Right Sizing: Finding the balance between Accounting’s "numbers" and Your EVMS

This week we tackle the third of five in our five essential frameworks discussion, we will review the Accounting Considerations from the ANSI/EIA-748 guidance.

If you’re actively using Earned Value as a management tool, then it’s very likely you have a love/hate relationship with the accounting folks.  You love them when they provide details and data you need to answer variances, and they serve as a bit of a watchdog for your project costs.  However, you hate them when their systems or processes are not set up correctly to effectively manage projects.  That wouldn’t be so bad, except in many cases they are reluctant to change the setup, or complain it’s too difficult.  Remember that people are a bit more willing to change if you offer to do most of the work for them, and in this case, it behooves you to do it because it will make for more effective and less painful project management.  While integrating the accounting software with your Earned Value Software can be challenging, it is well worth your time.

So, what can you do right now, to guide or change the direction of the accounting system setup so it is Earned Value friendly?  Take a look at the requirements for a certified EVMS in the ANSI/EIA-748 and implement the basic framework so your organization can grow into a certified system when, or if, the time comes.  It’s a solid framework that will only help you manage your projects, whether you need to be certified or not.  If you’re working with an existing setup, map out a crosswalk showing how to go from the old setup to the new setup.  This may include using different software, but most likely it will just be changes to codes and processes, since most accounting systems are robust enough to handle an EV friendly design.  

What are the accounting considerations from ANSI/EIA-748 we should consider?

1. Record direct costs in a manner consistent with the budgets in your accounting system.  This sounds relatively simple, right?  Here’s the part that most people miss: they fail to collect their actual cost in the same manner as the budget.  If you budgeted for 5 tons of gravel to be “earned” upon delivery under control account XYZ, then record the actual costs upon delivery as well (in the same control account), instead of when it is ordered or under control account ABC.  This sounds like common sense, but it is all too common to record actual cost in a way that’s different than how it was budgeted, or under a different control account.  Make sure you formalize the process to aid in consistency each month.
2. At a minimum, your project costs must be reconcilable with the accounting system.  Costs associated with your project should have a charge code pointing them to the correct control account, or at least to the correct project.  If you are using control accounts and charge codes, it’s extremely important that they are only pointed to one corresponding WBS element.  Double counting the costs or having to determine how to split the costs between the applicable WBS elements is just a headache waiting to happen!  This also means that the WBS you’re using to account for the costs will roll up to the parent WBS successfully.  I have seen people attempt to point costs to a level 5 WBS element, and then also at level 2 or 3.  If you’re WBS is set up correctly, and you’re only allocating costs to one element, this won’t be a problem.
3. Everything described in item 2 above, is also applicable to the OBS; that is, control accounts and charge codes must correspond to only one OBS element for accurate performance reporting.  This also helps you hold the correct departments/groups responsible for their work on the project.
4. If material or unit costs are applicable, make sure your processes are consistent in how you budget and account for them between the accounting system and the project.  This will help you measure performance for these items on the project.
5. The standard also discusses allocated indirect costs to the project.  However, for organizations that aren’t required to have a certified EVMS, I think this one can be less rigid, or even skipped altogether.  You can still manage the project well enough without spending a lot of time on the indirect costs—let the department responsible for the project handle it. 

For this section of the ANSI/EIA-748, you can easily see that consistency in planning and costing (including taking credit for performance) is key.  The right earned value software can make it easier to be consistent in planning and costing, as well as making it easier to be consistent between the accounting system and the project.  Let these rules be your guiding principles with the accounting considerations for an EVMS, and you’ll be well on your way to a headache free framework that yields the highest results for the least amount of effort!

Have you experienced any headaches with aligning your project or accounting system with EVMS principles?  Please share your story in the comments.  Stay tuned for the next blog; we’ll discuss the most crucial Analysis and Reports criteria of an EVMS.

- Melissa Duncan (About Melissa)

Read the previous posting Right Sizing: Shrink to Fit - One Size Does Not Fit All

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Earned Value legend as there may be a few of us that don’t yet have this memorized…

CA=Control Accounts
CAM=Control Account Manager
CPI=Cost Performance Index

EVM=Earned Value Management

EVMS=Earned Value Management System

EAC=Estimate At Completion 
IPMR=Integrated Program Management Report
LOE=Level of Effort
OBS=Organizational Breakdown Structure
PC=Project Controls
PM=Project Manager
RAM=Responsibility Assignment Matrix
SPI=Schedule Performance Index
WBS=Work Breakdown Structure

Right Sizing: Shrink to Fit - One Size Does Not Fit All

The second of five essential frameworks (ANSI/EIA 748) is Planning, Scheduling, and Budgeting as it relates to Earned Value. (see first essential framework of five)

Isn’t it ironic that the groups responsible for planning and budgeting in an organization often don’t succeed in their own planning and budgeting the implementation of their EVMS?  Project controls and project managers are the experts in this field, so we would expect their planning and execution to be flawless, right?  Yet, many times these professionals fail because they succumb to daily distractions and time/budget constraints set by management—as many people do.  However, if they don’t adequately design and plan their EVMS project for their company’s needs, they can end up looking like a buffoon!  

So it is no surprise that we need to review and discuss the ANSI/EIA-748 area for planning, budgeting, and scheduling.  These requirements for a certified EVMS can be grueling and painful, but you’re in luck if you’re not required to be certified.  The trick to this effort is to review the criteria in the standard and take a look at it from a macro perspective.  Ask yourself, “What is the overall intention with these 10 criteria?”  Grouping them together and summarizing the results is how we’ll convert the Ferrari EVMS to a Ford EVMS:

1. Create realistic schedules for your projects and use sensible logic ties.  Despite the added complexity, you must load resources on activities for an accurate timephased budget.  At a minimum, apply resources by cost element (such as labor, materials, overhead, etc.).  To aid integration with other systems, add your WBS to your schedule.  This allows you to roll it up as needed, which allows you to easily check the WBS for mistakes.  Finally, status your schedule at least monthly; any frequency less than that won’t allow you to manage project performance adequately.

It’s a good time to pause and ironically say “Simple right?”  Actually this is the hardest part, as invariably, there will be someone who does not want to resource load the schedule in order to keep budget separate from schedule.  That is a great way to blindfold the Project Manager and line management.  They’ll be running around in circles yelling at people trying to determine the true performance of the project.  I can’t even begin to tell you how archaic and ignorant this practice is on a project.  Just don’t go there.  If you’re already set up this way, find a way to fix it.

More tips: Use common sense for the level of detail you need in order to see variances that could derail the project.  Remember not to schedule down to the gnat’s behind, but don’t make a four line summary schedule either.  Your schedule should add up to the total budget; therefore you must account for all work and materials in the schedule.  Many organizations fail here; their schedules don’t add up to the total project cost.  They keep that “separate”, which adds unnecessary potential for errors and difficulties into the visibility of project performance.  If you choose to keep overheads separately, at least maintain the unburdened, direct cost balance in the schedule.  This way, at any given point, you should be able to take your unburdened cost and add the overheads to calculate the total project cost for authorized work.

2. Add major milestones to the schedule and limit the number of Level Of Effort (LOE) activities so you can measure performance as objectively as possible.  If you not familiar with different types of earning methods, percent complete will be good enough for now. 

3. While Control Accounts are not mandatory for a non-certified EVMS, at least develop charge codes assigned to a single WBS element and use the OBS (or the groups or department responsible for that work) to put someone in charge of managing those accounts.

4. Set up a reserve budget for each project based on risk, which will be used for unknown scope that could be added to finish the project.  You may also want to have a contingency fund at the department level for those events when the project needs additional funding beyond the project budget.  Reconcile the sum of all budgets by WBS, OBS (or group responsible), cost element, and work package (if you have them).  This includes the indirect costs as well.  Reconciling budgets will assist you in slicing and dicing the data a multitude of ways. 

You can see I’m not as passionate about these last three items as I am about the resource loaded, logic driven schedule.  It isn’t because they aren’t important.  It’s because without that kind of schedule, these areas become almost a moot point.  I’ve seen very intelligent, complex organizations completely skip the integration of budget and schedule.  They ALWAYS end up having problems managing their projects on schedule, within budget, while performing high quality work scope.  Unfortunately, this can lead to people and scope getting jerked around to stay the course, which is unfair and unnecessary.  Here’s the bottom line: planning, scheduling, and budgeting is tantamount to project success - it is the Holy Grail of project management, so be sure to give it the effort it deserves.  

Please comment if you’ve had experience in these areas; I’d love to hear success stories (or miserable failures), and I’ll even take some major griping if you’ve experienced the pain of not implementing the above recommendations.

Stay tuned for my next article, where I’ll break down the Accounting section of the ANSI/EIA-748 and show you the elements, and ways to implement them, for a bigger bang for your buck. 

- Melissa Duncan (About Melissa)

Read the previous posting Shrink to Fit - How to Scale your EVMS

Subscribe to Blog  

Earned Value legend as there may be a few of us that don’t yet have this memorized…

CA=Control Accounts
CAM=Control Account Manager
CPI=Cost Performance Index

EVM=Earned Value Management

EVMS=Earned Value Management System

EAC=Estimate At Completion 
IPMR=Integrated Program Management Report
LOE=Level of Effort
OBS=Organizational Breakdown Structure
PC=Project Controls
PM=Project Manager
RAM=Responsibility Assignment Matrix
SPI=Schedule Performance Index
WBS=Work Breakdown Structure