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Methodology Summary (English): Project Finances (Project Office Methodology v2.0) The purpose of this Phase is to provide a process, a procedure and associated guidelines to facilitate the management of the project estimates, costs and budgets.

The contents of this Phase may be subject to minor change to ensure alignment with the Project Office Methodology v2.0 training course, planned for development in financial year 2002-2003.

of 26 Individual Project Progress,Issues and Budget Reporting

Project Sponsorship

STAGES

PHASES

Consolidated Project Progress, Issues and Budget Reporting

Products, Services, Trainingand Documentation

Project Prioritiesand Guidance

Delivery Project Teams

A.Start-up

Benefits Delivery andIssues Reporting

Close

PerformanceMeasures

Handover

Cost/Benefits Management

Communications Project Control Quality and Standards

V.

I Start-up II Execution III Benefits Realisation IV Close

Project Office Life Cycle (v2.0) Incorporating a Separate Benefits Realisation Project

Project Planning

C.Planning andScheduling

B.ProjectManagementMaturityAssessment

D.ResourceManagement

E.Dependency Management

H.Business CaseMonitoring andBenefitsRealisation

G.ProjectFinances

J.StakeholderManagement

I.CommunicationsManagement

K.ProjectMonitoring andReporting

M.IssueManagement

L.RiskManagement

N.ScopeManagementand ChangeControl

O.Supplier Management

Q.Knowledge and OfficeManagement

P.Quality Management

R.Close

S.BenefitsRealisationProject Initiation

U.BenefitsRealisationProject OfficeManagement

T.BenefitsRealisationMonitoring andReporting

F.AssumptionManagement

Individual Project Progress,Issues and Budget Reporting

Project Sponsorship

STAGES

PHASES

Consolidated Project Progress, Issues and Budget Reporting

Products, Services, Trainingand Documentation

Project Prioritiesand Guidance

Delivery Project Teams

A.Start-up

Benefits Delivery andIssues Reporting

Close

PerformanceMeasures

Handover

Cost/Benefits Management

Communications Project Control Quality and Standards

V.

I Start-up II Execution III Benefits Realisation IV Close

Project Office Life Cycle (v2.0) Incorporating a Separate Benefits Realisation Project

Project Planning



B.ProjectManagementMaturityAssessment







G.ProjectFinances



I.CommunicationsManagement



M.IssueManagement

L.RiskManagement

N.ScopeManagementand ChangeControl

O.Supplier Management



P.Quality Management

R.CloseR.

CloseS.

BenefitsRealisationProject Initiation

S.BenefitsRealisationProject Initiation

U.BenefitsRealisationProject OfficeManagement

T.BenefitsRealisationMonitoring andReporting



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G. PROJECT FINANCES Purpose To provide a process, a procedure and associated guidelines to facilitate the management of the project estimates, costs and budgets. Overview Project Finances as described in this Phase relate to the derivation of the estimates for project cost and budgets, the accounting approaches to be used for project costs and the monitoring and reporting of project costs and budgets. This Project Finances Phase focuses on managing the finances of the project(s) and does not provide information concerning integration with an organisation’s operational budgets. Every project has an associated cost. The cost can be derived from many sources including the price of computer hardware or software, the time required from an organisation’s resource(s), costs of external resources, specific project-related purchases and the amount paid for use of facilities. Project costs and budgets must be managed throughout the project life cycle to ensure that the expected benefits accrue to the organisation within the specified financial constraints. If project costs become out-of-control or are significantly higher than expected, the project may no longer be viable for the organisation and the project sponsors may consider abandoning the effort or significantly changing the project scope. The cost estimating and budgeting procedures should be performed prior to preparing an official project budget request. However, time requirements and organisation budgeting limitations may dictate that a formal budgetary approval is received before the estimation process begins. The cost estimating and budgeting procedures should still be followed to ensure that the budget is realistic and that cost performance can be effectively measured throughout the project. There are many alternative ways of accounting for projects dependent upon such aspects as: ?? The size, duration and spread of impact of the project; ?? Whether the project crosses financial years; ?? The relative size of the total cost of the project; ?? Which project-related costs are excluded or included; and ?? The organisation’s approach to either expensing or capitalising all or part of project costs. This means that it is important to first determine the accounting approach to be used before project estimates, project budgets or project accounting management are defined. Together with the accounting approach, it is important to clearly define all of the responsibilities for the different aspects of Project Finances particularly the roles that the organisation’s Accounting Department will play and the specific tasks to be completed as part of the Project Office activities. The Project Finances Plan completed in the first task within the Phase includes all of the detailed policies, tasks and responsibilities necessary to record, monitor and report upon the project’s costs and budgets. The Cost Baseline prepared in the third task within the Phase is used to measure cost performances for the duration of the project.

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Summary Inputs Project Information

Project Organisation Chart Project Definition Document Project Plan Work Breakdown Structure Resource Breakdown Structure Task Duration Estimates Task Work Estimates Task Resource Assignments Initial Risk Analysis Planned Purchases of Good and Services

Tasks Define the Project Finances Plan Develop Project Cost Estimates Prepare Cost Baseline Monitor Project Costs and Budgets

Interim work products Project Cost Estimates

Phase deliverables Project Finances Plan Project Budgets Cost Baseline(s) Managed Project Costs

Reference materials Project Finances Task/Responsibility Matrix Sample Project Finances Reports Cost Estimate Techniques Earned Value Reporting

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Project Finances

G1 Define the

Project Finances Plan

G2 Develop Project Cost Estimates

Project Information Project Organisation Chart Project Definition Document Project Plan

Project Finances Plan

Project Cost Estimates

G3 Prepare Cost Baseline Project Budgets

Cost Baseline(s)

G4 Monitor Project Costs

and Budgets

Work Breakdown Structure Resource Breakdown Structure Task Duration Estimates Task Work Estimates Task Resource Assignments Initial Risk Analysis Planned Purchases of Goods and Services

Managed Project Costs

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G1 Define the Project Finances Plan Purpose To define the approach to managing project finances. Overview The first step in managing project costs is to develop a Project Finances Plan which establishes the parameters and requirements for the accounting, estimation, budgeting and control of project costs. G1.1 Determine the organisation’s accounting approach for project costs. There are many alternatives for accounting for project costs. The way in which the organisation accounts for project costs impacts the way that the project costs are estimated, budgeted for, recorded, managed and tracked. One of the most important decisions is whether the organisation is to capitalise all or part of the project or project-related costs. If capitalisation is to occur it is important that the organisation’s finance department provides the basis for accounting for every cost element, the identification and recording process and the role which the Project Office is to play. Depending upon the specific project, the accounting approach to project costs may vary. Some variations include: ?? Not all project-related costs are included in project costs. For instance, the costs for existing

organisation personnel who are working on the project may not form part of the project costs but be accounted for within existing (non-project) cost centres;

?? All project costs that are included are expensed (i.e., written off in the financial year in which they occur);

?? Some project costs are expensed (e.g., external service costs) and some costs are capitalised (e.g., new computer hardware); or

?? Total costs of the project are capitalised and depreciated (e.g., the costs of a new computer system development are treated as an asset, capitalised and written off over several years).

Additional project accounting treatment issues for which decisions are required may include: ?? Legal and statutory requirements for accounting and financial reporting (e.g., the timing for the

capitalisation of project costs); ?? Where projects either cross financial years or are longer than a financial year (e.g., what

happens at financial year end); ?? Where progressive implementation occurs and the project is not finally completed for some

extended period after live production commences and which may also cross financial years; ?? Where grants or subsidies are received to offset part of the project costs; ?? Multi-country projects where the costs of projects are transferred between legal entities; ?? Foreign currency conversion issues; and ?? The treatment of customs duties and taxes. Determine the organisation’s accounting approach for project costs. Confirm the specific combination of project costing and accounting options to be used for the specific project. This may include items such as: ?? Preparing a list of items to be included and those items which are to be excluded;

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?? For all items to be included, the basis of costing to be used e.g., internal personnel cost bases, rent or space calculations or overhead allocations;

?? Financial year-end treatment e.g., accrual or write-off; ?? Which costs are to be expensed (and when) and which costs are to be capitalised (both when

and on what basis); ?? Approaches to foreign currency rates, overhead allocations, inter-office rates and charges

(both domestic and international); ?? Dates for commencement of depreciation charges; ?? Capital or financing cost amounts or percentages; ?? Warranty and maintenance costs for equipment and facilities; and ?? Commencement and cut-off times for implementation costs - this may be significant if a

progressive “go-live” roll-out is to occur e.g., by department, division, product group, office, warehouse, location, state, territory or country.

G1.2 Determine the organisation’s budgeting approach for project costs. There are many alternatives for budgeting for project costs. The way in which the organisation budgets for project costs may impact the way that the project budgets are derived, managed and reported upon. Determine the organisation’s budgeting approach for project budgets and confirm the specific combination of budgeting options to be used for the specific project. This should include items such as: ?? How the project budgets will follow the project accounting approaches to be adopted; ?? How the budgets will be split or grouped e.g., by department, division or product group; ?? The level of detail to be used for project budgets; ?? Definition, agreement and statement of all budget assumptions e.g., for interest rates, foreign

currency conversion rates, inflation rates, purchased items and services estimates, overhead or on-costs estimates, vacation and training estimates; and

?? Periods for budgets (e.g., across financial years or only for the financial year). G1.3 Determine the accounting systems to be used to record and track the project costs

and budgets. There are many alternatives for recording and tracking project costs. Alternatives may include: ?? The organisation’s existing general ledger system; ?? The organisation’s existing job costing or work in progress systems; ?? The organisation’s existing project accounting system; ?? The organisation’s existing fixed asset accounting system; or ?? A separate project costing and management system. Determine the accounting systems to be used for project accounting. If a separate or new system has to be acquired or created, ensure that the organisation’s formal purchasing or system development processes are followed to acquire, install, build, test and implement the systems. G1.4 Determine the Chart of Accounts to be used for project costs. There are many alternatives for recording and tracking project costs. Determine whether: ?? The organisation’s existing Chart of Accounts and account numbers are to be adopted for the

project; ?? Changes have to be made to the existing Chart of Accounts or account numbers; or ?? A separate Chart of Accounts and/or account numbers have to be derived specifically for the

project.

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The Chart of Accounts and/or account numbers to be used may be driven by the accounting systems that are adopted (e.g., length of accounting code or structure of accounting codes). Define and agree the Chart of Accounts to be used for project costs. G1.5 Determine the mechanism(s) for capturing and managing project finances. Project costs can originate from many sources and often impact multiple areas of the project and the performing organisation. One of the key challenges in the management of project finances is identifying the sources of project costs and capturing these costs in a coordinated fashion as they are realised. This challenge can be overcome through the systematic use of tools and mechanisms that meet the management and reporting requirements of both the project and the overall organisation. Determine the sources of all project costs and agree which tools are to be used on the project, how they are to be deployed and how they support the needs of the project and organisation. Projects often use a variety of tools and mechanisms for capturing project costs, however these tools may or may not be integrated with each other or other relevant systems in the organisation. For example, a project may capture and track actual labour hours and the financial cost in Microsoft Project while managing hardware and software purchases in a separate spreadsheet. In this case, the supporting tools are not linked to each other or the relevant enterprise systems (e.g., Job Costing Systems, Financial Systems). G1.6 Define the roles and responsibilities for all elements of project finances. Define the roles and responsibilities for all elements of project finances. This should include responsibilities for such items as: ?? Defining the project accounting approach to be adopted; ?? Defining the project budgeting approach to be adopted; ?? Defining the budget assumptions; ?? Determining the accounting systems to be used; ?? Determining the budgeting systems to be used; ?? Defining the Chart of Accounts to be used; ?? Day-to-day posting of project costs to the project and other cost ledgers; ?? Approval process for posting and cost variances; ?? Balancing and reconciling accounts; ?? Preparation and distribution of Project Finances reporting; ?? Transferring costs at different times (e.g., at month end, at financial year end or at project end); ?? Managing fixed assets and other subsidiary ledger accounting entries; ?? Securing the project cost accounting; and ?? Checking and auditing project costs and project budgets. Prepare a Project Finances Task/Responsibility Matrix. A sample Project Finances Task/Responsibility Matrix is provided in Appendix 1. Ensure that the tasks to be completed by the organisation’s Accounting Department and the Project Office are clearly defined together with the roles and responsibilities. Other areas to consider may include: ?? What role will the Internal Audit department play in Project Finances to check or verify different

aspects and with what frequency;

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?? Linkage with Supplier Management phase to confirm the tasks and roles for the provision of costs for the acquisition of project-related goods and services; and

?? When the Project Office or the project itself closes, the tasks, roles and responsibilities for all of the final Project Finances closing entries and post-closing needs (e.g., external audit access to data).

G1.7 Determine the cost estimating approaches to be adopted. There are many alternative techniques which can be used for cost estimating, some of which are described in Appendix 3. This topic is explained in further detail in Planning and Scheduling phase. Determine the estimating approaches to be adopted. G1.8 Define Project Finances reporting requirements. Define Project Finances reporting requirements. Consider: ?? Content; ?? Frequency of reporting; ?? Formats for reporting; ?? Audience for reporting; and ?? Distribution means for reporting. Some sample Project Finances reports are contained in Appendix 2. Summary reports are discussed in Project Monitoring and Reporting phase. G1.9 Develop the Project Finances Plan. Develop the Project Finances Plan. The Project Finances process can differ significantly from one project to another - even in an organisation where formal Project Finances standards exist. The Project Finances Plan should be developed to address the unique characteristics and requirements of the project. Specific components of a Project Finances Plan may address issues such as: ?? Scope

?? Which project costs will be formally managed and included in project costs (e.g., not managing costs of internal resources) ?

?? What is the separating factor(s) between Project Finances and the organisation’s finance function (e.g., which tasks will be completed within the Project Office and which tasks are completed by the organisation’s accounting department) ?

?? Approach ?? What are the major activities involved in Project Finances ? ?? Who will be performing these activities ? ?? At what level of granularity will the budget be managed ? ?? How are risk factors and other uncertainties factored into the plan ? ?? When does official budgetary approval happen in the process ? ?? What level of completeness and approval is necessary before beginning project

execution ? ?? What tools and/or mechanisms will be used to capture and manage project finances ? ?? What cost categories will be used (e.g., use the existing Chart of Accounts) ? ?? When are project costs recognised ? ?? What project costs will be capitalised ? ?? What is the asset management function in the organisation and how does it interface

with the project (e.g., is hardware leased or purchased and how is it tracked) ?

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?? How will accounting and taxation rules be considered for project expenditures ? ?? How will projects which span budget cycles be accounted for ?

?? Estimating ?? What are the necessary inputs to the cost estimation process ? ?? What estimating technique will be used ? (see Appendix 3 - Cost Estimation Techniques

for more details) ?? What tools will facilitate estimation ? ?? How will the estimate be presented (e.g., level of detail, format and supporting detail) ? ?? Who must approve the estimate ?

?? Budgeting ?? What is the specific relationship between budgeting and estimating ? ?? What is the required format for the Cost Baseline ? ?? Are additional Cost Baselines necessary ?

?? Reporting (integrated with Project Monitoring and Reporting process) ?? How often must cost performance reports be created/reviewed ? ?? What are the specific content requirements for the cost performance reports ? ?? What level of granularity is required for the project and the organisation (e.g., by General

Ledger account codes, cost category roll-ups) ? ?? What format should the cost performance reports follow ? ?? What is the delivery mechanism for the cost performance reports ?

?? Control ?? What are the specific processes and procedures for cost control ? ?? What are the control limits for cost variances ? ?? Who must approve changes to the Cost Baseline ? ?? What level of communication is necessary surrounding change to the Cost Baseline ?

G1.10 Obtain formal approval for the Project Finances Plan. Complete a structured walk-through of the Project Finances Plan. Make any changes as necessary. Obtain formal written approval for the Project Finances Plan.

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G2 Develop Project Cost Estimates Purpose To develop initial estimates of project cost along with the necessary supporting detail. Overview The objective of the cost estimating process is to develop an approximation of the total costs of the project. These costs are the summation of all relevant project expenses including labour, materials, supplies and other special cost categories. The scope, approach and approved techniques for developing the cost estimates should be defined in the Project Finances Plan prior to beginning estimation. The cost estimating process described in this task is intended to develop a detailed estimate of project costs that will facilitate and provide inputs to the project budgeting process. However, in some organisations, these two processes are so tightly integrated that they may be viewed as a single process. The level of integration is influenced by the overall approach to Project Finances and the functions of supporting software tools, both of which should be outlined in the Project Finances Plan. The cost estimating process will vary from project to project based on the identified project team, the organisation’s standards and prior experience with similar projects. Each of these factors may influence the cost estimating techniques and/or the amount of time required to develop the Cost Estimate. However, the cost estimating process should consider different scenarios (and costing options) for achieving the same project objectives. Cost Estimates are usually first developed at a high-level while the project is at a concept stage to provide the organisation with an estimate of the likely total cost of the proposed effort. This information is important in assisting in project selection and prioritisation. As projects proceed into the Planning phase, initial cost estimates must be refined to ensure that appropriate funds are available, stakeholder expectations are managed and project scope is properly defined. Bottom-Up estimating can provide this level of detail but it is dependent upon the completion of a Work Breakdown Structure with activity durations defined and resources allocated to all appropriate activities and work packages. There are a multitude of tools available to support the cost estimation process. For smaller initiatives, a simple spreadsheet may provide an adequate framework for defining costs. However, most initiatives should utilise proven project management software, such as Microsoft Project, to provide more comprehensive costing functionality. Cost estimates are usually presented which are independent of timelines or schedules and usually in a format that follows the Work Breakdown Structure. The development costs for effort/work performed is discussed in further detail in Planning and Scheduling phase G2.1 Confirm that inputs to the cost estimation process are complete and accurate. The cost estimation process requires that several work products be complete to ensure that estimates are as accurate as possible. These inputs often include but are not limited to: ?? Budget assumptions; ?? Project Finances Plan; ?? Work Breakdown Structure;

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?? Resource Breakdown Structure; ?? Task Duration Estimates; ?? Task Work Estimates; ?? Task Resource Assignments; ?? Initial Risk Analysis; and ?? Planned purchases of goods and services.

Review and validate each of these work products before developing the initial project cost estimates to confirm the reasonableness and general completeness of the inputs. G2.2 Document key assumptions of the cost estimation process. Throughout the cost estimation process, assumptions are made that may have a significant impact on the value and accuracy of the cost estimates. These assumptions must be presented along with initial project cost estimates to provide a complete picture of how the cost estimates were developed and their basis of derivation. Document key assumptions of the cost estimation process and the basis for the derivation of each assumption. G2.3 Develop the cost estimates with supporting detail. Develop the cost estimates with supporting detail. The level of detail required will vary by project. For example, some projects may only require a high-level cost estimate with little or no detail to support the estimate. This is typically the case in the concept stage of a project or where detailed cost-performance reporting is not required. High-level cost estimates are often the output of the Analogous (Top-Down) and Parametric estimating techniques. For more information on cost estimating techniques, see Appendix 3. Figure G1 provides a sample format for a high-level cost estimate which needs to be tailored to meet the requirements of each project. In some cases, the Cost Categories may be presented by project phases to show the level of effort and related costs over the life of the project.

Figure G1: Sample Top-Down Cost Estimate

Top-Down Project Cost Estimate

Cost Categories Person Days Labor Rate CostLabor 2500 $2,320,000

Internal 1500 $480 $720,000External 1000 $1,600 $1,600,000

Material Purchases $390,000Hardware $200,000

Software $125,000Other $65,000

Expenses $240,000Travel $120,000Leases $120,000

Other $50,000TOTAL COST $3,000,000

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Cost estimates are also created using the Bottom-Up estimating technique to provide the necessary level of detail is available for effective cost performance reporting. However, it is often not feasible to perform Bottom-Up estimating until the project is well into the planning phase. Additionally, some projects will be able to develop Bottom-Up estimates only for the upcoming phase/stage of the project. This is particularly true in projects that employ the “Rolling Wave” planning approach shown in Figure G2.

Figure G2: Use of Top-Down and Bottom-Up Cost Estimating Techniques

Figure G3 provides a sample format for a detailed cost estimate created using the Bottom-Up estimating technique. A portion of the Work Breakdown Structure has been expanded to show individual resource assignments and related costs. This example shows how a Resource Breakdown Structure is integrated with a Work Breakdown Structure to develop the detailed Cost Estimate. The completed cost estimates should be represented in domestic currency rates and understood to be an approximation of project costs that may change many times prior to project execution. The cost estimates should be accompanied by supporting detail such as: ?? Scope of work estimated (e.g., only Year 1 is estimated in detail, only external resources are

costed); ?? Assumptions made during the estimation process; ?? Estimating technique/approach used (for both labour and purchases); ?? Approximate timeline for the project (to be formalised with the Project Schedule); ?? Analysis of key risks and how these risks have been factored into the cost estimate; ?? Comparison with any prior cost estimates; and ?? Degree of certainty in the estimate, expressed as a range of possible results (e.g., $3,000,000

? $350,000 or between $2,650,000 and $3,350,000). This supporting detail provides reviewers with the necessary context in which the cost estimates were developed and promotes a more complete understanding of the estimate.

PROJECT PHASESPlanning

CheckpointsEstimating Planning Phase

One(1)PhaseTwo(2)

PhaseThree(3)

PhaseFour(4)

Initial Estimating

Phase One Planning

Phase Two Planning

Phase Three Planning

Note: The Diamonds ( ? ) represent actual planning effort. The Bars ( ? ) represent the scope of the associated planning ef for t .

Phase Four Planning

T O P - D O W N

B O T T O M - U P

T O P - D O W N

B O T T O M - U P

T O P - D O W N

B O T T O M - U P

B O T T O M - U P

T O P - D O W N

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Figure G3: Sample Bottom-Up Project Cost Estimate Bottom-Up Project Cost Estimate

Duration WorkWBS ID RBS ID Activity Description Type Units (Days) (Hours) Rate Totals0 System Implementation $3,018,2001 Planning $700,0002 Requirements $200,0003 Design $318,2003.1 Establish Design & Quality Standards $20,0003.2 Conduct Business Process Design $100,0003.3 Conduct Software Design $58,2003.3.1 Develop Custom Software Prototype $10,640

5 Sr. Systems Analyst Work 1 8 64 60 $3,8409 Sr. Programmer Work 1 10 80 50 $4,00014 Database Administrator Work 1 5 40 70 $2,800

3.3.2 Validate and Revise the Prototype $6,48017 Sr. QA Specialist Work 1 4 32 60 $1,9205 Sr. Systems Analyst Work 1 3 24 60 $1,4409 Sr. Systems Programmer Work 1 3 24 60 $1,44014 Database Administrator Work 1 3 24 70 $1,680

3.3.3 Develop Input and Output Forms and Documents $15,4004 Systems Analyst Work 2 10 160 50 $8,0005 Sr. Systems Analyst Work 1 5 40 60 $2,40042 ABC Form Design Tool Material 1 $5,000

3.3.4 Define the Interaction Layer Architecture $16,8004 Systems Analyst Work 3 10 240 50 $12,0005 Sr. Systems Analyst Work 1 5 40 60 $2,40021 Sr. Data Design Specialist Work 1 5 40 60 $2,400

3.3.5 Develop Program Design Specifications $5,4404 Systems Analyst Work 2 5 80 50 $4,0005 Sr. Systems Analyst Work 1 3 24 60 $1,440

3.3.6 Establish Program Design and Coding Standards $3,4404 Systems Analyst Work 1 5 40 50 $2,0005 Sr. Systems Analyst Work 1 3 24 60 $1,440

3.4 Conduct Technical Infrastructure Design $60,0003.5 Conduct Data/Interface Design & Strategy $40,0003.6 Conduct Security & Controls Design $40,0004 Development $600,0005 Testing $500,0006 Implementation $300,0007 Post-Deployment $400,000

G2.4 Submit the cost estimates for initial approval. Upon completion of the cost estimates, review the approach and result of the cost estimation process. Make any changes as necessary. Obtain formal written agreement of the initial cost estimates.

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G3 Prepare Cost Baseline Purpose To develop a formal project budget and budget management processes and prepare a Cost Baseline. Overview The objective of the budgeting process is to develop a formal project budget by agreeing the results of the cost estimating process with the financial constraints established by the organisation. The project budgeting process produces the Cost Baseline, a time-phased budget used to measure cost performance for the duration of the project. In some cases, a project may prepare multiple draft Cost Baselines that address different cost measures (e.g., cash-flow forecast) or phase-specific iterations of the same cost measures. The Cost Baseline is one of the key supporting materials to assist with project funding. In certain situations, a project budget is established based on initial, rough estimates derived when the project was just a concept. G3.1 Confirm that all necessary inputs are available to begin the project budgeting process. The project budgeting process is dependent upon certain work products and activities having been completed. Confirm that the following items exist: ?? Project cost estimates; ?? Documented and agreed budget assumptions; ?? Project accounting rules and accounting systems to be used; ?? Initial approval of the project cost estimates; and ?? Project schedule. G3.2 Allocate the cost estimates to the individual activities or work packages in the Work

Breakdown Structure. Expand the cost estimates to the level of detail required for formal project cost tracking and control. The specific actions taken are dependent upon the approach and techniques used to develop the cost estimates. For example, if detailed tracking of costs within the project is not required, this step may be unnecessary. Depending on the approaches used to develop the cost estimates, there may or may not be any specific assignment of costs to the Work Breakdown Structure. However, to implement formal, detailed tracking of the project cost performance, the project budget must be driven by granular assignments of cost to individual activities or work packages. Each task or at a minimum, each group of tasks, in the project schedule should have a specific target cost. If the cost estimates were developed using the Bottom-Up estimating technique, there may be no need to further allocate project funds. However, if the cost estimates were created using a less accurate and/or high-level approach (e.g., Analogous or Parametric Estimating), the cost estimates will almost certainly need to be distributed to the lower levels of the Work Breakdown Structure. In some cases, especially long-term projects with minimal historical precedence, the costs may only be able to be detailed for the initial phase(s).

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G3.3 Develop the Cost Baseline. Develop the Cost Baseline to allow the project manager to consistently and effectively measure the cost performance of the project. The Cost Baseline differs from the cost estimates in that it is a time-phased budget that is strictly controlled throughout project execution. The Cost Baseline is an essential tool for reporting and managing project costs that must fit within the financial constraints of the performing organisation. To develop the Cost Baseline, the Project Schedule must be complete and signed-off by appropriate stakeholders. The Project Schedule is an important input to this process as it provides the time-specific ordering of tasks using dependencies and date constraints. Each of the tasks defined in the Project Schedule map to a specific component of the Work Breakdown Structure, which has been used to assign costs at the required level of detail. The Cost Baseline is developed by transposing the cost assignments from the Work Breakdown Structure to the appropriate tasks in the Project Schedule, thus creating a time-phased budget. The primary purpose of the Cost Baseline is to provide an effective measurement tool for analysing actual versus planned project cost performance. This information is valuable in assisting management in understanding progress and making key project decisions. The Cost Baseline is typically displayed as cumulative project costs over time, which often is in the form of an S-curve as shown in Figure G4.

Figure G4: Sample Cost Baseline S-Curve

Cu

mu

lati

ve C

ost

s

Time

Cost Baseline

Larger projects may often use different views of the Cost Baseline to provide a variety of views into the Project Finances, as deemed necessary by the defined reporting requirements. For example, the project may be required to separately track its cash flow. In this case, the cash flow forecast may be considered as a separate Cost Baseline. G3.4 Develop procedures to maintain the Cost Baseline. As the Cost Baseline may change during the project e.g., caused by scope or time changes, develop procedures to maintain the Cost Baseline. G3.5 Submit the Cost Baseline for approval. Upon completion of the preparation of the Cost Baseline, submit the Cost Baseline and supporting documentation for approval. Make any changes as necessary. Obtain formal written approval of the Cost Baseline.

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G4 Monitor Project Costs and Budgets Purpose To monitor, manage and control project costs and budgets. Overview The project cost and budget monitoring process focuses on minimising the impact to the Cost Baseline through a continuous review of the project’s financial condition and its potential influences. This process begins after the Cost Baseline is formally approved and continues through to the completion of the project. Performance reports are used to identify and gauge cost variances. While the overall cost estimates for projects are subject to change constantly during project execution, the Cost Baseline should be fixed to provide a consistent measurement of cost performance. The Cost Baseline is modified after approval only if there is a significant event (e.g., major change in project scope or accumulation of small scope changes) that causes the cost estimates to extend beyond established control limits. The project cost and budget monitoring process governs proposed changes to the Cost Baseline. The Project Finances Plan details the approach to controlling and conditions for prompting change to the Cost Baseline. This process will typically need to be sensitive to different accounting approaches (e.g., capital vs. expense, lease vs. purchase). G4.1 Collect project costs. As cost data is received it must be checked to ensure that the approval process for costs to be charged to the project are followed and that only approved costs are collected. As different organisations may have different levels of approval authority e.g., based on the monetary amount, budget ownership or level of seniority, these approval processes/levels must be available and clearly stated to enable the checking process to be completed. Collect project costs and check for the appropriate approvals. Update the various project accounting and tracking systems to reflect the actual project costs. This may include data received from sources such as: ?? Time capturing systems for project hours; ?? Costs from purchased goods receipts; ?? Charges for services; ?? Leasing and rental charges; ?? Travel and other expenses; ?? Other internal costing systems (e.g., depreciation charges, time and salary costs); and ?? Overhead allocations. G4.2 Prepare the Project Finances Reports. Prepare the Project Finances Reports. Distribute the reports to the agreed list of recipients following the approved timetable. G4.3 Identify cost and budget anomalies, trends and variances. Review the project cost and budget data to identify any cost anomalies. These anomalies could be any discrepancy or deviation from the cost estimates including both positive and negative cost variances. This review should focus on not only the point-in-time (i.e., current) status but also consider the short-term and long-term financial trends of the project.

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Significant cost variances may signal a problem with either the original estimate or the efficiency with which work is being completed on the project. Techniques such as Earned Value Reporting use a multi-dimensional view of Project Finances to measure cost performance. The Earned Value Reporting technique is further detailed in Appendix 4. To support the analysis of these variances and/or trends, the Project Manager should gather as much supporting information as possible surrounding the identified discrepancies including financial statistics, graphs, budget worksheets, procurement requests, supplier invoices or any other relevant project details. G4.4 Analyse the significance of the cost anomalies and make recommendations. Once some initial information has been gathered, analyse the cost over/under-runs to identify the root-cause(s). Interviewing project team members, investigating deliverables or reviewing project processes can be used as part of the investigation process. Prepare recommendations to bring the project costs under control. G4.5 Submit the recommendations for approval and control the potential impacts to the

Cost Baseline. Evaluate the recommendations and determine whether further investigation is required. Obtain approval for the recommended actions and update the cost estimates to show the current actual project costs and the new expected total project costs. If project costs are expected to change significantly (often prompted by a scope change), the Cost Baseline may need to be updated. For any potential modifications to the Cost Baseline, follow the established Change Control processes. Communicate the changes as necessary. G4.6 Project close. When the project is closed, ensure that project costs and budgets are included in the formal project close tasks which are addressed in the Close phase. Task to address may include: ?? Final accounting entries to complete the project cost collection; ?? Accounting entries to clear out the project cost ledgers; ?? Transfers of costs from project ledgers to asset ledgers; ?? Journal entries for capitalising project costs; ?? Production of final project cost reports; and ?? Ensuring the availability of data for financial audits which may occur at a later date.

Project Office Methodology: Appendix 1

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Appendix 1: Project Finances Task/Responsibility Matrix Purpose To document the project finances roles and responsibilities. Completion Instructions 1. Task Describe the task that is to be completed. 2. Assigned role Describe the role that has been assigned to complete the task. 3. Responsibilities Describe the responsibilities associated with the assigned role.

PROJECT FINANCES TASK/RESPONSIBILITY MATRIX

Organisation: Completed By:

Date: Page of

Task Assigned role Responsibilities

2 3 1

Appendix 2: Sample Project Finances Reports

Program Budget View - Plan vs. Actual Costs

<Program Name>Program Budget View - Plan vs. Actual CostsAs of <Date>

<Year> Ytd Plan

<Year> Ytd Actual Variance

<Month> 'XX Plan

<Month> 'XX Actual Variance

2nd Qtr Outlook

Project A

Phase 1 12,826 12,500 326 3,326 3,000 326 326

Phase 2 21,377 17,800 3,577 5,544 4,000 1,544 3,577 Phase 3 10,688 8,700 1,988 2,772 1,600 1,172 1,988

Phase 4 6,649 6,000 649 1,724 1,200 524 649

Total Project A 51,538 45,000 6,538 13,365 9,800 3,565 6,538

Project B 16,031 14,600 1,431 4,157 3,000 1,157 1,431

Project C 16,031 15,000 1,031 4,157 3,000 1,157 1,031

Project D 21,377 13,400 7,977 5,544 4,200 1,344 7,977

Contingency 4,530 - 4,530 906 - 906 4,530

Program Total 109,508 88,000 21,508 28,130 20,000 8,130 21,508

Program Year-to-Date Budget View - Plan vs. Actual Costs

YTD Plan vs. Actual Budget for <Year>

$0$50,000

$100,000$150,000$200,000$250,000$300,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

<Year>

U.S

. Do

llars

YTD Plan YTD Actual

Program Monthly Run Rate

Monthy Program Run Rate for <Year>

$0$5,000

$10,000$15,000$20,000$25,000$30,000$35,000


<Year>

U.S

. Do

llars

Plan Actual

Project Cost Distribution

Project Cost Distribution

Labor - Internal28%

Labor - External

45%

Material Purchases

12%

Expenses11% Other

4%

Labor - Internal Labor - External Material Purchases

Expenses Other

Project Cost Structure and Timeline

Project Cost Structure and Timeline

Labor - Internal

Labor - External

Material PurchasesExpenses

Other

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000


Labor - Internal Labor - External Material Purchases

Expenses Other

Appendix 3: Cost Estimation Techniques The cost estimation process will generally follow one of several techniques such as: ?? Analogous (Top-Down) Estimating - project costs are estimated by comparing the current

planned effort to previous projects of similar size, scope and characteristics. Analogous Estimating tends to be a simpler form of estimating, although often less accurate than other methods;

?? Parametric Estimating - project costs are estimated using specific project characteristics as

variables in a predictive mathematical model. Parametric Estimating relies on historical project data as the basis for the models, which are usually customised for specific project types within specific industries; and

?? Bottom-Up Estimating - project costs are estimated at the lowest level of the Work

Breakdown Structure by allocating resources and their associated rate information. Estimates for individual activities or work packages are then rolled up to form the overall project cost estimate. Bottom-Up Estimating is often viewed as the most accurate form of estimating, however the information required to perform the estimating technique is often not available until the later stages of the project.

Each of these techniques requires specific expertise and available historical information to develop the most accurate cost estimate. In practice, project managers may use multiple estimating techniques throughout a project’s life cycle as more information becomes available. For example, prior to a project’s approval, the project manager may use the Analogous Estimating technique to “approximate” the costs. These rough estimates are often included or generated as part of a business case, cost-benefit analysis or other justification statement required by the organisation. Providing this “order of magnitude” of project costs can assist an organisation in making critical decisions regarding project priorities. As the project moves into the planning phase, it is essential to use a more detailed estimating technique, such at Bottom-Up Estimating, to provide the level of granularity in project cost for effective cost performance reporting.

Appendix 4: Earned Value Reporting The purpose of this section is to provide an overview of the concept of Earned Value Reporting. Earned Value Reporting is defined as the use of project performance data in analysing current schedule and budget trends to accurately predict the final delivery date and cost of a project. The Earned Value Reporting concept focuses on relationship between the monetary value of actual work performed (earned value), the monetary value of work expected to be performed (planned value), the actual cost of the project and the total budget for the project. These three variables provide a multi-dimensional view of project progress that is often overlooked in traditional cost and performance management techniques. This information can assist with identifying problems early in the project and in taking corrective action to either change the project’s course and/or reset the expectations of stakeholders. The Earned Value Reporting process requires that the entire scope of the project be defined and a baseline project plan created following the bottom-up estimating technique with resources allocated and tasks outlined on a time-phased basis (project schedule). With this level of detail, the baseline project plan can provide cost information for the most granular levels of the Work Breakdown Structure. In addition to the baseline project plan, a comprehensive performance measurement plan must be created outlining the planned value timeline while establishing how, when and who will measure the project progress. The core variables used in implementing the Earned Value technique include: ?? BCWS - Budgeted Cost of Work Scheduled (Planned Value/PV); ?? ACWP - Actual Cost of Work Performed (Actual Cost/AC); ?? BCWP - Budgeted Cost of Work Performed (Earned Value/EV); and ?? BAC - Budget at Completion.

These variables are used in the following calculations to evaluate current project progress and predict its future direction.

Formula Description BCWP - ACWP = CV Cost Variance - amount of cost over/underrun BCWP - BCWS = SV Schedule Variance - amount of schedule over/underrun

expressed monetarily BCWP/BAC = % Complete Percent Complete - percent of work completed in terms of

earned value versus original budget estimate ACWP/BAC = % Budget Spent Percent Budget Spent - percent of money spent in terms of

actual costs versus original budget estimate BCWP/ACWP = CPI Cost Performance Index* - cost-efficiency factor for cost

over/underrun (see important note at bottom of table) BCWP/BCWS = SPI Schedule Performance Index - schedule-efficiency factor for

schedule over/underrun (BAC - BCWP)/CPI = ETC Estimate to Complete - value of work required to complete

the project ACWP + ETC = EAC Estimate at Completion - projected costs of project at

completion BAC - EAC = VAC Variance at Completion - projected level of cost

over/underrun at project completion * Note - When referencing the Cost Performance Index in calculations, it is important to use the “cumulative” Cost Performance Index, which considers cost performance over the life of the project as, otherwise, calculations may be skewed as a result of anomalies in periodic or incremental data.

The earned value calculations are performed on a periodic basis (e.g., monthly, quarterly). The resulting values are often charted on a graph to simplify the analysis. The following graph is an example of an Earned Value Chart for a seven-month project, which reports Earned Value data on a monthly basis and has just completed its fifth month.

Project Costs & Variances

$0.0$1.0$2.0$3.0$4.0$5.0$6.0$7.0$8.0$9.0

Cos

ts (i

n M

illio

ns $

)

($2.5)

($2.0)

($1.5)

($1.0)

($0.5)

$0.0

$0.5

$1.0

$1.5

Var

ianc

es (i

n M

illio

ns $

)

Actual Costs (ACWP) $1.0 $2.0 $3.0 $4.0 $5.0

Planned Value (BCWS) $1.0 $1.5 $2.0 $3.0 $5.0 $6.5 $8.0

Earned Value (BCWP) $1.5 $2.0 $2.3 $3.0 $4.0

Sched. Variance (EV-PV)

$0.5 $0.5 $0.3 $0.0 ($1.0) $0.0 $0.0

Cost Variance (EV-AC) $0.5 $0.0 ($0.8) ($1.0) ($1.0) $0.0 $0.0

Jan Feb Mar Apr May Jun Jul

In the example Earned Value Chart above, it is useful to analyse the status of the project at each of the monthly checkpoints. ?? January - The project team is completing more work than scheduled while using the same

budget that was set for the scheduled work (positive cost and schedule variances); ?? February - The project team is still completing more work than originally scheduled, however

there was a reduction in cost efficiency where actual project costs now equal earned value (zero cost variance and positive schedule variance);

?? March - The project team is still ahead of schedule (by a small margin) but performance is declining on both the cost and schedule measures (negative cost variance and positive schedule variance);

?? April - The project team has now completed exactly the amount of work (earned value) as had been scheduled but the gap in cost performance continues to grow (negative cost variance and zero schedule variance); and

?? May - The project team has fallen significantly behind schedule while cost performance has stabilised but still remains a problem (negative cost and schedule variance).

This example illustrates the fact that, even in the early stages, Earned Value Reporting can help identify trends in project performance that may not be recognised in traditional project reporting approaches. As early as February in the example, it is obvious that actual costs are increasing at a much greater pace than work is being completed. Additionally, by March, it becomes clear that project performance is declining rapidly both in terms of cost and schedule. These observations can be made by focusing not only on the cost and schedule variances but also on the performance trends depicted by the Earned Value Chart. Within the realm of Earned Value Reporting, there are many other concepts, techniques and approaches that should be considered when formally implementing Earned Value Reporting. However, the intent of this section is to provide a brief introduction to the general Earned Value Reporting concept without dictating a rigorous procedure.