Project Cost Controls
Project Cost Controls (also referred to as Job Costing) provide key tools to ensure projects are on budget and profitable. Cost overruns are common and can cause businesses to experience financial difficulties if their project finances aren't well controlled. Cost-control tools are designed to address most of the issues that cause projects to experience cost overruns. Cost controls focus on three main project elements that are critical to maintaining project profitability:
- Accurate project estimating
- Accurate project cost tracking and real-time project performance visibility
- Accurate and timely project information
First, establishing reliable and accurate estimates is vital. Second, once the project is underway, collecting the actual costs and real-time activities – along with reporting project metrics and variances — are essential to ensure potential cost overruns are addressed. And finally, analyzing project performance reports and trends provides critical insight into future project planning and execution decisions.
SaaS stands for Software as a Service and is a model of software deployment where an application is provided as a service on demand. Customers pay for using the software, rather than owning it.
LEM is labor, equipment and materials, and often includes expenses. It's a common acronym used to describe cost controls or job costing software that capture these types of project expenses. 4castplus is considered LEM software.
Resources are the people (employee or contractor labor), equipment and materials that are required in your project.
Resource classes let you categorize, or class, your project resources for billing.
Project Manager is a resource class that you can add individual labor resources to. You can also report on resource class. For example, you can group all of the equipment you use for excavation into one equipment resource class, called Excavation, to run reports that assist you with asset management.
Resource Utilization is a metric of how effectively used resources are to generate revenue, as a measure of all hours worked. For example, if John worked 47 hours in a week, and generated 40 hours of billable revenue, his resource utilization would be 85%. Resource Utilization is an important metric to identify possible revenue generating opportunities in your labor base.
Similar to Resource Utilization, Billable Utilization is a metric of how effectively used resources are to generate revenue, as a measure of all available hours worked. This metric requires the configuration of what is expected to be available hours to generate revenue for a period. For example, John worked 47 hours in a week, and generated 40 hours of billable revenue. The available hours for John are configured to be 40 hours. His billable utilization would be 100%. Billable Utilization is an important metric to review, in addition with Resource Utilization, to ensure that billable targets are achieved.
Cost and Billing Rates
A rate table organizes the project billing rates used in 4castplus. Rate tables let you setup different billing strategies for different project types or customers you may have. For example, Standard Rates or Premium Rates are examples of rate tables. You can create as many billing rate tables as you require.
A rate type is the unit of measure that your cost and billing rates are charged out at. For example, Hourly is a rate type for labor resources.
Reverse invoicing simplifies the billing relationship with contractors. A contractor enters their time in their employer's timesheet system, instead of the contractor tracking their own time. Using the timesheet transactions, the employer creates an invoice for the contractor, then the contractor is paid from this invoice: Reverse invoicing. The contractor isn't required to submit their own timesheets, nor do they need to submit an invoice. Reverse invoicing minimizes contractor disputes around hours billed and paid, and improves the quality of financial reporting.
Estimates & Forecasts
Markup vs. Margin
- Margin is calculated as a percentage of your revenue.
- Markup is calculated as a percentage of your cost.
Margin is the difference between your project revenue and project cost. For example, $1,000 (revenue estimate) - $800 (cost) = $200 gross margin. When expressed as a percentage of your project revenue, this gross margin is 20%.
Markup is a percentage, or dollar amount, that is added to your cost estimate. For example, $800.00 (baseline estimate) + $200 (markup) = $1,000 (revenue estimate). When expressed as a percentage of your project cost, this markup is 25%.
A contingency reserve is a % of the project estimate that is set aside, but not allocated in advance, to accommodate unforeseeable project costs. The contingency reserve is added to the estimate to determine the total project estimate. As project costs incur that exceed a project task estimate, the contingency reserve is drawn down.
You can link a baseline estimate to the project master budget. Once an estimate is baselined, it is locked (you cannot edit it) and represents the starting point for the project's tasks, costs, revenues, and overall plan. This is an important step: as project changes occur, you have a baseline from which to monitor these changes over time. Changes are tracked explicitly using change order management built into 4castplus and you can create forecasts at regular intervals during the project to better manage project progress. Your baseline estimate is the starting point for Earned Value Management (EVM).
Forecasting is simple: when you create a forecast you are updating key project information (for example, percent of completion), that indicates where your project is right now.
4castplus uses this information to provide you with information on the current performance and projected results for your project:
- It forecasts what your expected project results will be when the project is completed — how much it will cost to complete the project (Estimate to Complete (ETC)), and how much the project will once it is complete (Estimate at Complete (EAC)).
- Which tasks are in trouble and have costs above or below the original baseline (Variance)
- How much the current forecast has changed since the last forecast, and is it improving or worsening (Change in Variance)
Since you can do this at regular intervals, you create a systematic, controlled approach to monitoring your project's progress. You can make adjustments to the work in progress and keep your project on track.
Forecasting is a key component for running successful and profitable projects.
Earned Value Management (EVM)
EVM is a project management method that involves the calculation of cost, cost variances and forecasts of project costs. It gives an early indication of project cost performance to let you know if you need to take corrective action. EVM within 4castplus focuses on minimizing the project risk related to cost.
Weighted Average Percent Complete is used in a variety of metrics within 4castplus, and is derived from the percent complete determined for a project activity or phase. It works like this:
- When forecasting, you assign a percent complete to your project tasks.
- All task percent completes are rolled-up to determine the percent complete for the project activity or phase the tasks belong to.
- When tasks within a project activity or phase are incomplete, 4castplus weights the actual percent complete of the completed tasks to determine a weighted percent complete.
Weighted Average Percent Complete is calculated like this:
- Task Estimate x % Complete = Total Estimated Cost of Completed Work
- Total Estimated Cost of Completed Work / Total Baseline Estimate = Weighted Average Percent Complete
Earned revenue is used to evaluate your project performance. Using the Weighted Average Percent Complete (see above), you can see what your project earned revenue is at any point. Comparing this metric to your actual costs incurred lets you know if costs are flowing out of your project faster than revenue is coming in.
EAC and ETC
EAC (Estimate At Complete) and ETC (Estimate to Complete) are two measurements used in Earned Value Management. EAC represents what the estimated final result of the project will be, based on the actual costs incurred in the project to date combined with the current forecast of ETC. ETC represents how much it costs to complete the remaining work in the project.
Variance is the difference between the baseline estimate cost for a project task and the actual cost incurred on that task.
% Variance is calculated as: (Budget – Actual) / Budget
You thought something was going to cost you $50, but it ended up costing you $60. In this case your variance is -$10. Or, -20% when expressed as a percent. You can read a negative percentage as You are 20% over budget.
Variance is a signal that the project task or activity in your project has or has not performed according to your original expectations. Following up on significant variances lets you:
- quickly identify potential issues
- make adjustments
- provide you with information to make improvements on your future project estimating.
A time-and-materials project charges out all billable labor, equipment and materials (LEM) hours according to their billing rates. There is an estimate but no fixed final price.
- Resource-level estimates are calculated based on the cost and billing rates for the individual resources.
- Invoices are calculated based on billable transactions that have occurred in the project, for a selected date range.
In a fixed-price project, the vendor and customer have negotiated a set price for the entire project.
- Resource-level estimates are calculated based on the cost rates for the resources; and then a profit markup is applied to those cost rates to determine the potential revenue. Once a final negotiated price is determined, that price becomes the baseline price.
- Invoices are calculated based on the milestone or interval billing agreed upon. Total invoices cannot exceed the total of the final negotiated price and any change orders (see Change Management for how projects price can change after it is baselined)
In a cost plus project, the vendor and customer have negotiated a mark up on the project cost.
- Resource-level estimates are calculated based on the cost rates for the resources; and then a profit markup is applied to those cost rates to determine the potential revenue.
- Invoices are calculated based on billable transactions that have occurred in the project, for a selected date range.
In a unit price project, the vendor and customer have negotiated a unit price per for a measurable quantity.
- Resource-level estimates are calculated based on the cost and billable rates for the resources. Based on the specified quantity for a work package, a unit cost/price is determined.
- Invoices are calculated through the delivery of the project quantity, at the established unit price.
A cost project is identical to a fixed-price project with a profit markup of 0% and displays no revenue portion in any reports or estimates.
An overhead project is similar to a cost project in that it tracks the hours and cost of all overhead hours (statutory holidays, vacation, sick time, etc.) that incurred by a company. These hours are then used in the calculation of available hours and billable utilization.
Profit Margin Analysis
Revenue - Expenses = Profit Margin
Profit margin is the difference between revenue and expenses. When preparing your Baseline Estimate, you will have determined what your expected Profit Margin will be at the end of the project. The capability of 4castplus also allows you to see what your expected Profit Margin is at any given time in the project. As your project progresses, regularly comparing your actual Profit Margin to your expected Profit Margin will give you a high-level indication whether your project is on target or not. You can then start to drill-down and look at the variances within your project to determine where the underlying issue is.
Work Breakdown Structure (WBS)
A work breakdown structure (WBS), is the hierarchy of individual project tasks, or sequence of project events, you are required to complete as part of your overall project plan. You can create an unlimited hierarchy of tasks and folders in 4castplus to support even the most complex projects.
Trending is taking a look at the patterns that emerge from current and historical project performance. It is a key aspect of estimating and forecasting: to view trends that affect profitability or customer satisfaction, and to take steps to minimize the impact of unfavourable trends in future estimates.
Cost categories are a unique way to separately track and report different costs across a multitude of projects. When you assign a cost category to project tasks, you can track individual and total project costs in a specific category. Here are some cost category sample uses:
- Health & Safety: Track safety costs across projects and over time
- Environment: Track costs and time related to environmental sensitivity efforts across all projects
- Government: Track costs and time related to government inspections, applications, standards, WCB, etc
- R&D Grants: Track research efforts for government-related incentive programs
Utilization compares the total hours your LEM resources are available vs the total hours used. It provides you with information on how well utilized, or how productive, your resources are. Also, comparing the total hours your LEM resources utilized vs hours billed out provides you with information on the revenue-generating performance of your project resources.