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- 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
- 5. A comparative example
- 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!
- 7. A budget hierarchy
- 8. Creating a budget by deliverable
- 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
- 13. PMB Performance Measurement Baseline MR Management Reserve
- 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
- 15. Gathering actual data How will you find out The Actual Duration? The Remaining Duration?
- 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
- 20. Estimate to complete & the importance of CPI CPI is an important metric
- 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
- 37. Thoughts on Earned Value Management
- 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)
- 47. Will your numbers be accepted?
- 48. 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
- 49. 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
- 50. Thank you – Questions? An Introduction to Project Accounting John Chapman Programme Director Touchstone Energy www.TouchstoneEnergy.co.uk John.chapman@touchstone.co.uk

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