How Can a Contractor Have a Real-Time Visualization of Projects’ Profitability?

One of the advantages of having a Project Management Information System (PMIS) like PMWeb is the ability to capture all of the projects’ cost and financial data on a single platform in a real-time format. For a Contractor who is delivering an engineering and construction project, this could mean a lot when it comes to critical decisions that not only could impact the project but the organization as an overall. This cost and financial data can be also integrated or associated with other data sources to provide the additional information that the Contractor might require to have a single version of the truth real-time visualization of projects’ profitability.

To achieve this, PMWeb PMIS will be used to capture the needed budget, budget adjustments, commitments, change orders, progress invoices, miscellaneous costs, cost of contractors’ resources, contract, contract changes and requisitions. The cost data will be captured against the cost breakdown structure (CBS) cost accounts and for each financial period during the complete project duration. Both, the cost breakdown structure and financial periods should be identical to the other accounting, human resources and ERP applications that contractor uses to capture cost data to enable to integrate or associate data from different sources when needed.

The Project Schedule and Progress Percent Complete

It is crucial that the Contractor has a single approved integrated project schedule that covers the complete project scope of work. This project schedule is usually the schedule used by the cost estimating team to estimate the project cost. This schedule will be the schedule that the Contractor will submit to the Project Owner or the authorized representative for approval. In most projects today, the integrated project schedule need to be cost loaded with the income contract values which is the contract agreement between the Project Owner and the Contractor. The schedule will be also loaded with the labor and non-labor resources needed to deliver the project’s scope of work. During the project’s delivery, the monthly progress percent complete will be the percent complete used to assess the Contractor’s monthly requisition for work in place, subcontractors and suppliers monthly progress invoice for work in place and the earned value of the project’s current approved budget.

PMWeb will import the project schedule to enable assigning the different budget, commitment and contract line items to the appropriate project’ schedule task as well as assign the actual resources hours captured in the timesheet and daily report modules. It should be the same approved project schedule to be used across all of PMWeb modules.

Managing the Project Performance Budget

Using the final approved cost estimate captured in PMWeb and for which it was the basis for the Contractor to be awarded the construction contract, the project budget will be generated to the desired level of detail where the budget will be controlled.

Each budget line item will be linked to the associated project schedule activity to determine the start and finish dates for spending the budget amount. PMWeb allows to Contractor to create the budget spending projection for each line item using the most appropriate distribution curve or any other user defined projection. This is will be needed for cash flow analysis to determine the needed funding for the project.

Any adjustments to the approved project budget whether it is for increasing or decreasing the approved budget amount or to transfer budget amounts from one cost center to another or from one project to another, the budget request form will be used. All supportive documents need to be attached to the budget request which are usually stored in PMWeb document management repository. The approval for budget requests will be in accordance for the predefined workflow steps assigned for this module. The workflow could include conditions to ensure that the required authorities and approval levels are respected.

The budget earned value for completed works will be based on the percent complete of the associated project schedule activity. The earned value will take into consideration the approved budget adjustments to the original budget, that is the revised budget. At the end of each progress period, the estimate to complete for each budget line item number will equal the projected budget at completion which is revised budget plus all pending budget adjustments minus the earned value attained for that same progress period.

Managing the Project Cost

The same approved cost estimate will be used to generate the procurement packages for the scope of work that will be outsourced by the Contractor to subcontractors, suppliers, vendors and others. PMWeb online bidding module is usually used to get the prices from those organizations to enable the Contractor to analyze the received bids and select the preferred subcontractors, suppliers and vendors.

A commitment will be created for each successful bidder which will include the agreed prices for the outsourced scope of work. The commitment agreement will include the payment terms and conditions for the approved work in place. Some Contractors might also consider having commitment contracts for their own internal business units like plant, ready-mix and others who will be involved in the project delivery.

PMWeb also allows the Contractor to project the commitments on when each line will be due for payment. This will be needed to plan for the payments due for the subcontractors and suppliers. PMWeb allows the user to distribute the commitment amount for each line item in any desired format by using the predefined distribution curves or creating customized distribution curves.

All changes to commitment agreements whether they are potential or anticipated changes, approved, pending or disputed changes will be captured in PMWeb. All supportive documents need to be attached to the change order as well as related records and emails need to be linked to the change order. The status for the change order will be changed depending on the actions taken in the workflow assigned to the change order form. A change order could have an impact on the commitment agreement value as well as performance period. It should be noted that all commitment changes need to be reflected in the project budget. Approved changed will be accounted for in the approved budget requests whereas all potential, pending and disputed changes will be accounted for in the pending budget requests.

At the end of each financial period or progress period, a progress invoice will be submitted for the approved work in place. The percent complete for each line will be the percent complete value for the associated project schedule activity. The approved progress invoice represents the actual cost incurred by the Contractor for the works completed under each commitment agreement.

For other actual cost incurred that are not part of a commitment contract, those will be captured using PMWeb miscellaneous invoices module. The details of all such expenses will be captured in the invoice form along with all supportive documents. Again, the workflow will be used to formalize the submission, review and approval of those invoices.

The cost of Contractor’s own resources, management, labor and non-labor will be captured from PMWeb timesheet module. Those are the resources that are not part of any commitment contract or miscellaneous invoices. Usually, each crew supervisor will capture the details of all labor, and if needed equipment resources, spent on the project. The pay type for reported resource hours against each schedule activity and cost breakdown structure could be regular, overtime or premium. This will help in determining the actual cost for the reported resource hours. Timesheets would usually have workflows to formalize the approval of the reported hours.

The sum of period’s work in place, miscellaneous invoices and cost of resources will represent the total actual cost incurred by the project at the end of each financial period. The estimated cost at completion will equal the sum of the actual cost to date and the estimate to complete calculated earlier in the budget section.

Managing Project Income

The contract agreement between the Project Owner and the Contractor represents the revenue or income that the contractor will earn from completing the project’s scope of work in accordance the project’s specifications, drawings and other contract documents. PMWeb contract module will capture the details of each Bill of Quantity (BoQ) line item along with the associated project schedule activity. The contract terms and conditions will also be part of this contract agreement.

All change orders regardless if they are approved, pending or disputed will be captured in the change order module. It is important to attach all documents as well as PMWeb records and imported emails that are needed to support change order submission in particular if a change could be a disputed change and part of the project’s claim submission. Workflow can be added to formalize the internal review and approval of the change order.

Monthly requisitions for work in place will be captured using PMWeb requisition module. For each line item, the same percent complete used to calculate the budget earned value and commitment progress invoice for work in place will be used to calculate the income value for the work in place for the current progress period.

Assessing the Project’s Profitability

The project’s profitability will be assessed using three different metrics. The target profit metric is based on the variance between the original awarded income contract value and approved budget to deliver the project, the current profit/loss status as of today metric is the variance between the income contract amount invoiced to data and the actual cost incurred to date, and the third metric will be the projected profit/loss at project’s completion which is the difference between projected income contract at completion (revised contract plus all pending and disputed change orders) and the forecast cost at completion.

Assessing the Resources Efficiency

One of the variable cost elements that the Contractor must measure is the efficiency of the resources used in delivering the project scope of work. The PMWeb timesheet module was used to capture the hours and associated cost for the resources deployed at the project site on weekly basis. Nevertheless, this does not show the actual hours worked by those resources in delivering the project scope of work. Those are the hours that are captured in the daily report against the project schedule activities. PMWeb daily report module will be the form used to capture those resource hours. The details of the resources’ efficiency is part of the profitability report shown above.

Third Party Data Sources

Although PMWeb has all the modules to analyze the project’s profitability, nevertheless, some Contractors might opt to use their existing enterprise applications to capture some of those costs. For example, some Contractors might have their own Human Resources and Time Attendance applications to capture the actual cost of labor resources charged to the project. Further, they might also use they ERP or accounting application to capture the actual cost of plants and equipment resources. In addition, some contractors might decide to manage commitments, approved change orders and progress invoice for work in place using their ERP application. Regardless of what application to be used, all those application must have at least the following data fields in common: Project ID, Cost Breakdown Structure (CBS) account number and financial periods. This will enable the Contractor to use data visualization tools like MS Power BI to extract, load, transfer, associate and blend this multi-source data to create the same project profitability reports.

Conclusion

Contractors who are keen on monitoring, evaluating and reporting their projects profitability need to have a real-time project management information solution like PMWeb to help capturing the actual data that could impact the project cost as soon as they occur. Even if there is a demand for having the cost control to be done at the corporate office, a PMIS will ease the reconciliation process and immediately identify variances should they exist. The particulars of anticipated, pending and disputed commitment and contract change orders are usually mainly available at the project site, failing to report their details in a timely manner could mislead executive management on the true financial status of the project. Since a PMIS like PMWeb helps in capturing all projects records and communications, the Contractor have access to valuable data that can explain the reasons behind profitability variances and other financial trends.