An Introduction to Project Accounting

John Chapman
Programme Director
Touchstone Energy
www.TouchstoneEnergy.co.uk
John.chapman@touchstone.co.uk

Agenda

Accountancy
Project accounting & Financial Accounting
The five key values
Creating a budget by deliverable
Profiling the budget
Gathering actual data
Estimates to complete & the importance of CPI
Implementing Earned Value Management
Questions

Project Accounting v Financial Accounting

Financial Accounting

Programme & Project

Accounting

Based on periods in a
financial year

Start and end dates no

relation to accounting periods

Department & Cost Centre

Hierarchies
Comparative Reporting
based on same period last
year and actual versus
budget

Deliverable, Activity, Project,

Cross Department
Comparative Analysis only
possible if like type projects
with consistent coding
structure

Project Accounting v Financial Accounting

Financial Accounting

Programme & Project

Accounting

Directors & Managers understand

Financial Accounting

Concepts such as planned value

and earned value are not widely
understood.

Depreciation is based on a defined

policy

Costs are calculated on invoices

received. Depreciation is a financial
accounting function

Financial Accounting does not

report on Deliverables (aka
Products)

Reporting is (should be) focused on

Deliverables

A comparative example

The five key numbers

1. BAC: Budget at Complete,
How much can we spend?
2. ACWP: Actual Cost of Work Performed
How much have we spent so far?
3. ETC: Estimate To Complete
What do we need to spend to finish the project?
4. EAC: Estimate At Complete, EAC = ACWP + ETC
5. VAC : Variance At Complete, VAC = BAC EAC
Positive variance is favourable, Negative is unfavourable!

A budget hierarchy

Creating a budget by deliverable

Bottom up and top down estimating

Prepare your work breakdown structure (deliverables /

products)
We run to Level 4 Work Breakdown Structure
For each deliverable we identify
The components e.g. design workshop, design document
preparation, structured review,
The responsibility assignment
The quality management method
The estimate

Bottom up and top down estimating

The deliverable estimate

For time do you estimate in Days or Hours
Do you need to convert this to a financial value?
It should be completed by project role / skill
requirement
What are the component parts e.g. to prepare a design
To run a design workshop
To write a design document
To run a structured walkthrough

Bottom up and top down estimating

A risk assessment, if applicable, for the risk
budget for that deliverable
This gives us the bottom up estimate
We then do a top down review

Bottom up and top down estimating

And then consider
Unknown Risks
Management Reserve / contingency

Do you take into account Team Performance

Codes? i.e. skilled workers productivity might be
125% whilst a junior person could be 80%
Remember to baseline

PMB Performance Measurement Baseline

MR Management Reserve

Profile the budget across the Stages

Title
Project Initiation

BAC
5k

Stage 01
Stage 02

40k
35k

Stage 03
Closure
Totals
Risk
Contingency / MR

15k
5k
100k
5k
3k

Profile the budget based on

Estimates To Complete
each Stage
There are Stage budgets
Risk & Contingency held as
separate budgets

Gathering actual data

How will you find out

The Actual Duration?
The Remaining Duration?

Gathering actual data : the fun begins

Setup your time recording system to

track by say level 3 or level 4 work
breakdown structure
Timesheet entry for some is difficult!
Will subcontractors enter timesheets?
Speak to Finance about finding out
when supplier invoices come in
Do Finance track commitments?

Gathering actual data

Try asking for an estimate to complete?

i.e. the remaining duration
What is the % complete?
25%, 50%, 70%, 85%, 90%, 91%, 92%?

Will you enter data to a time recording

system and then re-enter to Microsoft
Project?

Gathering actual data

How do you know when something is completed

100%?
Design sign off how do you evaluate design? Use
IEEE standards
Software Installation what is the test criteria?
Completion of User Acceptance testing how
comprehensive were the tests?

Reporting the results

Title

BAC

ACWP

ETC

EAC

VAC

Project
Initiation

5k

5k

0k

5k

0k

Stage 01

40k

38k

0k

38k

2k

Stage 02

35k
15k
5k
100k

35k

5k

40k

-5k

Stage 03
Closure

Totals

Track Actual Cost of Work Performed

Work out the Estimate to Complete
Calculate the Estimate at Complete: EAC = ACWP + ETC
Calculate the Variance at Complete: VAC = BAC - EAC

Estimate to complete & the importance of CPI

CPI is an important
metric

Estimate to complete & the importance of CPI

The Cost Performance Index is

The Value for Money indicator

How much it really costs to earn one

Pound () of budget?

E.V.A in the UK 8, p25, Steve Wake

Estimate to complete & the importance of CPI

For example
You have agreed to run a series
of design workshops to
complete system design
The cost is 16,000 to complete
and that is the agreed budget

Estimate to complete & the importance of CPI

Did it cost 16,000 to finish this
eloquent prose?
Or was the budget exceed?

Did it take less time?

What you want to know is whether it
cost you more, the same or less to
get 16,000 of value

Estimate to complete & the importance of CPI

Did it cost 16,000 to finish this
eloquent prose?
Or was the budget exceed?

Did it take less time?

What you want to know is whether it
cost you more, the same or less to
get 16,000 of value

Estimate to complete & the importance of CPI

But what about during the
completion of this work?
What if it is 50% complete but you
have spent 60% of the budget?
The Cost Performance Index is a
metric that is used to evaluate this.

Estimate to complete & the importance of CPI

The formula is:

CPI = BCWP / ACWP
BCWP : Budgeted Cost of Work Performed
(also known as Earned Value: EV)

ACWP : Actual Cost of Work Performed

(also known as AC)

Alternative the formula is shown as:

CPI = EV / AC
E.V.A in the UK 8, p25
The Earned Value Management Maturity Model, p21

Estimate to complete & the importance of CPI

Title
Design Workshop
Write Design
Structured Review
Finalise & Sign off

Planned Value (BCWS)

BCWS (PV)
5k
6k
3k
2k

16k

Budgeted Cost of Work Scheduled (BCWS) is 16k

Also known as the Planned Value (PV)

Estimate to complete & the importance of CPI

Title
Design Workshop
Write Design
Structured Review
Finalise & Sign off

BCWS (PV)

BCWP(EV)

Actual Cost

5k
6k

5k
6k

5k
7k

3k
2k

3k
2k

3k
3k

16k

16k

18k

The work is completed, we have earned the budget of 16k

The actual cost (ACWP or AC) is 18k
Cost performance index is calculated as:
CPI = BCWP / ACWP or CPI = EV / AC
CPI = 16k / 18k
CPI = 0.89 (not good as it is less than 1)

Estimate to complete & the importance of CPI

Thanks to CPI and a budget that

represents all the work to be done
(BAC), .. it is possible to predict
how much will be spent getting
there There is common
knowledge and statistical evidence
showing this assumption to be
valid.

The project work is as

difficult as it is.

Estimate to complete & the importance of CPI

Statistical calculation of the Estimate at Complete

IEAC = BAC / CPI
Where
IEAC = Independent Estimate at Complete
BAC = Budget at Complete
CPI = Cost Performance Index
Or it can be shown as
EAC = BAC / CPI
E.V.A. In the UK 8, p79, Steve Wake
The Earned Value Management Maturity Model, p36

Estimate to complete & the importance of CPI

Budget at Complete: 250,000

CPI is 0.89

Independent Estimate at Complete is

250,000 / 0.89 = 280,898
Variance at Complete is
250,000 280,898 = -30,898
We are over budget

Estimate to complete & the importance of CPI

The Variance at Complete is

-30,898

Earlier we identified that the

design variance was -2,000
Using the CPI we can extrapolate
the Estimate at Complete.

Estimate to complete & the importance of CPI

CPI simply reveals the efficiency with which the

project is using funds or staff hours.
CPI = EV / AC
EAC = BAC / CPI
Since this formula divides two terms with the same
unit of measure, the result is unitless.

The Earned Value Management Maturity Model, p32

Estimate to complete & the importance of CPI

Budget at complete: 4,500 hours

CPI : 0.89

Estimate at complete
4500 / 0.89 = 5056 hours
When to use : at the 15% project completion point

The Earned Value Management Maturity Model, p32

Estimate to complete & the importance of CPI

1. A quick method to enable the

calculation of the Estimate at Complete
and therefore the Variance at Complete
2. Does not involve going back through
all the bottom up analysis of data
3. A unitless metric to assess risk: is our
Budget At Complete less than our
Estimate At Complete (in hours or
money)?

Estimate to complete & the importance of CPI

4. To give us an early warning indicator

to go back to the Project Board if
required.
5. Instead of using CPI, we can go back
to burning the midnight oil to
recalculate all the figures!
6. Remember
The project work is as difficult as it is.

Thoughts on
Earned Value
Management

What is EVM?
Earned Value Management is a project
control process based on a structured
approach to planning, cost collection and
performance measurement. It facilitates the
integration of project scope, time and cost
objectives, and the establishment of a
baseline plan for performance
measurement.
APM Body of Knowledge, 5th Edition

Earned Value Management

NSIA / EIA Standard 748 for Earned Value Management Contains
32 System Criteria:
Group 1 : Organisation Criteria : 5
Group 2 : Planning, Schedule and Budgeting : 10
Group 3 : Accounting Criteria : 6
Group 4 : Analysis Criteria : 6

Group 5 : Revisions Criteria : 5

Earned Value Project Management, Quentin W. Fleming and Joel M Koppelman, ISBN 1930699891

Earned Value Management

EVM Criterion #8
Establish and maintain a time-phased
budget baseline, at the control account
level, against which program performance
can be measured. Initial budgets
established for performance measurement
will be based on either internal
management goals or the external
customer negotiated target cost including
estimates for authorized but undefined
work

Earned Value Project Management, Quentin W. Fleming and Joel M Koppelman, ISBN 1930699891

A way of approaching
Instead of trying to achieve all these at once a proposal is to split this
into three levels representing levels of maturity
Level 01: Focus on the financial values and project scope.

Level 02 : Implement changes to the delivery method so the BCWP

can be calculated (i.e. how are you going to earn the value by the type
of work)
Level 03: Track schedule variance, the SPI, TCPI and so forth
And work out what this means for your type of programme or project

Implementing Earned Value Management

Level 01
Budget At Complete
Bottom up / top down estimating

Estimate at Complete
Calculation of Actual Cost + Estimate to Complete

Estimate to Complete
Bottom up / town down estimating (or CPI)

Actual Cost of Work Performed

A method of capturing actual time and actual cost by
deliverable (aka product)

Implementing Earned Value Management

Level 01
Variance at Complete
Calculation of Budget at Complete Estimate at Complete

Management reserve
Money set aside

Performance Measurement Baseline

Profile the budget across time

Risk budgets (Known & Unknown)

Risk assessment with budget allocation

Implementing Earned Value Management

Stage 02
BCWS (Planned Value)
Work breakdown structure with budgets baseline set by
deliverable

BCWP (Earned Value)

Track % complete (there are different methods) to Earn the
Value
Remember you cannot Earn more than the budget

Cost Variance

CV = BCWP ACWP
So you must have the BCWP

Implementing Earned Value Management

Level 02
Cost Variance %
Cost Performance Index (CPI)
As explained earlier

Undistributed Budget
An assessment of how to earn the value
How to evidence that the work is completed the physical
completeness with a link to the QMS
Training the project team to think in these terms.
A method of getting this feedback during delivery

Implementing Earned Value Management

Level 03

Schedule Variance (SV)

Schedule Variance %
Schedule Performance Index (SPI)
To Complete Performance Index (TCPI)

Will your numbers be accepted?

Book References

The Earned Value Management Maturity Model, Ray W Stratton, ISBN 1-56726180-9
Earned Value Project Management, 3rd Edition, Quentin W Fleming and Joel M Koppelman,
ISBN 193069989-1
EVA in the UK, Steve Wake
APM Body of Knowledge, 5th Edition, Association for Project Management, ISBN 1-90349413-3
Interfacing Risk and Earned Value Management, Association for Project Management,
ISBN 1-903494-24-9
The Mythical Man Month and Other Essays on Software Engineering, Frederick Brooks,
ISBN 0201835959
Project and Programme Accounting, a practical guide for Professional Service
Organisations and IT, John Chapman, Project Manager Today Publications, ISBN: 1900391-14
Earned Value Management using Microsoft Office Project, Sham Dayal, J.Ross Publishing,
ISBN 978-1-932159-98-1
Work Breakdown Structures, The Foundation for Project Management Excellence, Eric S
Norman, Shelly A Brotherton, Robert T Fried, Wiley, ISBN 978-0470-17712-9
Performance Based Earned Value, Paul J Solomon, Ralph R Young, Wiley Interscience,
ISBN 978-0-471-721888
Earned Schedule, Walter H Lipke, ISBN 0557177383

YouTube References
Touchstone Energy YouTube site
http://www.youtube.com/user/TouchstoneEnergyPro

Project Accounting for Business

Solutions
http://youtu.be/9MllQFyXvo8

The Earned Value Management

Metric CPI
http://youtu.be/u4NPJh9bck8

Thank you Questions?

An Introduction to Project Accounting
John Chapman
Programme Director
Touchstone Energy
www.TouchstoneEnergy.co.uk
John.chapman@touchstone.co.uk