Regardless of the project investment that an organization has decided to invest in, there are best practices that had been identified by professional bodies to be implemented to reduce the risk of project cost overrun. From the project owner perspective, cost overrun means that the investment will have a lower return on investment and a longer period to recover this investment. From a contractor perspective, cost overrun means a direct loss that could impact the contractor’s cashflow and operation. Sometimes, the cost overrun could be very severe and could impact the organization’s ability to stay in business.
Project Management Information Systems (PMIS) like PMWeb has enabled those projects centric organization in implementing integrated project financial management at the project level to ensure that every-day events and activities that could impact the project’s financial status are captured, analyzed and reported on. A PMIS will eliminate the bad practices of using MS Excel to log project’s data not only with a practice that lacks transparency, accountability and real-time reporting but that creates data silos that prohibits having a single version of the truth on the project’s financial status.
This article details how a Project Management Information System (PMIS) like PMWeb can be used to enforce the best practices of project financial management using ready-to-use out-of-the-box templates. Of course, there is always the option of adding new process using the custom form builder. Nevertheless, all those ready to user or custom forms have access to the document management repository to attach all supportive documents as well as the option of having a workflow to formalize the process for capturing, submitting, reviewing, analyzing and approving the different financial management processes.
Setting Up the Project Financial Management
To be able to have an integrated project financial system that can applied on a single project or projects across the enterprise, we need to define two important documents. The first is the Cost Breakdown Structure (CBS) or Cost Control Accounts (CA) while the second is the financial periods which are the same financial periods used at the corporate office to report the organization’s financial health.
The Cost Breakdown Structure (CBS) represents that control level that the organization wants to exert on their project’s financial performance. Similar to the Work Breakdown Structure (WBS), the CBS included multiple levels to decompose the project scope and associated cost. It is highly recommended that organizations adopt the same CBS across all projects or at the least the first 3 to 4 high levels and then use lower levels to decompose the project scope further.
In addition, it is important to have standard financial periods across all projects managed in the PMIS that are aligned with other corporate financial systems that are used to capture other cost data that could have an impact on the project’s financial status.
Project Cost Estimates
Regardless of the project size or type, every project should have an estimate of the costs associated in delivering the scope of work as defined in the Work Breakdown Structure (WBS) and project schedule. The cost estimate will quantity the resources, manpower and others, that are needed to deliver the project scope of work. Some organizations might use their own advanced cost estimating systems to come with those cost estimates, others might use MS Excel while others might use the PMIS like PMWeb to come with this cost estimate. The most important of all, is that the cost estimate must be reviewed and analyzed before it can be improved as the project cost estimate. Further, all supportive documents such as drawings, specifications, bill of quantities among others need to be attached to the cost estimate to ensure that the basis of the cost estimate are documented and available for review whenever it is needed. In addition, all cost estimate versions need to be maintained.
Managing the Project Approved Budget
When the cost estimate is formally reviewed and approved, the organization can them proceed and generate the project budget from the cost estimate. The project budget will include in addition to the cost estimate the other costs of risk contingency, management reserve, funding and financing cost, corporate overhead contribution, profit allowance, price of the land in the case of a project owner among others. All versions of the project budget need to be maintained although only one budget version can be labelled as an approved budget.
An important aspect of every project budget is the spending plan for the budget against the project’s financial periods to enable the organization to allocate those funds when needed. The planned budget value or as sometimes known as the budget cost of work scheduled needs to be aligned with the approved project schedule that will detail the start and finish dates of the project’s cost accounts. The distribution of the budget over those periods can be linear, front loaded, back loaded or any other desired distribution.
All changes to the approved project budget need to be managed in a governed format. Budget changes could result in increasing or decreasing the budget as well as in transferring funds from one cost center to another within the same project or to other projects that are being managed by the organization. Workflows need to be assigned to those budget changes to ensure that the necessary approvals are secured before this change can take place.
This will provide the organization with a single report that provides real-time status of the project budget performance that is based on the real-time data captured in the project budget and budget request modules. The layout and format of this report can be designed in any desired format to provide the needed information and knowledge for the project’s team member.
Determining the Desired Project Revenue
Now the organization needs to verify the project’s expected revenue or income will justify the project investment as detailed in the approved project budget. For a project owner, the revenue will be generated from selling the completed products of the project whereas for the contractor, the revenue will be the bid price that will be assigned to each item in the Bill of Quantity or Schedule of Values. Similar to all other out-of-the-box modules of PMWeb, the Contract or Revenue module of PMWeb will be used to capture the details of the expected revenue along with all supportive documents. In addition, a workflow can be assigned to the contract to formalize the review, analysis and approval of the document. All payment terms and conditions including provisions for taxes and other adjustments will be captured and become part of the agreement.
All changes to approved contract will be captured in the change order module to detail why this change has occurred, who has requested this change and by whom it was approved. All supportive documents will be attached to the change record similar to other PMWeb records.
The actual earned revenue for which in the case of the contractor this will be the monthly progress invoice submitted for approved work in place and materials on site whereas for the project owner this will be the actual sales or lease of project’s completed products. Workflows can assigned to enforce transparency and accountability in submitting, reviewing and approving those records in accordance with the project’s responsibility assignment matrix.
With the project budget and revenue captured on the same PMWeb platform, the organization can run different business intelligence reports to analyze the attractiveness of the project investment and the recovery of the investment.
Committing Actual Project Costs
Up to this point, the organization still did not commit to start spending the approved project budget. For the project owner, this will commence when the successful contractors, consultants, vendors among others are awarded their relevant contracts. Similarly, for the contractor the spending will commence when the contractor starts deploying the resources, awarding subcontract and material supply agreements among others. Of course, there are other expenses that could be incurred by project owners and contractors from sources other than the signed contract agreements like permits and other expenses. Those commitments are the awarded contracts that the organization has selected from the different offers received either using online bidding or the traditional approach of physical bid submissions.
The commitment contract will include the details of the bill of quantity or schedule of values line items. It will also include the contract agreement terms and conditions such as retention, advance payment, taxes among others.
Similar the project budget, the organization needs to ensure that the anticipated commitment spending is aligned with the approved budget spending otherwise there were will be either a shortfall in making payments for approved work in place or funds sitting idle that could deprive using it on other projects that is more needed. The distribution needs to be aligned with the project approved schedule and the method those funds will be spent.
With this additional project’s data becoming available, more reports can be generated to report on the commercial and technical analysis of the different bids received by the organization, comparing planned budget spending with anticipated commitment spending among many others. The Business Intelligence (BI) reports depends on what matters most for an organization or a project team member when it comes to having the needed information and knowledge to manage the project’s financial performance.
Managing Project Changes
No project will ever be delivered without a change that could be attributed to many reasons. Most of those changes could have an impact on the project cost and schedule for which an adjustment to the contract would be needed. Depending on the organization’s change management practices, different processes could be needed to manage those changes. Nevertheless, the minimum change management processes that an organization need to adopt at the processes of Anticipated Changes or Anticipated Variations and Change Orders or Variation Orders.
Similar to other PMWeb processes, PMWeb anticipated variation and variation order will be used to manage all changes that could affect the project. They will be used to capture the cost and schedule impact of each change. All supportive documents will be attached to those records and workflows will be used to formalize the submission, review, analyze and approve or reject those changes. In addition, other PMWeb records like Request for Information, Occurrence Report, Daily Report, Meeting Minutes among others need to be linked to the change order.
Tabular and graphical reports will be created to analyze the impact of changes on the project’s financial status as well as to analyze reasons for those changes and growth trends. Since the project’s data from other processes are all on the PMWeb platform, the organization can perform analysis to identify if there is correlation or trend worth to consider and study for why changes happened on their projects.
Managing Project Actual Cost
The actual cost will be incurred from progress invoices made against approved work in place and material on site for each awarded contract. Those invoices will usually be submitted at the end of each project financial period. Those invoices will be subject formal review and analysis before they are approved for payment. PMWeb progress invoice module will be used to capture this data.
In addition, actual cost could also result from miscellaneous invoices for permits, transportation, facilities, lease of warehouses among many others. All those expenses will be captured using PMWeb miscellaneous invoices module. In addition, actual cost could result from the organization’ own resources spent on the project which are captured using PMWeb timesheet module. Those resources could be manpower, equipment among others. The timesheet module allows specifying if those hours were spent during normal working hours, overtime or over weekends.
With the actual cost data being captured along with the planned cost, the organization can run meaningful and trust worthy project financial performance reporting using the best practice of Earned Value Management. Cost and Schedule Variance metrics and Cost and Schedule Performance Indices will be used to provide real-time single version of the truth status of the project financial performance.
Consolidating the Project Financial Performance
PMWeb cost ledger captures the details of the different financial-related transactions listed above in a single table to allow the organization to present this consolidated information in any desired format using the Cost Worksheet. This module which looks like a MS Excel spreadsheet, but it is not, allows the organization to select the cost data fields to be displayed, add new fields along with formulas to calculate the value of those new fields, filter reported data by status (approved or pending) and time periods that are related to. The organization can create different layouts to fulfill the different reporting needs but with the content all based on the real-time data captured in PMWeb by the different financial management processes. Those cost worksheets can be saved as MS Excel file if needed.
The same data will also be available to graphical reports that will summarize the project’s financial status and provide the organization with a visualization of how the project is performing from a financial perspective. The layout and content could vary from one organization to another but they are all based on the real-time data captured in PMWeb.
Of course, this financial performance data will become part of the overall project performance reporting which could provide performance details of project schedule, risk, issues, safety, quality, document management among many others.
Since PMWeb is an enterprise solution that allows capturing the performance of the complete projects portfolio of an organization, the data captured for each project will become part of the projects portfolio performance dashboard for which the organization’s executives and top management will use to understand how their projects are performing. PMWeb dashboard drilldown approach allows those executives to drilldown to the project dashboard, then to the financial status dashboard then to the specific financial data log, for example the variations log, and then drilldown to the specific variation order record to review including who was involved in the approval or rejection process as well as review all attached documents, linked other related PMWeb records and imported email communications that have influenced this change order record.
In conclusion, no projects centric organization can afford not having an integrated project financial system. Organizations who continue to use MS Excel to log those records are not only losing the real-time aspect of reporting information but increasing the high risk or wrong or incomplete data capturing as well as promote the lack of transparency and accountability in reporting the project’s financial status. Those organizations will store their valuable financial data in data silos that will take effort to compile and consolidate at a project level as well as at enterprise level.
The financial data captured in PMWeb will provide the organization with real-time single version of the truth on the project’s financial status. For those organization who use ERP and other accounting systems to capture some of the data captured in PMWeb, can either integrate PMWeb with their ERP application or simply extract, associate and blend the data from both PMWeb and ERP application to reconcile and report on the project’s financial status.