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Basics of Project-Level Financial Management for Project Managers

JOB LOOP. 1. 0. Project. Qualification. 2. 0. Project. Estimating. 3. 0. Project. 4. 0. Project. Pricing. Management. 5. 0. Post. Project Review. Basics of Project-Level Financial Management for Project Managers. Project Manager Academy Section Twelve. Program Outline.

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Basics of Project-Level Financial Management for Project Managers

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  1. JOB LOOP 1 . 0 Project Qualification 2 . 0 Project Estimating 3 . 0 Project 4 . 0 Project Pricing Management 5 . 0 Post Project Review Basics of Project-Level Financial Management for Project Managers Project Manager Academy Section Twelve

  2. Program Outline • PM as Project Leader • Project Financial Basics • Financial Lingo for the PM • Balance Sheet • P&L Statement • Project Cash Flow • Schedule of Values • Billings & Collections • Retainage • Cost to Complete Forecasting • Colonial Webb CTC Forecasting Tools

  3. The Objective To understand the fundamentals and best practices to produce an accurate cost to complete forecast

  4. PM as Project Leader Procurement Pre-Job Planning Operations Estimate D/B or D/A Budget Management & CTC Coordination & Fab Planning Change Order Management The Planner The Businessman Collections 8- Week Planner Cash Flow Management THE PROJECTLEADER Material Planning Technical Skills The Communicator Meeting Management Internal Communications Customer Communications Project Documentation

  5. Project Financial Management Basics

  6. Financial Lingo for the PM Balance Sheet – A financial statement that summarizes the company's assets, liabilities and shareholders' equity at a specific point in time Income Statement or Profit & Loss Statement – A financial statement that measures the company's financial performance over a specific accounting period Costs to Complete – An estimate of all costs to complete all of the remaining work on a project. Includes labor, materials, subcontracts, equipment and other direct costs

  7. More Financial Lingo for the PM Percent Complete Actual Costs to Date Total Cost at Completion Revenue – The portion of the sale price, or contract value, recognized as income in the financial statement over a specific period of time. GAAP requires contractors to recognize revenue using “Cost to Cost Percentage of Completion.” Revenue is also referred to as: Earned Sales, Earnings, Sales, Earned Revenue, Income and other terms. It all means the same thing

  8. More Financial Lingo for the PM Billings – Pay applications, requests or invoices sent to the customer. Billings relate to cash flow and have no impact on earned revenue Overbillings – When what we have billed the customer is greater than the earned revenue on the project. Sometimes called billings in excess of costs and earned gross profit Underbillings– When earned revenue on the project is greater than what we have billed the customer. Sometimes called costs and earned gross profit in excess of billings

  9. More Financial Lingo for the PM Variance – The difference between our current estimate (baseline) and our estimated cost at completion. A variance can occur with any or all of the direct cost types Write-down – In increase in the total estimated cost to recognize a forecasted cost overrun. This reduces earned revenue on a project by lowering the percentage complete Write-up – A decrease in the total estimated cost to recognize a forecasted cost savings. This increases the earned revenue on a project by increasing the percentage complete

  10. The Balance Sheet • Assets – Anything of value that we have the use of • Liabilities – Anything legal debt or obligation that must be paid in the future • Equity or Net Worth – The “book” value of the business. Total assets minus total liabilities

  11. Assets = Liabilities + Equity The Balance Sheet

  12. Line $ 1 Assets 2 Current Assets 3 Cash 279,300 4 Accounts Receivable 1,189,500 5 Notes Receivable 188,700 6 Material Inventory 314,700 7 Costs in Excess of Billing 140,400 8 Prepaid Expenses 29,100 9 Other Current Assets 63,600 10 Total Current Assets 2,205,300 11 Fixed Assets 12 Total Fixed Assets 1,929,900 13 Less: Accumulated Depreciation 859,200 14 Net Fixed Assets 1,070,700 15 Other Assets 123,600 16 Total Assets 3,399,600 Example Balance Sheetas of April 30, 2012 (1 of 2)

  13. Line $ 17 Liabilities & Net Worth 18 Current Liabilities 19 Accounts Payable 495,000 20 Notes Payable 298,500 21 Billings in Excess of Cost & Estimated Earnings 204,300 22 Accrued Expenses 259,200 23 Other Current Liabilities 131,400 24 Total Current Liabilities 1,388,400 25 Long-Term Liabilities 893,100 26 Total Liabilities 2,281,500 27 Net Worth 28 Capital Stock 375,000 29 Retained Earnings 743,100 30 Total Net Worth 1,118,100 31 Total Liabilities & Net Worth 3,399,600 Example Balance Sheetas of April 30, 2012 (2 of 2)

  14. Line $ % of Revenue 1 Contract Revenue 9,756,000 100 2 Contract Costs 3 Materials / Equipment 4,157,000 36.00 4 Subcontracts 860,500 11.00 5 Labor (includes taxes & fringes) 2,746,000 38.00 6 Other Contract Costs 24,500 1.25 7 Total Contract Costs 7,788,000 86.25 8 Gross Profit 1,968,000 15.75 9 General Administrative Expenses 1,525,000 11.25 10 Net Profit from Operations 443,000 4.50 Example Profit & Loss Statementfor the Month or Year Ending

  15. A Few Questions? Where does the monthly P&L statement come from? Sum of all individual jobs and monthly general & administrative (overhead) expenses How does the CTC impact the monthly P&L statement? It determines percent complete, which determines contract revenue

  16. A Few Questions? Why do we budget and forecast? Set financial goals Facilitate planning – Trucks, tools, employees…etc. Communicate goals to the team Shows the relationship between what’s coming in and what’s going out Things change and we must react – Markets, customers, pricing, project locations, staffing, cost structure…etc. Learn from the past Keep us looking ahead – Focus is on where we are going, not where we have been. Financial statements are “rear view”

  17. Project Cash Flow + Project billings - Accounts receivable = Project receipts - Project costs + Accounts payable = Project Cash Flow Why is the timing of project billings important?

  18. Building a Schedule of Values • Understand the project schedule • What will be done first? • What will be done last? • Items to be done first are front loaded (cost + GP + GP from items to be done last) • Examples: permits, mobilization, underground, storm drainage, large equipment • Items to be done last are rear loaded (cost only) • Examples: test & balance, controls, fixtures • Be careful when front loading items in the schedule that might be deducted from our scope

  19. Billing and Collecting • Understand the billing process – forms, timing, supporting documentation • Bill against the schedule of values – work in place, not percent of cost incurred • Anticipate cost to complete by the end of the month • Labor, materials, equipment, subs and other • Understand the payment cycle – owner to GC to Colonial Webb • Follow up on the bill to ensure its approval and inclusion in the payment cycle

  20. Managing Retainage • Understand the rules in the contract for the subcontractor and the GC • Ask the GC “Has the owner allowed you to reduce your retainage?” • Ask “When can we get a reduction?” • Don’t assume you have to be 100% complete before you ask • Bill retainage with the final progress billing

  21. Cost to Complete Forecasting

  22. Project Manager vs. Project Witness Project Manager Understand the actual productivity on the work completed JTD Know the work remaining to be completed and accurately estimate the labor and direct cost of this work Ability to accurately estimate what the total cost will be at completion Understands that CTC is part science and part art Can identify cost overruns at 20% complete Project Witness Know little about actual productivity on the job Assume or rely on superintendent to know what work is remaining Rely on the field or estimate to identify what remaining work will cost Think that CTC is all science and based on a formula Can identify a cost overrun at 80+% complete

  23. Cost to Complete Workshop I • You are the project manager and you are scheduled to meet with your boss to report on the status of your project • Specifically, he wants a summary of labor productivity to date, as well as projected labor hours and labor costs at completion • You have thoroughly walked the project with the superintendent, reviewed each work item and are satisfied that the installed quantities or percent complete for each item is relatively accurate

  24. Cost to Complete Workshop – Assignment • Review the summarized information from the project budget (Exhibit 1) • Review the summarized information from timecards and quantity/productivity reports (Exhibit 2) • Complete the earned value summary report (Exhibit 3) • Calculate the total labor cost at completion assuming a labor cost of $50/hour (Exhibit 4)

  25. Budgeted Total Unit of Man-Hours Quantity Measure Activity A 8,000 100,000 SF Activity B 6,000 50,000 LF Activity C 4,000 1,000 EA Activity D 1,000 1 LS Activity E 1,000 1 LS Total 20,000 Exhibit 1: Summarized Information From the Project Budget

  26. Hours Reported Units or Percent Unit of JTD Installed JTD Measure Activity A 4,000 40,000 SF Activity B 2,500 25,000 LF Activity C 2,400 600 EA Activity D 300 30.00% LS Activity E 300 10.00% LS Total 9,500 Exhibit 2:Summarized Information from Timecards & Quantity Reports

  27. Exhibit 3:Labor & Productivity Summary Report

  28. Exhibit 4:Labor Cost Summary • Labor cost to date = _____ Hours X $50 = $_____ • Projected labor cost to complete remaining work = _____ Hours X $50 = $_____ • Projected labor cost at completion = _____ Hours X $50 = $_____

  29. Amount: % of Sales CONTRACT AMOUNT $2,000,000 100.00% DIRECT COSTS Labor $800,000 40.00% Materials $800,000 40.00% Subcontractors $50,000 2.50% Equipment $70,000 3.50% TOTAL Direct Costs $1,720,000 86.00% Gross Profit $280,000 14.00% Cost & Profit Projection Workshop II ESTIMATE FOR INDIVIDUAL PROJECT

  30. Cost & Profit Projection Workshop II At the end of the third month… • Your job cost report indicates that you have spent: • $ 475,000 on labor (9,500 hours X $50/hour) • $ 492,000 on materials • $ 25,000 on subcontractors • $ 40,000 on equipment • $1,032,000 total (60% of total estimated costs)

  31. Cost & Profit Projection Workshop II • You have billed the customer $1,000,000 • After verifying installed quantities and percent complete on the various work activities and preparing your earned values summary, you estimate the cost to complete the remaining work to be as follows: • $ 675,000 on labor (13,500 hours X $50/hour) • $ 114,344 on materials • $ 25,000 on subcontractors • $ 30,000 on equipment • $ 844,344 total

  32. Cost & Profit Projection Workshop II What percent complete are you to on the project? Percent Complete: ____________ How much revenue and profit have you earned to date? Earned Revenue to Date: ____________ Earned Profit to Date: ____________ Assumptions: No change orders have occurred on this project This is a lump-sum project Is this project overbilled or underbilled? If so, by how much? Overbilled/Underbilled: ____________

  33. Cost & Profit Projection Workshop II How much profit do you project that this project will make once completed? Project Profit at Completion: ____________ Assumptions: No change orders have occurred on this project This is a lump-sum project How much profit gain or erosion does this represent when compared to the original estimate? Margin Gain/Erosion: ____________

  34. Monthly Projections & Percent Complete Calculations • There is only one way to accurately determine percent complete…You must re-estimate the remaining work on the project • A 5% error in percent complete on a $5,000,000 project equals a $250,000 error on the bottom line

  35. Assume that the PM and superintendent incorrectly estimated the costs to complete as $688,000 instead of $844,344 • $ 518,656 on labor (10,373 hours X $50/hour) • $ 114,344 on materials • $ 25,000 on subcontractors • $ 30,000 on equipment

  36. Impact of a Different Labor Estimate What percent complete do you believe that you are on the project? Percent Complete: ____________ How much revenue and profit do you believe that you have earned to date? Earned Revenue to Date: ____________ Earned Profit to Date: ____________ Assumptions: No change orders have occurred on this project This is a lump-sum project Is this project overbilled or underbilled? If so, by how much? Overbilled/Underbilled: ____________

  37. Impact of a Different Labor Estimate How much profit do you project that this project will make once completed? Project Profit at Completion: ____________ Assumptions: No change orders have occurred on this project This is a lump-sum project How much profit gain or erosion does this represent when compared to the original estimate? Margin Gain/Erosion: ____________ What is the impact next month when you realize that your labor estimate was off by $156,344?

  38. What Are the Keys to Getting a Good CTC for Labor?

  39. It ALL Starts With a Good Breakdown of Labor Phasing and Codes • PM and superintendent must first plan how the job will be constructed in the field and the best way to track labor and productivity on the project • This plan, not the estimator or the estimate, should drive the setup of labor phases and codes • Project-specific and not standard • Work breakdown structure must be broken down into manageable, bite-sized pieces of similar work and repeatability • Discuss CW examples – Brett

  40. It ALL Continues With a Good Operations Estimate Operations estimate – The project team’s (PM & supt.) initial estimate for each of the direct cost items, based on takeoff completed by the project team • Labor is the biggie, but should include other direct costs as well • Establishes the baseline to track against actual costs as they are incurred • Should be done in the format of the setup from operations • Must validate the original estimate and have buy in from PM and superintendent • Completed and in place prior to starting work on underground and above ground

  41. It ALL Continues With a Good Operations Estimate • A bad setup or poor/late operations estimate should set off bells and whistles • Should really serve as the first CTC forecast

  42. Monitoring Installed Work and Tracking Productivity is Key • Accurate coding and reporting of time is critical • Need to track and report productivity daily • We have to know daily production rates per man-day • If not tracking actual productivity, your CTC will be suspect

  43. Identifying the Remaining Work to be Completed • The cost budget must be updated for changes when we decide to do the work, not when we have a signed change order • Project manager and superintendent must review and mutually agree to what work is remaining to be completed • Walk the job and mark up the plans for completed and/or uncompleted work • Task & Time Approach – Estimate crew sizes and durations for each line item in the labor setup • Consider how JTD production rates apply to remaining work • Consider variables that might impact production on remaining work • Think about ALL of the labor on the project

  44. The Basics of Developing a Cost to Complete Step 1: Update the project labor budget to reflect change orders and the scope of what we are planning to build Step 2: Track and review productivity on completed work daily/weekly…be sure to include all man-hours for everyone on the project, not just the guys installing work Step 3: Conduct PM and superintendent job walk and analyze each task to determine what work is completed and remaining

  45. The Basics of Developing a Cost to Complete Step 4:Develop labor estimates for man-hours on remaining uncompleted work • Task and Time Method – Manpower plan with crew sizes X durations for each activity is another point of reference • Use actual production rates as a starting point if you have them • Units/man-hour or units/man-day • Count ALL man-hours or man-days on the entire job • Adjust production rates based on variables (The Art)

  46. The Basics of Developing a Cost to Complete Step 4:Develop labor estimates for man-hours on remaining uncompleted work • Do not assume that the operations estimate is still good for work that we have not started • Recognize the productivity will naturally decline in later part of a project • Completeness is an issue – when is a unit complete?

  47. The Basics of Developing a Cost to Complete Step 5:Review the average composite crew rates, consider how much O.T. is likely to be used and convert estimated labor man-hours to estimated labor dollars Step 6:Present to operations manager and CFO monthly and have them challenge and ask hard questions … be able to show/explain and defend the labor forecast Step 7:Manage to the manpower plan by the week. If crew sizes or durations for work activities begin to differ, STOP and evaluate!

  48. Common Cost to Complete Mistakes • Poor or no operations estimate • Not validated by PM and superintendent takeoff • No buy in • Late – trying to do a CTC before budget is locked down • Budgeted costs not updated for change orders • Wrong work breakdown structure • Too few or too many labor items • Too many labor hours in each work item • Not linked to how project is being built • Scope not clearly defined, locked down and identified in the breakdown • CTC not challenged or probed by operations manager and CFO…their job is to ask the tough questions and provide another line of defense

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