Each capital construction project consists of direct and indirect cost. Direct Costs are the costs that are proportional to the project which would usually include material for products, workers, project managers. Direct Costs are also known as Variable Costs as they vary with project requirements. On the other hand, Indirect Costs: are the costs expended regardless of the size of the project. They include project management team working on multiple jobs in the office, contract supervision, tools and equipment, temporary buildings, scaffolding, personal protective equipment, quality control and inspection, bonds and Insurance, repairs and maintenance. depreciation and amortization, project finance, general expenses among others. Indirect Costs are also known as Fixed Costs and they do not vary with project requirements.
Although we tend to closely monitor and control the spending of direct costs, nevertheless, many times less attention is given to indirect costs. Similar to the risks associated with direct cost scope of work for which they can be managed or outsourced or transferred to other, indirect costs scope of work can be also managed or outsourced. In summary, similar to direct costs, indirect costs need also to be managed, monitored, controlled and reported on.
Similar to direct costs, indirect costs need to be properly estimated. The detailed cost estimate will be associated with the relevant cost breakdown structure (CBS) levels that they relate to. The approved indirect costs estimate will become the basis for establishing their budget and their budgeted spending plan. The approved estimate will be also the basis for establishing the commitment cost for each category or package of indirect cost which can either outsourced or managed by the entity. The commitment cost will also become the basis for capturing the actual money spent on indirect costs. Those actions will enable the entity to manage, monitor, control and report on indirect costs.
Using a Project Management Information System (PMIS) like PMWeb, the processes for cost management of a capital construction project should cover the processes for both direct and indirect costs. The first step to achieve this requires defining the cost breakdown structure (CBS) for the indirect cost categories as explained above.
The next step is to use PMWeb cost estimate module to estimate indirect costs. PMWeb allows creating the cost estimate by using pre-defined cost items like for example associated with the site office facilities as well as labor and equipment resources. There is also the option of importing the cost estimate from MS Excel. It is important that when estimating indirect cost to provide the quantity, unit of measure and unit price for each cost estimate line item instead of lump sum values. This will be needed when capturing the actual spending of indirect cost.
When the indirect cost estimate is approved, PMWeb allows generating a budget request or adjustment. This will be used to append the approved project baseline budget with the budget for indirect cost. This budget adjustment will be posted as original budget rather than revised budget. The budget projection option allows defining the projected budget spending line for each budget line item. It is highly recommended to link each budget line item with the relevant project schedule activity. This will be used to calculate the earned value (EV) for each budget line item for which the budget at completion (BAC) and planned value (PV) is already available.
The approved cost estimate will be used to create the commitments for the different indirect cost categories to enable capturing actual spending. In addition, it allows creating procurement packages for outsourced scope of work. For example, for bonds and insurances needed for the project, the entity might ask for proposals from different insurance copies. This will enable the entity to compare and select the best proposals to generate the commitment for that indirect cost category.
The commitments for indirect costs should itemize all items that need to be managed, monitored, controlled and reported on. For example, for the team will be managing the project, the commitment will include a line item for each resource, by name, showing the total days, weeks or months allocated to the project and the unit rate for each resource. The unit rate which will be provided by the corporate office will be inclusive of salary, all allowances, indemnities among others.
To ensure that the approved indirect cost commitments reflect the predicted total indirect cost when the project is completed, all changes whether those are approved, pending or even expected should be captured. PMWeb potential change order module can be use as early warning notification of any predicted changes to what was originally approved. If the review of the potential change order finds that the change has merit, then a change order will be generated.
PMWeb change order module will be used to capture, review and approve or reject all changes. Those changes will be initially considered as pending until they are reviewed and approved or rejected. Approved revision will be the basis for having the revised commitments by adding them to original commitments. Projected commitments will be revised commitment plus pending revisions and potential changes that are still not approved or rejected.
Since the actual spending of resources and items that were included in the commitments created for indirect cost will usually happen on daily basis, PMWeb production module allows capturing those quantities on weekly basis. Those production forms can be assigned to different individuals to ensure accurate capturing of actual data for consumed resources and items. Similar to the concept of timesheets, production sheets as generated on weekly basis from the past week production sheet.
On monthly basis, an interim payment requisition will be released to estimate the amount of commitment indirect costs actually spent during the period. The actual quantities will be automatically captured from the production forms for which the actual cost will be calculated by multiplying the actual quantities by the unit price. The actual cost could be incurred against internal entity commitments between the project team and one of the entity’s business units as well as with external entities like insurance companies, suppliers, etc. This process will continue until the project comes to a completion. Those values will be the actual cost (AC) values used in the earned value management method.
For any other indirect cost expenses occurred that was not part of original cost estimate, nor the approved budget or commitments for indirect cost, PMWeb miscellaneous invoices module will be used to capture the cost against its related cost breakdown structure (CBS) level.
Another option for capturing indirect cost that was not part of a commitment is timesheets. Entities can use PMWeb timesheet module to capture the actual cost of resources, labor and equipment, spent on the project. PMWeb allows defining regular pay, overtime pay, weekend pay and other type of hourly actual cost rates for each resource to be reported on. PMWeb timesheet module allows each resource to submit his/her timesheet each week or submit a single timesheet for all resources, labor and equipment, that each resource is responsible for. PMWeb same timesheet allows posting hours on different projects.
For each PMWeb record including those for the indirect costs, the attachment tab will be used to attach all supportive documents required for the transaction or each process. It is highly recommended that all supportive documents to be uploaded and stored on PMWeb document repository. In addition, links to other transactions for the different project management cab be added as well as links to imported MS Outlook emails.
Similarly, a workflow will be assigned to each indirect cost process to map the sequence for the review and approval tasks for each record before its status become labelled as approved. This will enable assigning the role or project team member to each review task and the duration of the task. In addition, conditions can be added to each workflow to incorporate the approval authority levels associated with the workflow.
The captured indirect cost data from the different processes detailed above will provide the needed input for managing, monitoring, controlling and reporting the indirect cost using earned value management method. The budget adjustments will provide the budget at completion (BAC) and planned value (PV). The updated project schedule values for each period will be imported to PMWeb using the schedule link. This enables the earned value (EV) for each budget line item by multiplying the budget at completion (BAC) with the linked project schedule activity percent complete value. The actual cost (AC) values will be captured from progress invoices, miscellaneous invoices and timesheets.
Those values will become the basis for calculating the earned value measures. Those include the schedule variance (SV) which is the difference between earned value (EV) and planned value (PV), cost variance (CV) which is the difference between earned value (EV) and actual cost (AC), schedule performance index (SPI) which is the division of earned value (EV) by and planned value (PV), cost performance index (CPI) which is the division of earned value (EV) by actual cost (AC), the estimate to complete (ETC) which is difference between budget at completion (BAC) and earned value (EV), estimated cost at completion (EAC) which is summing estimate to complete (ETC) and actual cost (AC), and finally the variance at completion (VAC) which the difference between budget at completion (BAC) and estimated cost at completion (EAC).
About the Author
Bassam Samman, PMP, PSP, EVP, GPM is a Senior Project Management Consultant with 40-year service record providing project management, project controls services and project management information system to over than 200 projects with a total value in excess of US $100 Billion. Those projects included Commercial, Residential, Education and Healthcare Buildings and Infrastructure, Entertainment, Hospitality and Shopping Malls, Oil and Gas Plants and Refineries, Telecommunication and Information Technology projects. He is thoroughly experienced in complete project management including project management control systems, computerized project control software, claims analysis/prevention, risk analysis/management (contingency planning), design, supervision, training and business development.
Bassam is a frequent speaker in topics relating to Project Management, Strategic Project Management and Project Management Personal Skills. Over the past 40 years he has lectured at more than 350 events and courses at different locations in the Middle East, North Africa, Europe and South America. He has written more than 300 articles on project management and project management information systems that were featured in international and regional magazines and newspapers. He is a co-founder of the Project Management Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for more than 6 years. He is a certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning and Scheduling Professional (PSP) and Earned Value Professional (EVP) from the American Association of Cost Engineers (AACE) and Green Project Management (GPM).
Bassam holds a Masters in Engineering Administration (Construction Management) with Faculty Commendation, George Washington University, Washington, D.C., USA, Bachelor in Civil Engineering – Kuwait University, Kuwait and has attended many executive management programs at Harvard Business School, Boston, USA and London Business School, London, UK.