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AboutRead In 5 Minutes
One of the first principles of project controls is the concept of merging project cost and schedule to obtain a cash flow curve. A curve that represents how and when cost will be incurred on the project. This cash flow plan enables project managers and the finance team to identify the anticipated spend at any point in time – whether past, present or future – of the project. In the project controls vernacular, this aligning of cost and time is referred to as “Time-Phasing” the project budget.
First Principles of Project Controls
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, 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. These spend curves can then be compared with the actual costs while the project is underway, so that planned-versus-actual can be analyzed.
To understand how time-phasing works, we’ll look at the three primary tools for establishing a time-phased budget. In order of precedence:
- Project schedule
- Time-phasing algorithms
- Payment scheduling
1. Project Schedule
A project’s work breakdown structure (WBS) is a hierarchy of activities and milestones that need to be completed in order to deliver the full requirements of the project or contract. Most of the items on a WBS have a scheduled start and end date and require physical work to be completed in that timeframe. The effort to complete the activity will also carry cost in the form of labor, equipment, materials, and other expenses as needed to fulfill its deliverables. A key element of the project’s planning is to create a budget around the resources (hours, materials, etc.) necessary to complete the activity. If the project controls software has the logic built-in, it can take that budgeted cost and prorate it over the defined schedule for the activity. For example, a 2-month activity that is budgeted at $100,000 would be represented as a straight line starting at $0 at the start date and $100,000 at the finish date.
The project controls software can then accumulate all activities in the project and aggregate them together in one combined curve representing Planned Value for the entire project.
This is the most basic form of time-phasing the project budget. It’s clearly an oversimplification to think that cost will be incurred on an activity in such an even, linear manner, and for short-duration activities, using this default behavior is likely sufficient. However, for long-duration activities, that hold larger budgets and thus higher risk, more sophistication in time-phasing is likely to be required.
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2. Time-Phasing Algorithms
The next order of precedent when it comes to time-phasing, is to use the built-in mechanism for overriding that linear, prorated curve via the schedule. This override is achieved by using time-phasing tools for designing a more specialized cash flow plan for each activity.
Looking at the screenshot above, the selected activity (the $1.4M Subgrade Excavation) has been time-phased to represent the estimated incurred spend at the defined time intervals. This tool enables cost engineers to be far more precise with how spend will hit the project, providing greater cash flow accuracy. The screenshot below shows that same activity in a chart view.
When looking at how this one activity is aggregated together to form the planned value of the whole project, we get a picture that looks like the screenshot below. The curve for Actual Cost has been added to this chart to see how that crawls up alongside planned value.
3. Payment Schedule
The highest-order precedent method for time-phasing is using more specific payment schedules on subcontractor or supplier contracts. This is the most precise method as it reflects the exact terms of the contract. It’s more accurate than using the time-phasing algorithm method and it therefore overrides the first two methods.
It works like this. As part of any purchase order or subcontract, the buyer or project manager can input the payment terms of the contract right into the payment schedule. While this may seem somewhat similar to the time-phasing algorithm method in 2 above, it’s considered to be more accurate since it is no longer an estimated time-phase, but more reflective of the true terms of the contract. Additionally, the project controls software can apply the payment terms to the payment schedule to get a better picture of cash flow. This means that the system will account for when the cash is anticipated to actually be spent out of the bank – which is dependent on agreed-to terms with the subcontractor. Therefore, the cost may be recognized on the project many weeks prior to it being drawn from the bank. Payment terms can be upwards of 90-days – and that delay is very meaningful for the finance team.
Looking at the 4castplus screenshot above, the payment schedule for the selected purchase order items is shown. Note that payment terms in this case are 45 days, and that there are both scheduled and forecasted payments for each payment event. There are many types of payment events that can be used from milestones to progress to document delivery, etc. Payment schedule events can be tied to the purchase order receiving module to connect the dots between what was planned and what was completed and when.
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It's the Core of all Project Analytics
The time-phased project budget (and time-phased activities) forms the basis for all subsequent project controls analysis and metrics. Without planned value, there will be no way to compare actual cost or earned value against budget. The project budget would simply be a single lump sum figure that costs are drawn down from without any mechanism for assessing whether those costs are being spent according to plan or not.
The screenshot above shows a variety of curves that are representative of several key components of the project. All these curves are effectively being compared to the project budget (planned value). Whether it’s actual cost, forecast cost, earned value, estimate to complete (ETC) or fully committed budget – they are all only meaningful when that project is time-phased.
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The 4castplus suite of tools enables your team to enter a vast amount of project information daily. From estimates to purchase orders, job site tracking to change orders, progress measurements to forecasts, timesheets to customer invoices and so much more. Contact us to learn more.
