOs requested?
• Are scrap rates higher than planned?
• Have testing standards or quality control become
  more stringent?
• Are there widely divergent opinions on program
  status?

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POTENTIAL WARNING SIGNS

• Design And Build Changes
• Is the change rate higher than anticipated?
• Are there any problems with change control or
  configuration management?
• Does the type of change indicate that program
  maturity is lacking or engineering concepts are
  poor?
• Are changes being incorporated in a timely
  fashion?

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POTENTIAL WARNING SIGNS

• Estimates To Complete
• Does the ETC assume performance that is markedly
  better than historical indicators?
• Is the program slipping milestones but not the
  end date?
• Are percent complete measurements based on
  percent of budget consumed?

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SUCCESSFUL RESOLUTION

• Key Factors
• Recognition of contractor caused problems. Fault
  rarely lies solely with either the customer or
  the contractor.
• Understanding what has already been communicated
  to the customer either formally or informally.
• Isolate why overruns occurred - rates,
  inefficiency, subcontractor issues
• Describe the important relationships among
  performing organizations and how the were
  affected by the changes.
• Document with real examples supported by real
  data.
• Anticipate customer defenses.
• Timely gathering of evidence.

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SUCCESSFUL RESOLUTION

• Common Pitfalls In Estimating Damages
• Estimators not knowing what happened during
  contract negotiations.
• Leaving too much damage as indirect.
• Not completely understanding the original plan.
• Waiting too long to recognize a change has
  occurred.
• Underestimating future impacts.
• Contractor failing to recognize the importance of
  concurrent delays.
• Communicating conflicting schedule information to
  the customer.
• Pricing delay as if it occurred at the end of the
  project.
• Failure to account for possible damage due to
  cost escalation.
• Failure to account for both primary and secondary
  impacts, the ripple effect.

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SUCCESSFUL RESOLUTION

• Requirements Generally Needed to Prevail
• Establish the difference between the program
  as-planned and as-performed. This may be
  needed at both a system and sub-system level and
  should include all functions areas.
• Describe in detail the timing and nature of the
  out-of-scope work that caused in-scope work to be
  delay and/or disrupted.
• Identify on an anecdotal basis what disruptions
  would be expected from the out-of-scope work.
• Gather and summarize supporting documentation
  that verifies the anecdotal story.

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SUCCESSFUL RESOLUTION

• Typical Customer Responses
• The claim is an attempt to recover from under
  bidding.
• The disputed work was covered under the original
  terms of the contract.
• The contractor failed to provide adequate notice
  that a change occurred.
• The contractors facts are incorrect.
• Even though GFI/GFE was provided late it was
  before the contractor really needed it.
• The user community merely was making suggestions
  not formal changes from the customer.

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SUCCESSFUL RESOLUTION

• What To Expect From The DCAA
• Primary focus on pricing as opposed to
  entitlement.
• Requests for detailed support of damages that are
  traceable back to the program cost records.
• Requests for the individual names of people who
  performed extra work.
• High level of interest in labor and overhead
  rates.
• Identification of contractor caused cost
  overruns.

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FINAL THOUGHTS

• Watch and learn from your customer. What has
  happened in the past will probably happen again.
• Promptly notify the customer of changes.
• Your company has an integrated work environment.
  Be aware of multiple impacts.
• Price changes in a timely fashion. The causes of
  action blur over time.
• Problem contracts only get worse if neglected.

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QUOTE OF THE DAY

• To know where to find the information and how to
  use it That is the secret of success.
• Albert Einstein

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THANK YOU

• Questions
• Comments
• More Information or a presentation copy
• phillip.kohn_at_mossadams.com