europe - Project Controls · Accounting Techniques and Performance Metrics –BAC, EAC, AC & ETC...

evaeuropeGENEVA 2009

Geneva School of Business Administration Haute école de gestion de Genève

EVA EuropE 2009 wAs jointly orgAnisEd by pArtnErsgold sponsors

© 2009, CErn, HEg, AutHors - tHis mAtEriAl is proVidEd CourtEsy of EVA EuropE 2009, tHE EuropEAn orgAnisAtion for nuClEAr rEsEArCH(CErn), tHE gEnEVA sCHool of businEss AdministrAtion (HEg) And tHE AutHors. All rigHts rEsErVEd. tHE ContEnts mAy not bE rEproduCEd witHout pErmission of tHE AutHors And EVA EuropE.

©©Supertech Project ManagementSupertech Project Management

YOUR PRESENTERYOUR PRESENTERRoland Horat Roland Horat

Managing Director and Director Business, GlobalManaging Director and Director Business, GlobalSupertech Project Management (Australia)Supertech Project Management (Australia)

Integration , Synchronization and Merging Earned Value Performance Measurement with Traditional Job Cost accounting Practices


Why EVPM Discipline Results In Superior Reporting, Forecasting And

Project Control To Accounting Practices.

Topics:Topics:

EVPM Performance Metrics and Definitions.EVPM Performance Metrics and Definitions.

Accounting Performance Metrics and Definitions.Accounting Performance Metrics and Definitions.

Variances and Indices Formulae and InterpretationVariances and Indices Formulae and Interpretation

Basic Definitions:

1.Budget At Completion [BAC] — the sum of all budgets established for the work to be performed on a project or a work breakdown structure component or a schedule activity. The total planned value for the project. (PMBOK® Guide)*(Used By Both EVPM & Job Cost Accounting Systems)

2. Estimate At Completion [EAC] — the expected total cost of a schedule activity, a work breakdown structure (WBS) component or the project when the defined scope of work will be completed. The EAC may be calculated based on performance to date or estimated by the project team based on other factors, in which case it is often referred to as the latest revised estimate. (PMBOK® Guide)*(Used By Both EVPM & Job Cost Accounting Systems)

Note : At the project EAC = BACNote : As the project progresses the EAC ≠ the BAC

Metrics Available In Both Systems For Measuring And Reporting PeMetrics Available In Both Systems For Measuring And Reporting Performance .rformance .


EVPM Based Performance Metrics EVPM Based Performance Metrics –– Planned Value [PV]Planned Value [PV]


3. Planned Value (PV) — the authorized budget assigned to the scheduled work to be accomplished for a scheduled activity or work breakdown structure (WBS) component. Also referred to as the budgeted cost of work scheduled (BCWS). (PMBOK®Guide)*

(Used By both EVPM And Advanced Accounting Systems)

Data Requirements

EVPM Based Performance Metrics – Earned Value [EV]

4. Earned Value (EV) — the value of work performed expressed in terms of the approved budget assigned to that work for a schedule activity or work breakdown structure (WBS) component. Also referred to as the budgeted cost of work performed (BCWP). (PMBOK® Guide)*

(Used By EVPM Systems Only)


EVPM Based Performance Metrics – Actual Cost [AC] & Estimate To Complete [ETC]

5. Actual Cost (AC) — total costs actually incurred and recorded in accomplishing work performed during a given time period for a schedule activity or work breakdown structure component. Actual cost can sometimes be direct labor hours alone, direct costs alone or all costs including indirect costs. Also referred to as actual cost of work performed (ACWP). (PMBOK® Guide)*(Used By Both EVPM & Job Cost Accounting Systems)


Data Requirements

EVPM Based Performance Metrics – Key Definitions [Combined]


* All of these PMBOK© Guidereferences together will the others in this Guide are taken from the Project Management InstitutesProject Management Body of Knowledge (PMBOK® Guide) —Fourth Addition. For more information www.pmi.org.

Accounting Techniques and Performance Metrics – BAC, EAC, AC & ETC


* Accounting Systems use the Estimate At Completion [EAC] where the Actual Cost [AC] representing the Cumulative accrued value to the report Period is summed to the Estimate to Completion [ETC] for the remaining work. The Combined Value is then Compared Against the Budget At Completion [BAC] and the variance [VAC] noted.

Data Requirements

Accounting Techniques and Performance Metrics – BAC, EAC, PV, AC & ETC


* Advanced Accounting Systems use the Planned Value [PV] with the Actual Cost [AC] to determine the SPV the Spending Variance. This represents whether the spending rate is under or over that planned. The technique does not take earned value into account. As represented in the example an overspend trend is not recognized until the later third of the project.

Data Requirements

$PV(Scheduled Dollars)

$AC(Spent Dollars)

Cost Performance Index(CPI)

CPI = EV/AC

Schedule Performance Index(SPI)

SPI = EV/PV

Spending Rate Index (SRR)SRI = PV / AC

Cost Variance (CV)CV = EV‐AC

Schedule Variance (SV)SV = EV ‐ PV

$EV(Achieved Dollars)

Spending VarianceSPV = PV ‐ AC

EVPM And Accounting Variances and Indices

Advanced Accounting

All Part Of EVPM


Cost Variance (CV) is defined as the variance between the EV ‐ Earned Value and the AC ‐ Actual Cost. The CV determines by cost amount how much each task and project overspends or under‐spends its allocated budget.

This is interpreted as overspending.If CV <$0.00

This is interpreted as either breaking even or making a cost saving.If CV =>$0.00

CV = EV – AC (EVPM)

Schedule Variance (SV) is defined as the variance between the EV ‐ Earned Value and the PV ‐ Planed Value. The SV determines by cost amount how much each task and project is behind or ahead of the baseline (Contract) plan.

This is interpreted as behind schedule.If SV <$0.00

This is interpreted as either on schedule or ahead of schedule.If SV =>$0.00

SV = EV – PV (EVPM Only)

Spending Variance (SPV) is defined as the variance between the PV ‐ Planned Value and the AC ‐ Actual Cost and is used to determine the shortfall or surplus of funds available to the project where funding is provided strictly in accordance with the PV ‐ Planned Value.

This is interpreted as there being a shortage of funds to sustain the project.If SPV <$0.00

This is interpreted as a surplus of funds is available to meet actual/accrued costs.If SPV >$0.00

SPV = PV – AC (Accounting)

On completion of the project, the SPV = BAC ‐ EAC as the PV = BAC and the AC = EAC.

EVPM Definitions

Schedule Performance Index (SPI) ‐ is used to assess schedule performance at the project task outline level.

Cost Performance Index (CPI) ‐measures cost performance at the project task outline level.

Spending is less than the allocated budget indicating a cost saving.If CPI is > 1

Spending for the work completed is greater than the allocated budget indicating overspending.If CPI is < 1

CPI = EV/AC (EVPM Only)

Project is ahead of the scheduled baseline and will be delivered early.If SPI is > 1

Project is behind the scheduled baseline completion and will be delivered late.If SPI is < 1

SPI = EV/PV (EVPM Only)

At completion of the project the SPI is always = 1.0 as the EV = PV = BAC

Spending Rate Index (SRI) ‐ is used to assess the availability of funding to a project where funds are released in accordance with the PV ‐ Planned Value. The SRI ‐ Spending Rate Index should not be used as an alternative to theCPI to assess cost performance.

At completion of the project the SPI is always = 1.0 as the EV = PV = BAC

Spending is less than the Planned Value, sufficient funds are available to sustain the current work.If SRI is > 1

Spending is outpacing the Planned Value, indicates a shortage of funds to sustain the project.If SRI is < 1

SRI = PV/AC (Accounting Only)


Case Study – Using Variances To Identify Early Trends In Poor Performance


EVPM CV Establishes A Cost Trend from the Start of the Project

SPVAccounting Establishes a Negative Cost Trend In the Later Part of The project

Spending Variance Is Sometimes Misinterpreted as Cost Variance

CV Recovery Reaction Time Possible

Recovery Too Late

Case Study – Using Performance Indices To Early Trends In Poor Performance


EVPM CPI Establishes A Cost Trend from the Start of the Project

SPIAccounting Establishes a Negative Cost Trend In the Later Part of The project

Recovery Reaction Time Possible

Recovery Too Late

Spending Index Is Misinterpreted as Cost Performance Index

EV, PV, and AC Predictive Formula Based Forecasting (Not Part Accounting Practice)


The Independent Estimate At Completion, (IEAC) is an estimate based on attributes of past performance and how that might effect future performance. Examples include:

IEAC1 = AC + (BAC‐EV)/CPI where it is assumed the future cost performance is entirely based as that of the past.

IEAC2 = AC + (BAC‐EV)/(0.8xCPI + 0.2xSPI) where it is assumed the future cost performance will be influenced by 80% of the past cost and 20% past schedule performance.

IEAC3 = AC + 3x(BAC‐EV)/(CPI1 + CPI2 + CPI3) where the future cost performance will be influenced by that of the past three report periods.

IEAC4 = AC + (BAC‐EV)/(CPIxSPI) where the future cost performance will be influenced by past cost and schedule performance.

The Mathematical Estimate At Completion, (MEAC) is an estimate where the future cost performance is entirely dependant on the remaining budgeted cost. Formula: MEAC = AC + (BAC‐EV)

Predictive Formula To Adequacy of BAC and EAC (Not Part Accounting Practice)


To Complete Performance Index, TCPI (BAC) determines the “Efficiency Factor” and indicates how well the project or project elements need to perform in comparison with the baseline plan from the report period to completion in order to achieve the current (BAC) Budget At Completion.

It is unlikely that the BAC ‐ Budget At Completion will be achieved during the remaining work periods to completion. Indicator of an unfavorable cost performance in the future. Performance needs to be better than planned.

If TCPI is > 1

It is likely that the BAC ‐ Budget At Completion will be achieved during the remaining work periods to completion.

If TCPI is < 1

TCPI (BAC) = (BAC‐EV)/(BAC‐AC)

To Complete Performance Index, TCPI (EAC) indicates how well the project or project elements need to perform in comparison with the baseline plan from the report period to completion in order to achieve the current (EAC) Estimate At Completion.

It is unlikely that the EAC will be achieved during the remaining work periods to completion. Indicator of an unfavorable cost performance in the future. Performance needs to be better than planned.

If TCPI is > 1

It is likely that the EAC will be achieved during the remaining work periods.If TCPI is < 1

TCPI (EAC) = (BAC‐EV)/(EAC‐AC)

Profit Versus Planned Profit, Taking Account of Revenue (Not Part of EVPM Practice)Useful Extension to EVPM that facilitates Time Phased Profit Analysis


SP Sell Price/Revenue is generally a Multiplier of the BAC

PSP Planned Revenue is treated as PV

ESP Earned Revenue is treated as EV

At Completion both the ESP and PSP ‐ SP

At Completion:

PP Planned Profit = SP ‐ BAC

P Profit = SP ‐ EAC

ESP Earned Revenue is treated as EV

During Project Implementation:

PP Planned Profit = ESP ‐ EV

P Profit = ESP ‐ AC

Why EVPM Discipline Results In Superior Reporting, Forecasting And Project Control.

EVPM System Standard:

Supports Schedule & Cost Variances

Supports Schedule & Cost Performance Indices

All Data analysis is Time Phase.

Has extensive predictive algorithms based on historical performance.

EVPM Advanced/Extended:

Extended to Profit and Loss

Can be extended to Work and Commodity Usage Analysis

Used for Combined Cost, Work and Commodity usage KPI’s

Other:

Requires schedule and Cost resource integration.

Reporting is Both WBS, CA and OBS based.

Accounting System Standard

Limits performance analysis to Planned Value [PV], Actual Cost [AC] and the Estimate to Complete [ETC].

Excludes from the analysis Earned Value [EV] therefore limited forecasting based on AC and ETC, Excludes CPI and SPI.

Uses Spending Variance [SPV] and Spending Rate Index [SRI] as substitutes for CV and CPI

Performance measurement and reporting limited to a Control/Cost Account. Using EVPM this can be done by WBS, CA, WP or any Code Grouping.

Limited Productivity based analysis. AC/AW versus Published Averages.

Cash flow analysis does not include the rigors of EVPM.

Simplified Baseline Control PV


Disadvantages of Posting Actual Cost Data to Tasks Versus Project Account and

Work Package level.

Topics:Topics:

Commercial EVPM Environment, Data Repositories Commercial EVPM Environment, Data Repositories And Sources And Sources –– System Options System Options

Posting Posting ActualsActuals At Task Level to Scheduling Software At Task Level to Scheduling Software Versus Versus ActutalsActutals By Cost Account [CA] and By Work By Cost Account [CA] and By Work Package [WP].Package [WP].


Disadvantages of Posting Actual Cost Data to Tasks Versus Project Account and

Work Package level.

Topics:Topics:

Commercial EVPM Environment, Data Repositories Commercial EVPM Environment, Data Repositories And Sources And Sources –– System Options System Options

Posting Posting ActualsActuals At Task Level to Scheduling Software At Task Level to Scheduling Software Versus Versus ActutalsActutals By Cost Account [CA] and By Work By Cost Account [CA] and By Work Package [WP].Package [WP].

Dedicated EVPM

Middle Ware

Option 2 Post Actuals to Job Cost Accounting & Time Sheeting Systems, then Import or Post In Scheduling System

Option 1: Post Actuals To Planning

Software

Option 3: Import Schedule Data To

Accounting Systems

Undertake EVPM Analysis & Reporting

Option 4: Import Schedule & Cost

Data From Planning Software To EVPM

Middle Ware

Produce Planning Software EVPM

Reports

Produce EVM Reports from Within the Job Cost Accounting System

Commercial EVPM Environment, Data Repositories And Sources Commercial EVPM Environment, Data Repositories And Sources –– System OptionsSystem Options


Some Financial Systems products have their own EVM engines.

Mainstream scheduling software have limited EVPM features. Have their own or interface with other dedicated EVPM products.

EVPM Middleware has wide ranging capabilities .

EVENGINE for example has EVPM for cost, work and commodity usage, contract administration and financial modelling.

Option 5: Import ActualsPosted to Job Cost

Accounting System To EVPM Middle Ware

Disadvantages of Posting Actual Cost Data to Tasks Versus Project Account and Work Package level.

Method 1: Posting Actual Data Each report Period against each task and each assigned resource.

Time consuming, with large time sheets, to be completed. Should weigh the value of this method.

Method 2: Collecting Actual Data At Cost Account or Work Package Level by Report Period.

ACTUALS

Advantages: Limited Number Of Cost Accounts For Tracking And Reporting, Lower Overhead. Maintaining The Accuracy of PV, EV, ETC Is Established At Task Level.

AC CA/WP LevelAC CA/WP LevelETC at Task and Resource levelETC at Task and Resource level


Topics:Topics:

Problems with Schedule and Cost Data Problems with Schedule and Cost Data Synchronization.Synchronization.

Understanding the Accrual Methodology.Understanding the Accrual Methodology.


Data Synchronization Between EVPM and Job Cost Accounting System

EVPM assumes cost and units of work incurred [Actuals] and committed [ETC] correspond to the scheduled dates.

The problems:

A time lag between the collection and confirmation of actual cost and work as recorded in a Job Cost Accounting system and the status of the project. Data can be out of sync by as much as one month or may be incomplete.

Question: Does the Job Cost Accounting System allow Entry Reversals of Estimated Actuals, and the Reposting of Actuals to the previous report period.


Problems With Data SynchronizationEVPM reporting requires and relies on all schedule, work and cost data to be maintained and be current at the report status date. This includes actual/spent data, commitments and forecasts for future remaining work.

AC To DateAC To Date ETC To DateETC To Date

Step 2: During the next report period the accrued values are reversed out of the ledger and substituted with real time sheet and approved invoice values and the cycle is repeated. Check as some Accounting System do not allow reversals to be made to the previous report period.


Understanding the Accrual MethodStep 1: At the report period, the actual data for cost and work is reviewed and as required Estimated Actuals injected to the job cost accounting system to cover the cost and work notinvoiced or posted. This balancing of the books is referred to as the Accrual Method.

Concerns: If real and Accrued Actuals are not taken account off, Trends and forecasts on the Estimate to Complete can be under stated. ( CV, CPI, IEAC)Adjustments are best made through Middle Ware EVPM products such as EVENGINEwhich take account of past period accrual adjustments.

ACAJHistorical

AJ = Adjusted, AC = Actuals With Accrual Adjustment


EVPM For Determining The Real Project Cash Position, Profit And Loss

Statement.

Topics:Topics:

Understanding the Difference Between EVPM and Understanding the Difference Between EVPM and Commercial Based Cash Flow.Commercial Based Cash Flow.

Uses for Commercial Cash Flow Analysis.Uses for Commercial Cash Flow Analysis.


EVPM Does Not Take Account Of Negotiated Commercial Payment Conditions

45 DAY CLIENT PAYMENT TERMS

7 DAY LABOUR

30 DAY SUPPLIER TERMS

EVPMMethodology Needs To Be Extended/Tailored For Commercial Performance Analysis

Benefits of Real Cash Flow Modelling:

Understand the Negative cash position and establish the Amount of Project Financing required.

In the event of project delays what is the impact of the cash position of project financing.

How to ensure the project stays at least cash neutral?

Negotiate and Up Front Cash Payment

Front Load early tasks to ensure finance costs are minimized.

How to Model Real Cash Flow:

Use the Profit [P] and Planned Profit [PP] Extended EVPM Definitions.

Time shift EVPM based Time Phased Data.

Real Cash Flow Takes Account of the Negotiated Payment Terms

Example Terms


Comparison Between EVPMComparison Between EVPM and Commercial Based Cash Flowsand Commercial Based Cash Flows

EVPM Based Cash Position Commercial Cash Position

EVPM

EVPM

Commercial

Commercial


EVPM To Undertake The Traditional Job Cost Accounting Payment Role.

Topics:Topics:

Setting Up The Schedule and EVPM Code Structure Setting Up The Schedule and EVPM Code Structure To Facilitate PaymentsTo Facilitate Payments

Certificates of PaymentsCertificates of Payments

EVPM Can Be Extended to Undertake Certificate of Payments and Claims


Step 1. Step 1. Distributed the BAC, EAC and SP to each activity. Then if the activity is completed payment is due.

EAC = Subcontract Price

Then Certificates of Subcontractor Payments = Sum of EAC for Completed Work this period less value for last period.

SP = Main Contractor Revenue

Then Certificates of Claim = Sum of SP for this period less value for last period.

EVPM Can Automates Certificates of Claim & PaymentsEVPM Can Automates Certificates of Claim & Payments

Step 2. Step 2. Systematically Update the Schedule each report period and recalculate payment due. The difference between report periods is the certificate of Payment.


EVPM Techniques To Determine The Viability Of A Project And Its

Financial Performance As It Moves Through Its Life Cycle From Concept,

To Delivery.

Topics:Topics:

EVPM and The Project Life CycleEVPM and The Project Life Cycle

Determining The Viability Of Projects Using EVPM Determining The Viability Of Projects Using EVPM Modelling With Discounted Cash Flow. Modelling With Discounted Cash Flow.


Build a Project time phased financial model, then update and maintain through the project development phases:

Concept Phase

Using EVPM and the Project Life CycleUsing EVPM and the Project Life Cycle

Concept Phase: Initial business study to confirm the economic viability of the project.

Selection Phase: A number of Technology Studies are undertaken to determine the best technical solution for the project. At the end of the phase only one technology, contract management strategy should go forward. Estimate is at +/‐ 30%

Definition Phase: The engineering level is at 80% with placement of long lead items for equipment with suppliers. All contract work packages are identified, early works designs completed in readiness for the Execution phase. Estimate +/‐ 20%

Execution Phase: Engineering is rapidly progressed to 100% based on Supplier information and committments, Construction works commences and is completed in this phase with full EVPM control systems in place and functional by Area/Facility/Commodity using Control Accounts [CA] and Work Packages [WP]. Estimate +/‐ 10%

Execution PhaseDefinition PhaseSelection Phase


Financial Model

Model Each Phase Using Scheduling Software Using Cost AssignmenModel Each Phase Using Scheduling Software Using Cost Assignmentsts

Concept Level Management Schedule

Concept Level Engineering 5‐10%

Concept Level ExecutionSchedule

Selection Phase Level Schedule

Concept Level Revenue Model

Definition Phase Level Schedule

The schedule and EVPM model is continuously revised from one phase to the next to reduce risk.


Financial Model

Use EVPM Based Cash Flow And Apply Discounted Cash Flow PrinciplUse EVPM Based Cash Flow And Apply Discounted Cash Flow Principles es

Investment Return Period Cash Position = $0

Construction Period

Plant In productionPhase 1 to 3 Period

Internal Rate of return = 34% with 8% Finance Interest

1. Determine the viability of the project and rank with respect to the IRR. Make a project selection.2. Repeat the process through each phase of the project to confirm the project viability


What Cultural Change Will EVPM Have On The Way The Company

Does Business.

Topics:Topics:

EVPM By StealthEVPM By Stealth

Integration of Professional Disciplines and SkillsIntegration of Professional Disciplines and Skills


Most organizations already undertake EVPM reporting by stealth.

Most of the data is available but locked up in some vertical silos, Vertical Silos Can include: Scheduling, Estimating, Project Controls, Finance and Accounting Departments. Access may be restricted by technology, political, management structure.

Implementation of effective EVPM requires Project Management skills to be raised to an advanced level where the project management team understands:

1. Estimating 2. Planning

3. Accounting And Finance Practices4. Integration of The Three

Successful EVPM implementation requires company commitment beyond the purchase of the software,

May require significant cultural change in doing business and accountability.

Successful EVPM depends on investment in people with the appropriate project management skills.



These skills should be found in personnel with Tertiary qualifications in Project Management or are Accredited as Management Professionals through the PMI.

Alternatively, select and stream suitable technical or commercial candidates from within the organization to undertake subject specific training courses, then place on rotation within and organization to gain the practical experience.

Supertech Project Management Offers a Range of Courses.

Hire specialist consultants to establish the EVM Environment, then mentor and support the organization until sufficient staff have gained the experience and confidence to manage projects in their own right.


Integration , Synchronization and Merging Earned Value Integration , Synchronization and Merging Earned Value Performance Measurement Performance Measurement with Traditional Job Cost accounting with Traditional Job Cost accounting PracticesPractices

QUESTIONS AND ANSWERS ?QUESTIONS AND ANSWERS ?

ALL GRAPHS AND REPORTS PRODUCED USING ALL GRAPHS AND REPORTS PRODUCED USING SUPERTECHSUPERTECH’’SS EVENGINEEVENGINE MICROSOFT EXCEL ADDMICROSOFT EXCEL ADD‐‐IN EVPM IN EVPM

PROJECT CONTROL SOFTWAREPROJECT CONTROL SOFTWARE

For more information visit For more information visit www.suptec.netwww.suptec.net

europe - Project Controls · Accounting Techniques and Performance Metrics –BAC, EAC, AC & ETC...

Documents

Transcript of europe - Project Controls · Accounting Techniques and Performance Metrics –BAC, EAC, AC & ETC...