Many Real Estate Developers use the percentage of completion method to calculate the amount of revenue and therefore income that can be recognized by their businesses on long-term capital construction projects. The method is by the matching or accruals concept of accounting and ensures that the costs incurred on the project are matched to the revenues arising from that project. Those values will provide the required information for the real estate developer balance sheet.
In summary, this method calculates the percentage completion of the project by taking the ratio of costs incurred to date to the current total estimated costs at completion and applies that percentage to the estimated total revenue arising from the project. Nevertheless, for real estate developers to have a real-time single version of the truth values of their Recognized Revenue and Recognized Income, they need to digitize the different business processes required to capture the input data for those calculated values.
Depending on the quality of what to report on, the business processes needed for calculating the Recognized Revenue and Recognized Income include the project budget, budget adjustments, forecast, project schedule percent complete, revenue estimate, revenue changes, awarded contracts, change orders, interim progress invoices, and production reports. Those business processes will ensure that the values for the Estimated at Completion Cost, Actual Cost to Date, and Percentage of Completion are trustworthy, traceable, and auditable.
For example, for each financial period the Actual Cost will include all submitted and approved interim progress invoices, all submitted but not yet approved interim progress invoices, and all approved work in a place that is not yet submitted. On the other hand, the Estimated Completion Cost will include the Actual Cost plus the Estimated Cost to Complete the current approved revised project budget for the remaining scope of work. This will enable to automatically calculate the Percentage of Completion by dividing Actual Cost to Date over the Estimated at the Completion Cost. The Revenue Recognition amount will be automatically calculated by multiplying the Percentage of Completion with the Total Estimated Revenue value. The Income Recognition will be the difference between the Revenue Recognition and Actual Cost amounts.
For the Balance Sheet, the Actual Cost amount will be recognized as Debit Expenses, Income Recognized as Debit Construction in Progress (CIP), and Revenue Recognition as Credit. This will ensure a zero balance sheet. This information will be for the real-time single version of the truth Revenue and Income Recognition report.
Using a Project Management Information System (PMIS) like PMWeb, the business processes templates required to monitor, evaluate and report on the monthly Revenue and Income Recognition values are readily available out of the box. Those include the business processes for project budget, budget adjustments, forecast, revenue estimate, revenue changes, awarded contracts, change orders, interim progress invoices, and production reports.
For example, the PMWeb income contract module will be used to detail the estimated revenue of the real estate development. The contract will itemize all deliverables assets and the revenue associated with each whether this was sale revenue, lease revenue, operation revenue, or any other type of revenue valuation.
In addition, the PMWeb schedule module allows importing the updated project schedule which is usually created and maintained using Primavera P6. The project schedule activities will be assigned to their relevant project budget line items to enable automatically calculating and reporting on the Earned Value (EV) using the PMWeb forecast module.
Similar to all other managed business processes managed in PMWeb, supportive documents are usually submitted by the contractor along with each transaction submission. Details can be added to the attached documents to better explain what is being viewed. In addition, links to other relevant records of other business processes managed in PMWeb can be also linked to the cost-related business processes. Those could include for example Work Inspection Requests (WIR) that are associated with the invoiced work in place.
It is highly recommended that all those supportive documents, regardless of their type or source, get uploaded and stored on the PMWeb document management repository. PMWeb allows creating folders and subfolders to match the physical filing structure used to store hard copies of those documents.
To ensure the submit and approve dates of each cost management business process, a workflow will be used to formalize the submission, review, and approval tasks. The assigned workflow will map the submit, review and approve tasks, roles or roles assigned to each task, task duration, task type, and actions available for the task.
In addition, the workflow could be designed to include conditions to enforce the approval authority levels as defined in the Delegation of Authority (DoA) matrix. This will be required as all of the needed business processes have financial implications for which the decision to approve will depend on the roles and responsibilities of the individuals involved in those business processes.
When any of those cost management business processes are initiated, the workflow tab available on the process template will capture the planned review and approve workflow tasks for each transaction as well as the actual history of those review and approval tasks. PMWeb will capture the actual action data and time, done by who, action taken, comments made, and whether team input was requested.
The reader of the Revenue and Income Recognition report can select a specific project or period to have details of the current values of all financial figures that will impact the real estate developer’s bottom line. The report can be also designed to enable drilling down to the cost management transaction for the required data field.
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 systems to over 200 projects with a total value over the 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 on 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 Association for the Advancement of Cost Engineering (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.