In October 2016 XYZ Electronics won an 18-month labor intensive product development contract awarded by Hamilton Industries. The award was a cost reimbursable contract with a cost target of $2.70 million and a fixed fee of 6.75 percent of the target. The contract was XYZ's first attempt at using formal project management, including a newly developed project management methodology. XYZ had won several previous contracts from Hamilton Industries, but they were all fixed-price contracts with no requirement to use formal project management with earned value reporting. The terms and conditions of this contract included the following key points: Project Management (formalized) was to be used. Earned value cost schedule reporting was a requirement. The first earned value report was due at the end of the second month's effort and monthly thereafter. There would be two technical interchange meetings, one at the end of the sixth month and another at the end of the twelfth month. Earned value reporting was new to XYZ Electronics. In order to respond to the original request for proposal (RFP), a consultant was hired to conduct a four-hour seminar on earned value management. In attendance were the project manager who was assigned to the Hamilton RFP and would manage the contract after contract award, the entire cost accounting department, and the two line managers. The cost accounting group was not happy about having to learn earned value management techniques, but they reluctantly agreed to bid on the Hamilton RFP. On previous projects with Hamilton Industries, monthly interchange meetings were held. On this contract, it seemed that Hamilton Industries believed that fewer interchange meetings would be necessary because the information necessary could just as easily be obtained through the earned value status reports. Hamilton appeared to have tremendous faith in the ability of the earned value measurement system to provide meaningful information. In the past, Hamilton had never mentioned that it was considering the possible implementation of an earned value measurement system as a requirement on all future contracts. XYZ Electronics won the contract by being the lowest bidder. During the planning phase, a work breakdown structure (WBS) was developed containing 45 work packages of which only four work packages would be occurring during the first four months of the project. XYZ Electronics designed a very simple status report for the project. The table below contains the financial data provided to Hamilton Industries at the end Work Packages A B C D of the third month. Totals at End of Month 2 ($) PV EV AC PV 38000 30000 36000 86000 17000 16000 18000 55000 26000 24000 27000 72000 Totals at End of Month 3 ($) EV AC 40000 20000 23000 86000 PV: Planned Value EV: Earned Value AC: Actual Cost 74000 81000 52000 55000 68000 73000 60000 70000 A week after sending the status report to Hamilton Industries, XYZ's project manager was asked to attend an emergency meeting requested by Hamilton's vice president for engineering, who was functioning as the project sponsor. The vice president was threatening to cancel the project because of poor performance. At the meeting, the vice president commented, "Over the past month, the cost variance overrun has increased by 78 percent from $14,000 to $25,000, and the schedule variance slippage has increased by 45 percent from $31,000 to $45,000. At these rates, we are easily looking at a 500 percent cost overrun and a schedule slippage of at least one year. We cannot afford to let this project continue at this lackluster performance rate. If we cannot develop a plan to control time and cost any better than we have in the past three months, then I will just cancel the contract now, and we will find another contractor who can perform. QUESTIONS 1. Are the vice president's comments about cost and schedule variance, correct? What information did the vice president failed to analyze? Explain (5%) 2. What additional information should have been included in the status report? (4%) 3. Does XYX Electronics understand earned value measurement? If not, provide the reasons. (4%) 4. Does Hamilton Industries understand earned value management? (3%) 5. What should the project manager from XYZ Electronics say to defend the project's performance? (4%)