Project Accounting

Do You Really Need That Cost Code?

Project Cost Code Planning – such a love/hate relationship we have with cost codes.  Project controls professionals can spend endless hours discussing, debating and tweaking the required codes for their project.  Understandably so, as there can be so many layers of complexity of how to design the right code structure. We get many questions from companies about what code structure is the right structure for them, and we spend a great deal of time working with them to help define it.  We often get asked if there’s a standard coding structure they can just lift from some standards body and simply use it. Or if we have one they can use, or what do other companies use, etc.  Unfortunately, there’s no single source where a robust project-level code of accounts is fully defined for public or paid-for access for every industry.  There are, however, some standards and samples that have been defined for a variety of industries published by, for example, the AACE (http://www.aacei.org/) and CSI (http://www.csinet.org) which can provide you a significant jump on defining the system that best fits your business.  You’ll need to be a member, but well worth it. Here are a few teasers that give you the idea: http://www.aacei.org/toc/toc_20R-98.pdf www.aacei.org/toc/toc_21R-98.pdf http://fire.nist.gov/bfrlpubs/build99/PDF/b99080.pdf It hurts me to tell you this, but beyond resources like that, you’re likely going to have to bear down, get into it, and define your own coding structure. However, I do have some good news for you.  If you’re using a cost management system, your coding efforts can be significantly simplified. And that’s because a software system that understands concepts like a Cost Breakdown Structure, Resource Codes, Discipline Codes, Material Codes, etc. – can do a tremendous amount

Mistakes Happen – Adjustments and the Clean-up Guys

With the hundreds of people entering data into the system every day, what are the chances that a day will ever go by when all the data is entered perfectly – without a single mistake? Pretty unlikely. The reality is, people get tired, careless and are often in a hurry. So, despite the many mechanisms in place in 4castplus to reduce the chances of errors, they still happen; and the need to elegantly deal with errors is an unavoidable certainty.  The 4castplus Adjustments module is one of the most widely-used features in the whole system. In this article I’m going to go through the what, why, when and how of putting in adjustments as an auditable way to make financially controlled data corrections. Why Adjustments? Before I dive into how to use adjustments, you may be wondering why a formal Adjustments module is needed at all; and what would be the benefits of it.  It’s not uncommon for organizations to move into 4castplus from using mostly spreadsheets to manage their day-to-day operations, so formalized adjustments may at first seem like unnecessary extra work. The convenient thing about spreadsheets is that when you need to make a change to something, you just go ahead and change it and that’s that. There’s no formality around it or real record around the change – you change it and it’s done. Quick & dirty. The challenge with that of course, is: There’s no auditability around the change. No documented reason, history or reporting available regarding that change. There’s no financial control. You may have already closed-out the month of May, for example, and then someone goes and changes a rate or cost-code on an entry that occurred in May.

Managing the Complexities of Labor Rate Rules

  Simplifying Rates Management What happens when a Journeyman works a 16-hour shift? Well, first, he goes home tired and hungry and very keen on a cold beverage or two. But on top of that, he’s also got a smile in the back of his mind about the overtime and double-overtime he just earned. So, how much overtime was that exactly? Calculating how much of that 16 hours was regular, OT and Double-OT, can depend on a number of legal and contractual factors. The challenge many organizations face is: who is responsible for knowing the rules of how to allocate their hours to the correct buckets? It’s often the case that that allocation is done by the site foreman right at the jobsite when he’s recording his crew’s hours at the end of the day. But why not just let payroll or AP figure that out? Waiting for payroll or accounts payable to figure it out later is typically not an option since the Site Foreman needs to get their daily LEM sheet signed by the client on that day. Composite Rates Management This leads me to the discussion around what we call “Composite Rates”. In 4castplus, the Composite Rate Type feature enables administrators to preconfigure the quantity split for how labor timesheet entries should be allocated according to company and labor standards.  By pre-configuring these rules, the site personnel that are recording hours are alleviated from having to look-up or just know these rules for each member of the crew. All the site foreman has to enter is the total quantity of hours, and the system auto-distributes that time into the appropriate rate categories – such as Hourly, Overtime and

Managing Vendor Accruals and Vendor Invoice Matching on Large Construction Projects

 Click to download whitepaper The Situation The “Owner” on major construction projects, has a very different set of challenges and priorities than contractors or EPCs. While contractors are busily figuring out ways to get the work done as cheaply as possible – and invoicing the client for as much as possible – the Owner is busily controlling project finances, monitoring vendor performance, and making sure the project is commissioned on time and on budget.  In the big picture, Owners of course have a much more holistic view of the project in its entirety; and ultimately are managing the cost & timing expectations of their stakeholders & investors.  What that translates to on a day-to-day basis for the Owner, is close management of their vendors. Put into simplistic terms, it’s the vendors who are doing the work, and the Owner who is paying for it.  The challenge to the owner however; is that close management of vendors is not a trivial thing to do. There can be dozens if not hundreds of vendors on the job throughout a project’s lifecycle, and keeping on top of their costs, activities, productivity – and validating the invoices they send – all requires the owner to collect, organize and analyze a lot of information on a daily basis.  Which is not a trivial thing to do. 1 The Problem The Construction Industry is one of the last industries to adopt and embrace technology as end-to-end solutions for management of major projects. It’s shocking how many paper timecards, home-grown spreadsheets, phone calls, emails and handshake agreements that are still used on multi-million dollar – or multi-billion dollar – projects. I know there are a lot of people that hold on to

Jobsite LEM Tracking – What About Vendor Accruals?

All vendor expenses from the jobsite have to be on a purchase order right? Isn’t that how it’s supposed to work? Aren’t all projects so well planned and organized that there is a pre-issued PO for everything? Of course not. Even the most structured and planned projects have ad-hoc & unplanned purchases that happen at the jobsite almost daily. Other projects only issue purchase orders for a portion of the project; and the remaining vendor expenses just happen on the fly. Still other projects create no POs at all, and just give their field staff a stack of carbon paper Purchase Order Books they buy at Staples to record expenses as they occur. None of these scenarios are wrong of course – but as I’m sure you already know, the less pre-planned control you have over jobsite expenses, the more challenges you face with getting a good handle on project status and vendor accruals, amongst other things. In an ideal world, all vendor expenses should be controlled by issued purchase orders. These should be driven by the project budget – with committed costs recorded in the GL or procurement software, for every vendor cost: no exceptions. When expenses are recorded from a vendor, they should be recorded as an incurred cost against the original issued PO. This is the ultimate control because you know ahead of time all your budgeted and committed costs; and as your actuals are recorded, there is nothing that falls outside those committed amounts. There is full clarity around your accruals; and when the vendor invoices you, it’s an easy step to clear out that accrual. Even as change orders are approved, purchase orders are revised and committed amounts altered to

How Do You Keep Track of Vendor Accruals?

You thought you had your project all wrapped up when, SURPRISE, vendor invoices just keep coming in.  Whoops, things didn’t go as well as you thought. The costs on your project keep soaring, and you have to keep updating your project reports to your superiors. How does this happen? This happens because vendors rarely invoice you at the time they completed the work, or delivered the materials.  The problem is, if you wait until vendors invoice you to show the cost on your project, then you’re in for a lot of surprises. Here’s a common scenario: Every day your Site Supervisor is asked to approve or sign-off on the work done that day by the various subcontractors on your project – or materials delivered by suppliers. All those approved daily field tickets make their way back to the subcontractor’s Accounts Receivable group; and they then batch them up for invoicing. You of course have a copy too, and it likely sits as a scanned document on a shared drive somewhere. However, this receipt-of-work-done typically isn’t used as a means to record the associated cost on your project. Most often, a project’s actual costs are driven by updates from accounting, or manually input into spreadsheets by a project manager when the vendor invoice is received.  The problem with this model, is that you might not receive that invoice for weeks if not months after the work was completed – so during that time, there’s a discrepancy between what’s showing on your project for actual cost, and what you are in fact liable to pay. This scenario can fill you with surprises since you’re really at the mercy of your vendors’ invoicing cycles.  Not all vendors are

The WIP Report – It’s CFO Candy

Why the WIP Report is so Important In addition to effectively managing the costs and schedule of your project, it’s critical to stay on top of your Work in Progress or WIP.  WIP is critical to monitor. You, your CFO and your investors need to know just how profitable your project is, how much of the project has been funded by your customer, and how much has been financed by you.  Combining WIP information with project profitability and performance metrics, will give you a complete picture of the financial health of your project or your program.   Work in Progress looks at the following key metrics on either a single project or a portfolio of projects currently underway: Total estimated cost Total estimated revenue Total estimated profitability The revenue earned to date Estimated cost to complete Estimated remaining revenue The costs spent on the project(s) to date All billings that have been completed for the project(s) and billable remaining   Regularly reviewing your Work In Progress allows you to quickly identify any under or over billings that may be taking place in your project.  If your project has been financed by the bank or an underwriter – or when your CFO needs information on your project for his financial forecast – your WIP Report is going to be a critical report in your arsenal of effective project management tools. If you can produce a detailed WIP report and send that to your CFO on a regular basis, you'll make their life way easier - it's like filling their candy jar.   The WIP report in 4castplus combines the above mentioned metrics along with much more to give you a complete picture of your organization’s work

Top 4 Construction Invoicing Tips to Accelerate Cash Flow

 Accelerate Your Cash Flow You’ve spent considerable time and effort in running your projects well.  You make sure that your customer is kept very happy during project execution, and you’re expertly handling the multitude of challenges that come along with a complex project.  Your project is going well, your customer is happy. But you still can’t seem to get paid on time. What’s with that?   There’s no doubt about it, keeping your project healthy and well managed has a huge impact on achieving healthy cash flow, but that's really only part of the overall strategy of getting cash flowing happily into your organization.   The other half of it – the half that can really bite you – is making sure that you invoice efficiently, and your customers pay you efficiently.  Many construction organizations spend a great deal of cost and effort towards invoicing their customers in an attempt to improve their cash flow performance. The challenge, however, is that they’re using the same old process, the same old tools, subject to the same old risks.  And they’re getting the same old results: accounts receivable aging stretching to 120 days, accountants and auditors insisting on an allowance for uncollectable accounts, board members and bank managers tapping their fingers waiting for the latest receivables schedule.   It’s no wonder when you consider the inherent challenges that practically all construction companies have to deal with in getting their invoices out the door.  Those challenges, however, can be minimized, and cash-flow significantly accelerated by implementing the following four cash flow management strategies. Consolidate information. When your key project data resides in multiple systems, there is great risk in access, ownership and status of that data. When you consolidate

Time Phased Budgeting For Cash Flow Visibility and Risk Management

Why would I need to time-phase my project budget? The challenge with any project budget that doesn’t utilize the advantages of time-phasing, is that the project manager won’t know exactly when money is anticipated to be spent on the project. And neither will the CFO. Time-phased budgeting allows project managers to allocate costs for project activities over the anticipated timeline in which those expenditures are planned to take place. Not just by using any old guess as to when things might happen – or by using some uniform, evenly distributed pattern – but by actually using real contractual agreements as to when items are planned to be paid for.  By doing this, the project manager is then armed with an accurate timeline that predicts project spend patterns. Time-phased budgeting does more than just uniting the project schedule with the project budget. Of course, uniting the two is the first step in a time-phased approach to project budgeting. Without first merging the two, budget and schedule have no interconnection, and are left to float along independently. By subsequently time-phasing a project budget, you’re then armed with extended capacity to further refine exactly when, during the anticipated schedule, certain expenditures will take place. This delivers a more accurate representation of cash outflow so that appropriate project financial planning can be undertaken. You’re also much better able to monitor budget vs. actual costs as the project progresses so as to gain clear insight into potential cost overruns (or, under-runs) and other cost controls capabilities. It may not be immediately obvious why all this matters, but to get a good reading on that, it really boils down to two things: Managing project Cash Flow Powerful

The Walk of Shame

About a year ago I bumped into a former work colleague who I hadn’t seen in about 6 years. It prompted us to go have lunch to get caught up on life, family, business and everything else. His name was Dan. And since leaving our former employer, he went on to become CFO at a large construction & manufacturing company.  It was quite fortuitous for us to have reconnected because he was having a lot of struggles with his company’s projects suffering disastrous cost overruns & delays. “I get so frustrated,” he said as he knifed his steak sandwich. “it’s like they [the project managers] deliberately leave it to the end to figure out where things are at with their projects.” He was referring to how information flows to his financial group about the status of the various projects on the go in his company. “What’s the point in that? Why can’t we have those conversations six months earlier?” He waved his hands dismissively in the air as though he was at a complete loss as to what to do. “I used to think they were avoiding me.” He continued. “I figured they knew all along that it was bad news, and they didn’t want to have to face telling me. But now I know that they simply have no idea what’s going on until pretty late in the project. Essentially, until all the invoices have come in. Then it’s like, they just add up all the invoices and figure out what we owe. Then they come tell me. Is that normal?” Sensing that he was waiting for an answer at this point, I told him that it really isn’t all that uncommon for projects to