PMIS 338: PMIS For Managing Target Profit for Capital Projects

One of the common mistakes that some might fall in is assuming that the difference between the revenue earned for completing part of the project scope of work and the actual cost for completing the same scope of work is the project’s profit for that scope of work. Those are the few who fail to consider that when a contractor price his bid, the contractor might unbalance the bid to allow for front loading, inside knowledge on changes to the project scope of work among others. Unbalancing a bid will result in having some bid line item overpriced while others under-priced but ensuring the total bid price to be competitive enough to win the bid. In other words, part of the project’s scope of work will have high profit margin while others will have very low profit margin if a not a loss.

Therefore, to be able to report the true profit status of a project, the contractor needs to have three type of cost documents. The first is the revenue contract between the contractor and the project owner. This is the selling price. The second is the project budget which will detail the costs the contractor is planning to spend to deliver the project’s scope of work, site and home office overhead allocation, project finance cost and the contingency for accepted project risks. The project budget is what the project management team assigned to deliver the project will commit for the Contractor’s management to deliver the project at. The third will be commitments for subcontracts and purchase orders awarded for outsourced scope of work as well as internal purchase orders for products and services purchased from the company’s other business units. Those commitments will become the basis for capturing the actual cost incurred in addition to the actual cost incurred from non-commitments which will be captured using timesheets and miscellaneous invoices.

Using a Project Management Information System (PMIS) like PMWeb will enable the contractor to capture all of the above transactions on a single platform to provide a real-time single version of the truth when it comes to managing, monitoring, evaluating and reporting the project’s target profit. To ensure that there is a single language when it comes to capturing the data from the different cost records, there should be a unified cost breakdown structure (CBS) to capture the cost details for each transaction during the different project’s financial periods. Both, the cost breakdown structure and financial periods should be also identical to the other accounting, human resources and ERP applications that contractor uses to capture cost data to enable to integrate or associate data from different those different data sources when needed.

The Project Schedule and Progress Percent Complete

It is crucial that the Contractor has a single approved integrated project schedule that covers the complete project scope of work. In most projects today, the integrated project schedule need to be cost loaded with the income contract values which is the contract agreement between the Project Owner and the Contractor. During the project’s delivery, the monthly progress percent complete will be the percent complete used to assess the Contractor’s monthly requisition for work in place as well as subcontractors and suppliers monthly progress invoice for work in place. In addition, this percent complete will be used to calculate the earned value of the project’s current approved budget.

PMWeb will import the project schedule to enable assigning the different budget, commitment and contract line items to the appropriate project’ schedule task as well as assign the actual resources hours captured in the timesheet and daily report modules. This schedule will become the project schedule used across all other PMWeb modules that has links to the schedule such as submittals, RFIs, daily reports, meeting minutes as well as custom forms created in PMWeb.

Managing the Project Revenue

The contract agreement between the Project Owner and the Contractor represents the revenue or income that the contractor will earn from completing the project’s scope of work in accordance the project’s specifications, drawings and other contract documents. PMWeb contract module will capture the details of each Bill of Quantity (BoQ) line item along with the associated project schedule activity. The contract terms and conditions will also be part of this contract agreement.

All change orders regardless if they were approved, pending or disputed will be captured in the change order module. It is important to attach all documents as well as PMWeb records and imported emails that are needed to support change order submission in particular if a change could be a disputed change and part of the project’s claim submission. Workflow can be added to formalize the internal review and approval of the change order.

Monthly requisitions, or actual earned income or revenue, for work in place will be captured using PMWeb requisition module. For each line item, the same percent complete used to calculate the budget earned value and commitment progress invoice for work in place will be used to calculate the income value for the work in place for the current progress period.

Managing the Project Performance Budget

Using the final approved cost estimate captured in PMWeb and for which it was the basis for the Contractor to be awarded the construction contract, the project budget will be generated to the desired level of detail where the budget will be controlled. The total of the project budget will be less than the total of the project revenue by the target profit amount which will usually be inclusive of the management reserve amount.

Each budget line item will be linked to the associated project schedule activity to determine the start and finish dates for spending the budget amount. PMWeb allows to Contractor to create the budget spending projection for each line item using the most appropriate distribution curve or any other user defined projection. This is will be needed for cash flow analysis to determine the needed funding for the project.

Any adjustments to the approved project budget whether it is for increasing or decreasing the approved budget amount or to transfer budget amounts from one cost center to another or from one project to another, the budget request form will be used. All supportive documents need to be attached to the budget request which are usually stored in PMWeb document management repository. The approval for budget requests will be in accordance for the predefined workflow steps assigned for this module. The workflow could include conditions to ensure that the required authorities and approval levels are respected.

The budget earned value for completed works will be based on the percent complete of the associated project schedule activity. The earned value will take into consideration the approved budget adjustments to the original budget, that is the revised budget. At the end of each progress period, the estimate to complete for each budget line item number will equal the projected budget at completion which is revised budget plus all pending budget adjustments minus the earned value attained for that same progress period.

Managing the Project Cost

A commitment will be created for each subcontractor and supplier which will include the agreed prices for the outsourced scope of work. The commitment agreement will include the payment terms and conditions for the approved work in place. Some Contractors might also consider having commitment contracts for their own internal business units like plant, ready-mix, material purchase and others who will be involved in the project delivery.

All changes to commitment agreements whether they are potential or anticipated changes, approved, pending or disputed changes will be captured in PMWeb. All supportive documents need to be attached to the change order as well as related records and emails need to be linked to the change order. The status for the change order will be changed depending on the actions taken in the workflow assigned to the change order form. A change order could have an impact on the commitment agreement value as well as performance period. It should be noted that all commitment changes need to be reflected in the project budget. Approved changed will be accounted for in the approved budget requests whereas all potential, pending and disputed changes will be accounted for in the pending budget requests.

At the end of each financial period or progress period, a progress invoice will be submitted for the approved work in place. The percent complete for each line will be the percent complete value for the associated project schedule activity. The approved progress invoice represents the actual cost incurred by the Contractor for the works completed under each commitment agreement.

For other actual cost incurred that are not part of a commitment contract, those will be captured using PMWeb miscellaneous invoices module. The details of all such expenses will be captured in the invoice form along with all supportive documents. Again, the workflow will be used to formalize the submission, review and approval of those invoices.

The cost of Contractor’s own resources, management, labor and non-labor will be captured from PMWeb timesheet module. Those are the resources that are not part of any commitment contract or miscellaneous invoices. Usually, each crew supervisor will capture the details of all labor, and if needed equipment resources, spent on the project. The pay type for reported resource hours against each schedule activity and cost breakdown structure could be regular, overtime or premium. This will help in determining the actual cost for the reported resource hours. Timesheets would usually have workflows to formalize the approval of the reported hours.

The sum of period’s work in place, miscellaneous invoices and cost of resources will represent the total actual cost incurred by the project at the end of each financial period. The estimated cost at completion will equal the sum of the actual cost to date and the estimate to complete calculated earlier in the budget section.

Assessing the Project’s Profitability

The project’s profitability will be assessed using three different metrics. The target profit metric is based on the variance between the original awarded income contract value and approved budget to deliver the project, the current profit/loss status as of today metric is the variance between the income contract amount invoiced to data and the actual cost incurred to date, and the third metric will be the projected profit/loss at project’s completion which is the difference between projected income contract at completion (revised contract plus all pending and disputed change orders) and the forecast cost at completion.

Third Party Actual Cost Data Sources

Although PMWeb has all the modules to capture the project’s actual cost, nevertheless, some Contractors might opt to use their own existing enterprise applications to capture some of those costs. For example, some Contractors might have their own Human Resources and Time Attendance applications to capture the actual cost of labor resources charged to the project. Further, they might also use their ERP or accounting application to capture the actual cost of plants and equipment resources. In addition, some contractors might decide to manage subcontract agreements and purchase orders their ERP application. For those instances, PMWeb provides different options to enable contractors to integrate PMWeb with their ERP application to provide the needed profitability reporting.

The same approach can be adopted by the project owner, assuming a real estate developer. The difference would be that for revenue contracts, those will be the real assets sale and long-term lease agreements. As for the commitments, those will be the contract agreements with the project management consultant, engineering consultants, site supervision consultants, prime contractors and key vendors. The budget which should be aligned with the commitments and non-commitments costs needed to deliver the project as well as the project contingency.