Framework: An Integrated Approach to Portfolio, Program and Project
|[AACE HOME] -- [TCM HOME] -- [BUY THE TCM FRAMEWORK] --[DOWNLOAD PDF VERSION]|
[TOC] [PREVIOUS] [NEXT]
III. PROJECT CONTROL PROCESS - CHAPTER 9 - PROJECT CONTROL MEASUREMENT
9.1 Project Cost Accounting
Project cost accounting refers to the process of measuring and reporting the commitment and expenditure of money on a project. The measurement of money is a function of traditional accounting and payroll processes and systems. Project costs are measured so that commitments and expenditures of funds can be compared to the budget, and the funds can be evaluated as to whether they are too much or too little in consideration of the extent that work packages have been completed. The TCM process map does not explicitly include the cost accounting process; it only addresses the project control interface with cost accounting.
The "accounting" process excludes the "performance" measurement process (Section 9.2), which covers the measurement of the degree of completion or status of work packages (e.g., the status of materials shipments and inventory, the extent that materials have been installed, achievement of schedule milestones, etc.). In terms of information technology (IT), the distinction between cost accounting and other measurements is increasingly less distinct as materials or enterprise resource planning (MRP and ERP) systems increasingly encompass the measurement of all resource and performance data. However, disregarding the IT integration, cost accounting practice remains a unique function in itself.
9.1.2 Process Map for Project Cost Accounting
The project cost accounting process illustrated in Figure 9.1-1 includes not only the measurement of costs, but the review, classification, and accounting of them for project control purposes. The process is integrated with performance measurement (see Section 9.2). The measured costs are inputs to the project performance assessment process (Section 10.1)
Figure 9.1-1 Process Map for Project Cost Accounting
The following sections briefly describe the steps in the project cost accounting process.
.1 Plan for Project Cost Accounting
The process for project cost accounting starts with planning for cost accounting. Initial planning starts with planning for the project scope and execution strategy development process (Section 7.1) and continues through development of control accounts during project control plan implementation (Section 8.1). Project control is facilitated when the cost accounting process measures and reports costs using the same coding structure as the control accounts. However, many accounting systems are not designed to support work package cost accounting (e.g., they may not have enough account coding data fields, their coding structures may be designed to address capitalization needs, etc.). Therefore, the interface (i.e., data transfer) between cost accounting and project cost control systems must be planned.
Planning ensures that the accounting system cost accounts are either consistent with the control accounts, or that processes and procedures are in place to classify, map, and transfer the accounting system cost data to the control accounts in the cost control system. The mapping may be automated by rule-based software or it may involve manual translation and reentry of data. For example, if the enterprises accounting system only allows one actual cost entry or account per purchase order, but your project control accounts require cost data from individual line items within the purchase order, then the line item costs may have to be manually entered into the project cost control system. In addition, the interaction/interface of owner, supplier, and contractor accounting systems, if any, must be considered and addressed in cost accounting plans.
.2 Initiate Project Cost Accounts
After cost accounting has been planned, cost accounts are opened or initiated in the cost accounting system. The accounting plan will establish who may enter, change, delete, view, or otherwise use data and information in or from the system. To avoid mischarges, project cost accounts are generally opened only as needed, not all at once. Project control is responsible for interfacing with the accounting process to ensure that accounts are initiated in an appropriate and timely manner.
.3 Measure, Review, Classify, and Account Costs
Once accounts are opened, payments made to suppliers and contractors are recorded by the accounting process against the appropriate project cost account. Payments may also be made from one internal cost account to another within an enterprise. In any case, the project cost account ledger is debited to reflect the dispersal of funds. Similarly, accounting payroll systems capture labor expenditures (payments to the individuals) and these are also debited as costs to the project.
The project control function regularly checks that the costs recorded by the accounting process are appropriate. Cost data are commonly miscoded, misfiled, improperly invoiced, or otherwise mischarged. In addition, work may have been completed or materials received, but not yet invoiced; project control must review progress measurements (Section 9.2) to determine if costs have been incurred. Direct payments to suppliers, contractors, and individuals are generally captured by accounting (i.e., accounts payable) and can be reviewed in real-time with modern IT.
Some costs are not charged directly to the project cost accounts, but are initially charged to an indirect, overhead, or some other suspense cost center. For example, rent and utilities for an office building may be paid and charged to corporate overhead accounts; however, the project team housed in the building may be responsible for some of this cost. Periodically, these indirect or overhead costs are apportioned by the accounting process to other cost centers such as a project cost account. Indirect or overhead costs may be apportioned as a percentage markup on direct costs. The accounting process also periodically evaluates the markups and allocations used to ensure that the costs incurred are in balance with allocations. Project control may be responsible for establishing or reviewing the basis of indirect cost allocations to project cost accounts.
A methodology called activity-based cost accounting (ABC) seeks in part to ensure that indirect cost allocations are minimized and are proportional to the costs imposed by the activity (e.g., the allocation of building rent and utility cost to the project cost is based on the proportion of building floor area occupied and extent of building services used by the project team). ABC has a similar objective to the traditional practice of job costingthat is, to ascribe indirect costs appropriately to an order, job, or project.
The accounting process may charge to a cost account (i.e., book a debit to the project ledger) on a cash or accrual basis. Most project cost accounting is on a cash basis; that is, when the check is cut, the cost is recorded as expended. In accrual accounting, costs may be booked before the check is cut in recognition that while an actual payment has not been made, a commitment or liability to make that payment has been incurred (i.e., incurred costs). It may also be booked after the check is cut in recognition that while an actual payment has been made, the work or resource for which payment has been made has not yet occurred or been received. Project control may be responsible for establishing or reviewing the basis of accruals on projects.
Project control reports both accrued (i.e., incurred and committed) and cash (i.e., actual) expenditures. As will be discussed in the project forecasting Section 10.2, projects need to record both when project costs have been committed (i.e., work completed or materials received, but not yet paid) as well as actually expended so as to understand the projects liabilities and to support forecasts of remaining costs.
The costs described above are outflows or debits of funds from the project cost accounts. The project receives its funds from the enterprise and/or external project financiers. It is a project control responsibility to prepare committed and actual cash flow forecasts (Section 7.3) so the finance function can obtain funds (or approvals of funds) in a timely manner from whoever is financing the project.
.4 Report Project Costs
The project accounting system reports costs as they are debited and credited to the various cost accounts in the ledgers. As was discussed, if the accounting system cost accounts are inconsistent with the control accounts, the project control process must transfer the reported cost to the project cost control system. Unfortunately, such transfers are commonly required, consuming significant, if not all, project control resources on the project (this effort and resources must be planned). As a result, what is called cost control on many projects, really only consists of recording the amounts expended; by themselves, expenditure data are largely useless for control because they say nothing about whether the expenditures are too much or too little in consideration of the extent that work packages have been completed. Best practices for project performance assessment and reporting (e.g., earned value) are covered in Section 10.1.
.5 Close Project Cost Accounts
Project cost accounting ends when the cost accounts are closed in the cost account system. Before closing the accounts, it is generally a project control responsibility to ensure that all charges to cost accounts are complete (i.e., there are no outstanding invoices or charges) and that costs are recorded in the right accounts. To avoid mischarges, project cost accounts are generally closed as quickly as possible after the work is complete on that work package. Project control is responsible for interfacing with the accounting process to ensure that accounts are closed in an appropriate and timely manner.
After accounts are closed, capital costs must be booked to the asset ledger so depreciation can begin. It is generally a project control responsibility to ensure that costs are allocated to the appropriate asset account in a timely manner (the capitalization process is covered in Section 5.1). It is common for the enterprise financial functions to be more concerned with capitalization (i.e., the final cost data from project closeout) than project control (i.e., the working cost data during project execution). The result is that enterprise accounting systems are often set up to support asset accounts, rather than control accounts. Therefore, project control practitioners often find themselves heavily involved in helping to change and improve accounting systems as more companies add ERP and project management capabilities.
9.1.3 Inputs to Project Cost Accounting
.1 Project Implementation Basis. The implementation basis includes project cost accounting requirements that are usually consistent with business finance and accounting management (Section 4.1).
.2 Project Control Plan and Control Accounts. The project control plan (Section 8.1) describes specific systems and approaches to be used in project control including interface with accounting systems. The control accounts (Section 8.1) are work packages from the WBS for which responsibility has been assigned in accordance with the OBS and the procurement plan, and for which cost budgets and resources have been assigned, and activities scheduled. Accounting cost account structures may or may not align directly with the control account structure; plans must address this and cost allocations may need to be made for project control purposes.
.3 Progress Measurement Plans. Plans for measuring work completion (Section 9.2) and resource usage should be aligned with cost measurement plans as appropriate. Alignment may consider the frequency of measurements, alignment with control accounts, etc.
.4 Work Progress. The time of initiation and closing of cost accounts is partly dependent on planned work package activity start and actual completion dates (Section 9.2). Also, work progress is compared to payments made to identify committed costs.
.5 Changes. During project execution, changes to the baseline scope definition and plans are identified in the change management process (see Section 10.3). Change may result in changes to project cost accounting.
.6 Charges to Project Accounts. In the accounting process (steps of which are not part of the TCM process map), payments made to suppliers and contractors are recorded by the accounting process against the appropriate project cost account. Payments may also be made from one internal cost account to another within an enterprise.
.7 Historical Project Information. Successful past project cost accounting approaches are commonly used as future planning references.
9.1.4 Outputs from Project Cost Accounting
.1 Project Control Plan and Control Accounts. Project cost accounting planning may identify improvements to aspects of project control plan implementation (Section 8.1).
.2 Project Measurement Plans. Project cost accounting planning may identify improvements in plans for measuring work completion (Section 9.2).
.3 Corrections to Charges. Project control review of project costs may identify corrections that need to be made in the accounting process (e.g., mischarges, mistaken invoices, etc.).
.4 Cost Information for Financing. Project control prepares forecasts of committed and actual cash flow so the finance function can obtain funds (or approvals of funds) in a timely manner from whoever is financing the project. Information may also be needed for taxation and other enterprise financial purposes (Section 5.1).
.5 Cost Information for Capitalization. After accounts are closed, project control provides information about the allocation of project costs to assets so capital costs can be booked to the asset ledger and depreciation can begin (Section 5.1).
.6 Cost Information for Control. Cost commitment and expenditure information is used in earned value performance assessments, project cost forecasting, and cash flow assessment (Sections 10.1 and 10.2).
.7 Historical Project Information. The projects cost accounting approaches are captured for use as a future planning reference. Project cost data are also captured in the project historical database (Section 10.4).
9.1.5 Key Concepts for Project Cost Accounting
The following concepts and terminology described in this and other chapters are particularly important to understanding the project cost accounting process of TCM:
.1 Control and Cost Accounts. (See Section 8.1).
.2 Expenditures. A cost that is charged to an account when a payment or disbursement is made.
.3 Commitments. The sum of all financial obligations made, including expenditures as well as obligations, which will not be performed or received until later. May also be referred to as an accrued expenditure.
.4 Cost Allocation (overhead, markups, etc.). The process of evaluating, classifying, and shifting or transferring costs from one account to another so that reported costs for a work package are consistent with the basis for the cost included in the work package budget.
.5 Cash Flow Analysis. (See Section 7.3) The process of time phasing the budgeted or forecasted costs to determine the expected rates of cost commitment or expenditure. The analysis provides the financing function with the input it needs to ensure that sufficient funds are available or approved for the expenditure or commitment.
.6 Cash and Accrual Accounting. In cash accounting, costs are accounted for when expended (i.e., payments are made or cash disbursed). In accrual accounting, costs are accounted for when an obligation to make an expenditure is incurred, even if cash will not be expended or disbursed until a later time.
.7 Capitalization and Depreciation. Some project costs are charged (i.e., expensed) as immediate or current expenses. However, capital project costs are held in suspense as work-in-progress (i.e., a suspense account), until the capital asset is put in service. Prior to being put in service, the capital project costs are allocated to items in the capital asset ledger and balance sheet (i.e., capitalized), and these costs are then charged or recognized over time in the profit statement as a depreciation expense. Capital and expense designations and depreciation rules are usually defined by government tax authorities. Project control personnel generally assist the finance function in making the cost allocations.
.8 Activity-Based Costing (ABC). A method to allocate costs in a way that the costs budgeted and charged to an account truly represent all the resources consumed by the activity or item represented in the account (i.e., the allocation is not arbitrary, but reflects what drives the cost).
Further Readings and Sources
The interface of project control with cost accounting is generally covered in project management, project control, and cost management texts. The following references provide basic information and will lead to more detailed treatments.
Amos, Scott J., Editor. Skills and Knowledge of Cost Engineering, 5th ed. Morgantown, WV: AACE International, 2004.
Humphreys, Kenneth K., Editor. Project and Cost Engineers Handbook, 4th ed. New York: Marcel Dekker, Inc., 2005.
[TOC] [PREVIOUS] [NEXT]
2008 By AACE® International www.aacei.org