Procurement, Accounting & Financial Control

Why, What, How?

Most smaller projects get by without paying any special attention to accounting. It is common to work through the procurement and accounting section of the host department or the organisation's main financial function. In these cases, the Project Manager usually maintains basic financial information as part of the project'scontrol and reporting activities. Larger projects may need their own finance capability. Large, complex or joint-venture projects might even need a professional accountant and team to deal with the volume of work. Some joint ventures are run as entirely separate businesses requiring their own legal, financial and organisational structure. You might also use accounting software to manage the project's finances independently of the organisation's overall accounting (although appropriate data would be consolidated into the parent organisations' figures). The main financial activities of a project are:

formulating and controlling the budget, purchasing, payment and accounting for products, services, facilities, contracts, etc, tracking and reporting financial progress.

At the start of the project

Project Budget The project's budget will evolve from the project definition and benefit model work. For project management purposes, you will probably need to analyse it in further detail and with greater structure to support subsequent control and reporting. Budgets are usually set and managed for the duration of the project. In some cases you might prefer to work with a budget per stage or phase. One common problem with project budgets and accounting is that the project's duration is unlikely to match the organisation's financial year. Most organisations control budgets on an annual basis. The project needs to manage its budget over its full duration but the organisation needs to manage budgets on a cyclical basis - so you might need to manage and reconcile two sets of figures based over different time periods. In some cases it may require special processes to deal with a budget that needs to be carried over more than one financial year.

The original project budget might simply itemise the costs. For management purposes you need to know when these will occur. A typical project budget would show the various types of expenditure and which time period they are planned to fall into. This will subsequently allow you to track costs against the plan.

Budget Worksheet Most commonly, the project management team will prepare a budget in a spreadsheet format.

In this example we can see:

categories of cost, specific types of cost,

which month elements of each cost type fall into, total costs per category and type, total spend per month, overall project cost.

The costs of the project may include the cost of participants' time. There are many ways to account for time spent on the project. It can have a dramatic effect on the apparent cost of the project.

Basis No charge

Accounting For Time Description and Comments Some organisations view their employees' time as a sunk cost. They manage the use of that time rather than the cost of the time. Such logic might be applied to some or all of the project's internal resources. It is more common to see "no charge" for contributions from business unit participants than from IT staff and other project specialists.

This can significantly distort the apparent cost of the project leading to poor benefit management. Where there is no charge, it often means you will struggle to get the promised amount of time from those resources. Conversely, if you are paying a cross-charge to their business unit, their management are more likely to make their time available. Fee rates per hour A rate per hour is agreed for different resource types or individual participants. Setting a rate is easier than trying to identify all the specific costs relating to each individual. In many cases, the project manager will not be given access to individuals' pay details and might not be allowed information about average payroll costs per type of employee. The rate is likely to be derived from one of the choices below. How much the individual is paid for the given time period. This tends to understate the actual costs of that person's time. Fully loaded cost of employing the individual including such things as pensions contributions, provision of office space, apportioned HR costs, etc. The actual rates are likely to be calculated by standard uplifts on salary rather

Pay costs

Cost of service

than by individually calculating all such factors. Opportunity costs How much on average would a person like this be able to contribute to the business if they were not diverted onto the project. Cost to external How much would be charged to an external customer if customer they were to hire this employee from us. Usually choices like this are made by the organisation's financial management. The Project Manager should discuss the most appropriate approach and seek specific figures to be used for the planning and management of project costs. Make sure the approach to accounting for time and costs matches the methods used to prepare the benefit model.

At the start of each phase

At the start of each phase there will have been reviews of the overall approach and the preparation of detailed plans. There may have been changes in the timescale, for example if the phases was completed early or late. There may also have been changes in the way the team is resourced. Review the effect of these on the budget. In some cases, it might be appropriate to create a detailed budget per phase or stage.

During the project

Project costs may arise from many sources, for example:

Charges for time spent by project participants taken from the project's timesheet and time control system (based on agreed formulae for converting time into cost) Charges for time reported by other business units and participants Actual payroll costs of project participants Purchases, rentals and other direct expenditure of the project Purchases, travel, subsistence, accommodation and other expenditure incurred by individuals and re-charged to the project (via expense claims, purchase cards etc) Invoice items from sub-contractors for time and services Invoices items from sub-contractors to re-charge their costs for purchases, travel, subsistence, accommodation etc Internal cross-charges, eg use of facilities, telephone calls, printing, use of computer facilities etc Depreciation charges for capital assets such as equipment and facilities.

For each cost, you should be reviewing whether it is appropriate, justified, authorised, and in line with budget expectations. You may also need to account for taxes. In Europe, purchases usually attract VAT which should be properly recorded so that it can be reclaimed against the organisation's incoming VAT charges.

Procurement process During the life of the project you will need to procure various products, services and facilities. This may involve a selection process as discussed in the section onSub-contractor and Contract Management.

Purchase and Payment Process Even conventional purchases need procedures and controls. Below is an example of a basic purchase process. Note the controls:

must be a valid thing to buy requester must be authorised to make such a request (possibly subject to spending limits, restrictions on the type or method of expenditure, dual authorisation requirements etc) budget must be available (a running total of commitments is kept to identify the remaining budget available) delivery of the product or service is validated payment is only made if there is a three-way match between what was ordered, what was delivered, and what was billed.

There tends to be a different attitude to budgetary control between the public and private sectors. In the public sector, the budget is usually an absolute limit on expenditure as if it was an actual sum of money to be spent from your bank account. In the private sector, budgets are usually performance targets which can be overspent.
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Tracking and Reporting Financial Progress Financial data should be part of the routine project tracking and control reporting information. The project management team and project sponsors should regularly review financial progress. Costs and projected benefit should be monitored. The project should be managed actively to achieve optimum overall benefit. The basic requirement is to track and report spend against budget. Expenditure to date is compared with the project budget, typically showing such things as:

expenditure this period budget this period variance this period expenditure to date budget to date variance to date current forecast forecasted variance against overall project budget.

It is not useful to report financial data without an explanation. Where there is any significant discrepancy, the project management team should identify why it has occurred, whether it is a real problem, and what action should be taken. This information should be included in the financial reports. Management are usually over-burdened with information. It might be better to report financial information on an exception-reporting basis, ie only inform management of things significantly different to the budget or plan. Nevertheless, trend information can often illustrate the overall position. A graph showing trends will be much more useful than tables of numbers. This type of analysis is time based. It makes no allowance for the project running early or late. If the project is early it may be that we are spending money earlier than planned - so the spend against budget might look bad even though we are doing well. Conversely, if we are running late we might not have incurred some expenses by the planned date - so the spend against budget could look good even though things are going badly. One solution is to re-cast the budget from time to time as appropriate. We might show the spend against the latest budget projection as well as the comparison to the original budget. Another solution is to use "Earned Value". Earned Value "Earned Value" is a concept used to express the progress of a task or of the overall project in terms of financial value. It can give a more accurate view of the project. If I have completed half of a project worth 1,000,000 I could say I have earned 500,000. In fact, the real current value may be nothing since no benefit can be generated from a half finished system, but I could say I have earned 500,000 of its ultimate value. You can apply this logic to track the expected net benefit. More commonly, Earned Value calculations are used to track and manage the project's progress and costs. Consider this example: It is about half way through the project. Today we were supposed to have completed exactly half the deliverables. In fact we have only completed 40%. We were supposed to have spent 525,000 by now, but we've spent 675,000. The Project Manager might report an adverse progress variance of 10% and an adverse budget variance of 150,000. Our lack of progress to date means that there is more work remaining than the financial budget allowed for. In terms of being behind schedule, we can calculate that we are behind schedule by 125,000 worth of work. It has cost 275,000 more to get to where we are than it should have done. So, that budget variance of 150,000 was dangerously misleading. Take a look at that as a graph showing cost against deliverables completed (rather than the more usual plot of cost against time)...

The real cost overrun might be worse than the current Cost Variance. Remember this question from the section on Control and Reporting - what happens next A, B or C? Our Earned Value example assumed that the estimate to complete for remaining work remained unchanged. The fact that we have been overrunning to date might suggest we should reevaluate the Estimate To Complete, which would give us a different Variance At Completion.

Earned value concepts may be applied to the overall project, to individual tasks, or to any other sub-component of the project - for example, a workstream, a milestone, a phase etc. In practice, detailed planning and tracking information is held at the detailed level - by resource per task. Earned value calculations are normally made at this detailed level and consolidated upwards to produce the overall information for the project. Work done is usually calculated using the percentage complete information for each task. Multiply the actual percentage complete by the budget to calculate the budgeted cost of work performed. Multiply the planned percentage by the budget for the budgeted cost of work scheduled. This precision may not be necessary. Good information can be derived by making earned value calculations only for completed work or deliverables - provided they are small enough that you need not worry about intermediate progress. If you are only using Earned Value to track progress you might not need to worry about other costs - simply calculate the time cost elements. If you are trying to produce an accurate picture of the project's financial progress you should also add in the non-time costs.

Earned Value Terminology There are variations in the precise way practitioners apply Earned Value and in the language they use. This table summarises some common usages. Abbreviation Name ACWA Comments

Actual Cost of Work Similar to ACWP but only counting work Accomplished where a planned task, deliverable or milestone has been completed Actual Cost of Work Actual cost of work done to date Performed Actual Cost of Work Currently forecast or scheduled cost of Remaining remaining work for a task or for the overall project Actual Percentage Complete Budgeted At Completion Actual percentage of work completed for a given task (multiply by the planned task cost to calculate BCWP) The planned overall cost of a task or of the overall project (Baseline Cost)

ACWP ACWR

APC

BAC BCWA

Budgeted Cost of Similar to BCWP but only counting work Work Accomplished where a planned task, deliverable or milestone has been completed Budgeted Cost of How much the actual work done should

BCWP

Work Performed BCWR BCWS BPC Budgeted Cost of Work Remaining Budgeted Cost of Work Scheduled Budgeted Percentage Complete Cost Performance Index Earned Value Cost Variance Estimate At Completion Estimate To Complete Earned Value Cost Variance Earned Value Schedule Variance Forecast At Completion

have cost according to the original plan Originally planned cost of remaining work for a task or for the overall project How much the work scheduled to date should have cost Percentage of work which should have been completed to date for a given task (multiply by the planned task cost to calculate BCWS) BCWP / ACWP Cost efficiency of work done compared with its planned cost BCWP ACWP Difference between the planned cost of work done to the actual cost of doing it See FAC See ACWR See CV See SV Current expected overall cost of a task or of the overall project based on progress to date

CPI CV

EAC ETC EVCV EVSV FAC

SPI

Schedule BCWP / BCWS Schedule efficiency of Performance Index work done compared with work planned to date Earned Value Schedule Variance Variance At Completion BCWP BCWS Difference in value between work done and work planned to be done to date Difference between the budgeted cost (BAC) and the forecast cost (FAC)

SV

VAC

Most project managers do not use Earned Value methods - probably because it seems too complicated to understand. Another barrier is the effort. It requires detailed and accurate recording of time and other costs. These need to be analysed to create the information. Managers viewing the Earned Value reports need to be educated in their meaning. With larger projects it is probably worth the effort of using Earned Value. In some situations it is compulsory, for example, with large US Government contracts.

At the end of a phase

At the end of each phase, prepare the latest financial reports and projections. These will be used in the re-appraisal of the project's approach and the planning of the next stage. There will probably be a fair amount of work to do at this time. Contractual payments may be due. Participants may be leaving the team (make sure you have their final time information). You will also need to reconcile all the figures and controls. Check, for example, whether :

payments have been made and completed the available budget correctly reflects the commitments and payments made whether commitments match to payments whether there are any "unused" commitments that can be cancelled.

At the end of the project

At the end of the project you need to finalise the project's financial position. Make sure the final invoices have been received and paid. Make sure any regular payments or charges have been terminated or transferred to operational ownership (eg office space, telephone, etc). Agree what to do about underspent or overspent budget - it may be appropriate to transfer it to the operational budget. You may need to account for the transfer of ownership of capital assets and other property or facilities. In some cases, typically with joint ventures, the project may have been run as a financially independent business. In these cases, the winding up of the business is a major task requiring specialist accountancy and legal professionals. Prepare the final financial reports. Some of this information may be needed by the organisation's finance department and by any joint-venture partners. Make sure all appropriate financial information is properly archived in case of future disputes and for the calculation of taxes.