Practical Project Cost Control for Large Complex Projects

1. Project Value Delivery PRACTICAL COST CONTROL © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m FOR LARGE, COMPLEX PROJECTS Jeremie Averous December 2014 Version 0

2. More details about the topics of this presentation in our Cost Control Handbook An Advanced Project Management book published in Singapore! 2 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

3. Project Value Delivery Project Soft Power Unleashing Value Intercultural leadership Team effectiveness from Your Large, Complex Projects Leadership development Project Recovery Project Control and Reporting Project Startup support Advanced project training Project Health Check Support systems integration Remote sites integration Organizational maturity Advanced risk management Convergence planning We Empower Organizations T o b e R e l i a b l y S u c c e s s f u l i n Project Coaching Executing Large, Complex Projects Discover more on w w w . P r o j e c t V a l u e D e l i v e r y . c o m

4. Introduction © Project Value Delivery, 2014 3-w Dec-w 14 w . P r Page o 4 j e c t V a l u e D e l i v e r y . c o m 4 Introduction 1: Cost Control in Projects Why Cost Control is different from Accounting Interfaces with Project Control Profile & career of Cost Controllers 2: PVD Cost Control Golden Rules 3: Forecasting Principles Quantity-based Forecasting Productivity-based Forecasting 4: Reflecting forecasts in Project Reporting Sensitivities (Achievable vs Prudent) Contingency Management 5: Time-phasing of cost and Financial reporting 6: Cost Control Forensics Conclusion

5. • What is Cost Control all about? 5 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

6. What is Project Cost Control? • Something (secret) that is done by Finance • Registration of invoices from vendors and booking timesheets • Trying to figure out how to squeeze everything in the budget (anybody knows what the budget is?) • Approval of invoices to pay vendors • A back-office function that is on another floor • Etc. 6 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

7. To run like clockwork, there is a lot more to Project Cost Control than what you might think! 7 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

8. Introduction Project cost control’s purpose is to maintain an accurate forecast at a specific phase of the project, based on all the information available at the time the forecast is made. The objective is to allow proper decision-making by the Project Manager. The remit of Cost Control is thus essentially different from the usual remit of Accounting. 8 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

9. COST CONTROL BASIC DEFINITIONS AND CONCEPTS © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

10. Cost Management basic definitions Forecast Variance Budget Cost To Complete ETC Commit-ment Accruals Invoiced Amount Forecast Estimate To Complete Actual Cost 10 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

11. The Project Cost Model Project Cost Model -Breakdown Structure -time-phased -Source currencies Monthly Project Performance Report (EAC, fixed FOREX) Financial P&L Reports (POC, variable FOREX) Commitments Progress Reforecasts Management of Change Cash flow model (by currency & entity) 11 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

12. Part 1: Cost Control in Projects © Project Value Delivery, 2014 3-w Dec-w 14 w . P r Page o 1 2 j e c t V a l u e D e l i v e r y . c o m 12 Introduction 1: Cost Control in Projects Why Cost Control is different from Accounting Interfaces with Project Control Profile & career of Cost Controllers 2: PVD Cost Control Golden Rules 3: Forecasting Principles Quantity-based Forecasting Productivity-based Forecasting 4: Reflecting forecasts in Project Reporting Sensitivities (Achievable vs Prudent) Contingency Management 5: Time-phasing of cost and Financial reporting 6: Cost Control Forensics Conclusion

13. Starting a Project is like leaving on an Intercontinental journey 13 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

14. The sea make look calm but it will still get rough 14 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

15. The Three Fundamental Questions WHERE ARE WE? (ARE WE ON COURSE?) WHERE ARE WE GOING? WHAT DO WE NEED TO DO TO BE BACK ON COURSE? 15 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

16. In Manufacturing, the future is an extrapolation of the past 16 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

17. In Projects, the future needs to be re-forecast 17 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

18. Cost Control is not Accounting TWO DIFFERENT DISCIPLINES THAT NEED TO WORK TOGETHER COST CONTROL ACCOUNTING / FINANCE - Focus on the future - Understands the business - Follows commitments - Focus on project end point - Focus on the past - Same for any business - Follows invoicing and payment - Variable exchange rates - Cash flow management - Focus on reporting period end point (PoC accounting) 18 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

19. Usual failure mode observed in the field of Cost Control • The Urgent takes over the Important! Invoice processing Payments Angry vendors Cash management Financing Financial reporting Forecasting Trend analysis Identification of trends on actual commitments 19 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

20. Common “maturity’ observations when no strong Cost Management • Costs for internal resources as actual costs instead of standard rates – Extreme complication of cost tracking • Commitments are not tracked – only invoicing – Invoicing without commitments – Poor control on project bottom line because of invoicing delays • Poor consistency with project execution strategy and forecast schedule • No support to PM in scenario planning 20 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

21. The Cost Controller profile • A good Cost Controller is not necessarily someone with an accounting profile • Graduate engineers are often very successful • An excellent path towards Project Controls and Project Management roles. 21 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

22. The Cost Controller profile • Business skills: – understanding of contractual arrangements, – understanding of the project activity • Process skills: able to design, implement and improve information gathering processes, and the adequate Breakdown Structure • Technical skills: – knowledge of database basics, how to write requests and reports; – knowledge of the dedicated Cost Control tool • Leadership skills: ability to influence project parties to provide the required information at the right moment and to devise accurate cost forecasts 22 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

23. We Can Deal with Bad News, We Can’t Deal With Surprises 23 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

24. Get out of your seat to get the information 24 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

25. Where are the COMMITMENTS? 20M$ oversight over 3 months 25 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

26. INVOICES TAKE FOREVER TO ARRIVE. DON’t COUNT ON THEM TO KEEP CONTROL 26 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

27. Make sure you know where you’re going! 27 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

28. Don’t end your journey like this… and pennyless!... 28 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

29. Part 2: PVD Cost Control Golden Rules © Project Value Delivery, 2014 3-w Dec-w 14 w . P r Page o 2 9 j e c t V a l u e D e l i v e r y . c o m 29 Introduction 1: Cost Control in Projects Why Cost Control is different from Accounting Interfaces with Project Control Profile & career of Cost Controllers 2: PVD Cost Control Golden Rules 3: Forecasting Principles Quantity-based Forecasting Productivity-based Forecasting 4: Reflecting forecasts in Project Reporting Sensitivities (Achievable vs Prudent) Contingency Management 5: Time-phasing of cost and Financial reporting 6: Cost Control Forensics Conclusion

30. PVD Project Cost Control 14 Golden Rules • The main objective of Cost Management is to enable the Project Manager to take decisions based on an accurate description of the project financial situation, derived from the organization’s current knowledge and understanding of reality. 14 Golden Rules 30 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

31. Cost Control Golden Rules 1/5 • Accountability: Budget Owners are accountable for their budget (including forecast and time-phasing). PM retains ultimate accountability. Cost Control supports and challenges • Forecasting focus: The primary focus of Cost Management is accurate and realistic Forecasting along with prompt Reporting • Maintenance of the reference ‘Project Cost Model’: the basis for all financial assessments, modelling and reporting of the Company’s Forecasts and results on the Project 31 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

32. Cost Control Golden Rules 2/5 • Project Scope & Schedule consistency: Main Contract (plus any Change Orders), and latest project schedule. Includes comprehensive understanding of the Main Contract term. • No surprises: Variances should be exclusively caused by triggering events and not by internal oversights • Candidness principles: cost acknowledgment and reporting must be candid and reflect actual understanding of reality 32 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

33. Cost Control Golden Rules 3/5 • Immediacy principle: reflect significant new costs as soon as they are anticipated even if a detailed assessment is not yet available • Timeliness of reporting: produce the relevant reports on time 33 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

34. Cost Control Golden Rules 4/5 • Commitment tracking focus: Project Cost Management is responsible for ensuring that systems, processes and procedures are in place to identify and track Commitments for all Cost Allocations and categories. • Prudence principle for Estimated at Completion Forecast: includes recognizing Costs as soon as they are probable and not recognizing Revenues until they are certain • Realism principle for ‘Achievable’ Forecast: Project Cost Management reports what is realistically achievable, both with respect to final Costs and final Revenues 34 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

35. Cost Control Golden Rules 5/5 • Accuracy over precision: cost updates should be accurate but not necessarily precise • Data integrity principle: Project Cost Management ensures the integrity and consistency of the cost and Accounting data in the Project’s Forecast and Cost • Cost reconciliation principle: project cost model and accounting are compared on a monthly basis 35 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

36. Cost Control Golden Rules • Golden Rules will be explained throughout the presentation 36 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

37. Part 3: Forecasting Principles © Project Value Delivery, 2014 3-w Dec-w 14 w . P r Page o 3 7 j e c t V a l u e D e l i v e r y . c o m 37 Introduction 1: Cost Control in Projects Why Cost Control is different from Accounting Interfaces with Project Control Profile & career of Cost Controllers 2: PVD Cost Control Golden Rules 3: Forecasting Principles Quantity-based Forecasting Productivity-based Forecasting 4: Reflecting forecasts in Project Reporting Sensitivities (Achievable vs Prudent) Contingency Management 5: Time-phasing of cost and Financial reporting 6: Cost Control Forensics Conclusion

38. 38 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

40. FORECASTING FUNDAMENTALS © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

41. Should the forecast be precise or accurate? Accurate, not Precise © Project Value Delivery, 2013 Precise, not Accurate 41 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

42. • “Dead Reckoning” 42 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

43. Useful definitions External Resources (Supply-Chain) Procurement Subcontracting Purchase Order (Purchase Order) Equipment Subcontract Bulk, Standard Equipment Complicated Services 43 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

44. 2 main types of Forecasting BULK & STANDARD MATERIAL SERVICES, SUBCONTRACTS Quantity-based Remains to Commit Vs Committed Productivity based Estimate to Complete Vs Estimate at Completion 44 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

45. • What are the conditions for good forecast?? 45 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

46. Conditions for Forecast Quality • Committed Budget Owners – Each Work Package to have ONE Budget Owner – Avoid Padding of budgets by Budget Owners • Adequate communication between project parties – A good cost engineer/controller seeks information and does not remain at his/her desk • Appropriate Breakdown Structure – Relevant granularity and fit with project execution structure – No need of high level of detail • Don’t follow cost at Engineering CTR level 46 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

47. Forecast for Revenue • Recognition of Revenue in Forecast for Variation Orders follows very strict rules – No recognition when VO is not signed – Some organizations allows exceptions but: • require the highest levels of approval • Requires scope of work approval by Client • Needs to be accepted by auditors 47 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

48. BULK/ QUANTITIES FORECASTING FUNDAMENTALS © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

49. Bulk allowance management Forecasting Bulk Quantities FORECAST Net MTO ERECTED (Bill of Material) Allowance for Accuracies [Engineering] Allowance for MTO exclusions [Engineering] (maturity of MTO) Supply factor & cuts, nesting [Procurement] General Risk & Opportunity Contingency 49 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

50. Forecast for Bulk Procurement • Everything is based on the right level of allowances – Be clear on allowances + contingency – Allowance for supply/nesting is supplier and fabricator dependent! – Make sure receipt is done properly – Be clear on treatment of extra material (take-back clause, scrap etc) 50 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

51. EARNED VALUE FORECASTING FUNDAMENTALS © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

52. 12h flight 52 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

53. 53 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m = COST

54. We’ve been flying for 6 hours. We spent 50% of the fuel. Are we OK? 54 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

55. © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

56. We’ve done half the way. We spent 40% of the fuel. Are we OK? 56 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

57. Project Controls is a discipline by itself • My cost is lower than expected: what does it mean? • My physical progress is lower than expected: what does it mean? • One risk was realized: what does it mean? Earned Value Analysis 57 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

58. Budget Cost Variance (<0) Schedule Variance (>0) Time $ Earned Value Analysis: Forecasting using EVM Forecast considering Cost Performance Index AC today Forecast considering Future as in initial budget EV BC CPI= SPI= EV AC EV BC 58 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

59. What can we take from Earned Value Analysis? 2 Legs to a Sound Forecast Quality of Commitments Tracking Quality of Schedule Progress data Actual Physical Progress?? 59 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

60. Forecast Trick • Investigate quality of forecast when progress on a work package is about 20-30% – Earlier: not enough trend – Later: too late! 60 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

61. Advanced Earned Value • Take into account that productivity changes with progress! – Typically productivity diminishes when progress reaches > 80% • For good quality forecast: – pinpoint deliverables that have been completed already – measure productivity on completed deliverables to extrapolate to the rest of the project! 61 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

62. Typical example of productivity decrease in engineering Engineering productivity ~100% 0% • Example of causes: Time in project – Physical progress measurement standard optimistic – Rework on documents “AFC” (further revisions) – Review process more onerous than expected 62 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

63. Cost Management basic concepts Different configurations (right or wrong?) 63 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

64. Cost Management basic concepts Budget Commitment Invoiced EAC WRONG! Actual Cost 64 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

67. Cost Management basic concepts Budget Commitment OK BUT CAREFUL Invoiced EAC Actual Cost 67 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

68. Cost Management basic concepts Budget WRONG! Commitment Invoiced EAC Actual Cost 68 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

69. BREAKDOWN STRUCTURE ISSUES © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

70. 70 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m Design the appropriate breakdown !

71. What are the issues to take into account? • Reporting • Client requirements, • Legal entities • In-/Out-country • specific costs that are early indicators e.g. airfreight costs • Subcontracting strategy • Allowances to be split out • One WP should generally refer to one type of cost and cost follow-up method. 71 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

72. Too much detail drowns the team and removes agility Optimal Breakdown Detail Range Breakdown Structure detail Effectiveness Too little detail will not allow to grasp the project drivers 72 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

73. Project Control traps 73 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

74. Project Control traps Too much detail! Not enough time for analysis 74 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

75. KEEPING TRACK OF ALL VARIANCES © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

76. Data Integrity: Variances traceability • All Forecast Variances must be traceable – Cost control to maintain detailed (WP by WP) register of all EAC variances to allow • Auditability trail, • Keeping the history makes it easier to hand over cost control of the project to a new person if needed, • Allows to track discrepancies or budgets that would need more attention by looking in the past at all variances introduced in the cost model. • Repeated variances on a WP is an indicator of an issue to be investigated 76 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

77. WATCH FOR CONSEQUENTIAL COSTS © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

78. Watch for consequential costs! • While we have covered the different phases of a project, it is essential to always analyze if a Variance observed might not lead to other Variances: – Late engineering leading to claims and delays from suppliers – Late procurement leading to extra transportation costs (airfreight) and offshore standby – Late fabrication leading to offshore standby – Etc • Always seek the root cause and examine if no Consequential Variances! 78 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

79. Part 4: Reflecting Forecasts in Project Reporting © Project Value Delivery, 2014 3-w Dec-w 14 w . P r Page o 7 9 j e c t V a l u e D e l i v e r y . c o m 79 Introduction 1: Cost Control in Projects Why Cost Control is different from Accounting Interfaces with Project Control Profile & career of Cost Controllers 2: PVD Cost Control Golden Rules 3: Forecasting Principles Quantity-based Forecasting Productivity-based Forecasting 4: Reflecting forecasts in Project Reporting Sensitivities (Achievable vs Prudent) Contingency Management 5: Time-phasing of cost and Financial reporting 6: Cost Control Forensics Conclusion

80. EAC and ‘Achievable’ • EAC - Forecast: PRUDENT P80 • ‘Achievable’ from Sensitivity Analysis FORECAST and ‘ACHIEVABLE’ are both equally important 80 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

81. Reforecasting for Revenue Unsigned Change Order Cost EAC Cost Revenue Sensitivities 81 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

82. Forecast and Achievable Forecast Achievable Single Project Accounting Business Results Expectations 82 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

83. Reforecasting for COST When you know something is going to happen to your cost forecast, don’t wait until you have got all your cost elements to reforecast! Reforecast immediately (as soon as practicable) even if you have only an order of magnitude! 83 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

84. Sensitivities: the right order BEST ‘Achievable’ EAC - FORECAST WORST 84 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

85. FORECASTING FOR CONTINGENCY © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

86. Contingency evolution during project execution CONTINGENCY IS OWNED BY SENIOR MANAGEMENT Contingency Contingency level as released by Senior Management Time in the project The area between the two curves is in effect Management contingency Natural evolution of calculated (‘Monte Carlo’) for contingency [based on ETC] 86 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

87. Contingency: Caution • Releasing contingency to compensate for higher costs compared to the budget is not acceptable. • The engagement of the contingency ‘reserve’ is one of the ultimate responsibilities of the Project Manager • At any time it is not permissible to release contingency below the calculated contingency. 87 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

88. A BAD EXAMPLE ON A 36 MO PROJECT Contingency is used (too early) to cover cost overruns Forecast Revenue Forecast Total Cost (EAC) Forecast total Cost w/o contingency 18 months 88 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

90. $ Forecast Profit evolution during project execution Late recognition of Change Orders create a second sudden margin improvement Late release of contingency create a sudden margin improvement Project Forecast cost End of Integration/ Commissioning Time in the project Project Forecast revenue Project Contingency 90 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

91. $ Achievable profit evolution during project execution Achievable revenue Time in the project Achievable cost 91 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

92. Part 5: Time-phasing of Cost and Financial Reporing © Project Value Delivery, 2014 3-w Dec-w 14 w . P r Page o 9 2 j e c t V a l u e D e l i v e r y . c o m 92 Introduction 1: Cost Control in Projects Why Cost Control is different from Accounting Interfaces with Project Control Profile & career of Cost Controllers 2: PVD Cost Control Golden Rules 3: Forecasting Principles Quantity-based Forecasting Productivity-based Forecasting 4: Reflecting forecasts in Project Reporting Sensitivities (Achievable vs Prudent) Contingency Management 5: Time-phasing of cost and Financial reporting 6: Cost Control Forensics Conclusion

93. Forecasting and Time-Spread • Forecasting must not just address the issue of Estimate-at-Completion forecast, But also the forecast needs to be times-spread for each Work Package! ACTUALS TODAY FORECAST M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 M13 M14 WP1 0 0 0 456 56 435 657 7658 878 9769 969 969 63 242 WP2 0 0 0 0 0 5456 646 6574 7547 765 989 1324 536 5477 WP3 4235 535 536 636 47 474 5687 58 6969 979 70 721 21545 3452 WP4 44 44 44 44 44 44 55 55 77 0 0 0 0 0 WP5 75 0 0 5536 74 7657 0 0 43 6326 0 0 0 93 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

94. Why is Time-Spread important? For long projects, proper time-spread of cost & revenue is critical to the organization’s financial performance, and in particular to market anticipation (quarterly & yearly) >> SHARE PRICE OF COMPANY! 94 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

95. What is Percentage of Completion (POC) Accounting? • PoC is the method chosen to report long projects lasting over several reporting periods • PoC= Actual cost spent Total forecast cost • Recognized Profit = PoC x Total Forecast Profit 95 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

96. Cost POC and physical progress POC • Cost POC and Physical progress POC are different – Cost POC is generally lower than Physical progress POC • If there is too much of a difference between cost POC and physical progress POC, INVESTIGATE!! 96 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

97. What is PoC accounting? Revenue Cost Profit Time 97 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

98. What is PoC accounting? Recognized Profit Time Profit 98 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

99. Why should PM’s be concerned? 99 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

100. PMs and PoC accounting PM’s are supposed to focus on the ultimate performance of the project at completion However, PM you need to be aware of the effect of : The variability of the reported project result On The Company’s financial result during the execution of the Project 100 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

101. The main PoC accounting effects 101 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

102. The amplification effect PoC accounting amplifies the impact of changes in project profit forecast 102 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

103. The amplification effect Recognized Profit Time Profit EVENT 103 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

104. The amplification effect Recognized Profit Time Profit 104 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

105. The delay effect • Delay (slow progress) will impact significantly revenue recognition for a given period – significant impact on company’s forecast short term financials 105 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

106. The delay amplification effect Recognized Profit Time Profit DELAY 106 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

107. Part 6: Cost Control Forensics © Project Value Delivery, 2014 3-w Dec-w 14 w . P r Page o 1 j 07 e c t V a l u e D e l i v e r y . c o m 107 Introduction 1: Cost Control in Projects Why Cost Control is different from Accounting Interfaces with Project Control Profile & career of Cost Controllers 2: PVD Cost Control Golden Rules 3: Forecasting Principles Quantity-based Forecasting Productivity-based Forecasting 4: Reflecting forecasts in Project Reporting Sensitivities (Achievable vs Prudent) Contingency Management 5: Time-phasing of cost and Financial reporting 6: Cost Control Forensics Conclusion

109. What information? How do we make sense of it? 109 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

110. What is Project Controls? Project Controls is about building information sensors, and making sense of the information. 110 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

111. Cost Control Forensics: 3 levels of maturity • Level 1: quality of Commitments and Actuals – Actuals not Invoiced cost, comprehensive commitments, cost breakdown structure • Level 2: quality of Forecast – Consistency with project execution incl. time-phasing, allowances & contingency management, sensitivities, trends checking • Level 3: support to decision-making – Ability to run scenario analysis 111 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

112. Conclusion © Project Value Delivery, 2014 3-w Dec-w 14 w . P r Page o 1 j 12 e c t V a l u e D e l i v e r y . c o m 112 Introduction 1: Cost Control in Projects Why Cost Control is different from Accounting Interfaces with Project Control Profile & career of Cost Controllers 2: PVD Cost Control Golden Rules 3: Forecasting Principles Quantity-based Forecasting Productivity-based Forecasting 4: Reflecting forecasts in Project Reporting Sensitivities (Achievable vs Prudent) Contingency Management 5: Time-phasing of cost and Financial reporting 6: Cost Control Forensics Conclusion

113. HOW Are you taking decisions?!? 113 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

114. Is that the way you are flying? 114 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

115. Conclusion Cost Control for Large, Complex, long duration projects requires – Structure – Consistency – Discipline …shared by all the project team. Cost Control is in charge of advising the project manager and making sure that the processes run reliably Communicate with the team! Invest yourself as much as possible at the start of the project – this will decide 90% of the outcome 115 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

116. PVD Project Cost Control 14 Golden Rules • The main objective of Cost Management is to enable the Project Manager to take decisions based on an accurate description of the project financial situation, derived from the organization’s current knowledge and understanding of reality. 14 Golden Rules 116 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

117. Cost Control Golden Rules 1/5 • Accountability: Budget Owners are accountable for their budget (including forecast and time-phasing). PM retains ultimate accountability. Cost Control supports and challenges • Forecasting focus: The primary focus of Cost Management is accurate and realistic Forecasting along with prompt Reporting • Maintenance of the reference ‘Project Cost Model’: the basis for all financial assessments, modelling and reporting of the Company’s Forecasts and results on the Project 117 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

118. Cost Control Golden Rules 2/5 • Project Scope & Schedule consistency: Main Contract (plus any Change Orders), and latest project schedule. Includes comprehensive understanding of the Main Contract term. • No surprises: Variances should be exclusively caused by triggering events and not by internal oversights • Candidness principles: cost acknowledgment and reporting must be candid and reflect actual understanding of reality 118 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

119. Cost Control Golden Rules 3/5 • Immediacy principle: reflect significant new costs as soon as they are anticipated even if a detailed assessment is not yet available • Timeliness of reporting: produce the relevant reports on time 119 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

120. Cost Control Golden Rules 4/5 • Commitment tracking focus: Project Cost Management is responsible for ensuring that systems, processes and procedures are in place to identify and track Commitments for all Cost Allocations and categories. • Prudence principle for Estimated at Completion Forecast: includes recognizing Costs as soon as they are probable and not recognizing Revenues until they are certain • Realism principle for ‘Achievable’ Forecast: Project Cost Management reports what is realistically achievable, both with respect to final Costs and final Revenues 120 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

121. Cost Control Golden Rules 5/5 • Accuracy over precision: cost updates should be accurate but not necessarily precise • Data integrity principle: Project Cost Management ensures the integrity and consistency of the cost and Accounting data in the Project’s Forecast and Cost • Cost reconciliation principle: project cost model and accounting are compared on a monthly basis 121 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

122. Cost Control Golden Rules • Golden Rules have been explained throughout the presentation 122 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

123. Get out of your seat to get the information 123 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

124. Project Value Delivery THANK YOU! We Empower Organizations T o b e R e l i a b l y S u c c e s s f u l i n Executing Large, Complex Projects Discover more on w w w . P r o j e c t V a l u e D e l i v e r y . c o m

125. Project Value Delivery Project Soft Power Unleashing Value Intercultural leadership Team effectiveness from Your Large, Complex Projects Leadership development Project Recovery Project Control and Reporting Project Startup support Advanced project training Project Health Check Support systems integration Remote sites integration Organizational maturity Advanced risk management Convergence planning We Empower Organizations T o b e R e l i a b l y S u c c e s s f u l i n Project Coaching Executing Large, Complex Projects Discover more on w w w . P r o j e c t V a l u e D e l i v e r y . c o m

126. More details about the topics of this presentation in our Cost Control Handbook An other Advanced Project Management book by Project Value Delivery 126 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m

127. Project Value Delivery books Available on all e-bookshops 127 © Project Value Delivery, 2014 w w w . P r o j e c t V a l u e D e l i v e r y . c o m