Project Reporting - the What, the Why, and the How?
After spending 4-5yrs studying differential equations at university, we find ourselves on a project forecasting a cost code for end of month. Our only training is trial by error and hopefully a bit of mentoring. As Engineers, we end up figuring it out and getting pretty good at it. However, it is not the most efficient way to learn. The purpose of this articles is to break down project end of month reporting to the fundamentals and answer the “why” not just the “how”.
As a business, it is important to understand the financial performance of the project throughout the life of the project, to;
Be able to make informed financial decisions
Provide feedback to the tendering department
Provide support and mitigation measures as necessary.
A project may be making or losing money at any one point in time due to; over/underclaims or certain activities making/losing money (e.g. earthworks loses money at the start but pavement makes money at the end). A business cares about reliability of information. Reporting losses one month, and then gains the next month only serves to make your reporting unreliable. For this reason, the true measure is on the completion of the job. However, a business cannot function with the mentality of “wait until the project is finished to see if we made or lost money”. So we must report every month forecasting to the end of the project.
The financial reporting on projects ultimately leads to the calculation of the final margin or margin at completion (MAC). All other measures and metrics are intended as tool to verify the veracity and accuracy of the reported MAC. If you remember this, you will always understand where to apply the focus.
Cost vs Revenue
All complexity aside, the only thing that keeps you in busy is: money coming in (Revenue) is larger than money going out (Costs). The difference at the project level, is your margin.
Margin at Completion (MAC) = Revenue at Completion (RAC) – Cost at Completion (CAC)
Revenue at Completion (RAC) should be calculated by:
Remeasuring quantities at completion (QAC) through survey and remeasures (this is only applicable for Schedule of Rates contracts)
Remeasuring provisional items based on the expected totals.
Adding approved variations
Adding rise & fall as applicable
Cost at Completion (CAC) = Cost to Date (CTD) + Cost to Complete (CTC)
Cost to Date:
This should be the total from your accounting software, which should include:
Payroll
Received invoices
Accruals for incurred costs that haven’t been invoiced
Cost to Complete:
This the forecast of expected expenditure based on:
Cost performance to date
Known procurement gains/losses
Latest programmed duration remaining,
Otherwise based on tendered budget allowance
Costs vs Budget
Before the cost at completion can be determined, one must first understand both the cost to date and the cost performance to date. This entails comparing costs vs budget: to date, to complete, and at completion.
Similar to costs and revenue, the budget is defined in a; to date, to complete, and at completion number.
Earned Budget (EB), (to date)
Budget to Complete/Budget Remaining (BTC), (to complete) and
Budget at Completion (BAC) (at completion)
EB = Earned Quantities (EQ) * Budget Rates
Earned Quantity: the quantities of works completed (note this is a different concept to qty of works claimed. you may over or underclaim. this is a measure of what you have achieved)
Budget Rates: established from the tender. Generally, it is the sell rate minus the tendered margin
Budget at Completion (BAC) = Quantities at Completion (QAC) * Budget Rates
The QAC is the same value used to measure RAC. Thus, ensuring apples for apples.
Budget to Complete (BTC) = BAC -EB
To Date:
If calculated correctly, the Cost To Date should include all costs incurred to date (i.e. no missing costs).
If measured correctly, the EB should be reflective of the budget earned from actual works complete (not taking in to account any underclaims or overclaims).
Therefore, the comparison of the EB and CTD will reveal the to date position. The following two metrics are used to analyse this position:
Gain/Loss = EB – CTD
This highlights in dollar value whether the works were completed ahead of or behind budget.
Note Gain/Loss is a different concept to margin/profit because it compares to budget, not to revenue.
Cost Performance Index (CPI) = EB/CTD
This shows in relative terms how far ahead/behind budget the actual works have been completed by
CPI = 1 - On budget
CPI<1 – over budget
CPI>1 – below budget
These metrics are useful tools to sanity check both the EB & CTD. Is the data in line with expectations from the daily and weekly tracking? If not, could there be costs missing, or mis-coded? If not, could there be an error in the measurement of the earned quantity (EQ)?
To Complete:
The Cost to Complete (CTC) is commonly referred to as the forecast. The fundamental idea of the forecast, is to re-estimate the remainder of the project based on the latest and greatest information available.
The first forecast is the tender. This is the best estimate of the costs remaining at that stage of time before the project was awarded.
Subsequently, the upon project start-up and early procurement, more data is known, in particular the procurement gains/losses. So with this new information, a new and more accurate estimate can take place.
After the first month of works, the cost of works completed can be removed from the forecast. This is often referred to as winding down the forecast. Additionally, the data from the cost tracking can be used to adjust the forecast rates accordingly.
Cost at Completion:
This is the most important cost to calculate. All other metrics are used to evaluate the reliability of this value.
The cost at completion (CAC) is the sum of the CTD & CTC. Upon project award, the CAC is entirely CTC. However, each following month, the CAC will be more and more comprised of CTD and less of CTC. Therefore, it is expected that the CAC will become more and more accurate towards completion, due to the following reasons:
CTD are actual incurred costs, rather than estimated costs. Therefore, the higher the percentage of CTD, the more accurate the CAC
The more actual cost and performance data at hand, the more accurate the CTC can be calculated.
The less CTC remaining, the less variability possible in forecasted vs actual.
Common Forecasting Errors:
Not measuring apples to apples with quantities to calculate costs and revenue. If the QAC completion is remeasured either up or down for revenue, the new quantity must also be reflects in the cost at completion (and vice versa).
E.g. if 100m3 of concrete was remeasured to 120m3 of concrete in the calculation of Revenue at Completion (RAC), then the forecast CTC must also reflect 120m3. Otherwise an artificial gain will be calculated.
Winding down the forecast before the costs have landed.
E.g. 20 precast headwalls have been delivered, so the cost for the headwalls is removed from the forecast (CTC). However, the invoice hasn’t landed nor has the cost been accrued. Therefore, the cost is no longer in the CAC and an artificial gain has been fabricated.
A helpful visual tool to help understand the concept of the forecast: First, imagine a project with $100 budget that is performing exactly at budget. Now imagine two buckets, representing the CTC and CTD respectively. At the start of the project, all $100 is in the CTC bucket. However, as each month goes by and more costs are incurred, more money is taken out of the CTC bucket and placed in the CTD bucket. The total amount remains $100 (CAC).
Missing or over reporting costs to date.
Missing or over reporting CTD, will, all else being equal, create an artificial gain/loss in the CAC equal to the missing or over reported cost.
If the CPI to date is used as a metric to inform the forecast rate, then the error could be extended by applying the erroneous rate across the forecast.
Common Acronyms/Terms:
RAC: Revenue at Completion
RTD: Revenue to Date
RTC: Revenue to Complete
CAC: Cost at Completion/Forecast at Completion
CTD: Cost to Date
CTC: Cost to Complete/Forecast
MAC: Margin at Completion
BAC: Budget at Completion
EB: Earned Budget
BTC: Budget to Complete/Remaining Budget
CPI: Cost Performance Index
CPITC: CPI to Complete
CPIAC: CPI at Completion
Cash Position
“Revenue is vanity, Profit is sanity, Cash is King!”
Most failed businesses have failed due to lack of cash flow, rather than lack of profitability. Therefore, cash position remains an important metric to be included in the monthly report.
Cash Position = Total Invoiced Revenue to Date – Total Cost to Date
Total Invoiced Revenue to Date = Total certified to date – retention
Total Cost to Date = All invoiced and accrued costs to equal total incurred (same as the CTD used elsewhere).
Risks & Opportunities
Risks and Opportunities are used to account for the financial impact of uncertain events that are not taken into consideration in the claim.
Note a risk has a negative impact on margin if realised, and an opportunity has a positive impact on margin if realised.
All risks and opportunities have a potential impact to the project’s margin, and the key parameters in calculated the probable impact to margin is as follows:
Revenue if realised: If the Risk/Opportunity is realised, what is the impact to the RAC (positive or negative) that has not already been considered in the reported RAC
Cost if realised: If the Risk/Opportunity is realised, what is the impact to the CAC (positive or negative) that has not already been considered in the reported CAC
Probability: Expressed as a percentage, what is the likelihood of the Risk/Opportunity being realised.
Weighted Risk/Opportunity = (Revenue if realised – Cost if realised) * Probability
The key consideration, when populating the R&O register, if to ensure that only costs and revenues that are NOT included in the RAC and CAC are included here.
