Introduction

This blog is the second in a series I am producing once a week.  There are many topics we can discuss under Corporate Finance.  This series will include a subset of topics, including the following:

• Chart of Accounts
• Project Costing
• Reporting
• Model Set Up
• Forecasting
• Budgeting
• Program Based Fixed Asset Management

Project Costing has been a large part of my career, starting with supply chain optimization projects, custom mobile software solutions, automotive manufacturing and latest in trailer manufacturing.

Before we dive into the approach, let’s start with the benefits of Project Costing to make sure we are optimizing the value (value being net benefit less effort). 

1. Future Projects – History allows us to estimate the time and cost associated with specific parts of a project. Having enough details to breakdown a project and take parts for future project estimates is very beneficial to boost confidence in the numbers and timing.
2. Current Status – Tracking projects in an organized way helps prioritize tasks that keep the projects on time and in budget. When we make decisions without this information, the risk of missing critical information, prioritization issues and overruns are very high.

We can summarize the value of Project Costing, common to both benefits listed above, is the reduction of risk to a project.  Starts with risk reduction in the planning, then translates into risk reduction during the project while being tracked.

My approach is based on my experience, what is yours?  I write these blogs in hopes that it may help others.  I prefer to blog what I have learned from experience, not just a rewrite of what I found on the internet.  I also prefer collaboration over critique, so please comment only if you have something constructive to add.

Project Costing

The way I approach project costing varies based on the size of the project, the level of detail we are tracking against and the resources available.  As we saw in the introduction, we want enough detail to be a value for tracking and for use of information in future project planning.

• Detail
  • Work Towards Detail: I know some projects require a lot of detail on the timing, like a new car in development with over 1,000 end items to the plant. When I start a Project in concept phase, the project grouping is at a higher level of planning because of how often things change.  As the project moves closer to development, then I continue to introduce more details in the project (as example, the suspension might be a single line when project in concept, but then broken out by part, software, task and development phase when approved for development to production with allocation of the budgets to that detail)
  • Level of Detail: Once a project is ready to be broken down to the task level details, the work packages may be at a more detailed view than where the time and costs are tracked. Determining the level of cost and time tracking based, I usually go down to the detail of a system or assembly, sometimes based on a supplier and how it will be billed/contracted.  Then I assign the coding required for tracking time, services, and materials throughout the systems.
• Resources: This includes the tools and people available.
  • Tools:
    • Timekeeping: Are you using a timekeeping system, one that allows for entry of project details?
      • If so, then adding project selections helps to drive the numbers through a system. I ask people entering the information to be as accurate as possible, but not to the minute. 
      • If not, then I try to minimize the burden on the project team, so I tend to ask them each week to estimate the time spent on project. This feeds into my belief for noncritical information, where the cost of details outweighs the benefit: get 80% accuracy with 20% effort.  In those examples, I ask for percentages, like % of the week spent on project and % of tasks completed.  Accumulation of the task level time rolled up to the project level should be fairly accurate even with task level estimates.
    • Project Software: I use mainstream MS Project, only because I grew up on it and have used it effectively on an enterprise level. The project software does a good job in tracking tasks for time and percentage of completion.  I use the cost tracking in this software for summarization.  If a small project, then I manually enter, otherwise I use a template for loading and updating.  And that leads to my next tool.
    • Excel: I use this to track costs to the project. I like to setup in Excel because of the flexibility to track all the costs of the project.  I can download data from the ERP and MS Project for easy population of actuals vs budget by project line item.  I can enter time estimates for the people on the project, along with burden and any other allocation required (i.e. equipment usage or depreciation)
    • WBS: There is so much to discuss regarding WBS (work breakdown structure). This tool is important if you have complex products or complex development.  It tracks a project from concept to profit.  We were about to implement at an automotive OEM, which was at the time using the internal reference number for tracking project costs.  The internal number works quite well on the cost side, but did not help on connecting the revenues into the project.  WBS was our answer to having a wholistic view of the project profitability, and it integrates well into SAP Project, but need more people to support it.  More on that by request 😊
  • People:
    • PMO: If you have a PMO group, then they are charged with handling the tracking of timing, time and materials. With dedicated people tracking then the level of detail can be greater and should have high reliability (proper allocations for burden and other shared costs)
    • Project Members: It’s important that the project members understand the value of accurate information. With regards to projects that are over budget or at risk of delays, I also position a ‘red’ situation as a request for help, not an opportunity to bash the team.  Your project member participation in the set-up and follow through is essential to the success of project tracking.
  • Size: The size of the project can be determined in currency, time and/or complexity of work. I find the complexity is more a driver of how to set-up a project, mainly because some projects that are big budget are not always difficult to track.  Keep it simple as much as you can, and when you have a complex project then break it down into phases, then group by deliverable within phases, then areas and tasks.  Big projects get beautiful large worksheets, my favorite.
  • Reporting: Last topic is how I report on projects. You will find that I love dashboards.  If you have a portal that you can secure the reporting based on the login, then do it!  Giving the project leads access to the latest numbers by serving themselves helps you focus on the accuracy of the information while they can access and review.  If you need to create a presentation, then set-up the reporting to easily copy and paste into PowerPoint.  There should be one sheet for each area supporting the project, and one consolidated page with status.  At a minimum, you should have time, materials, timing, top issues with action items, and a summary of completed tasks from last meeting.  I also like to use colors (red, yellow, green) with dots to represent status, it allows the viewer to see at a glace how that project or area is doing.  Fewer words, more easy identification of actionable information.

If you have other methods for project costing, please share.

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About the Author

Travis King’s educational background is a dual degree in Accounting and Finance from University of Arizona, along with an MBA from UC Irvine.  His operational background is a mix of management in Accounting, Finance, Operations, Program Management, Design and Corporate Strategy.  He has worked in beverage distribution, defense, automotive, software and recreation industries.  He has led projects in forecasting financials, running market data, massive software migrations to SAP, reporting, budgeting, MRP and conducting data integrity audits.