One of the major challenges that faces organizations that are involved in capital construction projects delivery is deteriming the actual cost value at the end of each financial period. The challenge stems from the fact that most financial systems will only recognie actual cost for work in place, delivered materials and other expenses that had been invoiced for and approved. In other words invoices that although were submitted but not yet approved as well as approved work in place and delivered materials that were not yet invoiced will not be accounted for. Therefore, using the information from the financial system for financial performance reporting can be very much misleading.
To get around this problem, organization use an “adjusted actual cost” value for reporting actual costs (AC). The adjusted actual cost uses the actual cost from the financial system, plus an estimate for outstanding invoices for work accomplished and not invoiced completed work on site and materials delivered, which are called accruals. The accruals are usually estimated by the project team who will have an understanding of the extent of completed scope of work that is not covered by the approved invoices.
To explain the extent of inaccurate financial performance reporting that could occur if the estimated accruals were wrong, will assume that this reporting will be based on the earned value method (EVM) for which financial performance will be based on the schedule performance index (SPI), cost performance index (CPI) and variance at completion (VAC).
The SPI measure will depend on the project value or Budget at Completion (BAC), the Planned Value (PV) of spending which will be available from the cost-loaded schedule and the Earned Value (EV) for work in place and procurement activities which will be based on the percent complete (%) value for each activity multiple by its Budget at Completion (BAC) value as per the project schedule. The percent complete earning rules will be usually determined and agreed on when the project’s cost-loaded baseline schedule was approved.
On the otherhand, the CPI and VAC measures depend on the Actual Cost (AC) incurred for the earned progress. Unlike PV and EV where the source is the project schedule, the AC will depends on all submitted and approved invoices, invoices submitted but not yet approved and value of approved in place and materials delivered but not invoiced. Invoices can include invoices for work in place, materials delivered and miscellaeous invoices.
The VAC will be the difference between BAC and the Estimate at Completion (EAC) which depends on the AC value plus the Estimate to Complete (ETC) which is the difference between BAC and EV. Nevertheless, the ETC could be subject to adjustment to reflect expected future performance by using the CPI and SPI measure values. In other words, the CPI and VAC values could be wrong and misleading if the estimated accrual cost for invoices submitted but not yet approved and value of approved in place and materials delivered but not invoiced was not accurate.
Using a Project Management Information System (PMIS) like PMWeb where all cost management business processes required to deliver capital construction projects and produce the earned value financial performance reporting are readily available out of the box. Assuming that the Planned Value (PV) and Earned Value (EV) will be made available using the project’s planning and scheduling software and not PMWeb, then the remaining value that will be extracted from PMWeb will be the Actual Cost (AC). The actual cost will include the actual cost of all submitted and approved interim progress and miscellanous invoices. In addition, it will include submitted interim progress and miscellanous invoices but not yet approved. Further, actual cost will include the cost of approved work in place and mateirial delivered on site but not invoiced as well as consumed labor and equipment resources hours that are included in commitment contracts.
PMWeb commitment progress invoices module will be the first business process to be used to capture the actual cost of all submitted and approved as well as submitted but not yet approved interim progress invoices. PMWeb allows detailing and linking the progress invoices line items with the project schedule activity they are associated with. The status field will determine if the invoice was approved or submitted.
For all non-commitemnt invoices, PMWeb miscellaneous invoices module will be used to capture all those submitted invoices whether they were approved or not. The items included in those invoices can also be linked to the project schedule activity they are associated with. The status field in the miscellaneous invoices module will determine if the invoice was approved or submitted.
For approved work in place and material delivered to the construction site or to designated project owner warehouses that has been approved but not yet invoiced, PMWeb production module will be used to capture those details on weekly basis. PMWeb allows to use this captured data to generate the interim progress invoice at the end of the financial period. This will expedite the preparation of the monthly interim progress invoice.
The last PMWeb module to be used in capturing actual cost will be the timesheet module. This will be used to capture the actual labor and equipment resource hours spent on the project but not included in any of the commitment contracts. The spent hours could have different pay types to allow for regular, weekend, overtime and holiday working hours. Each reported resource entry can be associated with the project schedule activity that it relates to.
If there is a requirement to capture actual cost that is not captured in any of the PMWeb modules detailed above, then PMWeb journal entery module can be used to capture those actual cost expenses. This will ensure that there is a single system to store all actual cost data regardless of what systems were originally used to capture the cost data. The journal enteries can also be integrated with the organization’s financial system in case there was a requirement to capture those non-commitment expenses from the organization’s financial system. Nevertheless, this practice should not be encourged and should be limited to the absoulte minimum.
Regardless of the PMWeb module used to capture the actual cost values, all line items of those business processes’ transactions will be automatically captured in PMWeb cost ledger. The ledger can be filtered to only display actual cost data for which it will be grouped into commitement and non-commitment actual cost, then each category by grouped by the document type which was the source for the actual cost and finally, whether this actual is approved or pending approval.
This actual cost data captured in PMWeb will provide real-time and trust-worthy data to provide single version of the truth financial performance reporting whether earned value method (EVM) was used or not. PMWeb cost worksheet module provides a quick visualization of all commitment and non-commitment actual cost data whether this was approved or pending approval. In addition, the estimate to complete (ETC) or forecast to complete values can be displayed if they were captured in PMWeb forecast module. The cost worksheet will display approved and pending approval estimate to complete (ETC) values.
The reader of the cost worksheet can drilldown to the record that was used to capture the actual cost data as well as have the option to export the data to MS Excel. Similar to all other PMWeb business processes, reports can be used to display and share the actual cost information.
Similar to all other business processes managed in PMWeb, the project team can attach all supportive documents to each cost management and timesheet business process template detailed above. It is highly recommended to add details to each attached document to better explain to the reader what is being attached and viewed. In addition, links to other relevant transactions or records of other business processes managed in PMWeb can be also added.
It is also highly recommended that all those supportive documents, regardless of their type or source, get uploaded and stored on PMWeb document management repository. PMWeb allows creating folders and subfolders to match the physical filing structure used to store hardcopies of those documents. Permission rights can be set to those folders to restrict access to only those users who have access to do so. In addition, PMWeb users can subscribe to each folder so they can be notified when new documents are uploaded or downloaded.
To enforce transparency and accountability in managing cost management and timesheet business processes, a workflow needs to be added to each template to map the submit, review and approve tasks, role or roles assigned to each task, task duration, task type and actions available for task. The workflow can be configured to include the approval authority levels as set in the Delegation of Authority (DoA) document.
When any of the cost management business processes is submitted for review and approval, the workflow tab available on the relevant 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. The captured workflow data will include the actual action data and time, done by who, action taken, comments made and whether team input was requested.
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 550 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.