In defining a project accounting system for an organisation, the needs of both project management and the finance function have to be met. However their needs differ. By combining project and programme management techniques with financial and management accounting methods, a more holistic approach to capturing metrics is possible. Analysis of this will enable focused effort to improve project efficiency and effectiveness.
1. An Introduction to Project Accounting
John Chapman
Programme Director
Touchstone Energy
www.TouchstoneEnergy.co.uk
John.chapman@touchstone.co.uk
2. 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
3. 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
4. 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
6. 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!
9. 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
10. Bottom up and top down estimating
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
11. Bottom up and top down estimating
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
12. Bottom up and top down estimating
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
14. 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
16. 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?
17. Gathering actual data
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?
18. Gathering actual data
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?
19. 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
21. Estimate to complete & the importance of CPI
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
22. Estimate to complete & the importance of CPI
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
23. Estimate to complete & the importance of CPI
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
24. Estimate to complete & the importance of CPI
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
25. Estimate to complete & the importance of CPI
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.
26. Estimate to complete & the importance of CPI
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
27. Estimate to complete & the importance of CPI
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)
28. Estimate to complete & the importance of CPI
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)
29. Estimate to complete & the importance of CPI
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.
30. Estimate to complete & the importance of CPI
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
The Earned Value Management Maturity Model, p36
31. Estimate to complete & the importance of CPI
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
32. Estimate to complete & the importance of CPI
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.
33. Estimate to complete & the importance of CPI
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.
The Earned Value Management Maturity Model, p32
34. Estimate to complete & the importance of CPI
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
The Earned Value Management Maturity Model, p32
35. Estimate to complete & the importance of CPI
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)?
36. 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.
Estimate to complete & the importance of CPI
38. 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
39. 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
40. 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
41. 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
42. Implementing Earned Value Management
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)
43. Implementing Earned Value Management
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
44. Implementing Earned Value Management
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
45. Implementing Earned Value Management
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
46. Implementing Earned Value Management
Level 03
– Schedule Variance (SV)
– Schedule Variance %
– Schedule Performance Index (SPI)
– To Complete Performance Index (TCPI)
50. 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
51. 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
52. Thank you – Questions?
An Introduction to Project Accounting
John Chapman
Programme Director
Touchstone Energy
www.TouchstoneEnergy.co.uk
John.chapman@touchstone.co.uk