WP02 Accounting Software Can Help You Avoid Budget Overruns By: Michael Ingardia Most A/E-oriented accounting software available today has standard project reports that track progress made during the life of the project. These applications usually allow project managers (PMs) to budget projects on three levels: job, phase, and task. The top level (level 1), labeled Job or Project, usually represents the entire scope of a design project. The scope usually consists of multiple-time-sequence-oriented phases (level 2) covering preliminary concept to design development, construction documents, bidding, construction inspection, and post-construction. Each level-2 phase can, in turn, be broken up into numerous small tasks (level 3). An example of one such task might be completion of the drainage design on a street-widening project. This task could be budgeted to include the time the engineer will need to lay out the drainage areas, calculate water flow volumes, and design storm water drainage systems, as well as the CAD technician s time to complete the necessary construction drawings. Project progress reports can be set up to inform the PM about the progress of the drainage task by showing the actual labor cost expended against what was allotted for this aspect of the project in the original budget. But does a typical budget-vs.-actual-labor-cost report give the PM a reliable measurement of the real progress on this task? Unfortunately, the answer is no. Though the accounting procedure used by many A/E design firms requires the PM to enter the percentage complete at the project level (level 1) to reflect the appropriate percentage for invoicing purposes, this does not inform the PM of the real progress being made at the task level (level 3) on the numerous tasks needed to complete the project. Why standard project reports don t measure the project s actual progress. If, for example, 60% of the task budget has been spent, that does not necessarily mean that the task is 60% complete. There are a multitude of over-budget projects in the archives of most A/E design firms that prove the fallacy of assuming the percentage spent equals the percentage complete. Usually, the only point at which percentage spent equals percentage complete is at the very beginning of the project (when both equal zero) and at the very end of the project (when both equal 100%). For most design firms, the amount of labor spent on a project may not be in proportion to the actual progress made. axium.com All Text and Illustrations 2010 Axium Too many PMs simply report a percentage complete based on the project-to-date percentage spent. I recently worked with an A/E design firm where the standard instructions to PMs stated that percentage complete will equal percentage spent (expressed in labor dollars), plus 15% for anticipated profit. These instructions would make
sense for cost-plus-fee agreements, but are counterproductive on cost-plus-to-a-maximum or lump-sum fee agreements. After years of consulting with A/E firms, I ve observed that too many PMs only worry about the project as a whole instead of also focusing on the level of effort needed to complete each task (part of the scope-of-work) as budgeted to complete the project. They can t see the trees for the forest. Consequently, I ve developed a theory about the fiscal aspects of project management: Projects never go over budget. Some task or defined scope of work needed to complete the project exceeded the anticipated budget (level of work) needed to complete that task. Setting up an internal warning system for more reliable internal progress reports. In order to create an early warning report of when a project is likely to exceed its budget, it s necessary to set up the accounting software to separate percentage complete for invoicing purposes from percentage complete for internal progress reporting purposes. This internal reporting of project progress is often referred to as revenue recognition (RR) or earned fee (EF). Three steps are needed to set up more accurate project progress reporting: 1. Designate one person (usually someone other than the PM) to be responsible for the completion of each bite-size scope of work (as needed, for example, in the drainage design mentioned above). This person is called the task manager. While the task manager is responsible for completing his or her scope-of-work task, he or she is often not the only person whose work is being charged to this task. Each task manager is close to the work being performed on each task; therefore he or she should be better informed about the real progress made to date on each task than the PM. However, the PM could be the task manager on some tasks, especially if the task involves the PM s active participation, such as attending client meetings. 2. Have the task manager enter a percentage complete on a weekly or monthly basis at the task level (level 3). This percentage complete will not be used for invoice purposes, but only for internal RR or EF reporting. 3. Once all task managers have entered the percentage complete at the task level (level 3), the software calculates the revenue recognition by multiplying the percentage complete times the task budget for each task. The software then rolls the recognized revenue up from the task level to the phase level to the project level. The software is therefore capable of reporting on all three levels: budget vs. spent vs. recognized revenue. For example: The firm may have spent 60% of the project s labor budget, but the project is really only 52% complete based on the percentage-complete reporting entered by the project s task managers. The PM can then exercise discretion, as he or she deems appropriate, when invoicing the client. But at least the PM knows that the project s progress is behind the curve or is projected to go over budget based on project spending to date. Managing a large project with only simple budget-vs.-percentage-spent reports or billedvs.-received standard reports will not provide the PM with an early warning of projects that may exceed design budgets. Unless the design firm unlinks percentage complete at the task level for internal progress reporting (RR) from percentage complete at the project level for Accounting Software Can Help You Avoid Budget Overruns Whitepaper 2
invoice purposes, the firm will never know which projects may exceed design budgets. This procedure also works for those projects that have lump-sum or not-to-exceed subtotals at the phase level. For example: The project (level 1) may have different fee types on different phases, such as hourly billing rates for the preliminary design phase, lump-sum for the construction document (CD) phase, and hourly billing rates for the construction inspection phase. In this case, invoicing can be set up for the phase level instead of the project level. The percent-to-invoice for the progress payment invoice on the CD phase should be unlinked to the percentage complete for each task within the CD phase. I have worked with many A/E accounting packages to implement realistic RR or EF reporting for projects. I recommend that the budget-vs.-percentage-spent-vs.-rr report be a one-line summary for each project. Once a PM identifies a possible problem project he or she can request the same budget-vs.-percentage-spent-vs.-rr report format at the phase level and, as needed, at the task level until all the potential tasks that may go over budget have been identified. Another simple method is called exception reporting. The exception report provides the budget-vs.-percentage-spent-vs.-rr information only for those tasks of the specified project where RR is less than the percentage spent as reported in consistent units (raw labor cost vs. burdened labor cost vs. billable effort). Most of the more widely accepted A/E-oriented Windows- or Web-based accounting packages have an option for entering percentage complete at the lowest level of the work breakdown structure. Unfortunately, many A/E firms are not using this function. Contact your accounting software vendor if you are unsure whether your accounting package has this capability. If it doesn t, I recommend making this a requirement when your firm upgrades its software to one of the newer A/E-oriented accounting packages. If your software vendor doesn t understand the concept of internal revenue recognition (earned fee) based on percentage complete, I suggest that you contact an independent A/E consultant to assist your firm in implementing this critically important early warning project management tool. Remember: Projects don t go over budget. Tasks needed to complete the project exceed the time allocated for their completion. Manage the task budgets, and the project will come in under budget. PMs need to monitor and understand the reasons whenever percentage spent exceeds percentage complete at the task level. Michael Ingardia is president of Systems Management Consultants, Inc. (Overland Park, KS.; 913-681-1530; e-mail: mike@sysmgmt.com). He is a technology consultant exclusively to A/E firms. The material contained in this whitepaper was originally published in the Design Firm Management & Administration Report and is reprinted with the permission of IOMA. Accounting Software Can Help You Avoid Budget Overruns Whitepaper 3
How does Ajera help you avoid budget overruns? With Ajera, you can see your total budgeted hours and dollars graphed against your total billed and work in progress. This allows you to see how much room you have left on your project. The third line on the graph shows what has actually been earned based on hours worked and billing rates. Project manager can see this information right from the Snapshot Report. *Track the status of projects using Ajera s Progress Report. Accounting Software Can Help You Avoid Budget Overruns Whitepaper 4
Reported Percent Complete (green line) is your estimate of the actual work completed. Total Spent (red line) is your time and expenses for a project as they re entered. Total Contract (blue line) is what you ve budgeted based on your expected timeline. By selecting a project you can view the progress-to-date, comparing the total spent to the actual reported percentage complete as it relates to your total budget timeline. To bring the project in under budget it s important to monitor and diagnose when total spent exceeds percentage complete or your percentage complete falls behind your contract. To determine which phase may be a potential budget overrun, double-click to drill down to see the detail. Accounting Software Can Help You Avoid Budget Overruns Whitepaper 5
Accounting Software Can Help You Avoid Budget Overruns Michael Ingardia is president of Systems Management Consultants, Inc. (Overland Park, KS; 913-681-1530; e-mail: mike@sysmgmt.com). He is a technology consultant exclusively to A/E firms. The material contained in this whitepaper was originally published in the Design Firm Management & Administration Report and is reprinted with the permission of IOMA. Copyright 2004 by IOMA. All rights reserved No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval system without prior written permission of the publisher. Accounting Software Can Help You Avoid Budget Overruns Whitepaper 6