White Paper Oracle Projects Key Decisions

Actual vs. Standard Costing

1 A Knowledge-Driven Consulting White Paper 2009 Hitachi Consulting Corporation

Contents

Introduction .................................................................................................. 3 Standard Costing Flow ............................................................................... 3 Key Terms .................................................................................................... 4 Why Actual Rate does not equal Actual Cost .......................................... 5 Other Key Decisions ................................................................................... 5 Key Decision Areas ..................................................................................... 6 Key Drivers of Customizations .................................................................. 8 Overall Recommendations ......................................................................... 9 Author Bio .................................................................................................. 11 About Hitachi ............................................................................................. 12

Introduction
Large ERP implementations challenge even the most tech-savvy organizations. In the case of large Oracle projects early adoption of a labor costing approach can help ensure greater success across the project overall and also pave the way for custom design decisions that will present themselves later. Companies are generally faced with two labor costing choices: Actual Cost or Standard Cost. Make sure your decision makers know beforehand how these choices impact overall implementation. When implementing Oracle Projects, there are several key decisions a company must make when determining how to handle their projects: 1. 2. 3. 4. Actual Cost or Standard Cost? What is a Project? What costs go to Projects? Does the cost follow the Employee or the Project?

Questions 2-4 are critical and must be made, or at the very least discussed, when deciding on Question 1, Actual or Standard cost. Each method has Pros and Cons and will impact the overall implementation in different ways. The decision on Actual or Standard Cost is one of the most substantial ways that an implementation is affected because of the customizations that may be required to implement either method. Keep in mind, that every business is different and must define their mission critical business requirements. More importantly they then must define and put in practice the business process and procedures in order to meet those business requirements. For most companies where labor is a material portion of their project cost, part of meeting these business requirements is putting in place a robust job costing system that can provide meaningful data that meets their business requirements. There is no right answer and given the complexity and circular nature of the decision, this paper is not meant to provide the best answer but is meant to: 1. 2. 3. Define the key terms to clarify the conversation. Define how the other key questions factor into the decision. Identify the key decision areas and help the decision makers understand the nuances in each of those areas so they can make the correct decision for their implementation. Illustrate key drivers of customizations and how decisions or certain business requirements affect those. Summarize the reasons for choosing actual or standard and the likelihood of needing customizations.

4. 5.

In the end, this document is intended to help facilitate making the correct choice for a client with regard to the processes from Time Entry through Project Cost Collection.

Standard Costing Flow

Before diving into the key terms and options, below is a brief description of the Oracle out of the box process:

Fig. 1

OTL

Payroll

GL

Transaction Import Table

Projects

Oracle Time & Labor (OTL) collects hours entered on a timecard, applies rules and calculations to the time, and interfaces those hours to projects and to payroll. In Projects, the time entries from OTL can be costed using the employee hourly rate or by using costing extensions. These extensions in Projects can simulate the payroll calculations or some standard cost calculation. There are no standard interfaces to pass any entries made in Oracle Payroll to Projects. Entries made in Payroll often include additional non-hour employee payments such as bonuses, allowances, termination payments, and adjustments. In other words, Projects will only receive employee costs if they originated from a Time Card entry. Additionally there are no standard interfaces to pass to Projects any calculations done by Payroll such as the Employer portion of Tax, Medical/Dental Benefits, 401k, Workers Compensation, Garnishments, etc. Projects can interface the accounting entries to the GL for the costs provided by OTL while Payroll will interface to the GL for all costs (Labor, bonus, deductions, garnishments, etc) calculated in Payroll. (See Diagram A). Any costs interfaced to the GL from Projects would be accounted for via separate accounts that could be reconciled with Payroll so that labor costs would not be double counted. This is normally handled via applied accounts in a range outside the normal expense account values showing the amount of labor applied to projects.

Key Terms
1. Actual Cost We define Actual Cost as the result of the actual Payroll Run, which provides for a penny-to-penny reconciliation between Projects and Payroll. This includes both the hours an employee works, as well as any other pay the employee receives from bonuses, premiums, and other merit pay that can be attributed to a project. Standard Cost This is defined as a cost that produces anything other than a penny-to-penny matching of the employees earnings. There are many variations when computing standard cost, including bid rates, industry rates, or an average rate based on the salary of employees grouped by job title, location, grade, etc. Burden Cost The additional cost a company incurs based on the employing of a worker. This can include fringe benefits, such as vacation, insurance, taxes, etc. These types of costs can be calculated in Projects using a standard percentage rate based on historical financial data. They can also be calculated in payroll during the Gross to Net Calculation to get Actual Burden. However to apply the Actual Burden to a project is extremely costly and increases the number of transactions to a project to a level that reporting and project review can be cumbersome. Actual Burden is not a standard industry business

2.

3.

practice. Additional burden costs could be additional expenses to support an employee in doing their job (overhead) such as rent, phone, transportation, etc. 4. Blended Cost Sometimes the total of an employees earnings (actual or standard) plus their burden cost is called the Blended Cost. This one rate is charged to projects to account for all of the employees costs.

Why Actual Rate does not equal Actual Cost

Standard Oracle functionality sends the hours captured in OTL to the Projects module, where they can be costed based on the rates stored within Projects (by job or employee). It is possible, using extensions, to store the employees actual Payroll rate in the Projects cost tables. However, this should not be mistaken for Actual Cost. Using the employees actual pay rate to calculate the employees cost in Projects would still be considered Standard Cost, not Actual Cost because there is no guarantee that the Projects rate will match the employees actual paycheck without understanding how the following are handled: Adjustments to time in past periods Mid period pay changes Payment/Calculation of OT Frequency of updates to OT rules based on Union/Statutory regulations Prevailing Wage rules for payment of employees whose cost is based on job title/grade. Non-time related payments

As mentioned earlier, it is possible to use the costing extensions in Projects to mimic the calculations being done by Payroll. However, it would be difficult to guarantee complete accuracy and match Project costing to the employees paycheck due to the potential complexity of the business processes. Any changes in the payroll processes or calculations, including FastFormulas and Earning Policies, would have to be reproduced in the costing extensions in projects. This is made more difficult because Oracle Payroll uses proprietary code which cannot be accessed from Projects. All code for the costing extensions would be developed from scratch and would need to be maintained as patches and upgrades are applied in both Payroll and Projects. In addition to the reasons listed above, the decision of when to update the project costing extensions also must be considered carefully. Are all payrolls on the same schedule? Are all organizations costed the same way? How often are projects updated? In the end, none of these concerns or questions precludes actual cost from being achieved in Projects. They do add to the complexity and level of difficulty that a client must consider, depending on the accounting requirements and the implementation timeline and resources.

Other Key Decisions

1. What is a Project? This must be considered in order to define the buckets that costs will be placed in. For example, if Capital Projects will be handled in another system, then a process must be considered for splitting the employees time and costs if they work on multiple projects. Anytime Payroll Costs do not equal what is sent to Projects some process must be initiated to divide those costs. The first process being to define the Project portion and the Non Project portion. Secondly, the Project portion must be divided among the Projects, Tasks, and Types of labor that make up the cost. By defining the destinations 5

(i.e. Types of Projects) the specific needs of those projects can be designed for. Given the complexity of Project Costing and all the functionality that can be addressed; if the scope is too broad then development and testing can be too broad or in a worst case scenario requirements missed because the numerous requirements are overwhelming. More likely a company must decide if they are going to set up indirect or overhead projects to collect time/costs. This may be necessary for employees that split their time between chargeable work and administrative/sales/internal development duties. Additional project buckets could be Bid and Proposal, IT Projects, special Department projects, etc. If enough buckets are deemed necessary, this decision can lead to the concept that all costs go to Projects. If that is the case then many workflows or account generators can be standardized. 2. What costs go to projects? It is very easy to say that all costs go to projects, but companies must go through the exercise to think through if all costs truly do go to projects, and then more importantly, how to account for those costs. Costs such as bonuses, depreciation, bank charges, foreign exchange gain/loss, non-reimbursable taxes, are all examples of costs that often come up in discussion and are often handled outside of projects. Its important to discuss the materiality of all types of labor cost. If, in some cases, labor makes up a small portion of the overall cost of the project and the solution to charge actual cost is high then alternative solutions can be discussed. Another discussion point is what constitutes burden costs and how those costs get captured to projects. Often burden costs are an estimated percentage based on a years progress, which is then applie d against labor. These burden costs are accounted for in an applied account so they can be compared to actual fringe costs on a periodic basis and adjustments can be made to the burden rate if necessary. Overhead burden costs can also be costed to a project if management views these costs as projects costs. Do the costs follow the employee or the project? How are employee labor costs accounted for? Should the employee labor be costed to the project organization that is responsible for delivering the project or should their costs be applied to the organization that employees the person and most likely has budgeted for them? Either way, the costs will go to the Project and to the General Ledger; the question is just which cost center they are charged to. If the actual costs must go to the Project Org and a company chooses the standard cost method in projects, then in order for the actual labor costs to go to general ledger, payroll and projects along with finance must work together to come up with an accounting treatment to ensure the labor costs are properly accounted for.

3.

Key Decision Areas

This section is meant to offer a starting set of very specific questions to begin the design process. It would be impossible to document in this paper all of the various ways a solution could be developed. Therefore the following questions are meant to direct the conversation and allow the design team to work with management to help choose the correct cost treatment as well as focus the design teams. It is important to note that these questions must be addressed individually as well as collectively because we have found that more often than not a company can have contradicting requirements that it must address to minimize additional configuration and/or development. A common example of contradicting requirements is when companies require actual costs to be charged to a project but then, because of HR policy and security concerns, they do not allow the majority of employees to view these costs. These employees may have had access in the past and therefore, additional security and/or reports must be considered, thus changing how certain people do their jobs. Another example is when billing is done weekly, but employees are paid biweekly or even monthly. If actual cost is required, this may require payroll to be run/computed/ or estimated on a different timeframe.

Project Costing 1. What information do your Project Managers, Cost Controllers, Project Accountants, etc need to manage your projects? 2. 3. 4. How material is labor cost to overall project cost? Is actual cost a necessity to Projects or to Finance?

How timely does labor costing need to be imported to Projects? How often are budget to actual reviews done? How often should they be done?

Are the people that have access to labor costing in Projects authorized to see actual costs for all employees? How are Project estimates created? Are the estimates based of standard labor costs?

5.

How does the data need to be structured in projects to best support billing? Is billing mainly done based on costs? Hours? Both? Is billing based on the employee, their assigned job, or the job the employee performs at a specific time? Does that change? Is employee overtime billable at different rates even when it is not paid to the employee (IE salaried employees working more than 40 hours)?

OTL 1. How is time captured? Does the employee enter their own time or is that centralized? o 2. 3. The complexity of user entry can help determine if customizations are needed for enforcing rules, exploding time, etc.

How is the time approved? Does the approver make changes? How is Overtime captured*? Does the employee enter their Overtime in the timesheet or is it calculated by the system? Does Overtime have to be allocated across multiple projects or can it be applied to the last line of the timecard?

4. 5.

How are bonuses and non time related employee payments entered/applied? How are Adjustments to prior timecard periods handled? Who is responsible for identifying and entering different adjustments? What types of time entries are eligible to be adjusted? At what point in the process would each type of adjustment be made (and in which module)? Do adjustments need to be flagged or identified separately from regular time entries?

6.

How are Retroactive Pay Adjustments (including salary changes) handled? Payroll salary changes may be made to prior periods, but will always be paid within the current pay period. Should these changes appear in Projects?

* Note: Oracle provides for Overtime to be calculated (exploded) by OTLs rules evaluation process. This process takes the total hours entered in a

timesheet, and splits out the Overtime or Premiums, based on the rules defined. These rules are created to enforce company/union policies and labor laws. The rules are evaluated after the standard OTL to Projects interface is run. As a result, the hours that are sent from OTL to Projects are not exploded hours. If an employee is not entering their time broken out as Regular and Premium, the Projects costing extensions must be used to mimic the OTLR rules. If an interface from Payroll to Projects is being used, then the exploded OTLR time can be transferred to Projects. In R12, the Time Management to Project Accounting interface may be used, which will send the exploded hours along with a rate and cost for each line of time. This rate is not always equal to the employees actual rate, and so it should also not be considered a true actual cost interface. Payroll Accounting 1. Are you using Oracle Payroll? Even if a process is built to pass Project/Task from OTL to Payroll to facilitate interfacing from Payroll to Projects, the Standard Oracle Payroll will not cost to the project organization. Oracle Payroll costing is driven entirely by configuring the account segment values for each Element, Organization, Employee, etc. If you are not using Oracle Payroll then what type of entry can the third party payroll provider produce to send to the general ledger?

2.

Accounting / Finance 1. 2. 3. How is project reporting done currently? From the GL or from a projects system? Are actual or standard cost currently used? What are the expectations for PA / Payroll / and GL reconciliation?

Key Drivers of Customizations

The main drivers of customizations will be in the following OTL/Payroll areas. The following scenarios represent examples of business processes that typically result in some form of customizations: Overtime Rules 1. 2. If Overtime must be allocated or assigned to specific projects, rather than being charged to the last one entered in the timesheet, a custom program is needed If Overtime rules must be anything other than the standard Daily/Weekly rules provided by Oracle, a custom program is needed. Oracle does provide functionality to meet legislative and FLSA requirements. If the standard OTL to Projects interface is being used, exploded Overtime will not transfer to Projects. The OTLR rules for explosions must be developed as costing extensions within Projects to produce the same results.

3.

Data fields that must be transferred to Payroll or PA 1. Standard timecard layouts provide only a specific set of data fields to be transferred to either Payroll or PA. Any changes/additions to these fields require customization of the timecard layouts. (e.g. If Project/Task/Exp Type must be transferred from OTL to BEE, a customization is needed.)

Calculation of the Labor Cost 1. The standard OTL to Project Accounting process will pass only the hours entered in the timesheets to Projects (11i & R12). The hours will be tied to a Project, Task, Expenditure Type, Expenditure Org, and Date Earned.

2.

In R12, the seeded Transfer to Project Accounting process will cost labor only as follows: a. b. Straight time: Hours x Rate Premium time: Hours x Rate x Premium (i.e. Overtime/Doubletime)

3.

Non-standard calculations may require a customization or extension. Some examples are: a. b. c. d. Overtime must be allocated to multiple Projects or Tasks Special Overtime Rules: An employee becomes eligible for OT/DT th after working 4 hours on the 7 day Prevailing Wage Overrides or where each job title has a different premium. Premiums tied to a non-hours condition. For example, offshore divers who are paid a flat amount or premium on top of their rate, based on their dive depth. Salary employees who earn a premium based on hours worked (Salary Non Exempt)

e.

Adjustments 1. Adjustments can be handled via Retro Timecards or by making Adjustment entries in the current period timesheet. There are restrictions on both approaches, which will need to be weighed along with the costing method, overtime rules, and adjustment requirements to determine which approach will work best. Retro Timecards will allow the user to go back to the original timecard that was submitted and make changes after the period has already been closed. These changes will be picked up by the Retro process and will be costed and paid within the current period. However, if any of the timecard lines that were interfaced to Payroll or Projects have been changed in those modules, the original OTL timecard becomes locked and changes can no longer be made. Adjustment entries in the current period timesheet can be done at any time after the original timesheet period has been closed. The restriction is that these Adjustment entries must be flagged as separate from the regular hours worked in the period, so as not to interfere with any rules evaluations or Overtime explosions. Depending on the costing method being used, and the method of interfacing the labor to Projects, additional customization or extensions may be required to ensure that the correct rates are used for the adjustment lines.

2.

3.

4.

Payroll / Projects / General Ledger reconciliation. 1. If a company requires actual costs in projects they may expect to be able to reconcile Projects with the General Ledger. This process is extremely difficult to do because of the factors already discussed along with the potential differences in payroll timing and GL period. If Labor/Salary Accruals are needed for Projects, another custom interface may be required in addition to custom reports, not to mention a great deal of time and resources (depending on company size) to ensure the reconciliation is correct and make and adjustments that are discovered.

Overall Recommendations
The examples below are meant to provide the rationale for selecting Actual versus Standard Cost based on the earlier definitions of Actual and Standard Cost. These are the two extreme ends of the spectrum of costing, which should

help to foster an understanding of the factors with the most influence on the decision. Reasons for Actual Cost 1. 2. 3. 4. Costing in Projects must match Payroll, penny to penny, with minimal workarounds and reconciliation Costs must follow the project and the payroll system is unable to provide proper accounting to GL High volume of non time related employee payments which cannot be handled via a workaround involving pre-approved batches Very low margin projects where a fraction of a percentage in costs (between Standard versus Actual), may impact Project Managements behavior because of the significant impact to the bottom line. (This may also require estimates to be done based on actuals so that reasonable comparisons can be done)

Customizations are likely required and actuals can be used for companies that require the following: 1. 2. 3. 4. Costs to follow the Projects Monthly or semi-monthly updates to projects High complexity of time entry / approvals Employees receive many forms of non time related pay

See Figure 2 Fig. 2

HR / Pay OTL BEE

Additional Time Entry Adjs to TCs Bonuses Severance Retro, Other

EE

Payroll

Custom Account Generator

BEE or Payroll Interface GL

HR
Data is used throughout application

Transaction Import Table

Projects

BEE or Payroll Interface - This customization could do multiple things ranging from simulating the Payroll, interfacing the actual payroll results, using OTL and BEE data to compute standard costing, or taking the BEE data and interfacing only non-hours entries, while using the seeded OTL interface for all other hours-related entries. Custom Account Generator - If costing must be based on anything other than the employee organization or a fixed costing string it may require a custom interface.

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Reasons for Standard Cost 1. 2. 3. 4. Costing can be available in Projects in a more timely manner since the cost doesnt depend on the Payroll run Projects user community should not have access to actual employee rates More closely matches numbers used in bids and estimating Removes some burden from Payroll Reduce Processing Time Reduce manual steps and reconciliation

Customizations can likely be avoided or minimized and standard cost can be used for companies that require: 1. 2. 3. 4. Costs to follow the employee Costing updates to projects are required weekly or more frequently Low complexity of time entry / OT Calculation / approvals Non time related pay makes up a small portion of employee cost

Hitachi Consulting recommends that organizations implementing Oracle Project Costing discuss and decide on a labor costing approach early in the design process. The decisions made around costing will have a drastic effect on the design of other modules, and on the custom programs that may be required. Deciding on an approach as early as possible will help with setting expectations, defining the project timeline, and reducing risk for future re-design. For more information on Hitachi Consultings Oracle services and examples of how we have helped IT leaders and IT organizations plan, control, and move forward with their ERP strategies and projects, please do not hesitate to call Hitachi Consulting today at 1.877.664.0010.

Author Bio
Dan Stine, Senior Manager, Hitachi Consulting

About Hitachi Consulting Corporation As Hitachi, Ltd.'s (NYSE: HIT) global consulting company, with operations in the United States, Europe and Asia, Hitachi Consulting is a recognized leader in delivering proven business and IT strategies and solutions to Global 2000 companies across many industries. With a balanced view of strategy, people, process and technology, we work with companies to understand their unique business needs, and to develop and implement practical business strategies and technology solutions. From business strategy development through application deployment, our consultants are committed to helping clients quickly realize measurable business value and achieve sustainable ROI. Hitachi Consulting's client base includes 25 percent of the Global 100 as well as many leading mid-market companies. We offer a client-focused, collaborative approach and transfer knowledge throughout each engagement.

For more information, call 1.877.664.0010 or visit www.hitachiconsulting.com.

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About Hitachi
Hitachi, Ltd., (NYSE: HIT / TSE: 6501), headquartered in Tokyo, Japan, is a leading global electronics company with approximately 390,000 employees worldwide. Fiscal 2007 (ended March 31, 2008) consolidated revenues totaled 11,226 billion yen ($112.2 billion). The company offers a wide range of systems, products and services in market sectors including information systems, electronic devices, power and industrial systems, consumer products, materials, logistics and financial services. For more information on Hitachi, please visit the company's website at http://www.hitachi.com. For more information on Hitachi, please visit the company's Web site at http://www.hitachi.com/.
2009 Hitachi Consulting Corporation. All rights reserved. "Inspiring your next success!", "Knowledge-Driven Consulting", "Dove Consulting" are all registered service marks of Hitachi Consulting Corporation. Building the Market Responsive Company, Business Intelligence at the Edge of the Enterprise and Performance Management at the Edge of the Enterprise are all service marks of Hitachi Consulting Corporation.

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