Practical Project Management

In 1999, when the Performance Measurement Association became the first college of the Project Management Institute (PMI®), we learned how earned value improves awareness of the true health of a project.

Today, with time and material contracts less common, the pressure is on to practice more cost management and to monitor project health continually, effectively, and consistently throughout the project lifecycle.

It is now essential that you have a thorough knowledge of your project costs not only today but into the future.
How many of the following questions can you answer with any degree of certainty as your projects progress through their lifecycle?

• What is the projected profit?
• What is the projected return on investment?
• Do we have adequate cash flow or funding?
• When will the breakeven point occur?
• How much of the contingency will become profit?

This paper guides you in how to acquire the information so that you can confidently answer these questions.

What's Available?

The type of information needed to answer these essential questions about cost management is not stored in a scheduling tool, and most accounting packages do not integrate with your schedule.
So, how can you go about gathering this kind of information?

Since 1996 when earned value was introduced in the PMBOK®, many scheduling tools adopted basic earned value.
However, adding the functionality to manage items such as funding, cash flow, staffing, commitments, and billing rates, is a big stretch for a scheduling tool, and most do not provide it. Support for financial questions such as the return on investment and the breakeven point of the project is not likely to be in the next version of Microsoft Project®.

If you look to financial accounting software to answer these questions, you are still out of luck because they typically focus on historical aspects of the project and not future costs.
In addition, most accounting products are not activity-based.
The traditional accounting software tracks cost to the department and then, if you are lucky, cost to a product [Shi]. These drawbacks make it difficult to use accounting software to answer the essential cost management questions about your projects.

Enterprise Resource Planning (ERP) systems were designed to help with some of these cost management questions. However, companies have actually gone out of business trying to implement these systems.

If you have a resource-loaded schedule, you have the basis for the calculations that will answer all the essential cost management questions.
Would it not be great if you could press a button and load the information from your schedule into a cost management system that could calculate the expected profit, return on investment, breakeven point, and more?

These systems are available as Commercial Off The Shelf (COTS) products and they are priced at a fraction of an ERP system.
Typically, they are called earned value management systems, and there are several such products available. Each has different capabilities.
However, the foundation of all these systems is to provide a single repository for budget, actual costs, forecast, and earned value data.

Through integration with your scheduling tool (for schedule data) and your accounting system (for actual costs), together with forecasting and earned value calculations, you can analyze costs from all types of systems and truly manage your project costs.

What is the projected profit?

One of the most critical factors in today's economy is to understand which projects are profitable to your company, which are not, and which could be in the future.

Profit is what you get for delivery of the project (the revenue) minus the actual costs incurred. What is necessary for important strategic business decisions is the projected project profit - the projected revenue minus the budget.

When you first estimate the cost of a project, your estimate is based on the actual cost of previous similar projects. Items in the estimate are detail planned and become the budget.
This budget is used to calculate earned value, which, in turn, is used to evaluate your cost variances.
Analyzing cost variances becomes very important once the project begins as it can alert you to problems before your profit is gone!

After you have determined what you think it will cost you to deliver the project, you are ready to apply a markup to the project cost for billing purposes.
After all, even time and materials projects contain a margin of profit.
Typically, the markup is determined by having a set of billing rates that is different from the internal costs.
Therefore, in order to calculate your projected profit, you need one copy of the budget used to calculate the costs based on the internal rates and one copy to calculate costs using the billing rates.
The projected profit is calculated by subtracting the budget from the projected revenue.