The case for ‘Estimated Actuals’…
(door Jan Pol, PMP)
Anyone who is knee-deep into Project Performance Measurement exercises using the Earned Value Technique knows how challenging it is to vouch for the quality of the Actual Cost data being used in every reporting cycle. The most pertinent problems seem to be that;
a) Accounting Periods and Project Status Periods are not in sync, and
b) The Actual Cost system is unable to report all relevant cost at project status intervals.
In this blog I would like to focus on Actual Cost data being collected while work progresses or gets completed reported by the Control Account Manager(s). My ulterior motive is to push the term’ Cost Accrual’ or ‘Accrual’ to the background and put the term ‘Estimated Actuals’ on the foreground.
Before we get into the details I would first need to make my distinction clear between the term Estimated Actual Cost and the term Accruals, the more known term in the financial -and project management domain.
Accrual: Where cost is incurred during an accounting period, but which has not been paid or received. This language can be heard in the CFO office of a corporation.
Estimated Actual Cost: In situations where earned value is claimed but the invoice/hours has not been booked/paid. This language should be heard in the Project Management Office.
In order to set-up the stage for my case around ‘Estimated Actuals’ I’m presenting the following five (5) definitions below;
- Planned Value and Earned Value are intended to permit measurement of events which reflect progress in contract performance.
- Planned Value and Earned Value are NOT for measurement of administrative or financial events.
- Planned Value should normally be scheduled in accordance with a contract event.
- Earned Value should be earned when the event occurs / completes.
- To avoid distortion, actual cost should be recorded when EV is earned.
How many of you have done your project performance measurement analysis using actual cost from the system and overtime constantly being confronted with disturbing deviations (artificial variances?) which questions the quality of your reporting?
Often the project management team has to deal with long lead-times within the CFO department to book cost on supplier invoices, or face unprocessed time-cards, or struggle with change orders whereby the actual work is ahead of the supporting administrative work.
The devil is in the details and zooming in on those actual cost details often shows that not all actual cost have been collected in the system, providing perhaps ‘favorable’ but at least incorrect performance status. These are the moments in time that the Project Manager and Control Account Manager should be aware that in situations where Earned Value is claimed and the invoice has not been paid, estimated actual cost needs to be incorporated into Actual Cost data.
The Control Account Manager has to take the lead to create those ‘Estimated Actuals’ using the various sources of information which is at his disposal including;
- Purchase Requisitions and Processed Purchase Orders.
- Time-card registration.
- Contract Change Orders.
- Input from his resources executing the work.
While setting up the project, mobilizing the resources, creating the Project Management Plan, it’s important to set-up a process that captures ‘Estimated Actuals’ before Project Performance Measurement Reports are created and shared with all the relevant stakeholders.
- A process that enables you to estimate actual cost for equipment and materials together with your procurement lead.
- A process that enables you to estimate actual labor hours (on missing time-cards) with the Control Account Manager(s)*.
*) tip: When time-cards are missing and the Control Account Manager is unable to support, one can e.g. estimate the actual labor hours based on trends (actual labor hours from previous time-cards).
Jan Pol, PMP has been a project controls manager and project manager on US Government projects in Iraq, Afghanistan and Kuwait. He started using Earned Value Management in 2003 on USAID & US Army contracts which included a mix of different contract types such as; Firm Fixed Price, Time & Material and Cost Reimbursable. Currently Jan is an Associate with The PMO Company and continues to support his US Government and NATO contractor clients in deploying projects globally.