An introduction to project accounting

An Introduction to Project Accounting

John Chapman

Programme Director

Touchstone Energy

www.TouchstoneEnergy.co.uk

[email protected]

http://www.touchstoneenergy.co.uk/

mailto:[email protected]

Agenda

Accountancy

Project accounting & Financial Accounting

The five key values

Creating a budget by deliverable

Profiling the budget

Gathering actual data

Estimates to complete & the importance of CPI

Implementing Earned Value Management

Questions

Project Accounting v Financial Accounting

Financial Accounting Programme & Project Accounting

Based on periods in a financial year

Start and end dates – no relation to accounting periods

Department & Cost Centre Hierarchies

Deliverable, Activity, Project, Cross Department

Comparative Reporting based on same period last year and actual versus budget

Comparative Analysis only possible if like type projects with consistent coding structure

Project Accounting v Financial Accounting

Financial Accounting Programme & Project Accounting

Directors & Managers understand Financial Accounting

Concepts such as planned value and earned value are not widely understood.

Depreciation is based on a defined policy

Costs are calculated on invoices received. Depreciation is a financial accounting function

Financial Accounting does not report on Deliverables (aka Products)

Reporting is (should be) focused on Deliverables

A comparative example

The five key numbers

1. BAC: Budget at Complete,

How much can we spend?

2. ACWP: Actual Cost of Work Performed

How much have we spent so far?

3. ETC: Estimate To Complete

What do we need to spend to finish the project?

4. EAC: Estimate At Complete, EAC = ACWP + ETC

5. VAC : Variance At Complete, VAC = BAC – EAC

Positive variance is favourable, Negative is unfavourable!

A budget hierarchy

Creating a budget by deliverable

Bottom up and top down estimating

Prepare your work breakdown structure (deliverables /

products)

We run to Level 4 Work Breakdown Structure

For each deliverable we identify

– The components e.g. design workshop, design document

preparation, structured review,

– The responsibility assignment

– The quality management method

– The estimate


The deliverable estimate

– For time do you estimate in Days or Hours

– Do you need to convert this to a financial value?

– It should be completed by project role / skill

requirement

– What are the component parts e.g. to prepare a design

To run a design workshop

To write a design document

To run a structured walkthrough


A risk assessment, if applicable, for the risk

budget for that deliverable

This gives us the bottom up estimate

We then do a top down review


And then consider

– Unknown Risks

– Management Reserve / contingency

Do you take into account Team Performance

Codes? i.e. skilled workers productivity might be

125% whilst a junior person could be 80%

Remember to baseline

PMB Performance Measurement Baseline

MR Management Reserve

Profile the budget across the Stages

• Profile the budget based on

Estimates To Complete

each Stage

• There are Stage budgets

• Risk & Contingency held as

separate budgets

Title BAC

Project Initiation £5k

Stage 01 £40k

Stage 02 £35k

Stage 03 £15k

Closure £5k

Totals £100k

Risk £5k

Contingency / MR £3k


How will you find out

The Actual Duration?

The Remaining Duration?

Gathering actual data : the fun begins

Setup your time recording system to

track by say level 3 or level 4 work

breakdown structure

Timesheet entry for some is difficult!

Will subcontractors enter timesheets?

Speak to Finance about finding out

when supplier invoices come in

Do Finance track commitments?


Try asking for an estimate to complete?

i.e. the remaining duration

What is the % complete?

25%, 50%, 70%, 85%, 90%, 91%, 92%?

Will you enter data to a time recording

system and then re-enter to Microsoft

Project?


How do you know when something is completed

100%?

Design sign off – how do you evaluate design? Use

IEEE standards

Software Installation – what is the test criteria?

Completion of User Acceptance testing – how

comprehensive were the tests?

Reporting the results

Title BAC ACWP ETC EAC VAC

Project

Initiation £5k £5k £0k £5k £0k

Stage 01 £40k £38k £0k £38k £2k

Stage 02 £35k £35k £5k £40k -£5k

Stage 03 £15k

Closure £5k

Totals £100k

Track Actual Cost of Work Performed

Work out the Estimate to Complete

Calculate the Estimate at Complete: EAC = ACWP + ETC

Calculate the Variance at Complete: VAC = BAC - EAC

Estimate to complete & the importance of CPI

CPI is an important

metric


The Cost Performance Index is

The Value for Money indicator

How much it really costs to earn one

Pound (£) of budget?

E.V.A in the UK 8, p25, Steve Wake


For example

You have agreed to run a series

of design workshops to

complete system design

The cost is £16,000 to complete

and that is the agreed budget


Did it cost £16,000 to finish this

eloquent prose?

Or was the budget exceed?

Did it take less time?

What you want to know is whether it

cost you more, the same or less to

get £16,000 of value


But what about during the

completion of this work?

What if it is 50% complete but you

have spent 60% of the budget?

The Cost Performance Index is a

metric that is used to evaluate this.


The formula is:

CPI = BCWP / ACWP

BCWP : Budgeted Cost of Work Performed

(also known as Earned Value: EV)

ACWP : Actual Cost of Work Performed

(also known as AC)

Alternative the formula is shown as:

CPI = EV / AC E.V.A in the UK 8, p25

The Earned Value Management Maturity Model, p21


Title BCWS (PV)

Design Workshop £5k

Write Design £6k

Structured Review £3k

Finalise & Sign off £2k

Planned Value (BCWS) £16k

Budgeted Cost of Work Scheduled (BCWS) is £16k

Also known as the Planned Value (PV)


Title BCWS (PV) BCWP(EV) Actual Cost

Design Workshop £5k £5k £5k

Write Design £6k £6k £7k

Structured Review £3k £3k £3k

Finalise & Sign off £2k £2k £3k

£16k £16k £18k

The work is completed, we have ‘earned’ the budget of £16k

The actual cost (ACWP or AC) is £18k

Cost performance index is calculated as:

CPI = BCWP / ACWP or CPI = EV / AC

CPI = £16k / £18k

CPI = 0.89 (not good as it is less than 1)


Thanks to CPI … and a budget that represents all the work to be done (BAC), .. it is possible to predict … how much will be spent getting there… There is common knowledge and statistical evidence showing this assumption to be valid.

The project work is as difficult as it is.

http://www.amazon.co.uk/gp/product/images/1567261809/ref=dp_image_0?ie=UTF8&n=266239&s=books


Statistical calculation of the Estimate at Complete

IEAC = BAC / CPI

Where

IEAC = Independent Estimate at Complete

BAC = Budget at Complete

CPI = Cost Performance Index

Or it can be shown as

EAC = BAC / CPI

E.V.A. In the UK 8, p79, Steve Wake



Budget at Complete: £250,000

CPI is 0.89

Independent Estimate at Complete is

£250,000 / 0.89 = £280,898

Variance at Complete is

£250,000 – £280,898 = -£30,898

We are over budget


The Variance at Complete is

-£30,898

Earlier we identified that the

design variance was -£2,000

Using the CPI we can extrapolate

the Estimate at Complete.


CPI simply reveals the efficiency with which the

project is using funds or staff hours.

CPI = EV / AC

EAC = BAC / CPI

Since this formula divides two terms with the same

unit of measure, the result is unitless.



Budget at complete: 4,500 hours

CPI : 0.89

Estimate at complete

4500 / 0.89 = 5056 hours

When to use : at the 15% project completion point



1. A quick method to enable the

calculation of the Estimate at Complete

and therefore the Variance at Complete

2. Does not involve going back through

all the bottom up analysis of data

3. A unitless metric to assess risk: is our

Budget At Complete less than our

Estimate At Complete (in hours or

money)?

4. To give us an early warning indicator

to go back to the Project Board if

required.

5. Instead of using CPI, we can go back

to burning the midnight oil to

recalculate all the figures!

6. Remember

The project work is as difficult as it is.


http://www.amazon.co.uk/gp/product/images/1567261809/ref=dp_image_0?ie=UTF8&n=266239&s=books

Thoughts on

Earned Value

Management

What is EVM?

Earned Value Management is a project

control process based on a structured

approach to planning, cost collection and

performance measurement. It facilitates the

integration of project scope, time and cost

objectives, and the establishment of a

baseline plan for performance

measurement. APM Body of Knowledge, 5th Edition

Earned Value Management NSIA / EIA Standard 748 for Earned Value Management Contains

32 System Criteria:

Group 1 : Organisation Criteria : 5

Group 2 : Planning, Schedule and Budgeting : 10

Group 3 : Accounting Criteria : 6

Group 4 : Analysis Criteria : 6

Group 5 : Revisions Criteria : 5

Earned Value Project Management, Quentin W. Fleming and Joel M Koppelman, ISBN 1930699891

Earned Value Management EVM Criterion #8

Establish and maintain a time-phased

budget baseline, at the control account

level, against which program performance

can be measured. Initial budgets

established for performance measurement

will be based on either internal

management goals or the external

customer negotiated target cost including

estimates for authorized but undefined

work

Earned Value Project Management, Quentin W. Fleming and Joel M Koppelman, ISBN 1930699891

A way of approaching

Instead of trying to achieve all these at once a proposal is to split this

into three levels representing levels of maturity

• Level 01: Focus on the financial values and project scope.

• Level 02 : Implement changes to the delivery method so the BCWP

can be calculated (i.e. how are you going to earn the value by the type

of work)

• Level 03: Track schedule variance, the SPI, TCPI and so forth

And work out what this means for your type of programme or project


Level 01

– Budget At Complete

Bottom up / top down estimating

– Estimate at Complete

Calculation of Actual Cost + Estimate to Complete

– Estimate to Complete

Bottom up / town down estimating (or CPI)

– Actual Cost of Work Performed

A method of capturing actual time and actual cost by

deliverable (aka product)


Level 01

– Variance at Complete

Calculation of Budget at Complete – Estimate at Complete

– Management reserve

Money set aside

– Performance Measurement Baseline

Profile the budget across time

– Risk budgets (Known & Unknown)

Risk assessment with budget allocation


Stage 02

– BCWS (Planned Value)

Work breakdown structure with budgets baseline set by

deliverable

– BCWP (Earned Value)

Track % complete (there are different methods) to Earn the

Value

Remember you cannot ‘Earn’ more than the budget

– Cost Variance

CV £ = BCWP – ACWP

So you must have the BCWP


Level 02

– Cost Variance %

– Cost Performance Index (CPI)

As explained earlier

– Undistributed Budget

• An assessment of how to earn the value

• How to evidence that the work is completed – the physical

completeness with a link to the QMS

• Training the project team to think in these terms.

• A method of getting this feedback during delivery


Level 03

– Schedule Variance (SV)

– Schedule Variance %

– Schedule Performance Index (SPI)

– To Complete Performance Index (TCPI)

Will your numbers be accepted?

Book References The Earned Value Management Maturity Model, Ray W Stratton, ISBN 1-56726180-9

Earned Value Project Management, 3rd Edition, Quentin W Fleming and Joel M Koppelman, ISBN 193069989-1

EVA in the UK, Steve Wake

APM Body of Knowledge, 5th Edition, Association for Project Management, ISBN 1-903494-

13-3

Interfacing Risk and Earned Value Management, Association for Project Management,

ISBN 1-903494-24-9

The Mythical Man Month and Other Essays on Software Engineering, Frederick Brooks,

ISBN 0201835959

‘Project and Programme Accounting, a practical guide for Professional Service

Organisations and IT’, John Chapman, Project Manager Today Publications, ISBN: 1-

900391-14

Earned Value Management using Microsoft Office Project, Sham Dayal, J.Ross Publishing,

ISBN 978-1-932159-98-1

Work Breakdown Structures, The Foundation for Project Management Excellence, Eric S

Norman, Shelly A Brotherton, Robert T Fried, Wiley, ISBN 978-0470-17712-9

Performance Based Earned Value, Paul J Solomon, Ralph R Young, Wiley Interscience,

ISBN 978-0-471-721888

Earned Schedule, Walter H Lipke, ISBN 0557177383

YouTube References

Touchstone Energy YouTube site http://www.youtube.com/user/TouchstoneEnergyPro

Project Accounting for Business Solutions http://youtu.be/9MllQFyXvo8

The Earned Value Management Metric CPI http://youtu.be/u4NPJh9bck8

http://www.youtube.com/user/TouchstoneEnergyPro



http://youtu.be/9MllQFyXvo8

http://youtu.be/9MllQFyXvo8

http://youtu.be/u4NPJh9bck8



Thank you – Questions?

An Introduction to Project Accounting

John Chapman

Programme Director

Touchstone Energy

www.TouchstoneEnergy.co.uk

[email protected]

http://www.touchstoneenergy.co.uk/

mailto:[email protected]

An introduction to project accounting

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