An introduction to project accounting

An Introduction to Project Accounting
John Chapman
Programme Director
Touchstone Energy
www.TouchstoneEnergy.co.uk
John.chapman@touchstone.co.uk

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

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

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

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!

Creating a budget by deliverable

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

 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

 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

 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

PMB Performance Measurement Baseline
MR Management Reserve

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

Gathering actual data
How will you find out
The Actual Duration?
The Remaining Duration?

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?

 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?

 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?

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

Estimate to complete & the importance of CPI
CPI is an important
metric

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

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

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

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.

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

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)

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)

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.

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

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

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.

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.

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

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)?

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.

Thoughts on
Earned Value
Management

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

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

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

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

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)

 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

 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

 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

 Level 03
– Schedule Variance (SV)
– Schedule Variance %
– Schedule Performance Index (SPI)
– To Complete Performance Index (TCPI)

Will your numbers be accepted?

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

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

Thank you – Questions?
An Introduction to Project Accounting
John Chapman
Programme Director
Touchstone Energy
www.TouchstoneEnergy.co.uk
John.chapman@touchstone.co.uk

An introduction to project accounting

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An introduction to project accounting