Using multiple currencies for global project costing
by Betsy Smalley, PMP
RUNNING AN OIL PROJECT in Venezuela? Constructing a cell site in Brazil? Using the euro with an alliance partner? These are typical global projects that may have multiple currency implications for the project manager.
When Do You Need to Use a Multicurrency Project? Before traveling (pre-euro) in the Netherlands, I accustomed myself to mentally exchanging Dutch guilders for U.S. dollars. This worked for a while and allowed me to quickly estimate the price of a meal or a rental car. But then it came time to buy gas. Prices were reflected in Dutch guilders/liters on gas station signs, and my mental math failed (the calculator, too, since I didn't know the conversion rate for liters to gallons). But, of course, it didn't really matter; I simply selected the cheaper gas station, just as I would do at home.
This exemplifies what is probably the most fundamental rule in global cost management: Don't convert for the sake of converting. If you have a contractual requirement to run your project in U.S. dollars, you can request that bids from your foreign subcontractors be in dollars. Likewise, if you are comparing bids from two European companies, you can simply compare in euros without first converting. I can compare gas prices without first converting them to dollars; after all, when I need gas in Amsterdam, does it really matter if gas is more expensive there than in Houston?
Betsy Smalley, PMP, is a consulting manager at Welcom (www.welcom.com), a global leader in advanced project and cost management software solutions. She has over 20 years of experience in information technology and enterprise project management with IBM and Welcom, and has advised both domestic and international clients in the areas of project and earned value management. She is a member of PMI's Houston Chapter.
But if you are reading this article, you likely need to report your project in multiple currencies. Perhaps your contract requires that you report to the customer in dollars; however, you are running the project in your home euro currency, and you are expected to report to management in euros. You may need to run a project in one currency and procure labor or materials in another currency. You may also need to forecast currency fluctuation risks on a project.
You may need to be sensitive to currency risks that your customers or contractors are assuming, even if you are not directly impacted. For example, after successfully completing the first two phases of a project I ran for a client in Mexico City, a third phase was committed. But during the third phase, the peso devalued against the dollar, which made the work more expensive to the client. While the contract was in U.S. dollars and we were insulated from the currency risk, we were eager to fast track the work to minimize the effect on the client (for example, through front-end loading of resources and fast tracking).
Exhibit 1. The impact of rounding intermediate results is illustrated using this conversion.
Conversion Approach. So, when do you want to convert? And how do you convert? Whether you need to do formal cost performance reporting (CPR) or a simple budget analysis, running a global project adds new dimensions to cost reporting. And whether you use a simple spreadsheet system or a more robust cost management system, you need to follow some rules in order to ensure a sound project.
Calculations in Multiple Currencies. If you use the euro, be aware that there are special rules governing exchange with the currencies of its member states. The 11 member states had their National Currency Unit (NCU) rates fixed as of 1 January 1999. Conversion between the NCU rates and the euro is governed by Articles 4 and 5 of European Council Regulation 1103/97. This requires that intermediate results be stored to no fewer than six significant digits, with rounding and truncation not permitted. Conversions must use division, not multiplication by the inverse, and exchanges between member states must be expressed in euros before the conversion.
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Exhibit 2. This method allows reporting against the same program hours data using the selected currency rate table.
Exhibit 3. This method calculates euros using an exchange rate.
Exhibit 4. Rate tables from the euro to member currencies were fixed on 1 January 1999. Third-party currencies can fluctuate daily, monthly, or at the frequency your program requires.
In fact, the need for six significant figures with no rounding/truncation of intermediate results is sound practice that should be applied to any currency conversion. However, as the articles state, the conversion to third-party currencies is not governed by the articles and is subject to such normal conversion practices as market conventions or contract requirements.
The examples included in Exhibit 1 illustrate correct and incorrect conversion.
Time-Phased Costs. Several methods can help produce time-phased budget reports.
In one method, shown in Exhibit 2, you can store the rate table independently from the work package and hours spread. This allows you to keep multiple rate tables. For example, you can keep the base resource unit in hours and calculate dollars and euros independently. When you produce your budget report, you can then select the rate table containing the currency in which you want to report.
Another method, shown in Exhibit 3, would use an exchange rate to calculate a result in the desired currency.
In the example in Exhibit 4, the euro is used as a lead currency, and both an internal (deutsche mark) and an external currency (U.S. dollar) reflect derived results. In the rate tables in Exhibit 4, the euro to deutsche mark conversion contains a single rate because of the earlier-mentioned fixed rate. Since the rate for euro to dollar will continue to fluctuate, this table reflects a semiannual rate change.
Of course, you want to take care that you do not mix currencies in your totals. If the dollar is your lead currency, you want your totals to reflect that currency, not euros and dollars added together! In the example in Exhibit 5, WBS element 1.1 Design shows a budget of $47,776 in June 1999, which equates to ∈40,454. However, the totals and earned value reflect only the lead currency.
How are your resources burdened? If you add overheads to your direct rates, you must consider whether these burdens will also contain exchange rate calculations. (See Exhibit 6.)
Forecasting. The ability to easily forecast currency fluctuations is a necessity when running a global project. If your rate tables or rate files are independent of the project data, you can easily conduct “what if” forecasts to determine the impact of currency risk on your project.
Here we show the original budget and three forecasts:
■ Budget—the original planned budget, expressed in euros
■ EAC—the estimate at complete forecast
■ Euro_up—the EAC if the euro gains 10 percent vs. the dollar
■ Euro_dn—the EAC if the euro declines 10 percent vs. the dollar.
The report in Exhibit 7 shows the budget forecast with the case of the euro gaining or losing 10 percent against the dollar.
Additional Considerations. How often do you need to accommodate rate changes? Daily? Monthly? If you are working with commitments and accruals, you may need to change rates more frequently than if you are working on a project where actuals are captured monthly. The granularity should be meaningful enough to reflect the project accurately while not becoming burdensome.
THERE ARE BENEFITS and some considerations when running time-phased budgeting and reporting on a global project with multiple currencies. One useful technique would be to conduct a simulation of your project in order to ensure that you will be able to manage it not only as planned but also as it may change. Running a global program can add a dimension of complexity. Thoughtful planning can help you succeed.
Exhibit 5. Watch your totals when reporting in multiple currencies.
Exhibit 6. Although we are reporting overheads in euros, dollars, and deutsche marks, we are applying the overhead from a common overhead rate table. When we report in dollars, we will select the “USDI-RECT” and “USOVERHEAD” results.
Exhibit 7. The real power of multiple currency reporting is illustrated by showing the impact of currency fluctuations on your program Estimate at Complete, or EAC.
For more on conversion, here are some helpful websites:
■ Yahoo Currency converter (quote.yahoo.com/m5?a=1&s=EUR&t=USD)
■ OANDA Currency Converter (oanda.com/converter/classic)
■ European Union Site (europa.eu.int/euro) ■
PM Network April 2000