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MEGA ENGINEERING PROJECTS
Project Cost Planning and Control needs upgrading
This article refers to the well-known problems of budget overruns. Blaming the current Project Cost Control methodology for utilizing the Single Entry Accounting that prevents from early discovery of the budget overruns, this article shows what can be done to enhance the Cost Engineering by utilizing the Dual Entry Accounting. Good reasons for the need to upgrade the current method of Project Cost Control are shown, and then the Dual-Entry Project Accounting theory is explained, pointing for the advantages that it brings to Project Cost Engineering in general. For more information on on this subject, read the book entitled PROJECT ACCOUNTING FOR COMPLEX ENGINEERING PROJECTS.
Every Project Manager’s major goal is to ensure that his project is completed within the planned Time Frame but also within the Approved Budget. This article deals with the second part of this major goal - the financial component of the project, governed by the Project Accounting.
The quality of project accounting is particularly important on large engineering projects, called mega projects. To mega projects belong nuclear power plants, offshore oil and gas facilities, highway systems with many bridges and overpasses, large international airports, multi-national on shore and offshore pipelines, very large petrochemical plants, as well as NASA space projects and US Army and Navy arms development, long-term projects. Mega projects are always complex, often costing several billion dollars, extending for several years, and involving more than one engineering firm, several contractors firms, and very many supplier firms.
On every mega project, the Project Manager is always supported by the Cost Engineer and the Accountant. The term “Project Accounting” defines the common involvement of the Cost Engineer and the Accountant in the project financial component.
Let us define the “Project Accounting”. It consists of four major parts:
o FORECAST – comprising cost estimates and change orders, including BUDGET created from the First Forecast, plus Prorates and Contingency.
o ACTUALS – comprising information about the project progress.
o BOOKINGS – comprising billing related to Project Participants, i.e. contractors, suppliers, engineering firms, and other business entities or individuals who provide services and materials to the Project.
o COMMITMENTS – comprising data about the monetary funds furnished by Project Sponsors, i.e. business-, private-, or government entities that finance the project.
Currently, the Cost Engineer manages BUDGET, FORECAST and ACTUALS, using routines of Project Cost Control, where the Single Entry method is utilized. The Accountant manages BOOKINGS and COMMITMENTS, using the Business Accounting, where the Dual Entry method is utilized.
However, on mega projects, the dual responsibility for the project financial planning and cost control - where the Cost Engineer is not fully involved, and therefore he is not responsible for BOOKINGS and COMMITMENTS - often leads to completion delays and costly overruns of the budget.
Therefore, quite often the Cost Engineer is unable to warn early enough to prevent overrunning of the project budget. His excuse is always the same: “I can establish the budget overrun or under-run only after I know the amount of bills already paid, and for that I depend on the Accountant, who … unfortunately is always late!” The Project Managers wonders why his Cost Engineer must wait for the Accountant. Surely, the Cost Engineer sees all invoices and purchase orders much sooner than the Accountant does. Why then is he unable to extract the critical cost information sooner? Why must he wait for the Accountant?