Project Budgets, Work Planning, and Monitoring PDF

10.3 Project Budgets, Work Planning, and Monitoring Stephen C. Evans, AIA Project work planning is the central element in establishing and updating accounting budgets. Project work plans with the proper level of task detail provide the basis for project schedules, support the monitoring of project p...

10.3 Project Budgets, Work Planning, and Monitoring Stephen C. Evans, AIA Project work planning is the central element in establishing and updating accounting budgets. Project work plans with the proper level of task detail provide the basis for project schedules, support the monitoring of project progress, and serve as a means of communication for all project participants. T HE I MPORTANC E OF PROJEC T WO R K P L AN NI NG PA R T 3 : P R O J E C T D E L I V E R Y Design excellence, exceptional client service, quality assurance/quality control, and technical expertise are all elements of successful project execution. The ability to forecast revenue accurately using simple methods is fundamental to a firm’s operations and the foundation for many critical, high-level decisions such as staff adjustments and overhead budgeting. Good revenue projections represent the “lifeblood” of successful firm financial operations, and the processes in place for project budgeting, scheduling, and tracking serve as the basis for these forecasts. Project work planning is certainly a role expected of project managers, but also an opportunity for project team-building and leadership both internally and externally, including clients and contractors. Most firms, large, medium, and small alike, earn revenue by providing professional services—architects do projects. The resources used to perform project services must be managed and measured with tools that report and analyze past performance but more importantly use that information to look into the future. Resource utilization ratios, the amount of project chargeable time divided by the total time worked by individual staff members, are measured at the firm, market sector, discipline, and project levels and are an important factor in the ability to be profitable. A well-designed annual business plan includes utilization ratios expected for everyone in the firm including management, marketing, and project staff. The controlling mechanism for using resource utilization goals and resource forecasting is once again the project work plan. The term “resource” is used throughout this article to mean staff members in a firm. Good Project Work Plans = Good Resource and Revenue Projections Project work planning serves as the means to achieve project and firm profitability, schedule project milestones and resources, and monitor project progress. Work plans need not be highly detailed. The following attributes characterize the process and the plan: • Start early in the marketing phase by preparing top-down budgets. • Prepare simple project work plans with staff resources listed at the phase level at a minimum to produce a conceptual bottom-up budget. • Compare the two budgets and combine them into one feasible starting point for the project. • Further refine the conceptual plan with more detailed task-level planning during contract discussions to represent the scope of services proposed. Stephen C. Evans is the owner of Stephen C. Evans Consulting, LLC. His experience includes serving as senior project manager with Populous, director of risk management for HOK Corporate Legal, and director of operations for HOK’s North Central Region and Treanor Architects. 1 0 . 3 P r o j e c t B u d g e t s , Wo r k P l a n n i n g , a n d M o n i t o r i n g 621 • Finalize the project work plan with the contracted scope of services and the project team including outside consulting engineers immediately. • Involve the client in the work plan schedule development with particular regard to the timing of their input and approvals. • If a contractor or program manager is engaged in the project during design phases, involve them relative to their roles, input in the design, and timing. • Monitor the project work plan regularly during the life of the project. PA R T 3 : P R O J E C T D E L I V E R Y Project managers wear several hats in most small to medium-size firms and even in some larger firms that typically do very large and complex projects. The individual responsible for project management duties must lead the work planning efforts even though design and technical responsibilities may also be required by this person on the project. Preparing project work plans is not a “closed-door” process done by the project manager and presented to the principal and project team. Key team members, particularly design and technical project leaders, are at the table during the entire process, and it is good to have accounting staff involved at the same time. It works well for the architectural team to prepare the initial plan and project schedule followed by consulting engineers joining to add their major milestones and needs to the plan. Finally as part of a team-building exercise, the client is brought in to see the plan and how their participation is needed to meet the schedule. A proper project kickoff meeting agenda includes significant discussion and “buy-in” of the schedule produced by project planning efforts. Even in a small firm, working on smaller projects, with fewer project team members, a project kickoff meeting is advisable. PRO J E CT B U D GE TIN G The project budgeting process starts with the determination of the gross fee for the project. It is best if this has evolved through the marketing, sales, and contracting process but that is not always possible. Although value pricing is encouraged in firms with expertise and specialized services, it is most common that the “market” will determine the appropriate level of fees available if the firm expects to procure the project. The following are common compensation options for fee calculations that begin the budgeting process formally in one’s accounting system after the contract is signed: ▶ Services and Compensation (15.2) discusses methods of determining what to charge for architectural services as well as methods of compensation and strategies for getting paid. ▶ Financial Management Overview (7.2) discusses the ongoing monitoring of a firm’s financial resources. 622 • • • • • • • Lump sum fixed fees. Hourly with no upset based on hourly billing rates. Hourly-not-to-exceed fees based on hourly billing rates. Cost plus fixed fees. Unit cost pricing. Percentage of actual construction cost. Reimbursable and non-reimbursable direct costs are considerations in all options. Compensation options are affected by client types, building types, and the project delivery methods used. The budgets established in accounting systems contain both similar and dissimilar aspects depending on the compensation option established in the Agreement Between Owner and Architect. It is also possible to have more than one compensation option in a singular agreement responding to the scope of services provided, or compensation options with consultants that are different than the prime agreement. Revenue is recognized in professional service firms using one of two accounting methods with timing being the primary difference. The cash method of accounting recognizes revenue when cash is collected and expenses are paid. With accrual-based accounting, revenue is recognized when it is earned and expenses are incurred without regard to the time of receipt or payment of cash. The accrual method represents a more accurate means to measure the actual project and firm financial performance. The Design Project Management accrual method asks the question “what is the work in place,” earns revenue accordingly, and is not based on the collection of cash. All firms use the cash basis for cash flow and income tax purposes. Top-Down and Bottom-Up Project Budgeting There are three fundamental approaches to the project budgeting process and all three are necessary for successful project execution and performance: The development of an initial project budget based on the top-down approach is a good place to start in the process. If these budgets are based on historical project data and similar project scopes of services, they can actually be very accurate in the end in terms of projected fees to be earned by phase. A great exercise for firms to undertake would be to spend the resources necessary to look at past projects by market sector type and record actual labor and expense costs by phase into a database for future use in top-down budgeting. Top-down budgets are formula driven and based typically on a percentage of construction cost for the gross fee followed by a distribution of fees for the net service revenue representing the architect’s fees, consulting fees by discipline, and direct expenses. The net service revenue is then distributed by phase again on a predetermined percentage basis. Table 10.4 includes the following assumptions: Net service revenue: Net fee determined by subtracting consultant fees from the gross fee for the project. • The estimated construction cost for the project is $10,000,000. • The gross fee is 7 percent of the estimated construction cost. • Consultants will receive 40 percent of the gross fee. Subtracting the direct expense and contingency budgets from the net service revenue results in a project labor budget of $378,000. Table 10.5 includes the following assumptions: • The amounts by phase are based on the percentages listed and the total labor budget of $378,000. • The hours by phase are based on the dollar amounts by phase divided by an average hourly rate of $125. Particularly with a new project type and without historical data on labor expenditures, top-down budgeting does not provide a confident level of detail necessary to perform and monitor the job. Further, it does not respond to scope of services and provide assurance that the project can be delivered within the schedule and budgeted fee. The project work plan is the basis for a bottom-up budget, and project planning builds the fees by phase based not on assumptions but the project’s scope, schedule, and TABLE 10.4 Top-Down Budget Fee Distribution $ Amount Gross Fee @ 7% $700,000.00 Consultant Fees @ 40% $280,000.00 Net Service Revenue $420,000.00 Direct Expense Budget $21,000.00 Contingency Budget $21,000.00 Project Labor Budget $378,000.00 1 0 . 3 P r o j e c t B u d g e t s , Wo r k P l a n n i n g , a n d M o n i t o r i n g 623 PA R T 3 : P R O J E C T D E L I V E R Y 1. Top-down budgeting 2. Bottom-up budgeting 3. A combination of both TABLE 10.5 Top-Down Budget: Fee Distribution by Phase Phase % Amount $ Amount Hours Project Planning 2% $7,560.00 60 Preliminary Design 3% $11,340.00 91 Schematic Design 7% $26,460.00 212 Design Development 23% $86,940.00 696 Construction Documents 37% $139,860.00 1,119 Bidding/Negotiations Construction Phase Services Post-Construction Total Labor Budget 2% 25% 1% 100% $7,560.00 $94,500.00 $3,780.00 $378,000.00 60 756 30 3,024 PA R T 3 : P R O J E C T D E L I V E R Y tasks required to complete the work. It uses staff hours planned for these tasks and builds the fee amounts by phase based on the firm’s hourly rates schedule. The bottomup budget based on the project work plan provides a means to analyze the top-down budget and test its ability to be financially successful for the firm. More detail on the bottom-up work planning process and budget is contained in the project work planning process section of this article. It is not uncommon for the initial bottom-up budgets to be unrealistic in terms of the market fee value for the project. Nevertheless, it may not be wise to rely solely on the top-down approach. The best practice is to work with the two approaches together, combining them into a realistic plan with the proper level of task detail and resources. The project leadership team needs to work together and consider the scope, schedule, tasks, and resources absolutely needed to do the job. It is common to work through several versions of the plan and to balance these criteria into a feasible plan that meets financial goals and client expectations. Cartoon mock-up sets and deliverable lists can also provide needed support in “landing on” the proper project budget and work plan. Although deliverable lists are essential to the technical execution of any project, they are typically at a level of detail not appropriate for project work planning. However, used hand-in-hand with the project plan, these lists are invaluable in achieving a confident position moving forward into project work. Project Budget: Initial Accounting Setup ▶ See Developing Annual Budgets and Profit Planning (7.4) for related information. The establishment of an initial project budget in a firm’s accounting or project management system should coincide with documentation of client, consultant, and contract status for the project. Although challenging at times, this is an opportunity to verify that the project contract has been fully executed, or at least that a letter of understanding with the client regarding scope and fee has been signed. The following items should be addressed during initial project budgeting: • • • • Is the firm able to bill the client at this time? Is the firm able to recognize revenue at this time? Is the owner-architect agreement signed? If the owner-architect agreement is not signed, is there a signed letter of agreement that establishes scope of services and compensation? • Are all consultant agreements signed? • If all consultant agreements are not signed, is there a signed letter agreement that establishes scope of services and compensation? • Are direct expenses reimbursable, or included in the compensation? 624 Design Project Management TABLE 10.6 Initial Project Budget: Fee Distribution Line Description $ Amount Percentage (%) $100,000.00 100 Formulas A Gross Fee B Consultant Fees $40,000.00 40 A x 40% C Net Service Revenue (NSR) $60,000.00 60 A–B D Non-Reimbursable Expenses E NSR—Non-Reimbursable Expenses F Contingency $3,000.00 5 C x 5% G Project Labor Budget $54,000.00 90 E–F $3,000.00 $57,000.00 5 95 C x 5% C–D • • • • • • • • PA R T 3 : P R O J E C T D E L I V E R Y The fundamental question that needs to be answered and supported by a firm’s policies is whether or not a signed owner-architect agreement or signed letter of agreement is required in order to get a project number and assign (staff) resources to begin work. At a minimum, a signed letter of agreement should be required by policy, with a time restriction placed on the ability to recognize revenue internally if the fully executed owner-architect agreement is not completed. There remain many firms with long-standing client relationships and practices that use the “handshake” approach and are less structured in the contracting process. This carries risk, of course, and all firms should consider implementing at least the minimum requirement for signed letter agreements. The elements of a project budget are as follows: Gross fee Consultant fees Net service revenue Project contingency Non-reimbursable direct expense budget Project labor budget by phase of service Current percent complete by phase of service Budgeted resource forecast by phase of service The example illustrated in Table 10.6 starts with a gross fee of $100,000 and is a lump sum fixed fee. The consultant fee of $40,000 is inserted and based on the information contained in Table 10.4. The percentages used for contingency and non-reimbursable direct costs are in a typical range for most projects and could be based on historical data. It is best for firms to establish guidelines for these amounts based on past project data. Contingencies should not be targeted for “extra” profit, but rather utilized for various project circumstances including unplanned direct labor, unplanned direct expenses that are not reimbursable, or unplanned consultant fees. It is important to understand that these are internal budgets that will be used to recognize revenue and pay consultants for their services. (See Table 10.7.) The client billing process is a TABLE 10.7 Consultant Fee Distribution Consultant Name Discipline Fees ABC Structural Structural Engineering $15,000.00 ABC Mechanical MEP Engineering $15,000.00 ABC Civil Civil Engineering $10,000.00 Total $40,000.00 1 0 . 3 P r o j e c t B u d g e t s , Wo r k P l a n n i n g , a n d M o n i t o r i n g 625 TABLE 10.8 Initial Project Budget: Fee Distribution by Phase & Percent Complete Phase No. Phase Name $ Labor Budget % Labor Budget % Complete Earned Revenue 1 Project Planning $1,080.00 2 100.00 $1,080.00 2 Preliminary Design $1,620.00 3 100.00 $1,620.00 3 Schematic Design 7 10.00 4 Design Development $12,420.00 23 0.00 $0.00 5 Construction Documents $19,980.00 37 0.00 $0.00 6 Bidding/Negotiations 2 0.00 $0.00 7 Contract Administration 25 0.00 $0.00 8 Post-Construction 1 0.00 $0.00 100 5.70 $3,078.00 Total $3,780.00 $1,080.00 $13,500.00 $540.00 $54,000.00 $378.00 PA R T 3 : P R O J E C T D E L I V E R Y separate accounting tool that is based on contractual amounts by phase and can actually have different amounts by phase than internal budgets. For example, internal contingencies and expense budgets would not be part of contractual fee amounts, and this alone sets up different amounts by phase between internal budgets and contractual fees billed to clients. Table 10.8 exemplifies that revenue has been earned at the time the accounting setup occurred, and shows a total earned revenue amount of $3,078, recognizing work that was in place and complete. It is also good practice to consider the cash flow aspects and fee utilization by phase for consultants. The architect may be compensated for 15 percent of the contractual amount for Schematic Design, but the engineering discipline may only use 10 percent of its fee for this phase. If this is the case, the architect-consultant agreement for this service should carry an amount of 10 percent for Schematic Design. It is typical for most engineering disciplines to lag behind in actual percentages complete in early project phases and catch up toward the end of Construction Documents. Table 10.9 represents a tool that can be used for “high-level” resource planning during the initial budgeting process. It also serves as a good starting point for more detailed project work planning to be addressed in subsequent sections of this article. TABLE 10.9 Initial Project Budget: Staff Resource Planning Phase No. Phase Name Average Hourly Rate Hours/Phase 1 Project Planning $1,080.00 $175.00 6 2 Preliminary Design $1,620.00 $150.00 11 3 Schematic Design $3,780.00 $150.00 25 4 Design Development $12,420.00 $130.00 96 5 Construction Documents $19,980.00 $130.00 154 6 Bidding/Negotiations $1,080.00 $140.00 8 7 Contract Administration $13,500.00 $130.00 104 8 Post-Construction $540.00 $150.00 4 $54,000.00 $132.82 407 Total 626 $ Labor Budget Design Project Management TABLE 10.10 Earned Revenue vs. Billed Fees Fee Earned Phase Name $ Labor Budget % Labor Budget $ Dollar Amounts % Percent by Phase 1 Project Planning $1,080.00 2 $0.00 0 2 Preliminary Design $1,620.00 3 $0.00 0 3 Schematic Design $3,780.00 7 $9,000.00 15 4 Design Development $12,420.00 23 $12,000.00 20 5 Construction Documents $19,980.00 37 $21,000.00 35 6 Bidding/Negotiations 7 Contract Administration 8 Post-Construction Total $1,080.00 $13,500.00 $540.00 $54,000.00 2 25 100 $3,000.00 Earned as incurred Contingency $3,000.00 Earned when utilized $60,000.00 $15,000.00 1 Non-Reimbursable Direct Expenses Total $3,000.00 5 25 $0.00 $60,000.00 0 100 PA R T 3 : P R O J E C T D E L I V E R Y Phase No. Fee Billed Earned = Billed at project closeout Table 10.10 demonstrates the timing of recognizing revenue and billing the client for work complete. In this example, Phases 1 and 2, Project Planning and Preliminary Design, were not part of the compensation in the owner-architect agreement but were used internally by the architect to recognize revenue for work completed prior to the initiation of actual Schematic Design. This also exemplifies “withholding” amounts for direct expenses and contingencies internally until they are incurred and utilized, which is reconciled at project closeout. It is recommended that a “billed vs. earned” analysis be completed over time by month to see that these do not get considerably out of sequence during the project’s scheduled completion dates. Earning too far ahead of billing carries risk in the collection process, whereas billing ahead of earning in a reasonable way lowers this risk considerably. T HE P R OJEC T WORK PLA NN IN G PRO C E S S The project work planning process has evolved considerably in the last 20 years in the direction of simplification and service to the project. There is an appropriate level of detail for every plan, and without exception every project needs a project work plan. Large and complex projects need simplified and manageable task lists reflecting the scope of services in the contract. Small projects can have few tasks and be planned at the phase level in most cases. Some may argue that small projects do not need a work plan. However, all firms still need information provided by a work plan—staff utilization, historic data for fee development, and forecasts for firm-wide operations and financial management, for example. Project plans should be monitored regularly, which is normally on a monthly basis if there are no staff or scope changes. The components and considerations for a typical project work plan include the following: Prepare project work plans that serve the project manager and team. Do not prepare overly detailed project work plans that project managers and teams must serve. • The contractual scope of services, the “foundation” for the phases, tasks, deliverables, and milestones for the plan • A bar chart showing the start and end dates for phases, special milestones, and the overall project schedule 1 0 . 3 P r o j e c t B u d g e t s , Wo r k P l a n n i n g , a n d M o n i t o r i n g 627 • The staff resources and hours needed to do the work, planned by day, week, month, or year • Consultant requirements for their part of the project • Owner requirements for reviews and approvals • Labor or billing rates, applied to (staff) resources and used to track the fees, both planned and actual, to assess status • Non-reimbursable direct costs, earned as incurred and part of the profit calculation The benefits of project work planning are numerous and include the following: PA R T 3 : P R O J E C T D E L I V E R Y • Better understanding of the contractual scope of services with the ability to communicate the scope with graphic and numerical information. • Used to develop fees based on the scope of services with the level of detail needed to be confident schedules and profit targets are achievable. • When used during the contract negotiation process even at a conceptual level, scope and fees can be balanced in a quantitative manner. • Provide the necessary information to produce resource and earned revenue forecasts for the firm. T HE WOR K PLAN B ob Gi llcrist , Archi tect The work plan is a tool to allow for the accurate planning and monitoring of a project. In order to be better prepared for the type of issues that affect the performance of our projects, it is important that project managers have processes in place, and develop habits that involve the utilization of these processes, to allow them to be proactive and, when necessary, appropriately reactive. The model shown in Figure 10.7 is a simplistic approach to the stages of effective work plan development and utilization. Plan Adjust Do Check Bob Gillcrist FIGURE 10.7 Plan, Do, Check, Adjust (PDCA) Diagram Plan: For any task, there must be a plan. “Plan” here includes preparation of contracts, staffing, work plan, cartoon sets, CAD management, and other documents. Without a plan, one can never know if a task is performing properly or not, for without a plan there is nothing by which to judge its performance. The plan should be the 628 Design Project Management result of input from the project manager, project architect, and project designer, at a minimum. Others can be included as necessary. This plan is used to prepare any proposal to a client, and then used in the negotiation of a contract. Do: Put the plan into action. At this point the plan and the contract are completed and the project is underway. The plan is the step-by-step set of instructions to deliver the project in accordance with the contract. Check: Periodically check the progress of work against the original plan. This habit achieves two things: (1) It provides you with the opportunity to see what’s next; and (2) it allows you to verify that what you have completed thus far is done according to the plan. Much like a set of instructions by which you assemble something, you check the instructions after completing each step to verify that the step you just completed was done correctly and to prepare for the next step. A plan gone unchecked is no better than no plan at all. Adjust/act: Based on the results of checking a plan, it may be necessary to adjust the plan to correct for circumstances discovered and then act on those adjustments. To put all of this into context, a typical project scenario may look like this: In preparation for a project meet with the key participants and establish the goals, and develop the plan (as described above) for achieving them. At the appropriate time, begin to do what the plan calls for. At regular intervals, check the plan to verify if the project is proceeding as planned. If not, adjust the plan accordingly to bring the project back on track. The result of any such adjustment is a modified plan, and the cycle continues (plan, do, check, adjust/act, plan, do,…). • Document project team member roles and responsibilities that can be measured. • Analyze changes and their root causes related to scope and schedule, with proper documentation for additional service considerations. • Identify and take corrective actions if a project is not performing according to the project work plan. Work Breakdown Structure PA R T 3 : P R O J E C T D E L I V E R Y One thing remains consistent in all firms and all projects: Project plans and project revenue projections are necessary to see where the project is headed. The work plans can be set up in Excel or created within an enterprise software solution that has a project planning component. An enterprise solution is software with integrated accounting and timekeeping (project management) capabilities. An enterprise solution will provide important information that stand-alone Excel won’t; it will synchronize actual hours with planned hours in one place and provide reports for earned and projected revenue for your firm. After that, it gets easier to spend time where most architects want to live their professional lives—providing great client service and well-designed and functional buildings that are built well, sustainable, and lasting. It is essential to prepare the project plans to the level of detail that works for the project and the team, and not go to a level of detail that is hard if not impossible to manage. Plan to three, in some cases four, levels in the work breakdown structure (WBS) for most projects to produce a manageable plan that can be monitored and updated as required. Planning to two levels, where you simply add staff resources at the phase level, is likely not detailed enough. However, it can work well for experienced project managers that are very engaged in the project work, and for smaller projects with net service revenues under $50,000 to $100,000. Typically, the WBS levels are as follows: Level 1: Project name Level 2: Phase name Level 3: Task name Level 4: Sub-task name Level 5: Sub-sub-task name An example of a common Level 3 task would be “building elevations,” and associated Level 4 sub-tasks would be “north elevation,” “south elevation,” etc. For most purposes, staff assignments are made for the Level 3 building elevation task to be completed over a period of time, with no need to name the sub-tasks. Therefore, Level 3 is really all that is needed to manage the project. Special projects may require planning to Level 5, although this is micromanaging in most cases and risks serving the plan rather than letting the plan serve the project team. Small project practitioners might say, “I only have small projects, a lot of them, and I don’t have the time or see the need for doing project plans.” Project plans for small projects don’t need much detail, do not take much time, and can provide resource utilization reports to help manage staff. Let the complexity of the project guide the level of detail in the plan. Firms need to use resource utilization reports to measure the chargeability of staff, and when accuracy and regularity is achieved in this metric the firm will have measurable benefits. Do project plans for all projects, no exceptions: It’s not dependent on firm size. Lastly and in parallel with project planning, deliverable lists and cartoon sets are needed for all projects. Project profitability is most dependent on tailoring scope of services and fees to the documents and services delivered. A project work plan that does not reflect the tasks and consider the deliverables for the project has little chance of succeeding. Figure 10.8 demonstrates the principles of work breakdown structure and project work planning with resources added at Task Level 3. This is a partial view of a project 1 0 . 3 P r o j e c t B u d g e t s , Wo r k P l a n n i n g , a n d M o n i t o r i n g 629