12. Cost Control, Monitoring and Accounting - Carnegie ...

The Project Budget GoUptoTableofContents GoToChapter11 (AdvancedSchedulingTechniques) GoToChapter13 (QualityControlandSafetyDuringConstruction) CostControl,MonitoringandAccounting    TheCostControlProblem    TheProjectBudget    ForecastingforActivityCostControl    FinancialAccountingSystemsandCostAccounts    ControlofProjectCashFlows    ScheduleControl    ScheduleandBudgetUpdates    RelatingCostandScheduleInformation    References    Problems    Footnotes 12.CostControl,MonitoringandAccounting 12.1TheCostControlProblem Duringtheexecutionofaproject,proceduresforprojectcontrolandrecordkeeping becomeindispensabletoolstomanagersandotherparticipantsintheconstructionprocess. Thesetoolsservethedualpurposeofrecordingthefinancialtransactionsthatoccuras wellasgivingmanagersanindicationoftheprogressandproblemsassociatedwitha project.Theproblemsofprojectcontrolareaptlysummedupinanolddefinitionofa projectas"anycollectionofvaguelyrelatedactivitiesthatareninetypercent complete,overbudgetandlate."[1] Thetaskofprojectcontrolsystemsistogiveafair indicationoftheexistenceandtheextentofsuchproblems. Inthischapter,weconsidertheproblemsassociatedwithresourceutilization, accounting,monitoringandcontrolduringaproject.Inthisdiscussion,weemphasizethe projectmanagementusesofaccountinginformation.Interpretationofprojectaccountsis generallynotstraightforwarduntilaprojectiscompleted,andthenitistoolateto influenceprojectmanagement.Evenaftercompletionofaproject,theaccountingresults maybeconfusing.Hence,managersneedtoknowhowtointerpretaccountinginformationfor thepurposeofprojectmanagement.Intheprocessofconsideringmanagementproblems, however,weshalldiscusssomeofthecommonaccountingsystemsandconventions,although ourpurposeisnottoprovideacomprehensivesurveyofaccountingprocedures. Thelimitedobjectiveofprojectcontroldeservesemphasis.Projectcontrolprocedures areprimarilyintendedtoidentifydeviationsfromtheprojectplanratherthantosuggest possibleareasforcostsavings.Thischaracteristicreflectstheadvancedstageatwhich projectcontrolbecomesimportant.Thetimeatwhichmajorcostsavingscanbeachievedis duringplanninganddesignfortheproject.Duringtheactualconstruction,changesare likelytodelaytheprojectandleadtoinordinatecostincreases.Asaresult,thefocus ofprojectcontrolisonfulfillingtheoriginaldesignplansorindicatingdeviations fromtheseplans,ratherthanonsearchingforsignificantimprovementsandcostsavings. Itisonlywhenarescueoperationisrequiredthatmajorchangeswillnormallyoccurin theconstructionplan. Finally,theissuesassociatedwithintegrationofinformationwillrequiresome discussion.Projectmanagementactivitiesandfunctionalconcernsareintimatelylinked, yetthetechniquesusedinmanyinstancesdonotfacilitatecomprehensiveorintegrated considerationofprojectactivities.Forexample,scheduleinformationandcostaccounts areusuallykeptseparately.Asaresult,projectmanagersthemselvesmustsynthesizea comprehensiveviewfromthedifferentreportsontheprojectplustheirownfield observations.Inparticular,managersareoftenforcedtoinferthecostimpactsof schedulechanges,ratherthanbeingprovidedwithaidsforthisprocess.Communicationor integrationofvarioustypesofinformationcanserveanumberofusefulpurposes, althoughitdoesrequirespecialattentionintheestablishmentofprojectcontrol procedures. Backtotop 12.2TheProjectBudget Forcostcontrolonaproject,theconstructionplanandtheassociatedcashflow estimatescanprovidethebaselinereferenceforsubsequentprojectmonitoringand control.Forschedules,progressonindividualactivitiesandtheachievementofmilestone completionscanbecomparedwiththeprojectscheduletomonitortheprogressof activities.Contractandjobspecificationsprovidethecriteriabywhichtoassessand assuretherequiredqualityofconstruction.Thefinalordetailedcostestimateprovides abaselinefortheassessmentoffinancialperformanceduringtheproject.Totheextent thatcostsarewithinthedetailedcostestimate,thentheprojectisthoughttobeunderfinancial control.Overrunsinparticularcostcategoriessignalthepossibilityofproblemsand giveanindicationofexactlywhatproblemsarebeingencountered.Expenseoriented constructionplanningandcontrolfocusesuponthecategoriesincludedinthefinalcost estimation.Thisfocusisparticularrelevantforprojectswithfewactivitiesand considerablerepetitionsuchasgradingandpavingroadways. Forcontrolandmonitoringpurposes,theoriginaldetailedcostestimateistypically convertedtoaprojectbudget,andtheprojectbudgetisusedsubsequentlyasa guideformanagement.Specificitemsinthedetailedcostestimatebecomejobcost elements.Expensesincurredduringthecourseofaprojectarerecordedinspecificjob costaccountstobecomparedwiththeoriginalcostestimatesineachcategory.Thus, individualjobcostaccountsgenerallyrepresentthebasicunitforcostcontrol. Alternatively,jobcostaccountsmaybedisaggregatedordividedintoworkelements whicharerelatedbothtoparticularscheduledactivitiesandtoparticularcostaccounts. WorkelementdivisionswillbedescribedinSection12.8. Inadditiontocostamounts,informationonmaterialquantitiesandlaborinputswithin eachjobaccountisalsotypicallyretainedintheprojectbudget.Withthisinformation, actualmaterialsusageandlaboremployedcanbecomparedtotheexpectedrequirements.As aresult,costoverrunsorsavingsonparticularitemscanbeidentifiedasduetochanges inunitprices,laborproductivityorintheamountofmaterialconsumed. Thenumberofcostaccountsassociatedwithaparticularprojectcanvaryconsiderably. Forconstructors,ontheorderoffourhundredseparatecostaccountsmightbeusedona smallproject.[2]Theseaccountsrecordallthe transactionsassociatedwithaproject.Thus,separateaccountsmightexistfordifferent typesofmaterials,equipmentuse,payroll,projectoffice,etc.Bothphysicaland non-physicalresourcesarerepresented,includingoverheaditemssuchascomputeruseor interestcharges.Table12-1summarizesatypicalsetofcostaccountsthatmightbeused inbuildingconstruction.[3]Notethatthissetofaccountsis organizedhierarchically,withsevenmajordivisions(accounts201to207)andnumerous sub-divisionsundereachdivision.Thishierarchicalstructurefacilitatesaggregationof costsintopre-definedcategories;forexample,costsassociatedwiththesuperstructure (account204)wouldbethesumoftheunderlyingsubdivisions(ie.204.1,204.2,etc.)or finerlevelsofdetail(204.61,204.62,etc.).Thesub-divisionaccountsinTable12-1 couldbefurtherdividedintopersonnel,materialandotherresourcecostsforthepurpose offinancialaccounting,asdescribedinSection12.4. TABLE12-1 IllustrativeSetofProjectCostAccounts 201 ClearingandPreparingSite 202202.1202.2202.3 202.31202.32202.33 SubstructureExcavationandShoringPilingConcreteMasonry MixingandPlacingFormworkReinforcing 203 OutsideUtilities(water,gas,sewer,etc.) 204204.1204.2204.3204.4204.5204.6 204.61204.62204.63204.64204.65204.66204.67204.68204.69 204.7204.71204.72204.73204.74204.72 SuperstructureMasonryConstructionStructuralSteelWoodFraming,Partitions,etc. ExteriorFinishes(brickwork,terracotta,cutstone,etc.)Roofing,Drains,Gutters,Flashing,etc. InteriorFinishandTrim FinishFlooring,Stairs,Doors,TrimGlass,Windows,GlazingMarble,Tile,Terrazzo LathingandPlasteringSoundproofingandInsulationFinishHardwarePaintingandDecorating WaterproofingSprinklersandFireProtection ServiceWorkElectricalWorkHeatingandVentilatingPlumbingandSewage AirConditioningFireAlarm,Telephone,Security,Miscellaneous 205 Paving,Curbs,Walks 206 InstalledEquipment(elevators,revolvingdoors,mailchutes,etc.) 207 Fencing Indevelopingorimplementingasystemofcostaccounts,anappropriatenumberingor codingsystemisessentialtofacilitatecommunicationofinformationandproper aggregationofcostinformation.Particularcostaccountsareusedtoindicatethe expendituresassociatedwithspecificprojectsandtoindicatetheexpenditureson particularitemsthroughoutanorganization.Theseareexamplesofdifferentperspectives onthesameinformation,inwhichthesameinformationmaybesummarizedindifferentways forspecificpurposes.Thus,morethanoneaggregationofthecostinformationandmore thanoneapplicationprogramcanuseaparticularcostaccount.Separateidentifiersof thetypeofcostaccountandthespecificprojectmustbeprovidedforprojectcost accountsorforfinancialtransactions.Asaresult,astandardsetofcostcodessuchas theMASTERFORMATcodesdescribedinChapter9maybeadoptedtoidentifycostaccounts alongwithprojectidentifiersandextensionstoindicateorganizationorjobspecific needs.Similarlytheuseofdatabasesor,ataminimum,inter-communicatingapplications programsfacilitateaccesstocostinformation,asdescribedinChapter14. Convertingafinalcostestimateintoaprojectbudgetcompatiblewithan organization'scostaccountsisnotalwaysastraightforwardtask.AsdescribedinChapter 5,costestimatesaregenerallydisaggregatedintoappropriatefunctionalorresource basedprojectcategories.Forexample,laborandmaterialquantitiesmightbeincluded foreachofseveralphysicalcomponentsofaproject.Forcostaccountingpurposes,labor andmaterialquantitiesareaggregatedbytypenomatterforwhichphysicalcomponentthey areemployed.Forexample,particulartypesofworkersormaterialsmightbeusedon numerousdifferentphysicalcomponentsofafacility.Moreover,thecategoriesofcost accountsestablishedwithinanorganizationmaybearlittleresemblancetothequantities includedinafinalcostestimate.Thisisparticularlytruewhenfinalcostestimatesare preparedinaccordancewithanexternalreportingrequirementratherthaninviewofthe existingcostaccountswithinanorganization. Oneparticularprobleminformingaprojectbudgetintermsofcostaccountsisthe treatmentofcontingencyamounts.Theseallowancesareincludedinprojectcostestimates toaccommodateunforeseeneventsandtheresultingcosts.However,inadvanceofproject completion,thesourceofcontingencyexpensesisnotknown.Realistically,abudget accountingitemforcontingencyallowanceshouldbeestablishedwhenevera contingencyamountwasincludedinthefinalcostestimate. Asecondprobleminformingaprojectbudgetisthetreatmentofinflation.Typically, finalcostestimatesareformedintermsofrealdollarsandanitemreflectinginflation costsisaddedonasapercentageorlumpsum.Thisinflationallowancewouldthenbe allocatedtoindividualcostitemsinrelationtotheactualexpectedinflationoverthe periodforwhichcostswillbeincurred. Example12-1:ProjectBudgetforaDesignOffice AnexampleofasmallprojectbudgetisshowninTable12-2.Thisbudgetmightbeused byadesignfirmforaspecificdesignproject.Whilethisbudgetmightrepresentallthe workforthisfirmontheproject,numerousotherorganizationswouldbeinvolvedwith theirownbudgets.InTable12-2,asummarybudgetisshownaswellasadetailedlisting ofcostsforindividualsintheEngineeringDivision.Forthepurposeofconsistencywith costaccountsandmanagerialcontrol,laborcostsareaggregatedintothreegroups:the engineering,architecturalandenvironmentaldivisions.ThedetailedbudgetshowninTable 12-2appliesonlytotheengineeringdivisionlabor;otherdetailedbudgetsamountsfor categoriessuchassuppliesandtheotherworkdivisionswouldalsobeprepared.Notethat thesalarycostsassociatedwithindividualsareaggregatedtoobtainthetotallabor costsintheengineeringgroupfortheproject.Toperformthisaggregation,somemeansof identifyingindividualswithinorganizationalgroupsisrequired.Accompanyingabudgetof thisnature,someestimateoftheactualman-hoursoflaborrequiredbyprojecttaskwould alsobeprepared.Finally,thisbudgetmightbeusedforinternalpurposesalone.In submittingfinancialbillsandreportstotheclient,overheadandcontingencyamounts mightbecombinedwiththedirectlaborcoststoestablishanaggregatebillingrateper hour.Inthiscase,theoverhead,contingencyandprofitwouldrepresentallocated costsbasedonthedirectlaborcosts. TABLE12-2 ExampleofaSmallProjectBudgetforaDesignFirm Personnel   ArchitecturalDivision  Engineering  EnvironmentalDivision     Total OtherDirectExpenses   Travel  Supplies  Communication  ComputerServices     Total OverheadContingencyandProfit     Total BudgetSummary $67,251.0045,372.00     28,235.00 $140,858.00 2,400.001,500.00600.00    1,200.00 $5,700.00 $175,869.60    $95,700.00 $418,127.60 SeniorEngineerAssociateEngineerEngineerTechnician     Total EngineeringPersonnelDetail $11,562.0021,365.00    12,654.00 $45,372.00 Example12-2:ProjectBudgetforaConstructor Table12-3illustratesasummarybudgetforaconstructor.Thisbudgetisdeveloped fromaprojecttoconstructawharf.Aswiththeexampledesignofficebudgetabove,costs aredividedintodirectandindirectexpenses.Withindirectcosts,expensesaredivided intomaterial,subcontract,temporaryworkandmachinerycosts.Thisbudgetindicates aggregateamountsforthevariouscategories.Costdetailsassociatedwithparticularcost accountswouldsupplementandsupporttheaggregatebudgetshowninTable12-3.Aprofit andacontingencyamountmightbeaddedtothebasicbudgetof$1,715,147showninTable 12-3forcompleteness. TABLE12-3 AnExampleofaProjectBudgetforaWharfProject (AmountsinThousandsofDollars) MaterialCost SubcontractWork TemporaryWork MachineryCost TotalCost SteelPilingTie-rodAnchor-WallBackfillCopingDredgingFenderOtherSub-total $292,17288,233130,281242,23042,880048,996        5,000$849,800 $129,17829,25460,87327,91922,307111,65010,344      32,250$423,775 $16,38900013,17100              0$29,560 $0000001,750            0$1,750 $437,739117,487191,154300,14978,358111,65061,090         37,250$1,304,885 Summary TotalofdirectcostIndirectCost   CommonTemporaryWork  CommonMachinery   Transportation  OfficeOperatingCosts     TotalofIndirectCost       TotalProjectCost $1,304,885 19,32080,93415,550294,458     410,262.$1,715,147 Backtotop 12.3ForecastingforActivityCostControl Forthepurposeofprojectmanagementandcontrol,itisnotsufficienttoconsider onlythepastrecordofcostsandrevenuesincurredinaproject.Goodmanagersshould focusuponfuturerevenues,futurecostsandtechnicalproblems.Forthispurpose, traditionalfinancialaccountingschemesarenotadequatetoreflectthedynamicnatureof aproject.Accountstypicallyfocusonrecordingroutinecostsandpastexpenditures associatedwithactivities.[4] Generally,pastexpendituresrepresentsunkcosts thatcannotbealteredinthefutureandmayormaynotberelevantinthefuture.For example,afterthecompletionofsomeactivity,itmaybediscoveredthatsomequality flawrenderstheworkuseless.Unfortunately,theresourcesexpendedontheflawed constructionwillgenerallybesunkandcannotberecoveredforre-construction (althoughitmaybepossibletochangetheburdenofwhopaysfortheseresourcesby financialwithholdingorcharges;ownerswilltypicallyattempttohaveconstructorsor designerspayforchangesduetoqualityflaws).Sincefinancialaccountsarehistorical innature,somemeansofforecastingorprojectingthefuturecourseofaprojectis essentialformanagementcontrol.Inthissection,somemethodsforcostcontroland simpleforecastsaredescribed. AnexampleofforecastingusedtoassesstheprojectstatusisshowninTable12-4.In thisexample,costsarereportedinfivecategories,representingthesumofallthe variouscostaccountsassociatedwitheachcategory: BudgetedCostThebudgetedcostisderivedfromthedetailedcostestimate preparedatthestartoftheproject.Examplesofprojectbudgetswerepresentedin Section12.2.Thefactorsofcostwouldbereferencedbycostaccountandbyaprose description. EstimatedtotalcostTheestimatedorforecasttotalcostineachcategoryis thecurrentbestestimateofcostsbasedonprogressandanychangessincethebudgetwas formed.Estimatedtotalcostsarethesumofcosttodate,commitmentsandexposure. Methodsforestimatingtotalcostsaredescribedbelow. CostCommittedandCostExposure!!Estimatedcosttocompletionineachcategory individedintofirmcommitmentsandestimatedadditionalcostorexposure. Commitmentsmayrepresentmaterialordersorsubcontractsforwhichfirmdollaramounts havebeencommitted. CosttoDateTheactualcostincurredtodateisrecordedincolumn6andcan bederivedfromthefinancialrecordkeepingaccounts. Overor(Under)AfinalcolumninTable12-4indicatestheamountoverorunder thebudgetforeachcategory.Thiscolumnisanindicatoroftheextentofvariancefrom theprojectbudget;itemswithunusuallylargeoverrunswouldrepresentaparticular managerialconcern.Notethatvarianceisusedintheterminologyofproject controltoindicateadifferencebetweenbudgetedandactualexpenditures.Thetermis definedandusedquitedifferentlyinstatisticsormathematicalanalysis.InTable12-4, laborcostsarerunninghigherthanexpected,whereassubcontractsarelessthanexpected. Thecurrentstatusoftheprojectisaforecastbudgetoverrunof$5,950.with23 percentofthebudgetedprojectcostsincurredtodate. TABLE12-4 IllustrationofaJobStatusReport Factor BudgetedCost EstimatedTotalCost CostCommitted CostExposure CostToDate Overor(Under) LaborMaterialSubcontractsEquipmentOtherTotal $99,40688,499198,45837,543   72,693496,509 $102,34288,499196,32337,543   81,432506,139 $49,59642,50683,35223,623   49,356248,433 ---45,99397,832---             ---143,825 $52,746---15,13913,920   32,076113,881 $2,9360(2,135)0   8,7395,950 Forprojectcontrol,managerswouldfocusparticularattentiononitemsindicating substantialdeviationfrombudgetedamounts.Inparticular,thecostoverrunsinthelabor andinthe"otherexpensecategorywouldbeworthyofattentionbyaprojectmanager inTable12-4.Anextstepwouldbetolookingreaterdetailatthevariouscomponentsof thesecategories.Overrunsincostmightbeduetolowerthanexpectedproductivity, higherthanexpectedwagerates,higherthanexpectedmaterialcosts,orotherfactors. Evenfurther,lowproductivitymightbecausedbyinadequatetraining,lackofrequired resourcessuchasequipmentortools,orinordinateamountsofre-worktocorrectquality problems.Reviewofajobstatusreportisonlythefirststepinprojectcontrol. ThejobstatusreportillustratedinTable12-4employsexplicitestimatesofultimate costineachcategoryofexpense.Theseestimatesareusedtoidentifytheactualprogress andstatusofaexpensecategory.Estimatesmightbemadefromsimplelinear extrapolationsoftheproductivityorcostoftheworktodateoneachprojectitem. Algebraically,alinearestimationformulaisgenerallyoneoftwoforms.Usingalinear extrapolationofcosts,theforecasttotalcost,Cf,is: (12.1) whereCtisthecostincurredtotimetandptistheproportionofthe activitycompletedattimet.Forexample,anactivitywhichis50percentcompletewitha costof$40,000wouldbeestimatedtohaveatotalcostof$40,000/0.5=$80,000.More elaboratemethodsofforecastingcostswoulddisaggregatecostsintodifferentcategories, withthetotalcostthesumoftheforecastcostsineachcategory. Alternatively,theuseofmeasuredunitcostamountscanbeusedforforecastingtotal cost.Thebasicformulaforforecastingcostfromunitcostsis: (12.2) whereCfistheforecasttotalcost,Wisthetotalunitsofwork,andctis theaveragecostperunitofworkexperienceduptotimet.Iftheaverageunitcostis$50 perunitofworkonaparticularactivityand1,600unitsofworkexist,thenthe expectedcostis(1,600)(50)=$80,000forcompletion. TheunitcostinEquation(12.2)maybereplacedwiththehourlyproductivityand theunitcostperhour(orotherappropriatetimeperiod),resultingintheequation: (12.3) wherethecostperworkunit(ct)isreplacedbythetimeperunit,ht,divided bythecostperunitoftime,ut. Moreelaborateforecastingsystemsmightrecognizepeculiarproblemsassociatedwith workonparticularitemsandmodifythesesimpleproportionalcostestimates.Forexample, ifproductivityisimprovingasworkersandmanagersbecomemorefamiliarwiththeproject activities,theestimateoftotalcostsforanitemmightbereviseddownward.Inthis case,theestimatingequationwouldbecome: (12.4) whereforecasttotalcost,Cf,isthesumofcostincurredtodate,Ct,andthe costresultingfromtheremainingwork(W-Wt)multipliedbytheexpectedcostper unittimeperiodfortheremainderoftheactivity,ct. Asanumericalexample,supposethattheaverageunitcosthasbeen$50perunitof work,butthemostrecentfigureduringaprojectis$45perunitofwork.Iftheproject managerwasassuredthattheimprovedproductivitycouldbemaintainedfortheremainder oftheproject(consistingof800unitsofworkoutofatotalof1600unitsofwork),the costestimatewouldbe(50)(800)+(45)(800)=$76,000forcompletionoftheactivity. Notethatthisforecastusestheactualaverageproductivityachievedonthefirst800 unitsandusesaforecastofproductivityfortheremainingwork.Historicalchangesin productivitymightalsobeusedtorepresentthistypeofnon-linearchangesinwork productivityonparticularactivitiesovertime. Inadditiontochangesinproductivities,othercomponentsoftheestimatingformula canbeadjustedormoredetailedestimatessubstituted.Forexample,thechangeinunit pricesduetonewlaborcontractsormaterialsupplier'spricesmightbereflectedin estimatingfutureexpenditures.Inessence,thesameproblemsencounteredinpreparingthe detailedcostestimatearefacedintheprocessofpreparingexposureestimates,although thenumberandextentofuncertaintiesintheprojectenvironmentdeclineaswork progresses.Theonlyexceptiontothisruleisthedangerofqualityproblemsincompleted workwhichwouldrequirere-construction. Eachoftheestimatingmethodsdescribedaboverequirecurrentinformationonthestate ofworkaccomplishmentforparticularactivities.Thereareseveralpossiblemethodsto developsuchestimates,including[5]: UnitsofWorkCompletedForeasilymeasuredquantitiestheactualproportionof completedworkamountscanbemeasured.Forexample,thelinearfeetofpipinginstalled canbecomparedtotherequiredamountofpipingtoestimatethepercentageofpipingwork completed. IncrementalMilestonesParticularactivitiescanbesub-dividedor "decomposed"intoaseriesofmilestones,andthemilestonescanbeusedto indicatethepercentageofworkcompletebasedonhistoricalaverages.Forexample,the workeffortinvolvedwithinstallationofstandardpipingmightbedividedintofour milestones: Spoolinplace:20%ofworkand20%ofcumulativework. Endswelded:40%ofworkand60%ofcumulativework. HangarsandTrimComplete:30%ofworkand90%ofcumulativework. HydrotestedandComplete:10%ofworkand100%ofcumulativework. Thus,apipesectionforwhichtheendshavebeenweldedwouldbereportedas60% complete. OpinionSubjectivejudgmentsofthepercentagecompletecanbepreparedby inspectors,supervisorsorprojectmanagersthemselves.Clearly,thisestimatedtechnique canbebiasedbyoptimism,pessimismorinaccurateobservations.Knowledgeableestimaters andadequatefieldobservationsarerequiredtoobtainsufficientaccuracywiththis method. CostRatioThecostincurredtodatecanalsobeusedtoestimatethework progress.Forexample,ifanactivitywasbudgetedtocost$20,000andthecostincurred ataparticulardatewas$10,000,thentheestimatedpercentagecompleteunderthecost ratiomethodwouldbe10,000/20,000=0.5orfiftypercent.Thismethodprovidesno independentinformationontheactualpercentagecompleteoranypossibleerrorsinthe activitybudget:thecostforecastwillalwaysbethebudgetedamount.Consequently, managersmustusetheestimatedcoststocompleteanactivityderivedfromthecostratio methodwithextremecaution. Systematicapplicationofthesedifferentestimatingmethodstothevariousproject activitiesenablescalculationofthepercentagecompleteortheproductivityestimates usedinpreparingjobstatusreports. Insomecases,automateddataacquisitionforworkaccomplishmentsmightbeinstituted. Forexample,transpondersmightbemovedtothenewworklimitsaftereachday'sactivity andthenewlocationsautomaticallycomputedandcomparedwithprojectplans.These measurementsofactualprogressshouldbestoredinacentraldatabaseandthenprocessed forupdatingtheprojectschedule.Theuseofdatabasemanagementsystemsinthisfashion isdescribedinChapter14. Example12-3:EstimatedTotalCosttoCompleteanActivity Supposethatwewishtoestimatethetotalcosttocompletepipingconstruction activitiesonaproject.Thepipingconstructioninvolves1,000linearfeetofpiping whichhasbeendividedinto50sectionsformanagementconvenience.Atthistime,400 linearfeetofpipinghasbeeninstalledatacostof$40,000and500man-hoursoflabor. Theoriginalbudgetestimatewas$90,000withaproductivityofonefootperman-hour,a unitcostof$60permanhourandatotalmaterialcostof$30,000.Firmcommitmentsof materialdeliveryforthe$30,000estimatedcosthavebeenreceived. Thefirsttaskistoestimatetheproportionofworkcompleted.Twoestimatesare readilyavailable.First,400linearfeetofpipeisinplaceoutofatotalof1000 linearfeet,sotheproportionofworkcompletedis400/1000=0.4or40%.Thisisthe "unitsofworkcompleted"estimationmethod.Second,thecostratiomethodwould estimatetheworkcompleteasthecost-to-datedividedbythecostestimateor$40,000/$ 90,000=0.44or44%.Third,the"incrementalmilestones"methodwouldbe appliedbyexaminingeachpipesectionandestimatingapercentagecompleteandthen aggregatingtodeterminethetotalpercentagecomplete.Forexample,supposethefollowing quantitiesofpipingfellintofourcategoriesofcompleteness: complete(100%)hangarsandtrimcomplete(90%) endswelded(60%)spoolinplace(20%) 380ft20ft5ft0ft Thenusingtheincrementalmilestonesshownabove,theestimateofcompletedworkwould be380+(20)(0.9)+(5)(0.6)+0=401ftandtheproportioncompletewouldbe401 ft/1,000ft=0.401or40%afterrounding. Onceanestimateofworkcompletedisavailable,thentheestimatedcosttocomplete theactivitycanbecalculated.First,asimplelinearextrapolationofcostresultsinan estimateof$40,000/0.4=$100,000.forthepipingconstructionusingthe40%estimate ofworkcompleted.Thisestimateprojectsacostoverrunof100,000-90,000=$10,000. Second,alinearextrapolationofproductivityresultsinanestimateof(1000ft.)(500 hrs/400ft.)($60/hr)+30,000=$105,000.forcompletionofthepipingconstruction. Thisestimatesuggestsavarianceof105,000-90,000=$15,000abovetheactivity estimate.Inmakingthisestimate,laborandmaterialcostsenteredseparately,whereas thetwowereimplicitlycombinedinthesimplelinearcostforecastabove.Thesourceof thevariancecanalsobeidentifiedinthiscalculation:comparedtotheoriginal estimate,thelaborproductivityis1.25hoursperfootor25%higherthantheoriginal estimate. Example12-4:EstimatedTotalCostforCompletion Theforecastingproceduresdescribedaboveassumedlinearextrapolationsoffuture costs,basedeitheronthecompleteexperienceontheactivityortherecentexperience. Foractivitieswithgoodhistoricalrecords,itcanbethecasethatatypically non-linearprofileofcostexpendituresandcompletionproportionscanbeestimated. Figure12-1illustratesonepossiblenon-linearrelationshipsderivedfromexperiencein someparticularactivity.Theprogressonanewjobcanbecomparedtothishistorical record.Forexample,pointAinFigure12-1suggestsahigherexpenditurethanisnormal forthecompletionproportion.Thispointrepresents40%ofworkcompletedwithan expenditureof60%ofthebudget.Sincethehistoricalrecordsuggestsonly50%ofthe budgetshouldbeexpendedattimeof40%completion,a60-50=10%overrunincostis expectedevenifworkefficiencycanbeincreasedtohistoricalaverages.Ifcomparable costoverrunscontinuetoaccumulate,thenthecost-to-completewillbeevenhigher. Figure12-1 IllustrationofProportionCompletionversusExpenditureforanActivity Backtotop 12.4FinancialAccountingSystemsandCostAccounts Thecostaccountsdescribedintheprevioussectionsprovideonlyoneofthevarious componentsinafinancialaccountingsystem.Beforefurtherdiscussingtheuseofcost accountsinprojectcontrol,therelationshipofprojectandfinancialaccountingdeserves mention.Accountinginformationisgenerallyusedforthreedistinctpurposes: Internalreportingtoprojectmanagersforday-to-dayplanning,monitoringandcontrol. Internalreportingtomanagersforaidingstrategicplanning. Externalreportingtoowners,government,regulatorsandotheroutsideparties. Externalreportsareconstrainedtoparticularformsandproceduresbycontractual reportingrequirementsorbygenerallyacceptedaccountingpractices.Preparationofsuch externalreportsisreferredtoasfinancialaccounting.Incontrast,cost ormanagerialaccountingisintendedtoaidinternalmanagersintheir responsibilitiesofplanning,monitoringandcontrol. Projectcostsarealwaysincludedinthesystemoffinancialaccountsassociatedwith anorganization.Attheheartofthissystem,allexpensetransactionsarerecordedina generalledger.Thegeneralledgerofaccountsformsthebasisformanagementreportson particularprojectsaswellasthefinancialaccountsforanentireorganization.Other componentsofafinancialaccountingsysteminclude: Theaccountspayablejournalisintendedtoproviderecordsofbillsreceived fromvendors,materialsuppliers,subcontractorsandotheroutsideparties.Invoicesof chargesarerecordedinthissystemasarechecksissuedinpayment.Chargestoindividual costaccountsarerelayedorpostedtotheGeneralLedger. Accountsreceivablejournalsprovidetheoppositefunctiontothatofaccounts payable.Inthisjournal,billingstoclientsarerecordedaswellasreceipts.Revenues receivedarerelayedtothegeneralledger. Jobcostledgerssummarizethechargesassociatedwithparticularprojects, arrangedinthevariouscostaccountsusedfortheprojectbudget. Inventoryrecordsaremaintainedtoidentifytheamountofmaterialsavailableat anytime. Intraditionalbookkeepingsystems,daytodaytransactionsarefirstrecordedin journals.Withdouble-entrybookkeeping,eachtransactionisrecordedasbothadebitand acredittoparticularaccountsintheledger.Forexample,paymentofasupplier'sbill representsadebitorincreasetoaprojectcostaccountandacreditorreductiontothe company'scashaccount.Periodically,thetransactioninformationissummarizedand transferredtoledgeraccounts.Thisprocessiscalledposting,andmaybedone instantaneouslyordailyincomputerizedsystems. Inreviewingaccountinginformation,theconceptsofflowsandstocks shouldbekeptinmind.Dailytransactionstypicallyreflectflowsofdollaramounts enteringorleavingtheorganization.Similarly,useorreceiptofparticularmaterials representflowsfromortoinventory.Anaccountbalancerepresentsthestockor cumulativeamountoffundsresultingfromthesedailyflows.Informationonbothflowsand stocksareneededtogiveanaccurateviewofanorganization'sstate.Inaddition, forecastsoffuturechangesareneededforeffectivemanagement. Informationfromthegeneralledgerisassembledfortheorganization'sfinancial reports,includingbalancesheetsandincomestatementsforeachperiod.Thesereportsare thebasicproductsofthefinancialaccountingprocessandareoftenusedtoassessthe performanceofanorganization.Table12-5showsatypicalincomestatementforasmall constructionfirm,indicatinganetprofitof$330,000aftertaxes.Thisstatement summarizestheflowsoftransactionswithinayear.Table12-6showsthecomparable balancesheet,indicatedanetincreaseinretainedearningsequaltothenetprofit.The balancesheetreflectstheeffectsofincomeflowsduringtheyearontheoverallworthof theorganization. TABLE12-5 IllustrationofanAccountingStatementofIncome IncomeStatementfortheyearendedDecember31,19xx Grossprojectrevenues DirectprojectcostsoncontractsDepreciationofequipmentEstimating Administrativeandotherexpenses   Subtotalofcostandexpenses OperatingIncomeInterestExpense,net   Incomebeforetaxes Incometax   Netincomeaftertax Cashdividends   Retainedearnings,currentyear RetentionatbeginningofyearRetainedearningsatendofyear $7,200,000 5,500,000200,000150,000    650,0006,500,000 700,000    150,000550,000     220,000330,000     100,000230,000     650,000$880,000. TABLE12-6 IllustrationofanAccountingBalanceSheet BalanceSheetDecember31,19xx Assets Amount     Cash    PaymentsReceivable     Workinprogress,notclaimed     Workinprogress,retention     Equipmentatcostlessaccumulateddepreciation         Totalassets $150,000750,000700,000200,0001,400,000$3,200,000 LiabilitiesandEquity Liabilities    Accountspayable     Otheritemspayable(taxes,wages,etc.)     Longtermdebts         Subtotal Shareholders'funds    40,000sharesofcommonstock         (Includingpaid-incapital)     RetainedEarnings         Subtotal             TotalLiabilitiesandEquity $950,00050,000    500,000 1,500,000820,000    880,000 1,700,000$3,200,000 Inthecontextofprivateconstructionfirms,particularproblemsariseinthe treatmentofuncompletedcontractsinfinancialreports.Underthe "completed-contract"method,incomeisonlyreportedforcompletedprojects. Workonprojectsunderwayisonlyreportedonthebalancesheet,representinganassetif contractbillingsexceedcostsoraliabilityifcostsexceedbillings.Whenaprojectis completed,thetotalnetprofit(orloss)isreportedinthefinalperiodasincome.Under the"percentage-of-completion"method,actualcostsarereportedontheincome statementplusaproportionofallprojectrevenues(orbillings)equaltotheproportion ofworkcompletedduringtheperiod.Theproportionofworkcompletediscomputedasthe ratioofcostsincurredtodateandthetotalestimatedcostoftheproject.Thus,if twentypercentofaprojectwascompletedinaparticularperiodatadirectcostof $180,000andonaprojectwithexpectedrevenuesof$1,000,000,thenthecontract revenuesearnedwouldbecalculatedas$1,000,000(0.2)=$200,000.Thisfigure representsaprofitandcontributiontooverheadof$200,000-$180,000=$20,000for theperiod.Notethatbillingsandactualreceiptsmightbeinexcessorlessthanthe calculatedrevenuesof$200,000.Onthebalancesheetofanorganizationusingthe percentage-of-completionmethod,anassetisusuallyreportedtoreflectbillingsandthe estimatedorcalculatedearningsinexcessofactualbillings. Asanotherexampleofthedifferenceinthe"percentage-of-completion"and the"completed-contract"methods,considerathreeyearprojecttoconstructa plantwiththefollowingcashflowforacontractor: Year ContractExpenses PaymentsReceived 123Total $700,000180,000      320,000$1,200,000 $900,000250,000      150,000$1,300,000 Thesupervisingarchitectdeterminesthat60%ofthefacilityiscompleteinyear1and 75%inyear2.Underthe"percentage-of-completion"method,thenetincomein year1is$780,000(60%of$1,300,000)lessthe$700,000inexpensesor$80,000.Under the"completed-contract"method,theentireprofitof$100,000wouldbe reportedinyear3. The"percentage-of-completion"methodofreportingperiodearningshasthe advantageofrepresentingtheactualestimatedearningsineachperiod.Asaresult,the incomestreamandresultingprofitsarelesssusceptibletoprecipitateswingsonthe completionofaprojectascanoccurwiththe"completedcontractmethod"of calculatingincome.However,the"percentage-of-completion"hasthedisadvantage ofrelyinguponestimateswhichcanbemanipulatedtoobscuretheactualpositionofa companyorwhicharedifficulttoreproducebyoutsideobservers.Therearealso subtletiessuchasthedeferralofallcalculatedincomefromaprojectuntilaminimum thresholdoftheprojectiscompleted.Asaresult,interpretationoftheincomestatement andbalancesheetofaprivateorganizationisnotalwaysstraightforward.Finally,there aretaxdisadvantagesfromusingthe"percentage-of-completion"methodsince corporatetaxesonexpectedprofitsmaybecomedueduringtheprojectratherthanbeing deferreduntiltheprojectcompletion.Asanexampleoftaximplicationsofthetwo reportingmethods,astudyofforty-sevenconstructionfirmsconductedbytheGeneral AccountingOfficefoundthat$280millionintaxesweredeferredfrom1980to1984 throughuseofthe"completed-contract"method. [6] Itshouldbeapparentthatthe"percentage-of-completion"accountingprovides onlyaroughestimateoftheactualprofitorstatusofaproject.Also,the "completedcontract"methodofaccountingisentirelyretrospectiveandprovides noguidanceformanagement.Thisisonlyoneexampleofthetypesofallocationsthatare introducedtocorrespondtogenerallyacceptedaccountingpractices,yetmaynotfurther thecauseofgoodprojectmanagement.Anothercommonexampleistheuseofequipment depreciationschedulestoallocateequipmentpurchasecosts.Allocationsofcostsor revenuestoparticularperiodswithinaprojectmaycauseseverechangesinparticular indicators,buthavenorealmeaningforgoodmanagementorprofitovertheentirecourse ofaproject.AsJohnsonandKaplanargue:[7] Today'smanagementaccountinginformation,drivenbytheproceduresandcycleofthe organization'sfinancialreportingsystem,istoolate,tooaggregatedandtoodistorted toberelevantformanagers'planningandcontroldecisions.... Managementaccounting reportsareoflittlehelptooperatingmanagersastheyattempttoreducecostsand improveproductivity.Frequently,thereportsdecreaseproductivitybecausetheyrequire operatingmanagerstospendtimeattemptingtounderstandandexplainreportedvariances thathavelittletodowiththeeconomicandtechnologicalrealityoftheiroperations... Themanagagementaccountingsystemalsofailstoprovideaccurateproductcosts.Costare distributedtoproductsbysimplisticandarbitrarymeasures,usuallydirectlaborbased, thatdonotrepresentthedemandsmadebyeachproductonthefirm'sresources. Asaresult,complementaryprocedurestothoseusedintraditionalfinancialaccounting arerequiredtoaccomplisheffectiveprojectcontrol,asdescribedintheprecedingand followingsections.Whilefinancialstatementsprovideconsistentandessential informationontheconditionofanentireorganization,theyneedconsiderable interpretationandsupplementationtobeusefulforprojectmanagement. Example12-5:Calculatingnetprofit Asanexampleofthecalculationofnetprofit,supposethatacompanybegansixjobs inayear,completingthreejobsandhavingthreejobsstillunderwayattheendofthe year.DetailsofthesixjobsareshowninTable12-7.Whatwouldbethecompany'snet profitunder,first,the"percentage-of-completion"and,second,the "completedcontractmethod"accountingconventions? TABLE12-7 ExampleofFinancialRecordsofProjects NetProfitonCompletedContracts(Amountsinthousandsofdollars) Job1Job2Job3     TotalNetProfitonCompletedJobs $1,436356     -738 $1,054 StatusofJobsUnderway Job4 Job5 Job6 OriginalContractPriceContractChanges(ChangeOrders,etc.) TotalCosttoDatePaymentsReceivedorDuetoDateEstimatedCosttoComplete $4,2004003,6003,520500 $3,8006001,7101,8302,300 $5,630-3006203405,000 AsshowninTable12-7,anetprofitof$1,054,000wasearnedonthethreecompleted jobs.Underthe"completedcontract"method,thistotalwouldbetotalprofit. Underthepercentage-ofcompletionmethod,theyear'sexpectedprofitontheprojects underwaywouldbeaddedtothisamount.Forjob4,theexpectedprofitsarecalculatedas follows: Currentcontractprice =Originalcontractprice+ContractChanges =4,200+400+4,600 Creditordebittodate =Totalcoststodate-Paymentsreceivedorduetodate =3,600-3,520=-80 Contractvalueofuncompletedwork =Currentcontractprice-Paymentsreceivedordue =4,600-3,520=1,080 Creditordebittocome =Contractvalueofuncompletedwork-EstimatedCosttoComplete =1,080-500=580 Estimatedfinalgrossprofit =Creditordebittodate+Creditordebittocome =-80.+580.=500 Estimatedtotalprojectcosts =Contractprice-Grossprofit =4,600-500=4,100 EstimatedProfittodate =EstimatedfinalgrossprofitxProportionofworkcomplete =500.(3600/4100))=439 Similarcalculationsfortheotherjobsunderwayindicateestimatedprofitstodateof $166,000forJob5and-$32,000forJob6.Asaresult,thenetprofitusingthe "percentage-of-completion"methodwouldbe$1,627,000fortheyear.Notethat thisfigurewouldbealteredintheeventofmulti-yearprojectsinwhichnetprofitson projectscompletedorunderwayinthisyearwereclaimedinearlierperiods. Backtotop 12.5ControlofProjectCashFlows Section12.3describedthedevelopmentofinformationforthecontrolofprojectcosts withrespecttothevariousfunctionalactivitiesappearingintheprojectbudget.Project managersalsoareinvolvedwithassessmentoftheoverallstatusoftheproject,including thestatusofactivities,financing,paymentsandreceipts.Thesevariousitemscomprise theprojectandfinancingcashflowsdescribedinearlierchapters.Thesecomponents includecostsincurred(asdescribedabove),billingsandreceiptsforbillingstoowners (forcontractors),payableamountstosuppliersandcontractors,financingplancashflows (forbondsorotherfinancialinstruments),etc. Asanexampleofcashflowcontrol,considerthereportshowninTable12-8.Inthis case,costsarenotdividedintofunctionalcategoriesasinTable12-4,suchaslabor, material,orequipment.Table12-8representsasummaryoftheprojectstatusasviewed fromdifferentcomponentsoftheaccountingsystem.Thus,theaggregationof differentkindsofcostexposureorcostcommitmentshowninTable12-0hasnotbeen performed.TheelementsinTable12-8include: CostsThisisasummaryofchargesasreflectedbythejobcostaccounts, includingexpendituresandestimatedcosts.Thisrowprovidesanaggregatesummaryofthe detailedactivitycostinformationdescribedintheprevioussection.Forthisexample, thetotalcostsasofJuly2(7/02)were$8,754,516,andtheoriginalcostestimatewas $65,863,092,sotheapproximatepercentagecompletewas8,754,516/65,863,092or13.292%. However,theprojectmanagernowprojectsacostof$66,545,263fortheproject, representinganincreaseof$682,171overtheoriginalestimate.Thisnewestimatewould reflecttheactualpercentageofworkcompletedaswellasothereffectssuchaschanges inunitpricesforlaborormaterials.Needlesstosay,thisincreaseinexpectedcostsis notawelcomechangetotheprojectmanager. BillingsThisrowsummarizesthestateofcashflowswithrespecttotheowner ofthefacility;thisrowwouldnotbeincludedforreportstoowners.Thecontractamount was$67,511,602,andatotalof$9,276,621or13.741%ofthecontracthasbeenbilled. Theamountofallowablebillingisspecifiedunderthetermsofthecontractbetweenan ownerandanengineering,architect,orconstructor.Inthiscase,totalbillingshave exceededtheestimatedprojectcompletionproportion.Thefinalcolumnincludesthe currentlyprojectednetearningsof$966,339.Thisfigureiscalculatedasthecontract amountlessprojectedcosts:67,511,602-66,545,263=$966,339.Notethatthisprofit figuredoesnotreflectthetimevalueofmoneyordiscounting. PayablesThePayablesrowsummarizestheamountowedbythecontractorto materialsuppliers,labororsub-contractors.Atthetimeofthisreport,$6,719,103had beenpaidtosubcontractors,materialsuppliers,andothers.Invoicesof$1,300,089have accumulatedbuthavenotyetbeenpaid.Aretentionof$391,671hasbeenimposedon subcontractors,and$343,653indirectlaborexpenseshavebeenoccurred.Thetotalof payablesisequaltothetotalprojectexpensesshowninthefirstrowofcosts. ReceivablesThisrowsummarizesthecashflowofreceiptsfromtheowner.Note thattheactualreceiptsfromtheownermaydifferfromtheamountsbilledduetodelayed paymentsorretainageonthepartoftheowner.Thenet-billedequalsthegrossbilled lessretentionbytheowner.Inthiscase,grossbilledis$9,276,621(asshowninthe billingsrow),thenetbilledis$8,761,673andtheretentionis$514,948. Unfortunately,only$7,209,344hasbeenreceivedfromtheowner,sotheopenreceivable amountisa(substantial!)$2,067,277duefromtheowner. CashPositionThisrowsummarizesthecashpositionoftheprojectasifall expensesandreceiptsfortheprojectwerecombinedinasingleaccount.Theactual expenditureshavebeen$7,062,756(calculatedasthetotalcostsof$8,754,516less subcontractorretentionsof$391,671andunpaidbillsof$1,300,089)and$7,209,344has beenreceivedfromtheowner.Asaresult,anetcashbalanceof$146,588existswhich canbeusedinaninterestearningbankaccountortofinancedeficitsonotherprojects. EachoftherowsshowninTable12-8wouldbederivedfromdifferentsetsoffinancial accounts.Additionalreportscouldbepreparedonthefinancingcashflowsforbondsor interestchargesinanoverdraftaccount. TABLE12-8 AnExampleofaCashFlowStatusReport Costs7/02 Charges8,754,516 Estimated65,863,092 %Complete13.292 Projected66,545,263 Change682,171 Billings7/01 Contract67,511,602 GrossBill9,276,621 %Billed13.741 Profit966,339 Payables7/01 Paid6,719,103 Open1,300,089 Retention391,671 Labor343,653 Total8,754,516 Receivable7/02 NetBill8,761,673 Received7,209,344 Retention514,948 Open2,067,277 CashPosition Paid7,062,756 Received7,209,344 Position146,588 Theoverallstatusoftheprojectrequiressynthesizingthedifferentpiecesof informationsummarizedinTable12-8.Eachofthedifferentaccountingsystems contributingtothistableprovidesadifferentviewofthestatusoftheproject.Inthis example,thebudgetinformationindicatesthatcostsarehigherthanexpected,whichcould betroubling.However,aprofitisstillexpectedfortheproject.Asubstantialamountof moneyisduefromtheowner,andthiscouldturnouttobeaproblemiftheowner continuestolaginpayment.Finally,thepositivecashpositionfortheprojectishighly desirablesincefinancingchargescanbeavoided. Thejobstatusreportsillustratedinthisandtheprevioussectionsprovideaprimary toolforprojectcostcontrol.Differentreportswithvaryingamountsofdetailanditem reportswouldbepreparedfordifferentindividualsinvolvedinaproject.Reportsto uppermanagementwouldbesummaries,reportstoparticularstaffindividualswould emphasizetheirresponsibilities(eg.purchasing,payroll,etc.),anddetailedreports wouldbeprovidedtotheindividualprojectmanagers.Coupledwithschedulingreports describedinChapter10,thesereportsprovideasnapshotviewofhowaprojectisdoing. Ofcourse,thesescheduleandcostreportswouldhavetobetemperedbytheactual accomplishmentsandproblemsoccurringinthefield.Forexample,ifworkalready completedisofsub-standardquality,thesereportswouldnotrevealsuchaproblem.Even thoughthereportsindicatedaprojectontimeandonbudget,thepossibilityofre-work orinadequatefacilityperformanceduetoqualityproblemswouldquicklyreversethatrosy situation. Backtotop 12.6ScheduleControl Inadditiontocostcontrol,projectmanagersmustalsogiveconsiderableattentionto monitoringschedules.Constructiontypicallyinvolvesadeadlineforworkcompletion,so contractualagreementswillforceattentiontoschedules.Moregenerally,delaysin constructionrepresentadditionalcostsduetolatefacilityoccupancyorotherfactors. Justascostsincurredarecomparedtobudgetedcosts,actualactivitydurationsmaybe comparedtoexpecteddurations.Inthisprocess,forecastingthetimetocomplete particularactivitiesmayberequired. Themethodsusedforforecastingcompletiontimesofactivitiesaredirectlyanalogous tothoseusedforcostforecasting.Forexample,atypicalestimatingformulamightbe: (12.5) whereDfistheforecastduration,Wistheamountofwork,andhtisthe observedproductivitytotimet.Aswithcostcontrol,itisimportanttodeviseefficient andcosteffectivemethodsforgatheringinformationonactualprojectaccomplishments. Generally,observationsofworkcompletedaremadebyinspectorsandprojectmanagersand thenworkcompletedisestimatedasdescribedinSection12.3.Onceestimatesofwork completeandtimeexpendedonparticularactivitiesisavailable,deviationsfromthe originaldurationestimatecanbeestimated.Thecalculationsformakingduration estimatesarequitesimilartothoseusedinmakingcostestimatesinSection12.3. Forexample,Figure12-2showstheoriginallyscheduledprojectprogressversusthe actualprogressonaproject.Thisfigureisconstructedbysummingupthepercentageof eachactivitywhichiscompleteatdifferentpointsintime;thissummationcanbe weightedbythemagnitudeofeffortassociatedwitheachactivity.InFigure12-2,the projectwasaheadoftheoriginalscheduleforaperiodincludingpointA,butisnowlate atpointBbyanamountequaltothehorizontaldistancebetweentheplannedprogressand theactualprogressobservedtodate. Figure12-2 IllustrationofPlannedversusActualProgressoverTimeonaProject Scheduleadherenceandthecurrentstatusofaprojectcanalsoberepresentedon geometricmodelsofafacility.Forexample,ananimationoftheconstructionsequencecan beshownonacomputerscreen,withdifferentcolorsorothercodingschemeindicatingthe typeofactivityunderwayoneachcomponentofthefacility.Deviationsfromtheplanned schedulecanalsobeportrayedbycolorcoding.Theresultisamechanismtobothindicate workinprogressandscheduleadherencespecifictoindividualcomponentsinthefacility. Inevaluatingscheduleprogress,itisimportanttobearinmindthatsomeactivities possessfloatorschedulingleeway,whereasdelaysinactivitiesonthecriticalpathwill causeprojectdelays.Inparticular,thedelayinplannedprogressattimetmaybesoaked upinactivities'float(therebycausingnooveralldelayintheprojectcompletion)or maycauseaprojectdelay.Asaresultofthisambiguity,itispreferabletoupdatethe projectscheduletodeviseanaccurateprotrayalofthescheduleadherence.Afterapplying aschedulingalgorithm,anewprojectschedulecanbeobtained.Forcashflowplanning purposes,agraphorreportsimilartothatshowninFigure12-3canbeconstructedto compareactualexpenditurestoplannedexpendituresatanytime.Thisprocessof re-schedulingtoindicatethescheduleadherenceisonlyoneofmanyinstancesinwhich scheduleandbudgetupdatingmaybeappropriate,asdiscussedinthenextsection. Figure12-3 IllustrationofPlannedversusActualExpendituresonaProject Backtotop 12.7ScheduleandBudgetUpdates Schedulingandprojectplanningisanactivitythatcontinuesthroughoutthelifetime ofaproject.Aschangesordiscrepanciesbetweentheplanandtherealizationoccur,the projectscheduleandcostestimatesshouldbemodifiedandnewschedulesdevised.Too often,thescheduleisdevisedoncebyaplannerinthecentraloffice,andthenrevisions ormodificationsaredoneincompletelyoronlysporadically.Theresultisthelackof effectiveprojectmonitoringandthepossibilityofeventualchaosontheprojectsite. On"fasttrack"projects,initialconstructionactivitiesarebeguneven beforethefacilitydesignisfinalized.Inthiscase,specialattentionmustbeplacedon thecoordinatedschedulingofdesignandconstructionactivities.Eveninprojectsfor whichthedesignisfinalizedbeforeconstructionbegins,changeorders representingchangesinthe"final"designareoftenissuedtoincorporate changesdesiredbytheowner. Periodicupdatingoffutureactivitydurationsandbudgetsisespeciallyimportantto avoidexcessiveoptimisminprojectsexperiencingproblems.Ifonetypeofactivity experiencesdelaysonaproject,thenrelatedactivitiesarealsolikelytobedelayed unlessmanagerialchangesaremade.Constructionprojectsnormallyinvolvenumerous activitieswhicharecloselyrelatedduetotheuseofsimilarmaterials,equipment, workersorsitecharacteristics.Expectedcostchangesshouldalsobepropagatedthoughout aprojectplan.Inessence,durationandcostestimatesforfutureactivitiesshouldbe revisedinlightoftheactualexperienceonthejob.Withoutthisupdating,project schedulesslipmoreandmoreastimeprogresses.Toperformthistypeofupdating,project managersneedaccesstooriginalestimatesandestimatingassumptions. Unfortunately,mostprojectcostcontrolandschedulingsystemsdonotprovidemany aidsforsuchupdating.Whatisrequiredisameansofidentifyingdiscrepancies, diagnosingthecause,forecastingtheeffect,andpropagatingthiseffecttoallrelated activities.Whilethesestepscanbeundertakenmanually,computersaidstosupport interactiveupdatingorevenautomaticupdatingwouldbehelpful. [8] Beyondthedirectupdatingofactivitydurationsandcostestimates,projectmanagers shouldhavemechanismsavailableforevaluatinganytypeofschedulechange.Updating activitydurationestimations,changingscheduledstarttimes,modifyingtheestimatesof resourcesrequiredforeachactivity,andevenchangingtheprojectnetworklogic(by insertingnewactivitiesorotherchanges)shouldallbeeasilyaccomplished.Ineffect, schedulingaidsshouldbedirectlyavailabletoprojectmanagers. [9]Fortunately,localcomputersare commonlyavailableonsiteforthispurpose. Example12-6:ScheduleUpdatesinaSmallProject Asanexampleofthetypeofchangesthatmightberequired,considerthenineactivity projectdescribedinSection10.3andappearinginFigure12-4.Also,supposethatthe projectisfourdaysunderway,withthecurrentactivityscheduleandprogressasshownin Figure12-5.Afewproblemsorchangesthatmightbeencounteredincludethefollowing: Anundergroundwaterlinethatwaspreviouslyunknownwasrupturedduringthefifthday oftheproject.Anextradaywasrequiredtoreplacetherupturedsection,andanotherday willberequiredforclean-up.Whatistheimpactontheprojectduration? Toanalyzethischangewiththecriticalpathschedulingprocedure,themanagerhasthe optionsof(1)changingtheexpecteddurationofactivityC,GeneralExcavation,tothe newexpecteddurationof10daysor(2)splittingactivityCintotwotasks(corresponding totheworkdonepriortothewaterlinebreakandthattobedoneafter)andaddinganew activityrepresentingrepairandclean-upfromthewaterlinebreak.Thesecondapproach hastheadvantagethatanydelaystootheractivities(suchasactivitiesDandE)could alsobeindicatedbyprecedenceconstraints. Assumingthatnootheractivitiesareaffected,themanagerdecidestoincreasethe expecteddurationofactivityCto10days.SinceactivityCisonthecriticalpath,the projectdurationalsoincreasesby2days.Applyingthecriticalpathschedulingprocedure wouldconfirmthischangeandalsogiveanewsetofearliestandlateststartingtimes forthevariousactivities. After8daysontheproject,theownerasksthatanewdrainbeinstalledinadditionto thesewerlinescheduledforactivityG.Theprojectmanagerdeterminesthatanew activitycouldbeaddedtoinstallthedraininparallelwithActivityGandrequiring2 days.Whatistheeffectontheschedule? Insertinganewactivityintheprojectnetworkbetweennodes3and4violatesthe activity-on-branchconventionthatonlyoneactivitycanbedefinedbetweenanytwonodes. Hence,anewnodeandadummyactivitymustbeinsertedinadditiontothedrain installationactivity.Asaresult,thenodesmustbere-numberedandthecriticalpath scheduledevelopedagain.Performingtheseoperationsrevealsthatnochangeinthe projectdurationwouldoccurandthenewactivityhasatotalfloatof1day. Toavoidthelaborassociatedwithmodifyingthenetworkandre-numberingnodes,suppose thattheprojectmanagersimplyre-definedactivityGasinstallationofseweranddrain linesrequiring4days.Inthiscase,activityGwouldappearonthecriticalpathandthe projectdurationwouldincrease.Addinganadditionalcrewsothatthetwoinstallations couldproceedinparallelmightreducethedurationofactivityGbackto2daysand therebyavoidtheincreaseintheprojectduration. Atday12oftheproject,theexcavatedtrenchescollapseduringActivityE.An additional5dayswillberequiredforthisactivity.Whatistheeffectontheproject schedule?Whatchangesshouldbemadetoinsuremeetingthecompletiondeadline? ActivityEhasatotalfloatofonly1day.Withthechangeinthisactivity'sduration, itwilllieonthecriticalpathandtheprojectdurationwillincrease. Analysisofpossibletimesavingsinsubsequentactivitiesisnow required,usingtheproceduresdescribedinSection10.9. Figure12-4 ANineActivityExampleProject Figure12-5 CurrentScheduleforanExampleProjectPresentedasaBarChart Ascanbeimagined,itisnotatalluncommontoencounterchangesduringthecourseof aprojectthatrequiremodificationofdurations,changesinthenetworklogicof precedencerelationships,oradditionsanddeletionsofactivities.Consequently,the schedulingprocessshouldbereadilyavailableastheprojectisunderway. Backtotop 12.8RelatingCostandScheduleInformation Theprevioussectionsfocusedupontheidentificationofthebudgetaryandschedule statusofprojects.Actualprojectsinvolveacomplexinter-relationshipbetweentimeand cost.Asprojectsproceed,delaysinfluencecostsandbudgetaryproblemsmayinturn requireadjustmentstoactivityschedules.Trade-offsbetweentimeandcostswere discussedinSection10.9inthecontextofprojectplanninginwhichadditionalresources appliedtoaprojectactivitymightresultinashorterdurationbuthighercosts. Unanticipatedeventsmightresultinincreasesinbothtimeandcosttocompletean activity.Forexample,excavationproblemsmayeasilyleadtomuchlowerthananticipated productivityonactivitiesrequiringdigging. Whileprojectmanagersimplicitlyrecognizetheinter-playbetweentimeandcoston projects,itisraretofindeffectiveprojectcontrolsystemswhichincludeboth elements.Usually,projectcostsandschedulesarerecordedandreportedbyseparate applicationprograms.Projectmanagersmustthenperformthetedioustaskofrelatingthe twosetsofinformation. Thedifficultyofintegratingscheduleandcostinformationstemsprimarilyfromthe levelofdetailrequiredforeffectiveintegration.Usually,asingleprojectactivity willinvolvenumerouscostaccountcategories.Forexample,anactivityforthe preparationofafoundationwouldinvolvelaborers,cementworkers,concreteforms, concrete,reinforcement,transportationofmaterialsandotherresources.Evenamore disaggregatedactivitydefinitionsuchaserectionoffoundationformswouldinvolve numerousresourcessuchasforms,nails,carpenters,laborers,andmaterial transportation.Again,differentcostaccountswouldnormallybeusedtorecordthese variousresources.Similarly,numerousactivitiesmightinvolveexpensesassociatedwith particularcostaccounts.Forexample,aparticularmaterialsuchasstandardpipingmight beusedinnumerousdifferentscheduleactivities.Tointegratecostandschedule information,thedisaggregatedchargesforspecificactivitiesandspecificcostaccounts mustbethebasisofanalysis. Astraightforwardmeansofrelatingtimeandcostinformationistodefineindividualwork elementsrepresentingtheresourcesinaparticularcostcategoryassociatedwitha particularprojectactivity.Workelementswouldrepresentanelementinatwo-dimensional matrixofactivitiesandcostaccountsasillustratedinFigure12-6.Anumberingor identifyingsystemforworkelementswouldincludeboththerelevantcostaccountandthe associatedactivity.Insomecases,itmightalsobedesirabletoidentifyworkelements bytheresponsibleorganizationorindividual.Inthiscase,athreedimensional representationofworkelementsisrequired,withthethirddimensioncorrespondingto responsibleindividuals.[10] Moregenerally,moderncomputerizeddatabasescanaccomadate aflexiblestructureofdatarepresentationtosupportaggregationwithrespectto numerousdifferentperspectives;thistypeofsystemwillbediscussedinChapter14. Withthisorganizationofinformation,anumberofmanagementreportsorviewscouldbe generated.Inparticular,thecostsassociatedwithspecificactivitiescouldbeobtained asthesumoftheworkelementsappearinginanyrowinFigure12-6.Thesecostscouldbe usedtoevaluatealternatetechnologiestoaccomplishparticularactivitiesortoderive theexpectedprojectcashflowovertimeastheschedulechanges.Fromamanagement perspective,problemsdevelopingfromparticularactivitiescouldberapidlyidentified sincecostswouldbeaccumulatedatsuchadisaggregatedlevel.Asaresult,project controlbecomesatoncemorepreciseanddetailed. Figure12-6 IllustrationofaCostAccountandProjectActivityMatrix Unfortunately,thedevelopmentandmaintenanceofaworkelementdatabasecanrepresent alargedatacollectionandorganizationeffort.Asnotedearlier,fourhundredseparate costaccountsandfourhundredactivitieswouldnotbeunusualforaconstructionproject. Theresultwouldbeupto400x400=160,000separateworkelements.Ofcourse,notall activitiesinvolveeachcostaccount.However,evenadensityoftwopercent(sothateach activitywouldhaveeightcostaccountsandeachaccountwouldhaveeightassociated activitiesontheaverage)wouldinvolvenearlythirteenthousandworkelements.Initially preparingthisdatabaserepresentsaconsiderableburden,butitisalsothecasethat projectbookkeepersmustrecordprojecteventswithineachofthesevariousworkelements. Implementationsofthe"workelement"projectcontrolsystemshavetypically fonderedontheburdenofdatacollection,storageandbook-keeping. Untildatacollectionisbetterautomated,theuseofworkelementstocontrol activitiesinlargeprojectsislikelytobedifficulttoimplement.However,certain segmentsofprojectactivitiescanprofittremendouslyfromthistypeoforganization.In particular,materialrequirementscanbetrackedinthisfashion.Materialsinvolveonlya subsetofallcostaccountsandprojectactivities,sotheburdenofdatacollectionand controlismuchsmallerthanforanentiresystem.Moreover,thebenefitsfromintegration ofscheduleandcostinformationareparticularlynoticeableinmaterialscontrolsince deliveryschedulesaredirectlyaffectedandbulkorderdiscountsmightbeidentified. Consequently,materialscontrolsystemscanreasonablyencompassa"work element"accountingsystem. Intheabsenceofaworkelementaccountingsystem,costsassociatedwithparticular activitiesareusuallyestimatedbysummingexpensesinallcostaccountsdirectlyrelated toanactivityplusaproportionofexpensesincostaccountsusedjointlybytwoormore activities.Thebasisofcostallocationwouldtypicallybethelevelofeffortor resourcerequiredbythedifferentactivities.Forexample,costsassociatedwith supervisionmightbeallocatedtodifferentconcretingactivitiesonthebasisofthe amountofwork(measuredincubicyardsofconcrete)inthedifferentactivities.With theseallocations,costestimatesforparticularworkactivitiescanbeobtained. Backtotop 12.9References AmericanSocietyofCivilEngineers,"ConstructionCostControl,"ASCEManuals andReportsofEngineeringPracticeNo.65,Rev.Ed.,1985. Coombs,W.E.andW.J.Palmer,ConstructionAccountingandFinancialManagement, McGraw-Hill,NewYork,1977. Halpin,D.W.,FinancialandCostConceptsforConstructionManagement,John Wiley&Sons,NewYork,1985. Johnson,H.ThomasandRobertS.Kaplan,RelevanceLost,TheRiseandFallof ManagementAccounting,HarvardBusinessSchoolPress,Boston,MA1987. Mueller,F.W.IntegratedCostandScheduleControlforConstructionProjects,Van NostrandReinholdCompany,NewYork,1986. Tersine,R.J.,PrinciplesofInventoryandMaterialsManagement,NorthHolland, 1982. Backtotop 12.10Problems Supposethattheexpectedexpenditureoffundsinaparticularcategorywasexpectedto behaveinapiecewiselinearfashionoverthecourseoftheproject.Inparticular,the followingpointshavebeenestablishedfromhistoricalrecordsforthepercentageof completionversustheexpectedexpenditure(asapercentageofthebudget): PercentageofCompletion ExpectedExpenditure 0%20%40%60%80%100% 0%10%25%55%90%100% a.Graphtherelationshipbetweenpercentagecompleteandexpectedexpenditure. b.Developaformulaorsetofformulasforforecastingtheultimateexpenditureonthis activitygiventhepercentageofcompletion.Assumethatanyoverorunderexpenditure willcontinuetogrowproportionatelyduringthecourseoftheproject. c.Usingyourformula,whatistheexpectedexpenditureasapercentageoftheactivity budgetif:     i.15%offundshavebeenexpendedand15%oftheactivityiscomplete.     ii.30%offundshavebeenexpendedand30%oftheactivityiscomplete.     iii.80%offundshavebeenexpendedand80%oftheactivityiscomplete. RepeatProblem1parts(b)and(c)assumingthatanyoverorunderexpenditurewill notcontinuetogrowduringthecourseoftheproject. Supposethatyouhavebeenaskedtotakeoverasprojectmanageronasmallproject involvinginstallationof5,000linearfeet(LF)ofmetalductworkinabuilding.Thejob wasoriginallyestimatedtotaketenweeks,andyouareassumingyourdutiesafterthree weeksontheproject.Theoriginalestimateassumedthateachlinearfootofductwork wouldcost$10,representing$6inlaborcostsand$4inmaterialcost.Theexpected productionratewas500linearfeetofductworkperweek.Appearingbelowisthedata concerningthisprojectavailablefromyourfirm'sjobcontrolinformationsystem: Week WeeklyUnitCosts($/Lf) QuantityPlaced(Lf) TotalCost Labor Materials Total Week ToDate Week ToDate 123 12.008.576.67 4.004.004.00 16.0012.5710.67 250350450 2506001,050 4,0004,4004,800 4,0008,40013,200 a.Basedonanextrapolationusingtheaverageproductivityandcostforallthreeweeks, forecastthecompletiontime,costandvariancefromoriginalestimates. b.Supposethatyouassumethattheproductivityachievedinweek3wouldcontinueforthe remainderoftheproject.Howwouldthisaffectyourforecastsin(a)?Preparenew forecastsbasedonthisassumption. Whatcriticismscouldyoumakeofthejobstatusreportinthepreviousproblemfromthe viewpointofgoodprojectmanagement? Supposethatthefollowingestimatewasmadeforexcavationof120,000cubicyardsona site: Resource Quantity Cost MachinesLaborTrucksTotal 1,200hours6,000hours2,400hours $60,000150,000     75,000$285,000 After95,000cubicyardsofexcavationwascompleted,thefollowingexpenditureshad beenrecorded: Resource Quantity Cost MachinesLaborTrucksTotal 1,063hours7,138hours1,500hours $47,835142,527     46,875$237,237 a.Calculateestimatedandexperiencedproductivity(cubicyardsperhour)andunitcost (costpercubicyard)foreachresource. b.Basedonstraightlineextrapolation,doyouseeanyproblemwiththisactivity?Ifso, canyousuggestareasonfortheproblembasedonyourfindingsin(a)? Supposethefollowingcostsandunitsofworkcompletedwererecordedonanactivity: Month MonthlyExpenditure NumberofWorkUnitsCompleted 123456 $1,200$1,250$1,260$1,280$1,290$1,280 303238424242 Answerthefollowingquestions: a.Foreachmonth,determinethecumulativecost,thecumulativeworkcompleted,the averagecumulativecostperunitofwork,andthemonthlycostperunitofwork. b.Foreachmonth,prepareaforecastoftheeventualcost-to-completetheactivitybased ontheproportionofworkcompleted. c.Foreachmonth,prepareaforecastoftheeventualcost-to-completetheactivitybased ontheaverageproductivityexperiencedontheactivity. d.Foreachmonth,prepareaforecastoftheeventualcost-to-completetheactivitybased ontheproductivityexperiencedinthepreviousmonth. e.Whichforecastingmethod(b,cord)ispreferableforthisactivity?Why? RepeatProblem6forthefollowingexpenditurepattern: Month MonthlyExpenditure NumberofWorkUnitsCompleted 123456 $1,200$1,250$1,260$1,280$1,290$1,300 303545485254 Whyisitdifficulttointegrateschedulingandcostaccountinginformationinproject records? Prepareascheduleprogressreportonplannedversusactualexpenditureonaproject (similartothatinFigure12-5)fortheprojectdescribedinExample12-6. Supposethatthefollowingtenactivitieswereagreeduponinacontractbetweenan ownerandanengineer. OriginalWorkPlanInformation Activity Duration(months) Predecessors EstimatedCost($thousands) ABCDEFGHIJ 25523844112 ------BCB---E,FE,FBE,F 79841765107 OriginalContractInformation       TotalDirectCost       Overhead       TotalDirectandOverhead       Profit             TotalContractAmount $6464128     12.8$140.8 FirstYearCashFlow       Expenditures       Receipts $56,000$60,800 Themarkupontheactivities'costsincluded100%overheadandaprofitof10%onall costs(includingoverhead).Thisjobwassuspendedforoneyearaftercompletionofthe firstfouractivities,andtheownerpaidatotalof$60,800totheengineer.Nowthe ownerwishestore-commencethejob.However,generalinflationhasincreasedcostsbyten percentintheinterveningyear.Theengineer'sdiscountrateis15percentperyear(in currentyeardollars).Forsimplicity,youmayassumethatallcashtransactionsoccurat theendoftheyearinmakingdiscountingcalculationsinansweringthefollowing questions: a.Howlongwillberemainingsixactivitiesrequire? b.Supposethattheowneragreestomakealumpsumpaymentoftheremainingoriginal contractatthecompletionoftheproject.Wouldtheengineerstillmakeaprofitonthe job?Ifso,howmuch? c.Giventhattheengineerwouldreceivealumpsumpaymentattheendoftheproject,what amountshouldherequestinordertoearnhisdesiredtenpercentprofitonallcosts? d.Whatisthenetfuturevalueoftheentireprojectattheend,assumingthatthelump sumpaymentyoucalculatedin(c)isobtained? BasedonyourknowledgeofcodingsystemssuchasMASTERFORMATandestimating techniques,outlinetheproceduresthatmightbeimplementedtoaccomplish: a.automatedupdatingofdurationandcostestimatesofactivitiesinlightofexperience onearlier,similaractivities. b.interactivecomputerbasedaidstohelpaprojectmanagertoaccomplishthesametask. Backtotop 12.11Footnotes 1.CitedinZoll,PeterF.,"DatabaseStructures forProjectManagement,"ProceedingsoftheSeventhConferenceonElectronic Computation,ASCE,1979.Back 2. ThomasGibbreportsamediannumberof400costaccountsforatwo-million dollarprojectsinasampleof30contractorsin1975.SeeT.W.Gibb,Jr.,"Building ConstructioninSoutheasternUnitedStates,"SchoolofCivilEngineering,Georgia InstituteofTechnology,1975,reportedinD.W.Halpin,FinancialandCostConceptsfor ConstructionManagement,JohnWileyandSons,1985.Back 3. ThisillustrativesetofaccountswasadaptedfromanASCE ManualofPractice:ConstructionCostControl,TaskCommitteeonRevisionof ConstructionCostControlManual,ASCE,NewYork,1985.Back 4. Forafullerexpositionofthispoint,seeW.H.LucasandT.L. Morrison,"ManagementAccountingforConstructionContracts,"Management Accounting,1981,pp.59-65.Back 5. Foradescriptionofthesemethodsandexamplesasused byasampleofconstructioncompanies,seeL.S.Riggs,CostandScheduleControlin IndustrialConstruction,ReporttoTheConstructionIndustryInstitute,Dec.1986. Back 6. AsreportedintheWallStreetJournal,Feb.19,1986,pg.A1,c.4. Back 7. H.T.JohnsonandR.S.Kaplan,Relevance Lost,TheRiseandFallofManagementAccounting,HarvardBusinessSchoolPress,pg. 1,1987.Back 8.Oneexperimentalprogram directedatthisproblemisaknowledgebasedexpertsystemdescribedinR.E.Levittand J.C.Kunz,"UsingKnowledgeofConstructionandProjectManagementforAutomated ScheduleUpdating,"ProjectManagementJournal,Vol.16,1985,pp.57-76. Back 9.Foranexampleofa prototypeinteractiveprojectmanagementenvironmentthatincludesgraphicaldisplaysand schedulingalgorithms,seeR.Kromer,"InteractiveActivityNetworkAnalysisUsinga PersonalComputer,"UnpublishedMSThesis,DepartmentofCivilEngineering, Carnegie-MellonUniversity,Pittsburgh,PA,1984.Back 10. AthreedimensionalworkelementdefinitionwasproposedbyJ.M. Neil,"ASystemforIntegratedProjectManagement,"Proceedingsofthe ConferenceonCurrentPracticeinCostEstimatingandCostControl,ASCE,Austin, Texas,138-146,April1983.Back PreviousChapter | TableofContents | NextChapter