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Real-Time Single Version of the Truth Awarded Contracts Financial Performance and Status

Real-Time Single Version of the Truth Awarded Contracts Financial Performance and Status

Written by Bassam Samman, PMP, PSP, EVP, GPM

To conclude the benefits that digital transformation could bring to an organization and before they commence their journey for the comprehensive digital transformation of their capital construction projects delivery, financial transparency for capital construction project delivery needs to be addressed. Organizations involved in delivering capital projects will need as a minimum a summary financial status of their awarded contracts including details of approved, pending, and disputed change orders as well as approved and paid interim payment certificates. The awarded contracts will not be detailed to the bill of quantity or schedule of values line items although this is possible. Nevertheless, at this early stage of just trying to understand the benefits of digital transformation, those values will be kept summarized at the contract level except for the change orders for which those are recommended to be detailed to show the change order scope of work.

Of course, there are many other cost management related processes that are needed to achieve the ultimate financial transparency for construction capital projects. Those processes are the processes for budget, planned budget spending, budget adjustments, potential change orders, funding sources, funding adjustment requests, funding authorizations, miscellaneous invoices, forecast, revenue contracts, change orders for revenue contacts, requisitions among others. Nevertheless, at this early stage of trying to understand the benefits of digital transformation, those processes will not be implemented.

Project Management Information Systems (PMIS) that have the cost management functionality like PMWeb will be needed to provide the required financial transparency and associated reporting. Nevertheless, the PMWeb implementation will be limited to the commitment, change order and progress invoices modules of PMWeb. To start with, each contract that needs to be managed in a project needs to be added to the PMWeb commitment module. The total contract value will be added as a single line item. This value is also considered as the Budget Cost at Completion (BAC).

Whether there was a cost-loaded schedule that is used to identify the value for the anticipated monthly value of work in place or not, those values need also to be added to the commitment contract. Those values are also known as the Planned Spending Value (PV).

The attachment tab for the commitment module allows PMWeb to attach all supportive documents such as the awarded contract agreement, cost loaded schedule, performance bond, advance payment bond, and other documents that are needed to provide a better understanding of the awarded contract. Those documents can be uploaded directly into PMWeb or uploaded and stored in the PMWeb document management repository and then attached to the contract record. Of course, the latter is the recommended approach. The same attachment process will be also repeated for the other contract management processes including change orders and interim progress invoices.

All change orders regardless of their status will be captured in the PMWeb change order module. The change order will include the breakdown of each change against the relevant WBS values as well as the financial period where the change order values to be posted against.

The change order will also include the number of days that the planned contract duration will be adjusted to reflect the time impact of the change. The change order module will be used to capture all change orders whether approved, pending, or disputed. Approved change orders will be used to adjust the Budget at Completion (BAC) and Planned Earning or Spending Values (PV).

Similar to other PMWeb modules, a log can be created to provide details of all change orders issued against each contract. PMWeb comes ready with a log report for change orders although the organization can create its own register in the desired form and format using the organization’s own color branding. The change order log can be configured to display change orders for all projects or only for a specific project.

For the interim payment certificates, and similar to the contract agreement, it will be summarized as a single line item. The details of the interim payment certificate, which is usually done in MS Excel, since the contract items were not detailed in PMWeb, will be one of the documents to be attached to the progress invoice module. The approved amount of the interim payment certificate is also considered as the Actual Cost (AC).

Using the user-defined fields, two new fields will be added to the interim progress invoice. The first will be for the project schedule physical percent complete while the second will be for the calculated Earned Value (EV) for the progress invoice period. Those values will be added manually to the progress invoice. It should be noted that the Earned Value (EV) for the same progress period will be the calculated value from multiplying the total value of the contract, which is also considered as the Budget at Completion (BAC), with the physical percent complete value of the updated project schedule.

PMWeb also allows capturing the details of the actual payment made against the approved interim progress invoice. The payment tab for the progress invoice module allows capturing the actual amount paid, date of the payment, and the method and details of the actual payment made.

PMWeb also comes ready with a report that will provide details on all progress invoices issued against each contract within each project. The report also includes details of the invoice date, a total of issued invoices, total invoiced, and total retained. Of course, the organization can design its own output report with the desired form, format, and color branding.

In addition, PMWeb comes ready with another report that summarizes the details of each contract awarded on a project by providing the details of all issued change orders and interim progress invoices. The report has a built-in filter to select what contracts to be reported on and whether it will be for a specific project or selection of projects. The report has built-in hyperlinks to the awarded contract, change orders, and progress invoices to allow the report reader to drill down to the data source record when needed.

The contract’s financial data captured in PMWeb allows the creation of many tabular and visual reports to provide a real-time, single-version-of-the-truth financial status. For example, reports for the earned value method can be created. With the availability of the Budget at Completion (BAC), Planned Value (PV), Earned Value (EV), and Actual Cost (AC) values, the Earned Value Method (EVM) metrics will be calculated for each progress period. The Schedule Variance (SV) will be the difference between Earned Value (EV) and Planned Value (PV) whereas the Cost Variance (CV) will be the difference between the Earned Value (EV) and Actual Cost (AC). The Schedule Performance Index (SPI) will be calculated by dividing the Earned Value (EV) by the Planned Value (PV) whereas the Cost Performance Index (CPI) will be calculated by dividing the Earned Value (EV) by the Actual Cost (AC).

Since it is assumed that the financial reporting is based on lump-sum contracts for the project owner side, the other EVM measures for Estimate to Complete (ETC) and Estimate at Completion (EAC) will be identical to the calculated values in the interim progress invoice. This means that for the metric Variance at Completion (VAC), the value will be always “zero” as the Budget at Completion (BAC) and Estimate at Completion (EAC) will always be the same.

Similar to other PMWeb modules that could be used by the organization, the project center screen will be appended with the modules for commitment, commitment change orders, and progress invoices. If additional PMWeb cost-related modules were also used, those will be added to the project center screen as well. Those additional modules could include potential change orders, budget, budget adjustments, and income contracts along with their change orders and monthly requisitions. The income contracts will be of value if PMWeb is being used by a contractor as the income contract will be the contract agreement with the project owner while commitment contracts will be the contracts with subcontractors and suppliers. For project owners, the income contracts are the contracts associated with selling the building assets, revenue from long-term leases, and any other source of revenue to be considered.

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