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34
Contract Management | August 2009
Information
Technology
and
Aerospace
and Defense
Contractor
Managerial
Accounting
Systems
BY Scott claYton
35
Contract Management | August 2009
The impact of IT
advances on cost
management systems
in aerospace
and defense.
36
Contract Management | August 2009
InformatIon technology and aerospace and defense contractor managerIal accountIng systems
Over the past 50 years, the methods, tools,
and staffing levels employed in those func-
tions have undergone dramatic change. The
advent, introduction, and growing power
and sophistication of IT drove the change.
The IT tools for such change have included:
The ubiquitous use of personal comput- ƒ
ers throughout organizations,
The local and wide area networking of ƒ
those personal computers,
The use of general purpose spreadsheet ƒ
and word processing software, and
The development and acceptance of ƒ
special purpose applications on net-
work file servers.
Every aerospace and defense contractor has
undergone dramatic changes in the ways
they perform cost management processes.
Thirty years ago, the processes relied on
hand-completed hard-copy forms and
mainframe computer applications. Today,
general use and specialized software appli-
cations have enabled dramatically reduced
staffing levels, shortened the cycle times
of cost management system processes, and
resulted in profound improvements in error
reduction, and staff productivity.
Managerial
Accounting
“Managerial accounting” in the aerospace
and defense contractor industries consists
of synergistically connected processes. The
flow in
FIGURE 1
on page 38 is a simplified
depiction of the system and the individual
processes.
The effectiveness of each process in the
system depends on the effectiveness of its
predecessor process. When one or more
of the processes are ineffective, the entire
system suffers.
The level of commercial-off-the-shelf (COTS)
specialty software applications for these
processes varies widely from process to
process. For example, few companies have
a clearly defined organization or a system-
atic process to collect and analyze program
cost history. In the absence of demand,
few, if any, commercial software applica-
tions are designed specifically for that func-
tion. Conversely, the contract requirement
to implement earned value measurement
systems led to a number of applications
seeking to meet that need.
The level of investment in software ap-
plications varies widely from company
to company. Many companies, large and
small, try to employ general use software—
typically Microsoft Excel—for demanding
functions such as cost estimating, analysis,
and proposal pricing. Other companies have
made substantial IT investments in special-
ized software applications.
Estimating
System
Considerations
An organization’s estimating system is
defined as the “policies, procedures, and
practices for generating cost estimates
which forecast costs based on informa-
tion available”
1
It is an integral part of the
organization’s overall managerial, technical,
operations, and financial systems.
Ideally, estimates to perform projects are
founded on:
Detailed project schedules for product ƒ
development, testing, and production;
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).
38
Contract Management | August 2009
Facility capacity planning and iden- ƒ
tification of new or additional plant
requirements;
Analysis of the prospective project ƒ
in conjunction with the company’s
current backlog and other prospective
projects;
Strategic analysis in regard to market ƒ
position, sales volume, and return on
investment; and
Consistency with the company’s ƒ
accounting methods and procedures.
It may be obvious to most, but accurate
estimates of the resources required to
perform future work is a critical factor for a
company’s financial success. If the estimat-
ing system underestimates the required
resources, the organization will lose money.
If the resource estimates are too high, its
competitive position will be degraded and it
will lose business. In any event, an effective
estimating system is the foundation for pro-
posal pricing decisions and the source for the
metrics of cash flow, return on investment,
plant capacity, demand, and competition.
While IT advances have contributed to
the productivity improvements in the cost
estimating functions, additional require-
ments are imposed on large contractors
doing business with the U.S. Department of
Defense (DOD). Defense Federal Acquisition
Regulation Supplement (DFARS) 215.407-5
and 252.215-7002 require large contractors
to have an “acceptable” estimating system
and charges the Defense Contract Audit
Agency (DCAA) to audit and provide opinions
to contracting officers on the adequacy of
those systems.
However, different industries, different
companies in the same industry, and even
different tasks within a proposal use differ-
ent means to prepare estimates. The four
most commonly used methods include:
Round table, ƒ
Comparison, ƒ
Detailed, and ƒ
Parametric. ƒ
2
Round Table Estimating
This type of cost estimating involves the
interaction of functional groups such as
engineering, manufacturing, purchasing,
quality, and project management. Based
on experience and product knowledge, the
representatives develop estimates as a
group exercise. This method of estimating
has the advantages of speed and low cost
and the disadvantages of inconsistency, ir-
reproducibility, and subjectivity. Often, the
estimates are developed without the benefit
of detailed drawings, bills of material, or
performance specifications. Changes in IT
have had little impact on round table esti-
mating beyond storage media and flow.
Estimating By Comparison
“Comparison estimating” usually involves an
analyst, or estimator, acting on behalf of
the functional departments. A known prod-
uct is selected as the baseline for developing
estimates of the product under consider-
ation. Based on analysis of the new product
in comparison with the known product,
elements of material and labor are added or
subtracted from the baseline to produce the
estimate. This method is used where end
items or processes are sufficiently similar
within a given product line to enable valid
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.
Detailed Estimating
“Detailed estimating” involves thor-
ough, detailed analyses of all the inputs
required to produce the product. Labor,
materials, special tooling and equipment,
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
require drawings, bills of material, specifi-
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-
InformatIon technology and aerospace and defense contractor managerIal accountIng systems
Managerial
Accounting
System
Cost Control
and Earned
Value
Pricing
Proposal
Cost
History
Cost
Estimating
FIGURE 1
39
ness base, and forward pricing rates. Ad-
ditional elements include labor efficiency,
labor learning, line loss, production
setup, and knock-down, rework, warranty
and material scrap, waste, spoilage, and
destructive testing.
Publication of detailed cost data books by
RSMeans, Richardson, and others for the
commercial architecture, engineering, and
construction industry predates the advances
in IT. Those voluminous annual publications
contain extensive and wide-ranging labor,
equipment, and material cost estimate
data for the construction segments and me-
chanical, electrical, and process equipment.
These immense collections of data were ripe
for automation and a number of sophis-
ticated cost estimating applications are
available for those disciplines. The absence
of similar aerospace and defense industry
cost data publications left companies to
develop in-house estimates, applications,
and processes.
Parametric Estimating
“Parametric cost estimating” involves the
extrapolation of analogous historical
relationships to estimate the resources re-
quired to produce new products or services.
These “cost models” may be simple ratios,
known as “cost estimating relationships,”
or complex multivariate input applications
based on software vendor- and government-
funded manufacturing and programming
cost research.
Cost estimating relationships are used
for a wide variety of resource forecasting
tasks. Examples include line supervision
labor as a percentage of touch labor, design
engineering labor per drawing, print shop
service center costs as a percentage of total
cost, travel cost as a percentage of salaried
labor cost, or freight-in cost as a percentage
of raw materials cost. At the other end of
the parametric cost estimating spectrum
are sophisticated mathematical analyses
that “employ equations that describe
relationships between cost, schedule, and
measurable attributes of systems, hardware,
and software. The equations describe how
a product’s physical, performance, and
programmatic characteristics affect its cost
and schedule.”
3

The advantages of parametric cost esti-
mating techniques are speed, reproduc-
ibility, and objectivity. The disadvantages
are management acceptance of “black
box” numbers and that the nature of the
systems’ output does not support the
downstream business system (i.e., it’s
hard to use a parametric cost estimate as
a high-level performance measurement
baseline).
Combination of Procedures
Many companies use a combination of the
four basic types of cost estimating depend-
ing on needs and timing of the project, to
be estimated. For example, in the concept
definition phase of a project industrial
parametric cost estimating models provide
quick, inexpensive, order of magnitude cost
estimates. As the program matures, and
InformatIon technology and aerospace and defense contractor managerIal accountIng systems
Contract Management | August 2009
40
Contract Management | August 2009
InformatIon technology and aerospace and defense contractor managerIal accountIng systems
an estimate to complete is required, more
detailed cost estimating practices are used.
Proposal
Pricing System
Considerations
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.
Many companies rely on in-house–
developed spreadsheets and general use
database applications to perform proposal
pricing. COTS specialty applications to per-
form proposal pricing have been available
for more than 25 years. Initially, those
applications were mainframe hierarchi-
cal database applications such as Boeing
Computer Services’ “Executive Informa-
tion System—Proposal Pricing System.”
In-house–developed mainframe applica-
tions were developed in the 1970s. These
systems were later applications ran on
networked personal computers and relied
on proprietary databases, such as Microf-
rame’s “Award.” Modern proposal pricing
software applications require powerful
personal computers, are browser-enabled,
and rely on powerful network file servers
operating open-architecture relational
databases, such as Executive Business
Services’ “ProPricer” and Mainstay Corpo-
ration’s “PPAS” installed on Oracle or SQL
server databases.
A few of the functional requirements for
proposal pricing software include:
Summarizing, analyzing, and reporting ƒ
data in work breakdown structures;
Applying indirect rates and factors to ƒ
direct cost elements;
Handling monthly time-spread data; ƒ
Automatically calculating cost estimat- ƒ
ing relationships, such as freight-in and
touch labor supervision;
Having a tool set of utilities to factor, ƒ
substitute, and time-slip data;
Managing indented bills of materi- ƒ
als; and
Integrating and/or interfacing with ƒ
other business management systems
through import/export or direct access
of data files.
Project Cost
Management
Considerations
In the early 1970s, most aerospace and
defense contractors with the contractual
requirement to comply with the cost/sched-
ule control system criteria (C/SCSC) em-
ployed large numbers of cost and schedule
analysts to support cost account managers.
Those analysts relied primarily on in-house–
developed software running on mainframe
computer systems. Input was often pro-
vided from keypunch cards, and the output
was paper “tab runs” several feet thick.
With mixed results, several software
vendors developed mainframe applications
that attempted to address the aerospace
and defense requirements for earned value
program management. In the late 1970s to
mid 1980s, Welcom, Microframe, Artemis,
Primavera, and other companies introduced
project scheduling and earned value pro-
gram management software applications
for mainframe and personal computers. As
network, personal computer, and program-
ming software technology advances were
introduced, the migration from in-house
developed mainframe applications to COTS
client-server applications to COTS client-
server applications accelerated.
In December 1996, Under Secretary of
Defense for Acquisition and Technology
Dr. Paul Kaminski signed a policy memo-
randum which replaced the 35 DOD C/
SCSC with 32 earned value management
system (EVMS) guidelines. The change in
DOD’s attitude was as important as the
changes in the text. In the 1980s, industry
complained that the C/SCSC had become
an end in itself, rather than a means to the
end of effective program cost and schedule
management.
4
With the change came the following results:
Government and industry reconciled ƒ
their program management practices,
The number and cost of contractor ƒ
system demonstrations and subsequent
application reviews that were previously
required on every major new contract
were dramatically reduced, and
41
InformatIon technology and aerospace and defense contractor managerIal accountIng systems
The number and variability of project ƒ
cost control system software applica-
tions increased.
Conclusion
The combination of changing government
regulation of contractor management
systems and the implementation of dramati-
cally improved software applications run-
ning on greatly advanced and less expensive
hardware resulted in substantial improve-
ments in cost analysis staff productivity by
aerospace and defense contractors.
5
Today,
a much smaller aerospace and defense cost
analyst workforce satisfies more require-
ments in less time with more accuracy at a
lower cost.
Software Applications for
Estimating System Processes
The following list provide the company
name, Web site, and a brief description of
software vendors servicing the aerospace
and defense industries with estimating,
earned value, scheduling, cost control, and
proposal pricing software. The list is not
comprehensive nor does inclusion imply
endorsement.
“Software Applications for Estimating ƒ
System Processes for the Aerospace
and Defense Industry” (Advanced Man-
agement Solutions, www.amsrealtime.
com)—integrated project, cost, and
resource management software for PC,
Unix, and Mac.
“PMWorks Cost Management” (Ap- ƒ
plied Integration Management (AIM),
www.aim-pmcs.com)—a software
product that gives decision-makers
the information they need for ac-
curate decision-making: managers
can improve project performance by
accurately tracking costs, identify-
ing cost drivers and improvement
opportunities, and integrating with
and enhancing planning/scheduling
systems.
“Artemis” ( ƒ www.artemispm.com)—
multi-user, multi-platform enterprise
application for managing time, resourc-
es, schedules, and costs in support of
earned value.
“Business Engine” (Business Engine ƒ
Software Corp., www.microframe.
com)—resource optimization applica-
tion for project-driven enterprises.
Calypso Software Systems ( ƒ www.ca-
lypsosoftware.com)—software to help
government contractors and agencies
obtain the full benefit of performance
measurement environments by improv-
ing the quality of variance analysis
assessments.
“Cost Manager” ( ƒ http://costmanager.
scitor.com)—application that can
post your financial data directly to the
Web for your organization to see. Cost
Manager can create work authorization
documents, variance analysis reporting,
and many other types of online report-
Contract Management | August 2009
42
Contract Management | August 2009
InformatIon technology and aerospace and defense contractor managerIal accountIng systems
ing. Cost Manager has no license fees
for government contracts.
“EZ-Quant” (DCAA, ƒ www.dcaa.mil/
ezquant.htm)—free of charge, EZ-
Quant performs simple and multiple
least squares linear regression analysis,
statistical sampling, and improvement
(learning) curve calculations.
Dekker Ltd. ( ƒ http://dtrakker.com)—
a resource for tools for scheduling,
budgeting, EVM, activity-based cost
management, risk analysis, and Web-
based collaboration.
Deltek Systems Inc. ( ƒ www.deltek.
com)—a provider of enterprise
management software for project-
focused organizations, Deltek’s
applications include full function ac-
counting, project management, hu-
man resources, time and attendance,
payroll, project revenue recognition,
project costing and control, and
project billing.
“Project Data Quick Tool” (PDQTool) ƒ
(Dynetics, Inc., www.dynetics.com)—a
software product that facilitates evalu-
ation of scheduling and earned value
snapshots that solves the schedule and
earned values problems of rapid com-
parison of reporting period-to-reporting
period data snapshots, and providing
one file that contains historical data for
future reference.
“ProPricer” (Executive Business Services, ƒ
www.propricer.com)—a COTS solution
for proposal pricing, cost analysis, and
source selection.
“Journyx Timesheet” (Journyx, ƒ www.
journyx.com)—allows you to track
time and expenses for project manage-
ment and project billing from any loca-
tion via the Internet, runs on multiple
platforms and integrates easily with
existing project management pro-
grams, and includes an optional audit
trail. It is enterprise ready and is free
for up to 10 users.
“SEER” estimation tools (Galorath Inc., ƒ
www.galorath.com)—estimation tools
that derive cost, schedule, and staffing
estimates by assessing the impact of
product, organizational, and operation-
al variables using parametric methodol-
ogy coupled with knowledge bases.
“Milestones Professional 2000” (KIDASA ƒ
Software Inc., www.kidasa.com)—an
easy to use tool that produces presen-
tation-ready milestone schedules with
integrated cost data.
Kildrummy Technologies Ltd. ( ƒ www.
kildrummy.com)—designed, developed,
and supported by project professionals,
Kildrummy® solutions are used in over
40 countries in every continent across
the globe to manage projects worth
over $100 billion.
Mainstay Corporation ( ƒ www.mainstay.
com)—provides a family of proposal
products including PPAS, STAR, and
ParaModel. Each functional module
can operate by itself or as an integrat-
ed part of the family.
“HeavyBid,” “HeavyJob,” “The Dis- ƒ
patcher,” “Bidhistory,” and “FuelerPlus”
(HCSS Construction Software Solutions,
www.hcss.com)—software applications
to support infrastructure contractors.
Integrated Management Concepts ƒ
(www.intgconcepts.com)—produces
project control products for pricing, es-
timating, “what-ifs,” proposals, earned
value analysis, and reporting.
MicroPlanning International ( ƒ www.
mpi.com.au)—an Australian company
with strong scheduling and earned
value tools for multiple platforms.
Mincom ( ƒ www.mincom.com)—designs
and delivers total enterprise appli-
cations solutions for capital asset-
dependent companies in the utilities,
transportation, mining, oil, and gas
industries, as well as the government
and defense industries.
“Planisware OPX2” ( ƒ www.planisware.
com)—enterprisewide project control,
cost and earned value, schedule, re-
sources, and consolidations.
“E-Business Suite,” “PeopleSoft,” and ƒ
“JD Edwards” application suites (Oracle,
www.oracle.com)—integrated and scal-
able full function accounting, human
resources, supply chain management,
and project contracts application suites.
PRICE Systems ( ƒ www.pricesystems.
com)—a global software licensing
and professional services business
providing Fortune 1000 companies
with enterprise cost management and
analysis solutions.
Primavera Systems ( ƒ www.primavera.
com)—provider of enterprise software
solutions for earned value project
management that support planning,
scheduling, time reporting, portfolio
management, earned value manage-
ment, and complex cost management.
“Project Control Software” (Project ƒ
Control Software, www.projcontrol.
com)—a multi-user, multiple project
management system that integrates
with the accounting system and allows
organizations to consolidate their Mi-
crosoft Project and/or Primavera files
and do timesheets, resource workloads
and management, multiple project
reports, and earned value.
“Rational Concepts,” “I-Schedule,” “I- ƒ
Cost,” “Proj-Net,” and “Proposal-Net”
(Rational Concepts, www.rationalcon-
cepts.com)—Web-based project man-
agement software, including multi-
project critical path schedulers, EVMS
solutions, enterprise repositories and
project evaluation and analysis tools,
and proposal and basis of estimates
management systems.
Relevant Business Systems Inc. ( ƒ www.
relevant.com)—develops and markets
enterprise software for manufacturers
who use a work breakdown structure
and require earned value management.
43
Contract Management | August 2009
InformatIon technology and aerospace and defense contractor managerIal accountIng systems
“Risktrak” (Risk Services & Technology, ƒ
www.risktrak.com)—network-based
tool for integrated management of
cost, schedule, and technical risk.
Sage Timerline ( ƒ www.sagenorthamer-
ica.com)—supports accounting, opera-
tions, customer management, human
resources, time tracking, merchant
services, and the specialized needs of
the construction, distribution, health-
care, manufacturing, nonprofit, and
real estate industries.
SAP Solutions ( ƒ www.sap.com)—pro-
vides a comprehensive range of enter-
prise software applications, including
full function accounting, supply chain
management, and enterprise resource
planning systems that integrate cost,
schedule, and technical performance.
SPAR Associates Inc. ( ƒ www.sparusa.
com)—marketer of software and
services for earned value management
that integrate cost estimating with
contract cost and schedule perfor-
mance measurement reporting.
Super Tech ( ƒ www.suptec.com.au)—
specialists in computer-based project
management systems and technology,
providing a wide variety of services,
including project management
consulting, planning and scheduling,
cost estimating and control, project
management education, and project
management software and support.
VitalThought ( ƒ www.vitalthought.
com)—a full-service provider of project
management consulting, training and
software.
WinEstimator Inc. ( ƒ www.winest.com)—
an internationally recognized construc-
tion estimating software solution
provider providing a family of powerful,
integrated, and flexible estimating and
bidding software solutions.
CM
About the Author
SCOTT CLAYTON, CPCM, is a consultant
with Executive Business Services Inc. in
Sandy, Utah. He is a member of the Great Salt
Lake Chapter of NCMA. He can be contacted
at SClayton@ProPricer.com.
endnotes
DCAA Contract Audit Manual1. , 5-1201.1, Defense
Contract Audit Agency (DCAA) (January 2004).
Paul R. McDonald, 2. Financial Management and
Pricing of Government Contracts and Subcon-
tracts, Volume 1 (Procurement Associates, Inc.,
1986).
International Society of Parametric Analysts, 3.
accessed at www.ispa-cost.org/newispa.htm.
The 1996 guidelines were issued by Aerospace 4.
Industries Association, the Electronic Indus-
tries Association, the National Security Indus-
trial Association, the American Shipbuilding
Association, and the Shipbuilders Council of
America.
Although relevant industry data could not be 5.
found for this article, it appears clear that the
number of program cost and schedule analysts
employed today in the aerospace and defense
industries is much less than 20 years ago.