An introduction to project accounting
On the evening of 18th September 2013, John Chapman, Treasurer of the Programme Management SIG and a member of the APM Planning, Monitoring and Controls SIG gave a presentation to the APM Thames Valley Branch in Swindon. The subject was project accounting.
There were over 50 people who attended the event, which was held at the Nationwide Headquarters in Swindon.
John divided the presentation into three key subject areas
1.An introduction to project accounting
2.The importance of understanding CPI (the Cost Performance Index)
3.Thoughts on implementing Earned Value Management
The introduction to project accounting section initially discussed the five key numbers that any project manager should know; namely the budget at complete, the actual cost of work performed, the estimate to complete, the estimate at complete and the variance at complete.
John then spoke about the challenges of preparing a budget, the importance of having a work breakdown structure, a budget hierarchy and budgeting by deliverable. He referenced the EV / Risk SIG work on using Risk assessment to identify known and unknown risks, the budget allocation of this, and then moved onto look at profiling the budget across time to give a performance measurement baseline.
He then went through some of the challenges around gathering actual data considering areas including Time recording and Level 3 or Level 4 WBS allocation, asking for estimates to complete and how to identify % complete.
The second section of the presentation introduced the subject of Cost Performance Index (CPI). This is an important metric to understand, and using a worked example, with detailed explanation, he presented how the CPI can be used to calculate the Independent Estimate at Complete based on the Budget at Complete at the 15% completion point in a project.
There was general agreement with the comment that ‘The Project Work is as difficult as it is’, and that projects never get any easier.
The third and final subject area gave thoughts on implementing Earned Value Management. John discussed the challenges of understanding the subject matter and how seminal books such as Earned Value Project Management by Fleming and Koppelman give explanations that need to be interpreted into the context of a specific organisations project and programme.
His recommendation was that when implementing Earned Value, it is divided into three Stages of implementation. The first Stage is the understanding of the project financials and how these are calculated. The second Stage is to use the concepts of BCWS (planned value) and BCWP (earned value), cost variance and % complete. The third Stage is to consider Schedule Variance, To Complete Performance Index , Schedule Performance Index and the remaining Earned Value areas. There was a discussion on whether the full Earned Value approach needed to be implemented, or if a subset was applicable.
In closing the presentation, John explained the 10 steps for Earned Value Management talking through the following diagram.