The Missing Link in Project Driven Organizations
Contact the Author: Matthew Gentile, MBA, CMA, PE, PMP
firstname.lastname@example.org | 860.575.1281
Whether your organization delivers projects for profit, or invests capital to meet its strategic goals, you need to understand the financial health of the initiative from concept to closeout.
What happens after the go-no go decision on a major capital investment? How do you know if the project cost, schedule and scope are on track? How does the impact get rolled into the P+L? Do Finance and Operations have the same view of the project, and does the Executive team have full transparency?
Today, more firms than ever are involved in Project Delivery. Whether it’s their core service or an investment in the business, all organizations run projects. Architecture, Engineering, Construction and Program Management firms deliver construction projects for their livelihood. IT firms deliver technology infrastructure as their core business. Firms engaged in major capital programs span the gamut:
- Pharmaceuticals constantly expand their process facilities and labs, and invest in R&D programs
- Universities build out their campuses, add facilities and technology
- Financial Service firms invest in office buildings and data centers
- Real Estate Developers create their own revenue generating facilities
- Healthcare providers expand and upgrade their physical and technology infrastructure
- Sports and Hospitality companies build out their venues
- Utilities expand their power plants and grid
- Aerospace and Defense firms invest billions in R&D programs and in manufacturing highly specialized weapon systems and aircraft
- Government Agencies fund major transportation and other infrastructure programs
The list goes on. This paper focuses on getting the most bang for your buck, once the project is a go.
Once a project is approved by the Executive Team, a Project Manager typically takes over. His focus is to get the job done. Project Managers tends to have a technical /operations focus and some broad business background. Finance is told to keep track of the project. Finance tends to have an accounting focus and some broad operational background. They record budgets, actual costs and some forecast of cost at complete.
Finance and Operations view the project from different perspectives, and often lack the background or interest to clearly communicate with one another. As a result, Finance generates reports that Project Managers have little interest in, based on Project Manager input that Finance has little understanding of. This unreconciled assessment of the project gets rolled up to the Executive level as fact, and drives capital allocation decisions, risk management plans, and major components of the corporate P+L. Do you sense an issue yet?
How can you get accurate, timely, meaningful project information from Operations, fully validated and analyzed by Finance, which provides additional insight to Project Management, and real value to the Executive team? How can you eliminate surprises, warn the organization of risks and opportunities with enough time to react, and offer plans to mitigate the risk or capture the opportunity. To provide meaningful input to the P+L, so that the CEO, COO, CFO, banks and investors are kept fully apprised, and understand the impact on the firm’s profit and risk profile, a void needs to be filled.
The missing link is Project Controls. The Project Controls function fills the gap between the Executive Team, Operations, and Finance. These specialists have a deep understanding of both the project management process and Finance’s needs, as well as a broad understanding of the project’s technical component. They provide the Project Manager with the business construct and discipline to fully understand the health of his project today, and the trajectory it may be taking tomorrow. Project Control professionals analyze cost and schedule trends and converts them to realistic forecasts. They identify issues early on, with time to take corrective actions, and recommend solutions. They convert project information to the statistics Finance needs to realistically forecast project cost, revenue, cash flow, funding needs, contingency reserves, payment schedules to vendors, etc.
Project Controls relies on a toolbox of skills, analytics and programs to ply their craft, including:
- Cost Control
- Schedule Control
- Document Control
- Contract Management
- Change Order Management
- Budgeting , Forecasting and Variance analysis
- Earned Value Management
- Physical Progress Analysis / Percent of Completion
- Performance analysis
- Productivity analysis
- CPM planning and scheduling
- Manpower plans and Resource loading
- Work process analysis and integration
- Risk analysis
- Claims analysis
- Project Performance reports
- Executive Dashboards
- Team Building and Communication
How Project Control Works
Project Controls develops the baseline budget and schedule to deliver the specified scope of the project. Resources are allocated on a timeline to the baseline plan, identifying items like planned manpower, materials, subcontractor services, management, overhead, financing, etc. The project is broken down to discrete elements of work, called a Work Breakdown Structure (WBS). The WBS allows cost and schedule to be tracked in manageable chunks of work, or scope elements. The level of detail should be pragmatic considering the needs, size, complexity and risk of the project, and cost/benefit to manage the data. The timeline is developed using the Critical Path Method (CPM) scheduling technique which accounts for all interfaces, linkages and the most efficient sequence of work.
As the project progresses, actual costs and progress against the CPM baseline is monitored. This generates data that identifies how close to plan the project is tracking. Project Controls works with the Project Management team to apprise them of variances, validate the underlying causes, suggest corrective actions, and reforecast the project. The reforecast is the critical component provided to Finance.
Impact to the P+L
In firms that deliver projects for profit (e.g. engineering, construction, and IT firms), any variance in the forecast cost, revenue or progress of the project has an immediate impact to the P+L. These companies use percentage of completion accounting to determine project profitability. Basically, today’s profit is the project’s forecast profit at completion multiplied by the physical percent complete of the project. So it is critical to understand the expected cost and revenue at project completion, and the current physical progress.
The portfolio of projects comprises the revenue stream of these companies. Each project essentially has its own P+L that rolls up to the corporate P+L. It’s critical that the project P+L’s are as accurate as possible to manage not only the individual projects, but the company as a whole. Imagine if you bonused the team based on high expectations of project profitability, only to discover the project went south. Or you planned to acquire a new division based on high expectations of cash flow, only to discover the projects did not throw off the expected cash. Or profits recognized last year have to be reversed this year (due to last year’s poor forecasting), effectively doubling the hit to current Net Income. Huge decisions are made based on the ongoing expectations of project performance.
For firms that invest in projects to meet strategic goals, the Capital Investment is a critical element of spending, the balance sheet, and ultimately ROI. Executives want to know that the project is being delivered to the planned cost and schedule, and if not, what are the issues and mitigation plans. Good forecasts allow the Executive team to evaluate the project at checkpoints to determine resource allocation requirements, future funding and to help prioritize other projects. Project Controls, in tandem with Finance and Operations, provides the information to evaluate, forecast and optimize the projects final cost and delivery time.
Where Project Control fits in your Organization
All organizations need Project Controls to deliver projects more effectively. The mission of Project Controls is to:
- Provide the Executive team with most objective, accurate, and timely picture of the health of the project
- Provide Operations with the business support to successfully deliver projects on time and within budget
- Provide Finance with the data it needs to maintain an accurate, controlled set of books and records
There are at least 4 possible organization structures that can work for your organization.
- Project Controls reports directly to the CEO. This gives Project Controls the most independence and the ability to tell it as it sees it. However, it creates an additional report to the CEO.
- Project Controls reports to the COO / Operations. The underlying philosophy is that Project Controls is a valuable support service to Operations and should be an integral part of the project team. The more Project Controls is imbedded in the project, the better it can support the project. One potential issue is that Project Controls becomes beholden to the Project Manager and may be under pressure to skew his assessment of the project (e.g. delay bad news or conversely sand bag profit). However it can work well if the COO has the same incentive as the CEO, i.e. to know all the facts and have the opportunity to act on them.
- Project Controls reports to the CFO. The underlying philosophy is that Finance is the steward of the firm’s capital, and is driven to be as accurate as possible in reporting project performance and ensuring it adheres to all corporate policy and control mechanisms. The risk is that Finance loses touch with the practicalities of managing the project, makes it arduous to manage, or leaves Operations out of the loop in analyzing and reporting on the project. However it can work well if the CFO has a strong Operations background, balances policy with pragmatism, and maintains open communications with Operations.
- Hybrid structures often work well, with Project Control staff dedicated to projects, supported by a centralized Project Control Office. The Project Control Office maintains standards, policy, process, tools, reports and training, and allocates Project Control resources to the projects. The Project Control staff dedicated to specific projects report to both the Project Control Office and the Project Manager. The Project Control Office reports to the CEO or CFO.
How to determine when Project Controls is Successful
Project Controls needs to be part of the culture and fabric of the organization. You’ll know it’s working when you see the pendulum swing from Project Teams debating the merit of the project data, to debating the best solutions to mitigate risks or maximize opportunities. When Operations pleads for more support from Project Controls and when Finance stands fully behind the financials they receive from Project Controls, you’ve arrived.
Moreover, more projects will be delivered according to plan – scopes are stable, costs are on budget, deliverables are on time. Surprises are minimized, risks are managed, and innovative work plans are established to right the project. The Executive team develops confidence in the numbers, and trusts Project Controls for its advice and Capital decision making. Investors and Lenders see a marked improvement in the reliability of the financials, and can obtain ready insight into drivers of the P+L, key projects and capital investments.
When the CEO is getting a better night’s sleep, Project Controls has done its job. Amen.