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D-E Accounting at Project Initiation Stage


D-E Accounting at Project Initiation Stage

This article describes how to initiate D-E Accounting for any new Project.

            In the D-E Project Accounting, there are three distinct stages:  Project Initiation, Project in Progress, and Project Completed. This article will explain the first stage: PROJECT INITIATION.

            In this Project Initiation Stage, the Cost Engineer must work very closely with the Project Estimator, Project Scheduler, and Project Engineer, and he needs to execute the following tasks:

  1. Define the Project
  2. Create the Project Calendar
  3. Define Project Cost Accounts and Project Expense Accounts
  4. Load the Project Cost Estimate into the Project Cost Accounts
  5. Create Project Cost Schedule
  6. Create TECA input file (in MS Excel)
  7. Create Code of Accounts and First Forecast, using TECA batch method
  8. Create First Entry into the Forecast Journal
  9. Create the Project Budget
  10. Knowing Prorates, make the additional Forecast Journal Entry
  11. Review and adjust Forecast Distribution of Cost Accounts
  12. Create the Project Cash Flow Forecast
  13. Create package of Project Initiation Documents

Of course, to track the project costs, the Cost Engineer needs a project accounting program. In this article, we assume, that he is using TECA, the project accounting computer program. To illustrate the above tasks, this article refers to a very simple project, the Oklahoma Transit Gas Pipeline, having estimated cost of US$ 154 millions, and duration of 16 months.

Be aware that in the book, entitled PROJECT ACCOUNTING FOR COMPLEX ENGINEERING PROJECTS, supplemented with the computer program TECA and project databases, there are full examples of the D-E accounting related to three complex engineering projects:

            In the book, besides descriptions related to the D-E Accounting for the above three projects, there is also a complete user manual for the TECA program.


1. Define your Project

            Project Definition comprises the project title, the planned start and completion dates, the name of the Project Sponsors, the name of the leading engineering firm, names and titles of the project management members with telephone numbers and e-mail addresses. At this stage, the Cost Engineer has to create the new database for the pipeline project, and to enter there the project information data, usually supplied formally by the Project Engineer. 

            Click here to display the program screen though which the database for the pipeline project was created, and scroll the screen down to display the related project information screen.


2. Create Project Calendar

           All reports, and particularly Project Time-Cost Statements, Time-Cost Accounts and Time-Cost Ledgers, require that the total project duration be divided into Project Periods.  The Project Calendar must be established at this stage, and the total planned duration of the project shall be divided in to Project Periods. Usually, one  project period should be made equal to one calendar month, but it can be made equal to one year quarter (three months), if the Project is of a very long duration and the Project Sponsors require submission of quarterly reports. 

            Click here to display the program screen utilized to create the Project Calendar for the pipeline project, and scroll down to display the related Project Calendar Report.


3. Define Project Cost Accounts and Project Expense Accounts

            Although TECA permits for any number of accounts, yet for practical reasons their number should not be not greater than 200. For reasons of clarity, the pipeline project has only 39 Cost Accounts and 12 Expense Accounts. The Cost Engineer shall identify only the Cost Accounts (Project Objects) and Expense Accounts (Project Participants). Other accounts - such as Booking Accounts and Commitments Accounts - are generic, and they are created automatically by the computer software (TECA) when the Project is initiated.

COST ACCOUNTS:
        Project Cost Accounts are accounts belonging to all major Project Objects. Click here to display Cost Accounts related to the pipeline project. It is imperative to ensure that each Cost Account belongs either to CONSTRUCTION, or to MATERIALS, or to ENGINEERING. Notice that the CLASS attributes must be entered too. Here 'C' denotes Cost Account; '1' Engineering; '2' Materials; '3' Construction; 'd' Direct Cost; 'i' Indirect Cost.

EXPENSE ACCOUNTS:
        Project Expense Accounts are accounts belonging to all Project Participants. Click here, to display the data sheet, showing Expense Accounts related to our the pipeline project.  It is imperative to ensure that each Expense Account belongs either to a CONSTRUCTION FIRM, or to a SUPPLIER FIRM, or to an ENGINEERING FIRM. Notice that the Class attributes must be entered too. Here 'E' denotes Expense Account; '1' Engineering Firm; '2' Supplier Firm; '3' Contractor Firm; 'd' Direct Cost; 'i' Indirect Cost.

            It is recommended to arrange the data in one Ms Excel file, using the indicated format. This way, once additional data - such as the estimated cost, planned start and finish dates, and the two shape factors - are are entered, this file can be used directly as the data input form into the TECA computer program, as explained below in Point #6.


4. Load the Project Cost Estimate into the Project Cost Accounts

            The total cost contained in the Project Cost Estimate shall be allocated to Project Cost Accounts. In case of simple accounts, such as Route Marking, or Clearing and Grading, the estimated costs can be entered directly into the Ms Excel worksheet, mentioned above. However, complex accounts, such as River Crossing - as well as any account comprising several cost positions, and particularly accounts related to Materials - require using the Global WBS Accounts. Each gWBS Account summarize the costs for the related Cost Account. In the Project in Progress Stage, each gWBS account supplies also current progress figures - Global Earned Value and Global Earned Work - for its related Cost Account. The sum of the costs of all Cost Accounts must be equal the sum of the Total Project Cost Estimate. Allocating the estimated costs - regarding the type of each cost position - must satisfy the Rules for gWBS Accounts; click here to read about the rules. To allocate the costs properly, the Cost Engineer should work closely with the Project Estimator.

           Click here for the example of the gWBS Account for the River Crossing, pertaining to the pipeline project, and scroll down for the example of the gWBS Account for the Compressor Station.


5. Create Project Cost Schedule

            Every Cost Accounts must be furnished with the planned Start Date and Finish Date. These dates shall be obtained from the overall Project Schedule, usually prepared by the Project Scheduler. For every Project Cost Account, the Early Start and Late Finish dates shall be extracted, and entered into the MS Excel worksheet, mentioned above. Click here for the example of the Project Cost Schedule pertaining to the pipeline project.

            The distribution of the forecasted costs on each bar chart, related to every Cost Account, can be linear, or front-shifted, or back-shifted, or even individually defined (as it may pertain to purchases of some expensive equipments at certain planned dates). At this initial stage, the distribution shape of each Cost Account must be defined by the Cost Engineer, who shall select the appropriate factors F1 and F2, that define the shape; click here to read about the factors. The selected values of F1 and F2 shall be entered into the the MS Excel worksheet, mentioned above.   


6. Create TECA input file (in MS Excel)

            The MS Excel worksheet, mentioned above - when supplemented with all needed data - becomes the input file for the TECA computer program. Click here for the example of the MS Excel file related to the pipeline project, and scroll down to see the part comprising Expense Accounts. Notice that only the Cost Accounts are supplied with the values of the estimated costs, start an finish dates, and the forecast distribution shape factors F1 and F2. In the case of the Expense Accounts, no such data are required, and the input fields shall be left with zeros and blanks.
             We shall name this file C:\TECA_Oklahoma\PipelineInput.xls as TECA Input file.


7. Create Code of Accounts and First Forecast, using TECA batch method

            The batch method of the TECA computer program allows the Cost Engineer to create the Code of Accounts as well as the First Entry into the Forecast Journal in the matter of a few minutes. There are three procedures, and in total seven (7) steps:

PROCEDURE #1 - Create Code of Cost Accounts

Step #1  On the special screen (click here), marked "COST", the TECA input file (mentioned above) shall be located from the combo, and the file area comprising the Cost Accounts shall be defined; in our case as A3:J41. These coordinates can be found from the displayed file, when the button SHOW WORKSHEET is clicked. 

Step #2  When the button CREATE MS ACCESS TABLE is clicked, the program verifies the data contained in the input file. If there are any errors in the input file,  the program lists the errors and stops. Then the Cost Engineer should display the input file, and fix the errors there. Otherwise, if the data is OK, the program creates the temporary table, and advises accordingly.

Step #3 When the button CREATE TEMPORARY CODE is clicked, in response the program creates the code and displays this screen; (click here). If the data appears OK to the Cost Engineer, he shall click the button DATA APPENDING, and in response the program displays the code of accounts screen; (click here).  

PROCEDURE #2- Create the First Entry into Forecast Journal

Step #4 Returning to the same special screen (click here), marked "COST", the Cost Engineer clicks the button CREATE TEMPORARY JOURNAL. In response the program creates the temporary screen of the First Forecast Journal Entry; (click here). If the data appears OK to the Cost Engineer, he shall click the button DATA APPENDING, and in response the program displays the Forecast Journal with the First Entry almost completed (DEBIT site only); (click here).  

PROCEDURE #3- Create Code of Expense Accounts

Step #5  Returning to the same special screen, mentioned above, the User shall click the button NEXT to display the screen marked "EXPENSE"; (click here). The TECA input file shall be located from the combo, and the file area comprising the Expense Accounts shall be defined; in our case as A44:J55. These coordinates can be found from the displayed file, when the button SHOW WORKSHEET is clicked. 

Step #6  When the button CREATE MS ACCESS TABLE is clicked, the program verifies the data contained in the input file. If there are any errors in the input file,  the program lists the errors and stops. Then the Cost Engineer should display the input file, and fix the errors there. Otherwise, if the data is OK, the program creates the temporary table, and advises accordingly.

Step #7 When the button CREATE TEMPORARY CODE is clicked, in response the program creates the code and displays this screen; (click here). If the data appears OK to the Cost Engineer, he shall click the button DATA APPENDING, and in response the program displays the code of accounts screen (click here), displaying the Expense Accounts.  


8. Create First Entry into the Forecast Journal

            The procedure for making Forecast Journal entries is quite simple, and it was already described in our Article #3. In our case now, the data set of the First Entry already exists, as it has been created automatically via Procedure #2, Step #4 above.  However, it contains now only the DEBIT site, comprising Cost Account costs only. Now, it is necessary to create the CREDIT site, and to post this journal entry.

            Click here to display the initial program screen of the Forecast Journal. On the DEBIT site, there are listed all positions of the Cost Accounts, sum of which is equivalent to the Project Cost Estimate, amounting to $154,000,000. To post this journal entry, the Cost Engineer must create the CREDIT site by entering to a few Generic Forecast Accounts the same amounts, summarized by Class. Click here to display the completed, and ready to posting program screen of the Forecast Journal. As you can see, the Generic Account with class F3d contains the sum of amounts  contained in all Cost Accounts with class C3d. Similarly, the Generic Account with class F2d contains the sum of amounts  contained in all Cost Accounts with class C2d; and F2i - with these of C2i; and F1d - with these of C1d; and F1i - with these of C1i. This way the sum of CREDIT column is made equal the sum of DEBIT column, and this journal entry can be posted by clicking the button POST. The TECA program permits to summarize the amounts for the Generic Accounts easily, by clicking a few buttons.


9. Create Project Budget

            The procedure for creating the Project Budget is quite simple, and it was already described in our Article #9. This procedure can be executed only after the First Forecast Journal Entry has been created, as described in Point 8 above.  Click here for the example of the Project Budget Report related to the pipeline project, and scroll down to see the Project Budget screen. As you can see, the Project Budget amounts to $162,470,100, with the 5% Contingency of $7,700,100, and the 0.5% Prorates of $770,000.


10. Knowing Prorates, make the additional Forecast Journal Entry

           To get the total Project Forecast, it is necessary now to add the Prorates of $770,000 to the current Forecast. This requires an additional entry into the Forecast Journal; click here for the example. Here, defined already during the budget creation, the Prorates of $770,000 are being added to the current forecast. The Contingency is never added to the current forecast, and it is used only when required to offset any overrun of the current Total Project Forecast.


11. Review and adjust Forecast Distribution of Cost Accounts

           Prior to creating the Project Cash Flow Forecast, the Cost Engineer shall review the Forecast Distribution of every Cost Account. The Forecast Distribution of each Cost Account has an impact on the Project Cash Flow.  Therefore, it is important that the Cost Engineer defines the forecast distribution shape now, to reflect the most probable distribution of Actuals that occurs in the future, when the project is being executed and when the progress is defined by Earned Value and Earned Work. By selecting and using the factors F1 and F2 in the Task #5 above,  the Cost Engineer had already defined Forecast Distribution of every Cost Account. However, now, by looking at the histograms, he can fine-tune the distribution shape of some or even all Cost Accounts. His final selection of the forecast distribution shape should be based on his professional experience regarding the expected work progress of each Project Object, i.e. Cost Account.  

            Although some of the Cost Accounts, related to Engineering, may require the linear distribution (F1=0 and F2=0), other, such as River Crossing (F1=1 and F2=1, click here and scroll down), or Compressor Station (F1=1 and F2=0, click here and scroll down) may require the more probable bulky distribution. The procedure for defining the Forecast Distribution of Cost Accounts was explained already in our Article #5.


12. Create Project Cash Flow Forecast

            The procedure for creating the Project Cash Flow is quite simple, and it was already described in our Article #9. This procedure can be executed only after the First Forecast Journal Entry has been created, and Prorates entered into the Total Forecast, as described above in Point 11 above. 

            Click here for the example of the Project Cash Flow creation screen related to the pipeline project; scroll down to see the Project Cash Flow Report screen; and scroll further down to see the related histogram and S-Curves.  As you can see, Project Sponsors are expected to provide the necessary project funds in quarterly intervals. The Commitment S-Curve (blue) represents the Project Cash Flow Forecast, and it should always remain above the Project Forecast S-Curve (green) to satisfy an adequate supply of project funds at all indicated Project Periods. 


13. Create package of Project Initiation Documents

            Once the above steps have been concluded, the Cost Engineer should create and present the following reports to the Project Manager, who in turn may forward copies of the same to the Project Sponsors:


Remarks

        D-E Project Accounting, through the above listed 13 tasks, allows the Cost Engineer to initiate his project cost control job swiftly and in the well organized way.  In this stage, the Cost Engineer is expected to create the budget, code of accounts, project cost schedule, project cash flow forecast, and also to create several project initiation documents to be presented to the Top Management as well as to the Project Sponsors. Here, he must work closely with the Project Estimator, Project Scheduler, and Project Engineer.

         Having completed this Project Initiation Stage, the Cost Engineer's job during the next project stage - PROJECT in PROGRESS - will be very easy, comprising mainly the maintenance of the four journals. Then, to generate any report, he will simply click some buttons, without any need to do any data retrieval or calculations on his part.


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