D-2

FINANCIALCONTROLIN PROJECTMANAGEMENT
by Nghi M. Nguyen

INTRODUCTION
FIGURE 1
Project financial control, the planning, organ- PROCEDUU SCIlEKATIC FtlWlClAL COIiTROL IN PID.1ICT IWI.\GEK!!IT
izing and controlling of the financial status of a
project compatible with owner's requiremen~s, is
becoming more and more important in project control
disciplines as competition for engineering services
increases for engineering contractors. Financial
control systems are implemented in a project to
keep the services costs for which a contractor is
directly responsible as reasonable as possible
within the contract budget and assist project
management in achieving the contractual profit on
a project. Financial control is required through
all stages of project development for planning
and controlling resources and tasks for a contrac-
tor's services.

Figure 1 shows the procedure schematic of finan-

cial control in project management. Financial
control systems'comprise budgeti~g process, cost
records, forecasting process, variance analysis
and corrective actions. They are mechanism to
capture data from the project financial activities, S.rvlc...
analyze these data and continually forecast the . Cou COQtrol
financial status of the project. This status is
reported to project management where appropriate
decisions are made to maintain project profitabili-
ty. A typical project financial control cycle is
shown in Figure 2. The objectives of this paper
are:

To identify different factors involved in

financial planning and control in project
management
FIGURE2
PROJECT PlIIAIICIAL CONTROL CYCLE
To discuss the cost engineering process
through different stages of financial
planning and control in the project Contract Stwly BudS_cina P'toc...
management team Service. Budget FIQaQcIal bpott
Estimate Ptoject Gro..
Foree..tlng Management
To examine the trend of this discipline (Salary. Expense
Costs. Hanhou,r -oj Vaclanca Analya1a Review a r- Analya1a
PtoH t
as an effective project management-support Forecast..... ) .Apptovala (C.P.A.)
tool. Personnel Data
FUe

MAJOR FACTORS IN PROJECT FINANCIAL CONTROL Ptoject FInancIal

6: Administration
Procedures CQrrective actions.
The following are major factors affecting the
financial planning and control of a project:

1985 AACETRANSACTIONS 0.2.1

 Project contract: J The contractis the most
important document which stipulates the
services required by the owner. It is an
agreement between the engiueering contractor
(E/C) and its client relatingto the under-
takings of both parties in the project.
Special attention shall be given to any request
for E/C services different from those stipula-
ted in the contract since this may completely
change the financial picture of the project.
Attention must also be paid to any agreements
between the E/C and its sub-consultants. A
copy of the contract must be distributed within
the company to all corporate management staff
as well as the project key personnel. The
contract, therefore, defines clearly the
requirement and responsibilities E/C has to
follow in the proper execution of the project.
Outside authorities and parties: Government
laws, by-laws and regulation or those of other
parties affecting the financial aspect of the
project, e.g., insurance companies, regulatory
agencies, etc.
Scope and objectives: The scope of profession-
al services E/C has to do, ~i.e. engineering,
procurement, construction, project controls,
commissioning or any other related services
required for the satisfactory completion of the
project. The objectives should indicate the
relative importance of Quality/Scope, Cost and
Time objectives as well as the degree of
involvement of E/C in the planning, control and
administration required for the project.
Financial budget and project assignment sheet
(P.A.S.): Financial budgets for professional
services required must be prepared by all
chiefs of disciplines involved in the project.
These budgets will be reviewed by project
management and consulted with the services
financial controller (or cost engine~r; with
respect to cost. records, cost trends, acope
services, etc. These discipline budgets will
be reviewed by corporate management and sub-
mitted to client for approval under the total
integrated budget prepared on a project assign-
ment sheet (P.A.S.). The purpose of .the P.A.S.
is, therefore, to record the official opening
of .a project and to provide information on the
project such as client, project code, descrip-
tion of projects, services, invoicing terms and
conditions, format of cost reports required,
schedule.and the integrated financial budget.
The financial budget on the P.A.S. is used as a
yardstick for financial planning and control of
project reviews, direct costs and gross profit
expected. It serves as a guide for the cost
engineer to plan and control actual services
costs, versus planned costs. The financial
budget and the P.A.S. must be revised, updated
and approved as soon as .aproject change notice
(P.C.N.) is approved. This budget is not only
helping to control the project; it also serves
to define the company's bookings.
Project organization: The structure of E/C and
its client project teams to fulfill their
respective functions.
0.2.2 1985 AACETRANSACTIONS
Work breakdown and coding: The scope of E/C
services to be broken into manageable elements
of work. The cost engineer must establish
codings to control the work performed by E/C.
Project instructions: The manual detailing
the responsibilities of parties involved and
covering all procedures incidental to the
proper .perfonnanae.ofwork.
Work and manpower planning and control: The
planning and control on the project of the
Quality/Scope, Cost, Time and Manpower for E/C
services. The planning and control of work
and manpower is the basis for the development
of E/C services budget. It shall be reviewed
and updated on a m~nthly basis by each discip-
line concerned. It will enable the project
cost engineer to assist project management in
leveling the manpower across all divisions,
per discipline, after taking project manpower
requirement into consideration.
Services cost control: This is the pre-
requisite for effective financial planning and
control. It is the control of manhours and
:direct costs of E/C's professional services
. salaries, expenses and its sub-consultants.
It consists of E/C control of its employees'
time sheets and expense sheets, project
services and expense costs reports, services
billings and audits.
Services billings: The billing of E/C pro-
fessional services performed. The cost to be
billed is governed by the condition of the
contract with the client e.g. cost plus, lump
sum ~tc. Billings are issued upon reviewing
with project management by the cost engineer.
Master schedule for E/C services: The CPM
master schedule showing the start, duration,
and completion of essential phases of activi-
of, ties. The master schedule establishes key
dates for the overall strategy for the execu-
tion of the project. It is helpful for the
cashflow forecast of E/C professional services.
Progress report: The project monthly report
issued by project management covering reports
of all disciplines with respect to their per-
formance to-date, their forecasted services,
essential activities, Quality/Scope, planning,
cost, schedule, manpower and other resources
as well as their evaluations and recommenda-
tions.
Quality assurance: The planning and control
support from E/C corporate chiefs of discip-
lines to the project team.
Document control: . A well-organized system for
the orderly day-to-day receiving, storage,
retrieval and distribution of all project docu-
ments.
Project panel review meeting: A meeting to
review the status of the project, to evaluate
the performance of the project team and to
provide management with the input of company
corporate management.
 Project meeting: The coordination project
meeting which must be held with a two-week
frequency to assess deviation between planned,
actual, forecast to complete and indicated
total in all areas of project management
concern for all E/C services so that to bring
deviations back on course.
Change control: All changes of Quality/Scope,
cost or time schedule not due to E/C's error
or negligence are subject to the preparation
of Project Change Notices (P.C.N.) PCNs are
considered changes to the contract and E/C,
therefore, shall determine the effect of such
change on its services cost of the work.
COST ENGINEERING PROCESS IN
PROJECT FINANCIAL CONTROL
The financial planning cycle starts with a
thorough study of a letter of intent or a contract
signed by E/C authority and its client. All items
of the contract relating to the f~ancial aspects
of the project have to be thoroughly understood and
memorized, if possible,by the cost engineer. Items
such as schedule, remuneration of E/C, reimbursable
costs and audits, terms of payment, changes, liabi-
lity of E/C, taxes, insurance, subcontracts, etc.
are of utmost importance in helping to implement an
effective financial planning. Cost engineering
will assist project management in preparing the
preliminary P.A.S., the budget summary, the salary
and expense budget so as to record the official
opening of the project, the characteristics of the
proj~ct, the project financial budget or revisions
in the company finance and accounting books.
Should any budget revisions or PCNs take place,
cost engineering will subsequently revise and re-
issue the P.A.S. The cost engineer's responsibi-
lities are to coordinate and analyse the services
information so as to outline the procedures to be
followed in setting up work breakdown and coding
for services time and expense charges. These work
breakdown and codings were set up based on project
organization chart and the cost engineer's inten-
tion to later monitor and control the costs and
manpower of professional services contracted to
E/C. The following illustrates a typical coding
of time charges.
Contract Subdivision Subject Minor
xxxx xxxx xxxx xx
-- ~ --
t billings to its client within budget on cost plus
Plant Area Code i
J Facility t Billing
(1,2,3...) (Civil, Classifica-
.(301,302...) Elect...) tion
As soon as the preliminary P.A.S. is approved
and entered into the computerized financial
system, a preliminary project financial summary
(P.F.S.) is .issued. Figure 3 illustrates a
format for P.F.S. This P.F.S. will be analysed
and monitored on a monthly basis as the project
progresses.. The preliminary E/C services budget
is prepared based on the prerequisites such as
preliminary work breakdown, packages, services,
1985 AACETRANSACTIONS
schedule, project coding, preliminary engineering
(if any), historic records of similar projects.
The definitive P.A.S. budget is the result of
all discipline manpower estimated from the "second
level" summary of manpower - the summary from the
first leve~ details the needs of personnel for the
various categories of manpower - and this P.A.S.
budget will be updated and revised as required dur-
ing the life cycle of the project. Figures 4a, 4b
and 5 illustrate the form used for the summary of
the P.A.S. and a second level work and manpower con-
trol sheet used for manpowerplanningpurposes. .
This form is also used for the refinement of the
budget as it indicates in detail the number of per-
sons each discipline required as well as the dura-
tion of their assignment determined by the work pro-
ductivity required and the time constraints estab-
lished by the schedule. Discipline managers shall
review the second level forecast for their respec-
tive discipline with the cost engineer to help the
latter to estimate their budget. It is also used
for E/C manpowerforecastand leveling (MFL) which
receives information from this form and releases a
manpowerstatus report. A reconciliationof the
project manpower status with respect to other pro-
jects being run in the E/C offices will produce an
MFL project report and MFL salary forecast. Figures
6 and 7 illustrate the concepts. Cost engineering
will assist, coordinate and produce the MFL infor-
mation te confirm the chiefs of discipline's man-
power planning and provide the latter with an e-
quivalent MFL's salary and revenue's forecasts, ad-
vising them of their cost trends in planning their
services compatible with E/C company's corporate
policies.
The financial control cycle starts with the
collection, checking and verification of the
time sheets and expenses sheets submitted by
project staff. Codings for these documents
must be verified since they will be.entered
into the computerized service and expense cost
reporting system at the end of each month as
information to be monitored and reviewed by the
cost engineer and presented to project manage-
ment for decision-making. This timely and
effective reporting and monitoring of financial
data will help reducing management's decision-
making time.
Information provided by the different cost
reports will help the cost engineer to control
the cost and manhours of the services contracted
to E/C. Such a financial control will keep E/C
contract and ensuring E/C's budgeted profits on
lump sum contracts.
Financial planning and control of E/C services
follows strictly the control of work and man-
power forecast and leveling (MFL). The degree
of control will be obtained effectively if the
cost engineer can have an effective general
observation and forecast of the direction the
project is heading. He has to supply project
management with good predictive control so that
the latter will not be involved with too much
guesswork which can jeopardize the financial
success of the project. As he practises
D.2.3
 FIGURE 3
FPC335-036-0'36j-1'-0000 190
WANAC.CO. 0001 5NC INC. ACCOUNT 6552 BAlE COWEAU-SE~. IV.
CLIENT 1344 S.C.W.R. LTO.

CURReNT Y::AF TO Tiiiimffij ~. ortOJip(: -<

P~OJECT TO FORECAST TO
TOUL 121 BUDCET1311 VS 2 1 vS 3
'40NTi'i
----------i>UE OATe I II COWPHTE
----
<.EVENUES FRDW :
FlxEo) FteS'
SALARY IAI ...-..-.-
~ "_.....
~I SCell-'NEC'-'c;
WRITE OFF

----------- P.ESE<VES
--------
-_.-..--.--- _ _--I.!!!~L REVE~.ES__ '--'---
COSTS CF :
SALAFIES BILLABLE IBI
NON BILLAB. ICI
PAID QUT ~ARKUP
.TCTA.!:,..£.~~_
EXPEIIS'=S 81ll'8L~
NON BILLABLE
PAlO OUT WARKUP
PH AL COSTS
-_.
. --. - . .. - .-' ---------
"--.-..- --------
IOUL COSTS

------------ CROSS P~CFI T 101 ------------

ro.O ;
RATI,: :
19'0.00 lOI.00 BILLJ:IG FATE CN SALARIES; A/B 202.00 195.00 202.00 203.00

BILLINC ~U'"A.Y
AEC:;I pg
P eC.E I Vo\nl ES
HOLDe 'C K S
FORerer, ;:XtI1A"t~:. ~:>JUST"E'n ..-.-..-.
----------- -----------
TOTAL !'IV'JI CES
Wt,;RK (N
l)(FE~::Al~
PKOCeSS t.,
I-a
8~lA"'jCCC.. o\Jv,u,lC
~s (-I
. ... .. _. .-- ..'-'
---------- P.t:SE,,-r:~ (-)
- - . ...
----------
TOTAL Pc,~"'UES
-----------
REPC;H )Arc ~4-1~-31 036 PROJECT FIN'~ClAL SUMWARY
PAINT 04TE ::1-=.-11-08 AEQ~EST 0363 PACE LaC 3017 1

FIGURE 4a

-
.sncl~ANPOWER
WORK

CONTR~
SECONO LEVEL
MANPOWER
AND

SUMMARY
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niilliilimH .

D.2.4 1985 AACETR~NSACTIONS

 FIGURE 4b

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FIGURE 5

OUVERTURE ...OPENING
PROJET/PROJECT

CONDI710NS OE FACTURATION - BILLING CONDmONS

A) DESCRIPTION:

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1985 AACETRANSACTION 0.2.5

.,
...
 FIGURE 6

snc
-- OUVERTURE - OPENING
PROJET/PROJECT
A'"
IT__
D88

.. .....
11'AI8MO
'II
...........
== 1.=.
....
1,n.".MD

I I I
H.8.: LES SECTIONS "S.F." SERONT AEMPLIESPAR LES SERVICES FINANCIERS
-F .S," AREASWILL BE COMPLETED BY FINANCIALSERVICES
"'''.1.
CLIENT: L............-J NO'" tJSUEI,.:COMMONNAMe I I
RAISONSOCIAL-E.
SOCIALNAMe I I

AORESSEIAOOAESS I I
I
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POSTAl/CITY-POSTAL
COOE I , I
i l....l.-J PAYS. PRaY .COUNTRY . PROV I I I

J MO.ICT: L......J CIE G£RAN"n,IANAQIHQCO I

S.','.M
I I U
L..-J NO" DUPROJET,PROJECTNAME

i l....l.-J UEUDUPAOJU PROJECTL.OCATION . I

; Dly.BuR AESP MANG01'1-ofFICE I I
,
.! -L............-
NOMDUDlRECTlUAMANAGER
NAUe

L............-J N" DEREF au CLIENT'CLIENTAEf NO I

I

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I IIIIVlNUIOIlIlIVINUII '"0M: 8UDOIf OESCAIPflON£TENOUEDUTRAVAIL.
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DESCRIPTIONo"r.UPfm WORKnc
ttONQAAlAES
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FEES

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COST
DIVERS,MISC
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FlAQI"TIONStWAI'
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!
AUE"YESI"ERYES8 < > A COUTwAJOAEAvEC",-.IMUU"IS IT A RCOST
.fI\.USWITHA WAXlNUtrI"1
I TOTAL :rO mO.I;:(A
COOT DIS ULAlMIII4LMIY COlT . COMMENT AIAES IPR081EwES TECHNIQUES. RlSOUES. ETC.)
COMMeNTS ITECHNIC"'- PROBlEMS. eUI'OSUAE. UC.)
fACT'U"ABI..IS/8IU.A8I.E ,.,

NON 'ACT .JNQN0.8II.L. ,.,

WAAGE PAyEEIPAlo..OUT "'ARK.UP ,e,
TOT A&.

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.,..., ...,1 . ...." sc
SICI1M' UIII '1IfI1 '"
""' L IU PIU"'UI,.
"IU..,C.'JUl If 1 + IA"181 '110
TOTAL
PROFIT BRUT SELON LOFFRE DE SERVICE GROSS PROFIT PER PAOPOSAL

,0' _'110 N' DELOFFRI:DE..SERY

,..OPIT IiAUTIUO" PfIIOPIT PROPOSALNO
.1 COM=N7R;;=ENTS - .-
.. P..8./8AL... Q.PJ8AL: (01 + IAI'CB. 'IIoj
AUTOFIISATIOHSIAUTHOAIZATIOHS
ISE\.ONLESDIRECTIVES
O.EFICIELL£S:PER
OFFICiAlINSTRUCTIONS, F fS

D8R1CllUA-YAlUGlII A'.'"

FIGURE 7

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..................
"&"6&1...: ru" UcC ."'.: aflOOAT DATf t5 OCTO_Ell I.n
............... OIV 141..114.. , II£UW.c;V

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.,

D.2.6 1985 AACETRANSACTIONS

 predictive control and forecast, the cost * Occupancy cost per employee
engineer will have to forecast monthly IIman- Rent + taxes + electricity + equipment
hours-to-completell, "expense-to-complete" for G = Rental.. telephone rental
budgeted disciplines using the MFL detail Total number of equivalent employees
sheets. The manhour forecast is systematically
converted into salary forecast and is incorp- * Turnover
orated in the services cost reports. These H : Total number of employees resigned X 100
r
must be assessed for any deviations so that Total number of employees
corrective action is taken by project management
if necessary. These cost reports also can be * Sickness
used to monitor against the services billings. Total number of mandays lost due to
Variances ,must be monitored closely to keep I: s,ickness
X 100
project costs within the budget. For this Total number of mandays during period
purpose, the salary costs.to.date as calculated
from the time sheets and the estimated salaries- * Utilization factor (without N.R.'s)
to-complete the project are forecasted. The J = Total reimbursable manhours X 100
latter is obtained from the MFL information. The total manhours
total of these two costs minus the budgeted
salary costs will give the variance. Informa- * Utilization factor (with N.R. 's)
tion on these financial control-related pro- K = Chargeable manhours (inc!. N.R. 's) X 100
cedures will be summarized and printed in the total manhours
project financial summary and issued to the cost
engineer to review with project management. .. IIReadiness-to-servell factor
Corrective 'actions, if required, must be L = Unchargeable costs X 100
recommended to project management in order to chargeable costs
maintain budgeted contractual p~ofit as set up
dur~ng the planning phase.
TREND OF PROJECT FINANCIAL CONTROL
The cost reports produced as a 'result of the
AS AN EFFECTIVE MANAGEMENT-SUPPORT TOOL
financial planning and control phases of the
project will be audited to make sure that the
contract clauses are followed satisfactorily with The financial planning and control process will
definitely be an integral and important part in the
respect to all financial aspects of the job. The
project management team. Financial decisions af-
final result of the process is the final project
fecting project profit, which must be made by proJect
financial summary in which all financial aspects
of the job are finalized. and corporate management, will rely on the financial
control expertise of the cost engineer to plan, or-
In order to visualize the financial performance ganize and control the project's financial activi-
of EiC, financial ratios have been developed. ties in order to achieve the project goals and ob-
They constitute effective indicators for the jectives in accordance with owner's requirements.
analysis of financial performance. The following A combination of engineering and business management
are typical important factors to be considered for training will be of importance in attaining finan-
the project: cial control expertise. Never before has a disci-
pline been of such importance in the successful
% Gross Profit/Base Salary execution of projects. Cost engineering, a major
% Billing-rate/Base Reimbursable Salary Costs management-support profession, must have this im-
po'rtantrole in providing project management an
Other ratios which help the cost engineer to alternative in the decision-making process through
have a good understanding of where the project its expertise in manpower planning, cash flow esti-
is heading financially,to are: mates, schedules, timely cost planning and control,
* Project Break Even Mark-Up (A/B) and status forecasts resulting in meaningful and
effective computerized management information sys-
Base salary cost + fringe benefits t project tems. Thus, the growth of financial control disci-
N.R.'s + occupancy costs pline will, once again, confirm the important evo-
Base reimbursable salary costs lution of cost engineering profession.

* Average Mark-Up: Net fees - N.R.'s

(C/B) Base reimbursable salary costs
* Reimbursable manhours required to break-even:
! Total E/C costs
D Net fees per reimbursable manhour Nghl M, Nguyen
SNC Inc.
* Number of days of revenues (including reimbur&- 1 Complexe
Desjardins
able expenses) in receivables outstanding PO Box 10 . 32nd FI.
(Excluding holdbacks) Montreal,Quebc H5B 1CB
! = Outstanding receivables, where
F Average daily revenues

F = Total revenues
Number of days in the period (including
holidays)

1985 AACETRANSACTIONS D.2.7