7.1 Project Review Cost & Process (07010m)

This program provides the framework for the operational management team to review project progress and senior management to overview the project team's performance.  This review process should occur regularly and be undertaken at least monthly.

Background to Project Review

Each project should have incorporated:-

1. Start Template Project, containing:

   • List of all items that need to be purchased including internal costs such as:
     - Insurances
     - Payroll
   • Identified Project Stages
   • List of all Risk2Do items identified to ensure the project meets the Client's needs, company obligations and quality standards.
2. The contract value broken down into individual Budgets for all purchased items by stages as applicable.
3. All changes to the Contract's Scope of Works to be controlled by Head Contract and Variations to ensure correct notices to Subcontractors and Suppliers to ensure changes are correctly managed.
4. Raising of:
   
   • Labour Orders - Hours & Cost of Labour
   • Purchase Orders - Supply of Goods
   • Equipment Orders - Internal hire costs of company owned equipment.
   • Subcontracts - a formal contract between your company and a subcontractor to Large Value Contracts to esure detailed controls are maintained.  Subcontracts should ensure correct insurances, payment schedules and Risk2Do verification processes maintained.
   • Subcontractor payments processed within 5 days of receipt.

1. Project  Exit or F3 to select the Project
2. Review type 
   - Initialize/Default forecast at least once a month as this is required to start a new process
   - Review/Follow on to log back in to continue a review process
   - Management check - For senior management to review the project, as this mode does not adjust any values.
3. Risk Item Inclusion - All/Open/Extended/Competed Only - Risk2Do items have a number of status controls and may have delayed activities linked to the status of a cost allocation on the project.
4. Include Column - Retention/Accrued/To be committed - The project cost report has flexible column selection but in the active review process, there is limited selection on one column only.

Display Format

Muli's display format is in drillable format so the reviewer may drill down to look at cost allocation (just click on the line item).  This shows the detailed Budget, Variations, Orders and Subcontract and Risk2Do items.  By clicking on the Order or Risk2Do item, full details are displayed.

Allocation Details - Top level

Cost Allocation Number & Description: 4-digit Allocation Number.  The allocation description is constant over ALL projects.

Overhead Allocations

0 - 0999

Operational Projects 1000 - 1149 Income Account

1150 - 1159 Management Costs (Construction Mgmt only)

1160 - 1199 Standing Risk2Do items

1200 - 1799 Project Preliminaries

1800 - 1999 Responsibility Overhead (for Profit Centres)

2000 - 5999 Site Trades

6000 - 7299 Special Allocations

7300 - 7399 Pools & Ponds

7400 - 7498 Furniture & Fittings

7500 - 7598 Multi Media

7600 - 7679 Computer

7680 - 7699 Customer Support & Training

7700 - 7799 User Allocations

7800 - 7898 Transport Storage

7980 P/C Provisional Sums

7999 Reserved Net Site Costs

8000 - 8498 Design Expenses

8500 - 8998 Marketing

9000 - 9498 Land Purchase & Holding

9500 - 9598 User Specials

9600 - 9799 Project Finance Control

9800 - 9898 Client Controls

9900 - 9989 Project Controls

9998 Project Contribution

Note:  It is recommended that allocations are not added or changed without consulting Muli to obtain a clear understanding of Usage & Objectives.

Column 3 - Risk2Do

These are the place markers to ensure activities/processes are completed.  All identified issues should be represented by a Risk2Do.  As procedural Risk2Do may not be applicable later in a project, generally only active not completed items are displayed.

Column 4 - Unapproved Invoices

As Supplier invoices and Subcontractor progress claims are received, they are registered in [17.1] Unapproved Register and should be processed into Accounts Payable within 1 week to meet Security of Payment notification obligations and ensure Head Contract claim values are sufficient.

As Unapproved Invoices are processed to the Approved column, they are automatically removed from the unapproved column.  PS:  In the bottom screen, the Project Total Unapproved is displayed along with the value greater than 7 days.

Column 5 - Adjusted Budget

This value includes the original Budget and approved Variations (ie: Adjusted Contract Value) that have been distributed.

Note:  In the Allocation Report, Budget distributed on a Variation that is not yet approved is shown in Blue (to remind the project team to allow for costs, if applicable) but not included in Adjusted Budget.

Column 6 - Committed Orders

The value of Orders and Subcontracts committed.  The project team should aim to establish inclusive trade packages with trade risk included where possible.  Sundry supplies such as hardware and concrete should be let as bulk orders, utilising Authority to Deliver for individual deliveries.  On review, management shoudl ensure commitments are realistic for the project stage.

Column 7 - Approved (for Payment, not necessarily paid)

This value includes the project component of the invoice but does not include General Ledger control items such as GST, Withholding Tax.  This value does include Retention which may not be paid for a considerable period.

Column 8 - Retention

The value withheld from Subcontract progress payments to cover contractural obligations and also to offset the cashflow implications of Head Contract retention and bank guarantee.  The retention value is included in Approved.

Column 9 - Final Forecast Value

The Project Manager's pessimistic view of the total costs required to complete the Scope of Works covered by the Cost Allocation includes "contingencies" to cover risk items not yet completed.

Note 1: The sum of all project contingency values is highlighted at the bottom of the report.

Note 2: Detailed discussion of Final Forecast processing which occurs at the allocation level (LINK)

Column 10 - Previous Variance

Once senior management accepts a Cost Report, then "this Variance" value is transferred to "previous Variance" to allow reviewers to foccus on changes.

Column 11 - Review Flag

This flag indicates whether the management review team have physically entered the allocation report to review the final forecast.

Column 12 - Variance this Report

The difference between "Adjusted Budget" and Final Forecast Cost.  Red (-ve) Loss  Black (+ve) Gain.

Unapproved Variations

As the value of Unapproved Variations is often far greater than the total project contribution, correct assessment is essential.   Remember, the final forecast includes all costs required to complete the project.  Ie: if you need to pay the excavator to remove extra over rock, that cost should be in the final forecast as the cost will be expended to complete the project.  Likewise, the safe value of the unapproved variation will show the pessimistic view of expected contractual recovery - the value you are certain to get if not prepared to take it off your salary.  Likewise, the provision of a curtail to the front entry requires no work unless the variation is approved and would not be allowed in the final forecast OR safe value.

Management should review all Unapproved Variations and may need to become involved in ensuring timely resolution.

Forecast

While Muli utilise "Earned Value Recognition" of project contribution, this often gives substantially different earnings results to traditional widget accounting.

Why? 

It is the Project Manager's responsibility to claim the maximum values available under the terms of the contract.  Many subcontractors are slow in submitting progress claims, particularly when their project scope is subject to major change.

Muli Method is explained in detail in [8.10.3] Project Contribution Maintenance

In summary, all Income & Expense is calculated to completion, the difference is Gross Margin (at completion)

Approved Costs:
Final Forecast Costs = % complete
Gross Margin x % complete = Earned Margin to Date

Liquidity

Most construction companies fail because of liquidity reasons and strong focus on liquidity is essential.  In fact, the [8-2] Project Liquidity Report is a primary management tool giving instant cash positions of all projects.  All project reviews need to verify the liquidity position of the project.  However, it is difficult to rectify a problem project when the contract conditions are unreasonable and companies need to focus on ensuring they only contract on reasonable financial conditions.

Project Prepayment = Received (-) Approved for Payment  (The object is to keep in the positive)

Unapproved Invoice (Total Project) - This vaue is presented as a current total and a total greater than 7 days.  This should be zero if the project team are functioning correctly.

Note:  Unapproved Invoice values are NOT used within the Muli Accounts, but provide a managed control on the Risk associated with incomplete/delayed payments to Supplier & Subcontractors.

Risk2Do

These anchor points enable process review of non-financial aspects of a project delivery and document the quantified costs/risks associated with work yet to be completed.  In theory, I would expect to see at least 2% Project Contingency for the value of uncompleted work, which is progressively released as the project is completed.  A project with little contingency provision is a project requiring a detailed review.

Project Dates

Having revised the Project Schedule to confirm that projected completion dates are achievable, you are now ready to start your Cost Report Process.  The schedule review process should have highlighted parts of the project under stress and these would be the first trades to review to see how the project team are provisioning for identified issues.

Cost Reporting

Before commencing to update a Cost Report:-

-  Ensure AP Invoices and Subcontractor Progress Claims are up to date

-  Ensure Head Contract Variations are up to date (Do they require Order or Subcontract Amendments)

-  Review Project Schedule.  Are there timing extensions that will alter staffing and equipment costs.

BEVIN  INSERT FLOW CHART  -  See Ron

When you login to Muli (if initialised) completes a default Cost Report which is displayed.  Otherwise displays the data from the previous worksheet.  Maximum worksheet duration is 21 days.

Review the summary data, particularly the value of Unapproved Invoices and you may need to bring them up to date.

Click on the first displayed allocation.  If this is less than 1149, it is indicating additional income on each of these allocations.  You will need to verify expected income for it to show in the Project Review Summary.

You need to look through the Budget and Variation items to ensure all items are included in Committed Order values.  Remember, blue Budget items in the Adjusted Budget area are NOT yet active/available money as they have not been approved on the Head Contract.

Verify Correct Allocated Budget Values

One of the biggest mistakes of project team members raising Commitments is the failure to allocate the correct Budget.

Example:-   Budget Formwork $110,000 from Estimate

After negotiation with the Subcontractor, agree to $100,000 plus day labour for the plinth base (which has not been detailed) but you expect it to cost $6,000.

Allocated Budget $110,000

Committed Order $100,000

Risk2Do = Plinth Base $6,000

The net result indicates a saving of $4,000 (additional to Contribution)

It then emerges that safety handrails were not covered in the Subcontract documents and an additional $2,000 Subcontract Amendment is required.

Allocated Budget is Zero  (there is nothing left)

Amendment Committed $2,000

Now the Final Forecast cost of the formwork is:

Original Subcontract $100,000

Amendment - handrail 2,000

Risk2Do - plinth base 6,000 = $108,000

Therefore, saving $2,000

The Final Forecast cost is what you, as a Project Manager, believes you will need to pay a Supplier or Subcontractor to have the project finished.  History tells us some Subcontracts, such as Bricklayer, seldom finish without additional payments and when a contract is raised, we would expect to see a Risk2Do follow-up Contingency provision.

How to Adjust Final Forecast

Each identified issue should be a separte Risk2Do with a value in "Risk Provided $" field (Cost Reporting does not look at the worst case and opportunity value).  The Risk provided value should be adjusted to reflect current management expected outcome or have its status changed, if completed.

When Order or Subcontract is complete

While the Committed = Approved and Retention = 0  required for a Subcontract

A Purchase Order may be flagged as "completed" without the need for -  Committed = Approved

By highlighting the Order/Subcontract and pressing the F11 complete flag, the Final Forecast on the Order is automatically changed to the Approved Value stopping any further processing of NEW invoices  (Also stops Unapproved Register linking to a completed Order)