Abstract
Today, businesses and government agencies alike are demanding greater visibility into project and program performance. With tighter budgets than in days past, stakeholders need confidence that funds are being well spent. As a result, project controllers are called upon to deliver timely information that can proactively shape business decisions.
This paper outlines the most significant hindrances to effective cost controls. These challenges emerge from various sources ranging from organizational readiness to the design of processes and systems. Then, referencing case studies of both contractors and owners in industries including utilities and oil and gas, we identify the project controls best practices—including process standardization, system integration, and report automation—that organizations are implementing to achieve higher-quality information more quickly and to realize more successful projects.
Fundamental Cost Controls Questions
Organizations often have difficulty providing accurate and timely project performance information for themselves and their clients. To ensure successful projects, those responsible for tracking and guiding performance face some fundamental questions, which they must be able to answer. While conceptually simple, the reality of answering these questions is often complex and tedious.
Some fundamental questions that project controls professionals face include knowing their current budgets and forecasts and determining how each may have changed. The answers can become more muddled if the project features various sources of funds. For example, in the public sector, agencies or municipalities may be looking at different sources of funds, such as federal, state, and local grants, tax revenue, and bond issues, all which must be allocated and spent according to specific rules. The private sector also sees this difficulty with the formation of joint ventures for large and megaprojects where each party contributes separate funds.
Another fundamental cost control question is related to contract commitments. A project controller will want to know how much of the budget has been committed to the sub-contractors on a project at any given time. To complete the picture, they need to know how much has been spent. All of this information should provide insight into what trends are developing and how the project is performing.
Schedules and costs are basic inputs for project performance, yet it is often difficult to accurately report both. Further, once cost and schedule have been reported, how can performance be measured so that improvement is possible? Finally, these projects have specific contractual requirements which, ideally, should have an audit trail of decisions made and data pulled from various locations.
Again, these questions seem simple. Of course, project controllers or managers should know how much has been spent, how much is left to spend and how the project is performing against targets. Through our repeated experiences with customers facing these questions, it remains difficult to achieve answers in a timely manner. And based on this experience, we have documented the most significant challenges project cost controls specialists are facing when attempting to answer these questions.
Number 10: Cost Accounting, Not Cost Analysis
A growing frustration among project controls professionals stems from being perceived as cost “accountants,” responsible for accounting for work that was performed relatively long ago. They find that a great deal of their job entails reconciling and ensuring that recorded data is accurate. Capital planners or cost analysts of a project should be creating scenarios, and planning and analyzing the data of a project, not counting costs.
Number 9: Budgeting and Forecasting Effectively
In many cases, approaches to budgeting and forecasting can vary based upon the background and approach of the person doing the work. Therefore, consistency across these elements of a project can be lost. Organizations face the need to standardize their budgets and forecasts so that there is a level of reliability in how budgets and forecasts are created in one project versus another part of the project.
Number 8: Getting Progress Data from Multiple Subcontractors
Attempting to pull together an integrated master schedule from many different subcontractors is a problematic task. The process of gathering progress data such as percent complete, or ensuring that sign-offs are accurately reported from different subcontractors, is difficult in itself. That data should then ideally be used to provide a meaningful report or analysis of the project. But the cumbersome nature of obtaining this data, and the often irregular delivery of this information, often results in delayed or inaccurate reports. Larger projects infer more subcontractors, which can easily compound the problem
Number 7: Integrating Schedule and Cost
The integration of schedule and cost is also another cause for concern among project controllers. Schedulers tend to work in terms of work breakdown structures(WBS) structures and activities, whereas cost analysts and finance report and manage by cost codes, transactions, and fiscal periods. Each side typically has different managers who are reviewing their data and schedules. Scheduling and cost are also often using different tools to report their data. Therefore, pulling information from both sides has been a challenge.
Number 6: Aligning Data between Multiple Source Systems
Data alignment between multiple sources has also been cited as a problem faced by project managers. Not just in regards to the schedule and costs aspects of a project, but very often, projects will have to align data from different sources such as a time sheet system, asset management systems, funds management systems, contract management systems, and so on. Many organizations use spreadsheet software such as Microsoft® Excel to record the voluminous data pulled from various locations. However, due to the complex nature of some projects, a software solution without security, version control, and reliance on many disconnected files is often not the ideal manner to report and analyze cost performance data.
Number 5: Time and Effort Involved with Reporting
Aside from the difficulty that lies in pulling information from different sources in a project, a bigger concern is the time and effort it takes to actually gather this information for reporting purposes. Often there are various sources where organizations are receiving their data. A cost controls system and scheduling system will output different codes of information which must then be consolidated and pulled together without room for error. However, the typical solution is a manual one, which is tedious, time consuming, and prone to error from a multitude of sources.
Number 4: Managing the Customer Relationship
A project will always have customers. Even in a situation where there is one owner of a project, there are still customers for the project: stakeholders, funding authorities, the business unit that requested an IT solution, etc. Often, a client will want to see cost and performance measurements in a manner that your organization does not currently provide. Therefore, we often see organizations focus their resources on obtaining reports for the customer in the format they have requested. However, the time and effort spent in producing the client-specified report may not be the ideal way for the organization to forecast and plan ahead for the benefit of the project. Ultimately, attempting to please the client diverts efforts from actually improving project performance, which would be the greater client “reward.”
Number 3: Accuracy of Reports
Once the data has been collected and the format has been established for a report, there then comes the need to ensure that the report is accurate and understandable. For example, a summary report should be able to provide accurate details in WBS or costs and provide a level of clarity on the project.
Number 2: Insufficient Resources for Controls
There seems to be a greater demand for cost reporting, better planning, and scenario analysis. In a more complex environment, where there may be mergers and acquisitions, there are massive collaborations between different organizations on a project. At the same time, there is great pressure on the limited resources of the organization. The challenge becomes having the resources to provide detailed, accurate reporting in a timely fashion.
Number 1: Controlling Changes
Controlling changes within a project can prove to be the most difficult aspect of cost management. While a budget may be set for a project, inevitably a variation or scope change will come into play. Established business rules must be followed based on the type of contract or type of project and organization is working with. Various questions then arise relating to accurately reporting who approved a change and when. How did the variable affect the budget and the forecast? Were all changes accurately reported on? Does the current budget and forecast reflect the change? Building on the other challenges faced (insufficient resources, disconnected data and systems, manual compilation of data), a mismanaged change can severely impact the accuracy of reporting and jeopardize the potential success of a project.
Case Studies
The following organizations had struggled in various aspects of their project controls processes, driven by the challenges discussed. However, through the implementation of systems to aid with the automation and standardization of data, they were able to realize more successful controls.
Major Oil and Gas Company
A major oil and gas company, with six refineries in the United States, sought a new project cost management system, which would bring together their different sources of data and help them standardize a new process across their organization. The new system would provide them with the flexibility of configuration and reporting while matching their processes and terminology. It would also provide flexibility and speed of integration with their homegrown systems, Oracle Primavera P6 for scheduling, a general ledger system, and others.
They sought a system that would work with their portfolio of capital projects, as well as within a shutdowns and turnaround (STO) environment. When shutting down a refinery for repairs, maintenance, or other purposes, it is essential for the organization to work extremely efficiently, minimizing the downtime and revenue lost during every hour the facility is inactive. For them, the need to control costs and assisting with a speedy return to production was a big factor in choosing their controls systems.
For these turnaround projects, a key objective is to track the project's productivity on a daily basis. They also needed to be able to automate and define rules for reporting so that highly paid analysts would not be forced to manually apply business rules, a necessary but rote activity, if the system can do the task for them. Extensive performance reporting is also an important factor for these projects. Organizations should be able to outline elements such as direct/indirect costs by vendor, unit, craft/discipline, work order, and phase. What this oil and gas company was looking for was for the ability to have these reports delivered automatically and instantaneously.
The organization was also looking for the ability to control the changes of a project through their system and be able to be report on those discretely from the original budget. At the portfolio level, they wanted the ability to standardize views on the cost side, as well as match their system's labeling and descriptions to their internal terminology to make it a user-friendly system for their employees.
What they developed was a common process and a common system that managed forecast, how much they achieved or earned, their expenditures, the estimates, and management of contingency/drawdown. They were able to achieve daily/weekly time phasing; integration with Oracle Primavera P6 for progress measurement; and integration on a daily basis with time and attendance/contractor billing.
Nuclear Power Contractor/Joint Venture
Another case study involves a joint venture between two major nuclear power contractors.
The joint venture (JV) was standardized on SAP and P6 and sought to bring together the data from each system. They deployed enterprise management system EcoSys EPC to import data from both systems and deliver integrated performance management, reporting, and controls. Additionally, one side of the venture used SAP for timekeeping, while the other had its own timesheet system. Both systems needed to be integrated for effective reporting.
Exhibit 1: The Integration Approach for the Nuclear Power Contractor/Joint Venture
This is a common example of a challenge in cost controls where the mission is to create a unified, standard process or system out of disparate data sources for financials, schedules, timesheets, and the multitude of details tied to each. P6 housed the WBS, which was then pushed to SAP via EcoSys, which served as the basis for its WBS. This approach is unique because the status of the project is also reported to SAP. This means someone from the P6 perspective allowed a certain WBS element or element of work within the project to pass to SAP so that the financial system had that optimization.
As the project was in process, forecasts and percent completes were maintained in the schedule, with actual costs and commitments data coming in from SAP. EcoSys was able to map codes between the general ledger system, the timesheet system and schedule system for consolidated reporting. EPC provided earned value; project cost reporting; reviews on budget, cost, forecasts, commitments; actuals and set up to support revenue; change management details in the same repository; and historical snapshots on all of the data collected.
Highlights of this Approach
One of the requirements for this project was the ability to use different earned value techniques, for different elements of the project. The organization needed the ability to define engineering work directly in the schedule. Progress was measured by drawing from the percent complete in the schedule. However, the overhead and other direct costs were developed in EcoSys EPC and therefore, the organization was able to track earned value for those items as well.
There was a full time-phased history of their earned value by month. These measures could be looked at from an hourly or cost point of view. They also had the ability to review performance analysis by month, year, and project life.
Within this project, change and trend management was integrated directly into the current budget and current forecast. Therefore, they were able to see various types of changes, whether a negative trend, variation, or scope change. They could review those elements side by side with the original budget and understand exactly what went into the current budget and current forecast. The system also gave them the ability to run their performance against the current forecast.
A key element in this project was their ability to analyze performance by different breakdowns. For example, the WBS is used by schedulers, but the project may require a drill down and performance analysis by discipline, by organizational breakdown structure (OBS) or by cost type, such as labor, material, and other direct costs. The implementation of EcoSys EPC gave them this ability.
Exhibit 2: Drilldown of WBS and OBS in Cost Controls System, EcoSys EPC
As an example of defining standard processes through the project controls system, the JV decided to integrate data in the schedule (P6) accounting for the different financial periods of each JV partner. This created a level of complexity where data had to be obtained based on each contractor's close dates and consolidate into an easy-to-understand report. By setting up a standard process that could be automated within the system, project owners were provided a sense of security that tasks were being completed on time.
Energy Contractor
This final case study will focus on a world leader in project management and engineering & construction in the energy industry. The company operates in 48 countries with revenues of €6 billion annually.
In this case, they used Primavera P6 as their scheduling tool and Oracle E-Business as their financial system. They were looking to develop and define a common work process globally across their firm. These are the key areas for control: budgeting; forecasting; tracking change and types of change; ensuring that forecasts were updated according to various contract rules; tracking contract commitment; and providing standardized reporting.
The organization requested that they be able to report not only by their cost structures but also have the ability to quickly present to the same information to clients according to the client's requested format. For this firm, it was a strategic need they wished to develop. It would allow them to demonstrate a level of professionalism that differentiated them from their competitors.
As part of the common work process definition, they selected EcoSys EPC as their global project cost controls system, which was piloted first in the United States.
In building their business case to implement this cost controls system, the energy contractor conducted a study where they identified that nearly two thirds of their cost analyst's time was spent on “wasteful” activities (Exhibit 3). They also conducted an analysis where they identified how much efficiency would increase if their cost analysts spent less of their time troubleshooting (Exhibit 4).
Exhibit 3: “Wasteful” Activities, Study Results
Exhibit 4: Cost Analyst Target Utilization, Study Results
They also designed the system so that the lower levels of the cost breakdown structure (CBS) provided flexibility, especially to the different regions around the world. Those regions had their own definition of how they wanted to understand their cost: by different cost type, different disciplines, etc., which are often broken down by: material codes, construction codes, financial/accounting codes.
The project now had the flexibility of a WBS but they were also able to view it by the standardized corporate code. They developed budgets at a high level, but a forecast might have been created at an extremely detailed level, while the actuals were in the middle. Therefore, while the level of data entry varied, they still had the ability to consolidate and roll up actual hours, actual costs, budgets, forecasts, commitments, etc. across various levels.
Beyond the System—Managing the Organizational Change:
One of the key lessons learned was the need for a carefully conceived and executed implementation plan for rolling out a global system across such a large and geographically diverse firm. The organization spent time strategizing how the cost controls system would expand from the initial U.S. implementation and across different projects, etc. They identified and empowered influential decision-makers within the organization to drive the initiative and paid close attention to communicating the benefits of this system throughout the organization, ensuring them that the new system would ease workloads. They spent time defining the common work process and they carefully managed the implementation of the new processes in conjunction with the system implementation. They developed an organization within the firm that could sustain this process and enforced the process going forward so that it could be responsive to needs and changes that evolve in a growing business.
With the implementation of their new cost controls system, this firm was able to achieve these: common work process and system for client and internal reporting; the ability to demonstrate increased professionalism and responsiveness to customers; and increases in efficiency, accuracy, and visibility within the project.
Conclusion
Answering fundamental cost controls questions is often difficult. Challenges include insufficient resources, a reliance on manual consolidation, systems that fail to share data, different perspectives and data structures, and an insufficient change management process.
The case studies have demonstrated common themes that are emerging in cost controls organizations to address these challenges:
- Organizations are moving towards standardization of cost controls processes while allowing flexibility at the project level if is required.
- That the process should be supported and enforced through an integrated cost controls system. Through integration, reporting becomes more automated and eliminates many of the challenges presented.
- A well-planned strategy for achieving this process can position an organization for success.
By implementing a cost controls system that can provide the flexibility an organization needs, while also allowing for the standardization of processes, project performance can be more visible, thus allowing the organization to provide more accurate reporting within their organization and if needed, for their clients.
