Current Project Cost Control Method

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Why current Project Cost Control method is not satisfactory

in case of all EPC (Engineering, Procurement, Construction) Projects 

ABSTRACT:

This article explains the current Project Cost Control method, showing advantages and disadvantages. Until now, this  method has been the only one available to Cost Engineers to asses  the financial project progress. Although this method covers well all aspects of BUDGET, FORECASTS and ACTUALS, it does not govern the relationship between ACTUALS and BOOKINGS, and does not deal with COMMITMENTS at all. Because it does not encompass the Total Project Cost Management, this method does not permit for early discovery of project budget overruns, and also it does not provide the Cost Engineer with the ability to control the Total Project Cost, i.e. inclusive of BOOKINGS and COMMITMENTS that today are managed by the Project Accountant only. In the case of EPC projects, this method needs to be superseded with the D-E Cost Engineering method, described in the three previous articles of this website.

            All Cost Engineers who had the opportunity to be involved in planning and controlling costs of EPC project are aware about the limitations of the current Cost Control method, and hence they may welcome the D-E Cost Engineering concept. It makes the job of Cost Engineer efficient, allows him also to understand and to control total project finances, to supervise the Project Accountant, and to spot any danger of budget overrun much sooner than otherwise possible if the current Cost Control methodology is used. On the other hand, such Cost Engineers, who were never involved in cost planning and control of EPC projects, may find the Dual-Entry Cost Engineering unnecessarily complex and hence unwanted. However, the true Cost Engineering is such one that applies to EPC projects. Only there the Cost Engineer meets the full complexity of tracing costs and predicting the project funds, dealing with several sub-projects, with many contractors and suppliers, with more than one engineering firm, where the project costs amount to billions of dollars, and the project span extends for several years.

Both Single-Entry and Dual-Entry are theorems on which accounting methods, whether used for business, banking, project costs, or personal finance, are based. The current Cost Control Method is based on the Single-Entry theorem. It reflects the intuitive and simple principle of cost control (plus, minus, equal). Almost everybody is using this accounting theorem, for example by people who balance their checkbooks and household accounts except for business Accountants. Since 15th century all Accountants are using the Dual-Entry theorem (DEBIT=CREDIT) as their preferred and only method of accounting for business.

The structure of the Project Accounting is much more complex than that of the Business Accounting, because of the time aspect that represents the very critical element in engineering projects. Large and long-duration engineering projects - such as nuclear power plants, airports, offshore oil and gas facilities and pipelines, highway systems with bridges and overpasses - require high quality project cost planning and control. Therefore, it seems logical to modernize the Project Accounting. This modernization must ensure that the Single-Entry theorem - still used for Budget, Forecast and Actuals is replaced by the Dual-Entry theorem. It is interesting to observe that the Dual-Entry theorem is already being used in the Project Accounting to handle Bookings and Commitments. However,  it is used only for this part of project accounting and then by Accountants only and not by Cost Engineers.

            The Single-Entry Accounting, utilized in the current Cost Control Method, recognizes every account as an independent entity. Each transaction, described by date and title, either increases or decreases the balance of the account, and the financial entry is made directly into the Ledger account. In contrary, the Dual-Entry accounting recognizes every account as an entity that belongs to an accounting network. There the amount of each transaction, also described by date and title, is entered into two or more accounts,  and the sum of debits must be equal to the sum of credits. In the Dual- Entry Accounting, financial entry is made always first into the Journal and later posted into the Ledger.

            There are only three basic formulas that govern the Single-Entry method of Project Cost Control, and they apply to any single Account as well as to the total Project: 

Current balance:                             Bc = Bp + A D                             (Equation #1)

Current forecast:                              F = U * [1 P /100)] + W           (Equation #2)

Overrun (+) or under run (-):           X = 100 * (F U) / U                         (Equation #3)

 Where:


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