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CONSTRUCTION PLANNING AND SCHEDULING

CO9T CONTROL MONITORING AND ACCOUNTING

UNIT

- III

2 MARKS
are the probtems which occurred in cost control?
During the execution of a proiect, procedures for project control and record keeping
become indispensable tools to managers and other participants in the construction
process. These tools serve the dual purpose of recording the financial transactions that
occur as well as giving managers an indication of the progress and problems associated
with a project.
The problems of project control are aptly summed up in an old definition of a project as
',any collection of vaguely related activities that are ninety percent complete, over
budget and late." The task of project control systems is to give a fair indication of the
existence and the extent of such problems'

1. what

2.NamethetypesofAccountingorMethodofAccountlng.(MaylJune2oo7)
1. Completed-Contract method
2. Percentage of completion method

3.

Mention some elements of cost control.

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cost control involves processing of cost accounting reports received from

theprojectmanagementformakingdecisionsforthefutureandnotofthepast.
In construction projects, generally there are two parties whose lnvestments are

various
standards,
responsibility centers of operating divisions, relating the cost incurred ]^,ith
analyzing the reasons for variances, and presenting the results of monitoring to

involved clients and contractors.

4,

Define the term iob control. (AprlMav 2o1o)

This method gives an individual or group of individual's responsibility

for

projecting cash requirements and income on individual projects' This usually goes hand
in hand with the proieit management philosophy of the execution of construction. In
cases where the critical path method (CPM) or PERT scheduling is employed, it is

posslbletogeneratecashflowdirectlyfromtheseschedules.Therehasbeengood
success, although the complexity of the programmers at times has led to technical

5.

difficulties.
what are the objectives of cost control?

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To locate Areas of Inefficient Functioning


As a Basis for Preparing Estimates

Estimation of Profit or Loss

6. What are tlie stag.es of work at which cost control is affected? (May/.run

2(,12)

1. At the design stage


2. At the construction stage'
7, write the classification of cost contro! system,

1. Profit or Loss with reference to full payment


2. Profit or Lbss with reference to partial payments
3. Comparison with Standard Costs
4. Unit Costing

8. Write some details aSout cost control codes.

is Very much essential in the cost analysis to give the various items, certain syrnbols
or code numbers by which they can be identified without taking pains to write the full
description every tirne.

It

9.

Mention the types of cost control,


> Alphabetical classification
> Decimalclassification

10. Define control estimates based on cost.


For cost control, it is nessa r,!fto hav a master controi estimate for establishing
overall cost control. It is prpar.ed during planning stage itself. It is made of direct
costs, indirect cost and funds allocated for contingencies and escalation.
11,

write the levets of cost based on cost elements..

1.
2.
3.

4,
5.
6.

Dtrect manpower costs-salary, wages and other costs


Direct material at-site delivered costs
Direct equipment, plant and services cost
Sub-contract costs
Indirect on-sire costs-variable, fixed
Indirect external cosrs-head office overheads, management related and commercial
fixed and variable costs.

12. Define the term budgeting costs.

The project budget

is the well co-ordinate

management approved financial

plan of operations, indicating the amounts required for achieving assigned targets,
and the expected receipts frorn sales or the value of work done'

13. Write the importance of proiect budget.

>

project.
It.is essentially a planning document. It outlines the financial plan of the
2

> It specifies the future financial course of action for steering the project.
> It speclfies a standard for measuring effectiveness and efficiency with which

activities are to be performed.


14. Write the formuta for measurement of cost performance.
Project earned value, depending upon the nature of the project, can be measrrred in one
or more of the three parameters, i,e., cost, work hours and quantity of work done. Its
progress is expressed in percentage:
Project progress (o/o) = Budgeted cost work performed

15. Define the term cost report.

The cost reports of construction/production centres should reflect a comparison of


standard and actual costs. In case of functional departments, cost comparison should
be made between budgeted and actual costs.
16, What is the management rote in cost control? (AprlMay 2OO8)

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Cost control can be called effective if the management:


Implements efficient cost control procedures and systems.
Develops and updates the control estimates,
Analyses cost trends to discover potential cost problems and takes remedial measure
to control cost.
Encourages a cost conscience and time conscience attitude.

continuously examines methods

of

execution with an object

of total project

reductions.

17, Write the types of time based studies.


1. Cash flow forecastin g
2. Investment appraisal.
18. What is meant by cash flow forecasting?
Cash flow is the movement of money into or out of a company.
The purpose of cash flow forecasting can be explained as follows:

(i)

It ensures that sulficient cash is available to meet the demand.


(ii) It provides a reliable indicator to lending institutions that advances made can
repaid according to an agreed programmed

19. Write the classification about time based economic appraisal.


1. New construction
2, Replacement and modernization

3. Economic choice
4. Financing problems

be

cost

20. What are the factors involving in investment appraisal?

1. Pay back
2. Return on capital employed
3. Discount cash flow method.

21. Mention the components of a flnancial accountilg system. (Nov/Dcc 2011)

1.
2.
3.

4.

The account payable journal


Accounts receivable journal
Job cost ledgers
Inventory records

22. How. to HerrBine the cash ftow in proiect?

1. Payment (Cash outflow)


2, Receipts (Cash inflow)
3. Timing of payment.

23. Explain the order-of cash flow status report? (Mayllun 2609)

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Costs
Billings
Payables
Receivables
Cash position

24. Defi.ne th term schdule control. (APrlMay 2ou)

In addition to cost control, project managers must also glve attention to monitoring

schedule. Construction typically involves a deadline for work completion, so contractual


agreement will force attention to schedules.

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Delays in construction represent additional costs due to late facility occupancy or other
factors.

25. Define fixed cost and variable cost. (MaylJune 2oo7)


r' Fixed costs are costs that are independent of output. These remain constant
throughout the relevant range and are usually considered sunk for the relevant

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range (not relevant to output decisions).


Flxed costs often include rent, buildings, machinery, etc.
Variable costs are costs that vary with output. Generally variable costs increase
at a constant rate relative to labor and capital, Variable costs may include wages,
utilities, materials used in production, etc.

26. Define the term proiect budget' (Nov/Dec 2oO7,2oLl)


' / A prediction of the costs associated with a particular company project' These
. costs include labour, materials, and other related expenses'
,/ Every project needs a.budget against which to measure costs that are expended.

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The overall project budget requires buy-in from management and from
owners of the Business Plan.
Breaking this overall budget into WBs-related parts permits the project manager
and each task leader to control their own performance.

27. How do we produce proiect budget?

1. To control resou rces


2. To communicate plans to various responsibility center managers.
3. To motivate managers to strive to achleve budget goals.
4. To evaluate the performance of managers
5. To provide visitrility anto the company's performance
28. What is a projert cash flow? (Nov/Dec 2OO7)
cash flow is the npvernent of money into or out of a business, project, or fihancial
product. rt is ,'qrary nnasured during a specified, finite period of time. Measurement of
casft fu G n be used for calculating other parameters that give informatlon on a
or f aryls n*r and sih.Etion.

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IL sirc costs invotved in a project. (AprlMay 2OOa)
fbG -c EE types of costs in a typical project:
. Fi=d
o rU*iable
o Died
e Indrect
e Sunk
3G Dfrerentiate cost committed and cost exposure. (Nov/Dec

2OO8,

Aprl&ay 2Dtt)

/ Cornmitted costs are costs that have been committed by management.


/ Th6e costs are similar to sunk costs in that they exist as a result of previous

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decisions although the'charge'has yet to be incurred or the cash released.


Examples are like renovation of factory premises, capital expenditures being incurred
as company's purchase orders have been issued or work done is partially completely
and payment to suppliers still outstanding.
The cost of exposure technique allows the project management team to make
economic decisions about testing.

31. Define tlre tet'tlr sunk cost.


A cosL that has already been Incurred and cannot be recovered lrrespectlve of the
decision to accept or reject the project is called sunk cost.

32. What do you understand about'account receivable journats,?

(Nov/Dec 2oo8)

Accounts receivable represents money owed by entities to the firm on the sale of
products or services on credit. In most business entities, accounts receivable is typically
executed by generating an invoice and either mailing or electronically delivering it to the

customer, who, in turn, must pay it within an established timeframe, called credit terrns
or payment terms,

33. What are the uses of account receivable iournals?


The accounts receivable departments use the sales ledger, this is because a sales ledger
normally records i
- The sales a business has made,
- The amount of money received for goods or services.
- The amountof moRey owed at the end of each month varies (debtors)

34. What do you understand about'accounts payable journal'? (Nov/Dec 20O8)


Accounts payable are amounts a company owes because it purchased goods or services
on crdit from a supplier or vendor.

35. What

are the difference betwen percentage completion method

completed contract method and completed contract method? (May/Jun

and

2OO9)

'Percentage of completion (PoC) is an accounting method of work-in-progress


evaluation, for recording lOng-term contracts. GAAP allows another method of revenue
recognition for long-term construction contracts, the completed-contract method. An
accounting method in which the revenues and expenses of long-term contfacts are
recognized yearly as a percentage ofthe work completed during that year.
This is the opposite of the completed contract method, which allows taxpayers to defer

the

income and expenses until a long-term project


The percentage of cornpletion method of accounting is cornmonly used

reporting

of any

completed.
construction projects.

is

in

The. Completed-contract method is an accounting method of work-in-progress


evaluation, for recording long-term contracts. GAAP allows another method of revenue
recognition for long-term construction contracts, the percentage-of-completion method.
With this method, revenue is recognized when the contract is fulfilled.

36. Define job status report. (AprlMay 2010)


A listing of open production orders that shows current location, units in progress,
projected completion dates, and sometimes material.
This report shows the status oi all active tasks for the organization for which it is
generated. The report lists the workflow stages currently being completed by the tasks
in the job and for each stage shows how many tasks are at that stage.

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Only active tasks are included in the report. An active task is one which has not been
terminated and has not yet completed the final stage of the workflow used to
manage the task.
You cannot run this report for archived jobs.

37. What are the advantages of accounting system? (l't aylJun 2Ot2)

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Speed

Automatic document production


Accuracy
Up-to-date information
Availability of information
Managementinformation
LegibiliV
Efficiency
Cost savings
Reduce frustration
The ability to deal in multiple currencies easily

38. How witt you estimate the progress of a proiect? (Nov/Dec 2012)
The more accurate your estimate of project cost is, the better able you will be to manage
your project's budget. Therefore, estlmating a project's costs is important for several
reasons:

. It-enables you to weigh anticipated benefits against antlcipated costs to see whether
the project makes sense.
. It ailows you to see whether the necessary funds are avallable to support the
proiect.
. it slrves as a guldeline to help ensure that you have sufficient funds to complete the
project.

39. What is s-curve?


"A display of cumulative costs, labor hours or other quantities plotted agalnst time. The
name derives from the s-like shape of the curve, flatter at the beginning and end and
steeper in the middle, whlch is typical of most projects. The beginning represents a
slow, deliberate but accelerating start, while the end represents a deceleration as the
work runs out."
40. What are the types of S-curve?
There are a variety of S-curves that are applicable to project management applications,
including:

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Man Hours versus Time S-curve


Costs versus Time S-curve
Baseline S-curve
Actual S-curve

Target S-curve
Value and Percentage S-curves

41. Write the uses of S-Curve,

It is used to forecast the cash requirements of a project. The cumulative


expenditure for a project normally takes the shape of letter's'. By plotting the
cumulative expenditure against cumulative project duration, it is possible to
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The s-curve shape arises during early contract stage, because of lesser number
of activities and hence, the expenditurb curve is relatively flat.

42. How is an S-Curve generated?


To generate a Baseline S-curve, a Baseline Schedule is required. The Baseline Schedules
should contain the following information for each task:

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Baseline Start Date, Finish Date


Baseline Man Hours and/or Costs

generate Actual and Target S-curves,

Production Schedule.

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The Production Schedules should contain the following information for each task:

o
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required.

Actual start Date, Finish Date


Actual Man Hours qndlor Costs
Actual Percentage Complete

43, Define cost versus time s-curve.


The Costs versus Time S-curve is appropriate for projects that contain labor and non-labor
(e'9. material supply / hire / subcontract) tasks. It shows cumulative costs expeRded over
time for the duration of the project, and may be used to assist in the calculation of the
project's cash flow, and cost to complete,

44. Define baseline s-curve.


Prior to project commencement, a schedule is prepared outlining the proposed allocation
of resources and the timing of tasks necessary to complete the project within a set time
frame and budget. This schedule is referred to as the Baseline Schedule. From this
schedule, a Baseline s-curve is generated. This s-curve reflects the planned progress of
the project. If the project requirements change prior to commencement (e.g. change of
scope, delayed start), the Baseline Schedule may require revision to reflect the changed
requirements,

45. Define target s-curve.

Following project commencement, modification of the Baseline Schedule ii usually


required. Changes are continually made to the Production Schedule (which is originally

the same as the Baseline Schedule). The

proifrr
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schedule reflects the actual


progress of the project to date, and any revisinns
tD bd(s yet to commence or not
yet completed. From this schedule, a Target 9orre rrsy be geneEted.
46.Define actual s-curve,
The production schedule is updated on a regrk bG throughout the duration of the
project. These updates include the revisftrn d pelertage complete for each task to
date. Uslng this information, an Actual S-orrye nray be generated. This S-curve reflects
the actual progress of the project to date, ard rnay be compared with the Baseline and
Target S-curves to determine how the proi:ct b progressing. During the project, the
Actual S-curve will terminate at the Cut Otr DaE47.Define value and percentage s-curye.
S-curves may be graphed as absolute values (a-e. I'lan Hours or Costs) versus Time, or
as percentage values versus Time. Value 9orrvEs are useful for determining Man Hours
or Costs expended to date, and Man Flours o. Co6ts to complete, Percentage S-curves
are useful for calculating the projds actJal prcentage complete against target and
baseline percentage complete, and fior cahrlating the project's percentage growth (or
contraction).

48. Write the two categories of darct cost.


Overhead costs: Costs for pioducts and services for your project that are dilficult to
subdlvide and allocate direc0y. EEmples include employee benefits, office space rent,
general supplies, and the costs of fumiture, fixtures, and eguipment.

General and administrative costs: Expenditures that keep your organization


operational (if your organiatbn doesn't exist, you can't perform your project).
Examples include salaries of yo.rr contracts department, finance department, and top
management as well as fees for general accounting and legal services.

49. Write the some categories of indirect cost.


Employee benefits: Bnefits (such as annual, sick, and holiday leave; health and
life insurance; and retirement plan contributions) in addition to salary while you and
the other team members are working on the brochure
Rent: The cost of the office space you use when you're developing the copy for the
brochure

Equipment: The computer you use to compose the copy for the brochure
Management and adminlstrative salaries: A portion of the salaries of upper
managers and staff who perform the administrative duties necessary to keep your'
organization functioning.

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16 marks
What are the obicctives of co,st controt? Exptain. (8 Marks) (l,raylJune
2(,(,7,2012)
> To locate Areas of fnefficient Functioning
During the course of coflstruction, if there is in-efficient functioning
' the
at any stage or
work is carried out in ah unecondmical mdnn"r, ttr"n in" ..Itlnt
data is
used so that the remedial action can be taken well in time.
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Cost control data gives the day to day costs incurred on the various
' and
of work
thus provides a.n immediate warning to the site engineeriitems
whether
the
construction cost is going higher than the estimated one.
o If the methods of cost control are not used, then any loss in the construction of the
project will be known only at the end and then it *orra
o".Lrn" loo tate to do
anything except to accept the losses.
> As a Basis for preparing Estimates

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The estirnates for,any cofibtruction project are prepared by


taking
costs, of the
materials as we, as the performanle of men and machine!the
doing
diffrent
-provides
operations. cost contror acts as a basis of estimation
$rr.,
the
feedback to the estimator for updating. ttre knowledge of
"na JltJ or men ana
ttre-oulpui
machines.

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The unit rates of.the cost for various items of work can be
charked out after the
comple-tion of a job and these would help in preparing realistic
estimates for similar
works for which the contractor may like to tendei his did.
However, the costs also depend upon the local conditions
as well as the labour rates
prev.iring in that particula. area. ihus, the unit
rates of costs inourJ'not arways be
ao-plied to simirar types of.works and appropriate adjustments
srrouiJ ue maoe to get
efficient output of the work.

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Estimation of profit or Loss

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The contractor can. find his profit or ross by comparing the


actual expenditdre
incurred on the work as-indicaied by the costiontrol
data and the measurements oF
the completed portion of the worf< fiteiy to Le paid to him.
Briefty di6cu6s relationship bctween estimattng and
cost contror. (MaylJune
2OO7)

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In order to determine whether the estimated profit is being made or


not, we go for
cost control techniques.

There is a crose relationship between cost control and


estimation because; the
expenditure is regulated on the basis of the estimates
of works.

In the abstract estirnate of the cost of a construction project,


there is an indication
of the quantities of work invorved in tne virious items
of
work, their rates and the
estimated cost. cost contror is affected on thtbasis
of
the
estimated costs of each
item of work as provided in the estimates.
However, an abstract of the cost indicates the item wise
costs and does not give the
details of the costs of each operation. trere Liv ,.t
*'Ir-"iriiiiiii or"a"tuir, or
costs for labour, machinery etc. separately.
Thus, the cost estimates are not much suitable as a
basis of cost keeping.

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3. Write briefly about proiect cash flows. (Nov/Dec 2ooz)


1. gQsTs
by the job cost accounts, including
r' This is a summary of charges as reflectedprovides
an aggregate summary of the
expenditures and estimateJ 6sts. rhis row
previous
section'
delailed activity cost information described in the
$ s'754'516' and the
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fir this example, the total costs as of luly 2 (7 /O2) were
percentage complete was
original cost esHmate wis g65,853,O92, sd the approximate
A,7 54,5t6 | 65,a63,092 or t3.292o/o.
for the project'
/
However, the project manager now projects a cost of $66'545 '263
representing an increase of $6A2,L71over the original estimate'
of work completed as well as
/ This new estimate would reflect the actual percentage
materials'
or
prices
labor
for
other elfects such as changes in unlt

r'Needlesstosay,thisincreaseinexpectedcostsisnotawelcomechangetothe
project manager.

2.

BILLINGS

r'ThisrowsummarizesthestateofcashflowswithresPecttotheownerofthefacility;

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this row would not be included for reports to owners'


!.3'7.4lo/o of the
The contract amount was $67,511,602, and a total of $9,276'62l.or
the terms of
under
contract has been Unfea. He a'mount oi altowaUte billing is speciffed
the contract between an owner and an engineering, architect, or constructor'
proportion'
In this case, total billings have exceeded the estimated project completion
The final column includes the currently projected net earnings of $966'339'
67,511,602 This figure iS calculated as the contract amount less projected- costs: time value of
the
reflect
not
66,545,263 = $966,339. lrlt" nut this profit figure does
money or discounting'

ruEles

to material suppliers,
The Payables row summarizes the amount owed by the contractor
labor or sub-contractors'
material
At the time of this report, i6,71g,:I}3 had been paid to subcontractors/
yet
been
not
have
but
suppliers,.and ottrers. liv-oiJeJ oi si,:oo,oe9 have accumulated
paid.

r'Retentionof$3gl,6Tlhasbeenimposedonsubcontractors,and$343,653indirect
labor expenses has been occurred,

in the first row of


The total of payables is equal to the total project expenses shown
costs.

4.

RECETVABLES

r'Thisrowsummarizesthecashflowofreceiptsfromtheowner.Notethattheactual
payments or
ieicipts from the o*n"r .uy differ from the amounts billed due to delayed
retainage on the part of the owner.

Thenet-billedequalsthegrossbilledlessretentjonbytheowner.In-thiscase,gross
and the
biled is $g,276,62L tu, .nz*n-in lne uittings row), the net billed is $8,767'673
retention is $514,948.
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CASH POSITION

This row summarizesi!:


position of thc proJect as if alr experrses
and receipts for
the project were combined-.1.n
in a stngie

ac;;ni.

The actual expenditur:s have been g7,062,756 (carcurated


as the totar costs of
98,7s4,5L6 tess subcontractor rerentions oiisgr,oir ura-rnpuia
uiiii oi Er,:oo,oagl
and g 7
has-bee' received r-rtr,"i*n"r.
'in '"n-'iri..".t
As a resurt, a net cash barance of
'2o9
'344
9146,5s8 exists whicli ."; d; ;r;;
earning bank account or to finance
deficits on other projects.

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costs invotved in a construction proiect? (Nov/Dec


2oo7,

The cost contror system depends upon


the degree of rever of detair in which contror is
required to be exercised for a particurar
work. The cost of operating a cost contror
sy=tern is directly proportional to the detail
in which the costs oi tt ,u-ri*, operations
Due to this, it may be desirable to use a simpler
" of cost control. A
system
']! 'Erydd'
grd
#em must be quick acting, besides being simple.
Tbe dassi6661;on of cost control system
is done in the following ways:
Ptoflt or Loss with reference to fult paymnt
This system wir be usefur onry in very sma[
contracts of short duration. hfact, this
system is hardry a method of contror, as it
can be onry used to prevent simirar mistakes
in the later contracts. After the compretion
of work, the contractor .on.,p.r", the money
he has received for the work with the amount
he has spent on it.

Profit or Loss with reference to partial payments


At regurar intervars, the contractor is paid for the portion
of work compreted by him. To
know the profit and ross position for that part
of the work, the cost incurred by the
contractor
is compared with the payments received.

Comparison with Standard Costs


In this method, the cost record consists of the detairs
of the rate of cost for rabour
machinery and materials separately. These
are then compared with the rates.of those
items known as "cost standards". Ii is
then possibre to know at giance whether there
is
any inefficiency and how it can be improved.
Unit Costing

The carcuration of the rate of cost of each


item of work can be done by dividing the
expenditure on the item and the quantity
of work Jone. thus, ttre eniciencvlf the work
can be assessed by comparing the rates
in the cost estimates with the rate of cost as
calculated above. This method gives an
indicationl0 the fierd starf to take care of those
items of work where the losses are to be
reducJ.
5. Discuss step-by-step for budgetary cost control
for a proiect. (Apr/May 2ooa)
. For control and monitoring purposes, the original
detailed cost estimate is typically
converted into a project budget. The project
budget is the well co-ordinate
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management approved financial plan of operations, indicating the amounts required for
achieving assigned targets, and the expected receipts from sales or the value of work
done.

A project budget reflects the.financial plan of the operations, divided into responsibility

centers

with specific goals clearly outlined along with the costs expected to

be

incurred.

The Primary purpose of having a budget is to assign financial targets and resources to

each responsibility centers, to co-ordinate their activities, to form the basis for
controlling programmed, and to make the participants cost conscious instead of
purposeless routine working. The basis of the budget is the project plan and its
schedule
of work.

6. Explain the importance of forecasting the activity cost contro!. (Nov/Dec 2ooa)
For the purpose of project management and control, it is not sufficient to consider only
the past records of costs and revenues incurred in a project, Good managers should focus
upon future revenues, future cosls and technical problems.
Cost analysis aims to predict

future

costs. These cost forecasts serve two main purposes:

1. To appraise the project management of the possible cost over-run or under-run


for taking timely corrective actions such as modirying cash flow and updating
financial
forecasts and project profitability expectations.

2.

To update key personnel on anticipated cost changes in their field of responsibility,


so as to create cost consciousness for exploring means for minimizing wastage and
reducing costs.

3.

Jo'b status

report, explicit estimates of ultimate cost in each category of expense


are prepared, which are used to identify the actual prog ress and status of an
expense category.

4.

Estimates might be made from simple linear extrapolations of the productivity or


cost of the work to date on each project item.

7. Explaan Proiect Budget. (MaylJune 2oo9)


For control and monitoring purposes, the original detailed cost estimate is typically
converted into a project budget.

Definition: The project budget is the well co-ordinate management approved financial
plan of operations, indicating the amounts required for achieving assigned targets,
and the expected receipts from sales or the value of work done.

A project budget reflects the financial plan of the operations, divided into responsibi,ity

centers with specific goars crearry outlined arong with the costs expected

incurred,

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to

be

The primary purpose of having a budget is to assign financial targets and resou.ces
to
each responsibility centers, to co-ordlnate their activities, to form the basis for
controlling programmed, and to make the participants cost conscious instead of
purposeless routine working. The basis of the b.udg.et is the project plan
an{ its scledule,

or work.

'
'

In a construction project, the client and the contractor have separate budgets.
The client is construction budget is primarily a capital budget designed to formulate
tirne-phase funds requirement and the sources from which these funds are to
be
provisioned' It also includes the expenditure on procurement
of land, consultant fee,

constructor's payment gtc.

'

The contractor's budgeL is.. resources, cost and: sales income oriented budget. It
includes income and expeadit,re statements, cash frow, barance sheet etc

Importa nce of proiect Bqdget

It is essentially a planning document. It outlines the financial plan of tfre project.


It specifies the futur financial course of action for steering the project.

2.
3. It

specifies a standard for'rnemuring effectivefiess and efficiency with which


activities
are to be performed.

4' It is a financial comrnitment for-aotioF, an instrument for allocation of responsibility,


a means of commuhicaticrrl, an aid rlor co-oidination, a tool for motivation,

an

authority for imprementation- and a deviee for contro[ing performance. A project


without a budget is like a rnissle without guidance system or a ship without
navigational instruments.

a' vvhat are the components of ,fiRa.ncia+ aGounts?

(May./June 2009, Nov/.Dec 20r.1)

cost accounts provide onry o.e.of,-the-various components in a financiar accounting

system. Accounting information- is generalry used for three distinct purposes: .


L lnternal reporting to project managers for day-to_day planning, monitoring and
control,

2.

Internal reporting to managers for,aiding strategic planning.


3' External reporting to owner's, government, regurators and other outside parties,
' External reports are constrained to particurar forms and procedures by contractual
reporting requirements or by genera[y accepted accounting pracflces, preparation
of
such external reports is called financial accounting.

' In contrast, cost or managerial accounting

is intended to aid internal managers


in their responsibilities of planning, monitoring and control.
74

t_

Financial accounts

of an organisation always

contain proiect costs'

In

an

organisation
all the expense transactions are recorded in a general ledger'

The general ledger of accounts is the basis for management reports on particular
project as well as financial accounts for the entire organlsatlon. oLher components of
a financial accounting system includes:

4.Theaccountpayablejournal:Thisisintendedtoproviderecordsforbillsreceived

from vendors, material suppliers, subcontractors and other outside parties. Invoices
of
charges are recorded as checks issued in payment' Charges to individual cost
accounts
are posted to general ledger'

5.Accountsreceivablejournals:Toprovidetheoppositefunctiontothatofaccounts

6.

payable. In this Journal, billings to clients are recorded as well as receipts' Revenues
received are posted to general ledger.
lob cost ledgers: Summarizes the costs associated with partlcular project arranged
in the various cost accounts used for the project budget'

?. Inventory reqords: These are maintained to identiff the amount of materials


available
at any time. In traditional book keeping system, day to day transactions are first

recorded

as both a
in journals. With double entry book keeping, each transaction is recorded
debit and credit to the particular accounts in the ledger'
project
For example: Payment of a suppliers bi II represents a debit or increase to a
cost account and a credit or reduction to company's cash account' Periodically, the
Posting
transaction information is transferred to ledger accounts. This irocess is called
and may be done instantaneously or daily in computerized systems'

Inrecivingaccountinginformation,theconceptsofflowsandstocksshouldbekept
in mind. Daily transactions reflect flows of rupees entering or leaving the organisation.

Similarly, use or receipt of particular materials represents flow from or to inventory'


. An account balance represents the resulting cumulative amount of funds resulting
from these daily flows. Information on both flows (cash lnflow and outflow) and
stocks
arc nccded to give an accurate view of an organisation's state'
. In addition, forecasts of future changes are needed for effective management'
Informatlon from the ledger is assembled for the organisation's financial reports;
including balance sheets and income statements for each period'
. These reports are the basic products of the financial accounting process and are
often used to assess the performance of an organisation'

9.

Exptain the method of preparing iob status report


2O09)

with an example. (Eaylrr=

Management wifl need certain data from you in order


to see overal hearth,
performance against milestones, and the threai
that project issues present. For overalt
project health, these data points might include:

.
'
'
o
o
.
'
o

The project's name


The project identification number if your company uses
a toor to store projects.
The overa[ project hearth (red ye[ow green - more
on this in a futufe artiire;.
The go complete you expected to be at today (planned
completion).
The o/o complete you are actually at.
The number of days behind or ahead agalnst the plan.
The number of brocking issues you face
lmore about this rater in.this articre).
The number of ,,normal issues" you face,

These data elements shourd provide a sound overview


of project hearth for the, ayerage
executive who is not detairs mindecr and is not interested
in getting rflore involved,in your
proJed.

There are three major components to reporung project


status:

overarr: we need to see the overafl project hearth. As managers,


we want to be abre
arso want to herp make that determination
sometimes. You might not know everything we
know despite our best efforts to
communicate. your project might not be as healthy
as you think it is.
Milestones: your project has major accomprishments which
rnust be cornpreted by
specific dates. we managers want to see which
mirestones are comprete, which ones
are in progress, and which ones are coming up
next. This aflows us to'anatyse ttre
schedule and decide to either feel comfortabie
with it or challenge it.
rssues: Your project arso probabry has one or more
obstacres" to compretion which
have been discovered' we'd rike to see brief
a"tuiir uoort each issue so that we can
make a decision about whether or not to step
in and help if necessary.

to detect a project in troubre. we

t''^H}';::

fSrtrow

status report for project cash frow contror. (Ma.yltune

Cash Ftow Status Report


WEEK ENDING:
CASH BALANCE!
Checking Accounts
Savings Accounts
Cash Equivalents
PRODUCTION:
16

!.

2o1o,

Last Week
Last Month
Last Year

Average weekly production past 52 weeks


Forecasted Production next week

ACCOUNTS RECEIVABLE AGING:

rrent
31 - 60 Dat/s
51 - 90 Days
91 - ilIOIEF
120 + Drrs
Cu

TOTALAU.

AGO(x'ilXS PAYABI.E SUilllARY:


Ortrnt
31 - 610 Days
61 - 90 Days
91 - 12O Da)ts
120 + Days
Total All AP$
COLLECTIONS:
Last Week
MTD
YTD

COLLECiION RATTOS:
Total AP vs. Collections
Total AR vs. Collectlons

o/o

o/o

costs: This ls a summary of charges as reflected by the job ost

accounts, lncluding

expnditures and estimated costs.


o,f cash flow with respect to the owner of the
facility; this row would not be included for the reports to owners. the amount of allowable
batlhg is specified under the terms of contract between an owner and an engineer'
ardthct or @nstructor, In this case, total billings have exceeded the estimated proJect

Bitlings: This row summarizes the state

omCaion Foportion.
Pryables: The payables now summarize the amount owed by the contractor to material
slmfetrs, labour, sub-contractors. The total payables are equal to the total projdct
shovrn in the first row of costs.
rc
Hr.flGS Thb row summarizes the cash flow of receipts from the owner. Note that the
77

actual receipts froth the owner may differ from the


amounts billed due to
delayed payments or retain age on the part
of
the
owner. The net-billed equals the
gross
billed less retention by the owner.

cash Position: This row summarizes the cash position of


the project as if a[
and receipts for
project
the

were combined in a single account.

expenses

11'

rflustrate a typicar accounting income statesrrer]t'


statesaerlts and
afld acoounting
acoou,ting balance
bar
sheet. (Aprl,"y 20111 '""o'nting
fncome statement

r'

Income statement (arso referred to as profrt


and ross statement. (p&L), revenue
statement, statement of .financiar performance, earniREs
statenrent, operating
statement or statement of operations) is a company's
financiar statem:ent that
indicates how the .evenue (money received
from the sale of products and services
before e*pensei are taken out, arso known as
th "top rine:,) is.transformed into
the net income (the result after all revenues and expenses
have been accounted
for, also known as Net profit or the ,,bottom line").
r' It disprays the revenues recognized for a specific periodr.
and the
cost and
'
expenses charged against these revenues,
including *rit"_ofL i"r., O-"r".,u,,on
and amortization of various assets) and taxes. The purpose
of the income
statement is to show managers and investors
whether the company maae or tost
money dur;ng the period being reported.
r'_ rhe important thing to remember
about an income statement is that it represents
a period of time. This contrasts with the barance-sheet,
which .represents:a singre

'

moment in time.

Balance Sheet

r' In financiar accounting, a barance sheet or statement

of financiar position rs a
summary of the financiar barances of a sore proprietorship, .business
a
partnership,
a corporation or other business organization, iuch
as an LLC or un t-t-p, nrr"tr,
liabilities and ownership equlty are ristea
as or a specific date, such as the end of
its financiar year' A barance sheet is often
described as a ,,snapshot of a
company's financiar condition". of the four
basic financial statemeRts, the barance
sheet is the onry statement which appries
to a singre point in time of a business,
calendar year,

r' A standard company

r'
.

barance sheet has three parts: assets, riabirities


and
ownershrp equity' The main categories
of assets are usuary risted first and
typically in order of liquidity. Asseti are
fo[owea oy the liabilities. The. diffefencebetween the assets and the liabirities ir
r,no*n *
or the net assets or the
net worth or capitar of the company and according "quity
to the accounting equation, net
worth must egual assets minus liabilities
Another way to rook at the same equation is
that assets equal riabirities prus
owner's equity. Looking at the equation in
this way shows how assets were
18

ir-

r'

financed: either by borrowing money (liability) or by using the owner's money


(owner's equity). Balance sheets are usually presented with assets in one section
and liabilities and net worth in the other section with the two sections "balancing."
A business operating entirely in cash can rrcasure its profits by withdrawing the
enure bank balance at the end of the period, plus any cash in hand, However,
. many businesses are not paid immediatdy; they build up inventories of goods and
thy acquire buildings and equipment.

12. E)elain the adya.ntages


zoaz)

of budget update process in cqst control.

(MaylJune

Scheduling and project planning is an activity that continues throughout the


lifeume of a project, As changes or discrepancies behl/een the plan and the
realization occur, the project schedule and cost estimates should be modified and
new schedules devised.
Too often, the schedule is devised once by a planner ln the central office, and
then revisions or modifications are done incompletely.or only sporadically. The
result is the lack of,effective project monitoring and the possibility of eventual
clnos on the project site.
on 'fast track' projects, initial construction activities are begun even before the
facility design is finalized. In this case, special attention must be placed on the
coordinated scheduling of design and construction activities.
Even in projects for which the design is finalized before construction begins,

drange orders representing changes in the "final" design are often issued to
incorporate changes desired by the owner,
Beyond the direct updating of activity durations and cost estimates, project
rnirnagers should have mechanisms available for evaluating any type of schedule
clrange.
Updating activity duration estimations, changing scheduled start times, modifying
the estimates of resources required for each activity, and even changing the
project network logic (by inserting new activities or other changes) should all be
easily accomplished.
In effect, scheduling aids should be directly available to project managers.
Fortunately, local computers are commonly available on site for this purpose.

!L rL<t-ate the profit estimation of proiect under


6od- and "Completed contract method". (6 marks)
@eted-Contract

"Percentage completion

Method: In this method, income is only reported for completed

FoFds.

I6t on project underway is only reported on the balance sheet representing


air a}sset if contract billings exceed costs or liability ,f cost exceeds billings. When a
project is completed, total net profit (or loss) is reported in the final period as income.

Percentage of completion Method: The actual costs are reported on the income
statement plus a proportion of all project revenues equal to the proportion of work
completed during the period.
The proportion of work completed is computed as the ratio of costs incurred to date and
the total estimated cost of the project.

14. Describe the retationship between cost and schedute information. (Nov/Dec
20t2)

o
o
o

Actual project involves a complex inter-relationship between time and cost.


Additional resources applied to a project actiiity might resurt in a shorter
duration but higher costs.
The. project manager can easily recognise the relation between time
and cost

in

projects.

But

it is difficult to find effective project control systems which inelude both

elemehts.

Project costs and schedures are recorded and reported in separate apptication
programs,
Project manager must then perform the tedious task of rerating the two sets
of
information.
The primary difficulty in integrating schedule and cost information is the level
of
details required for the effective integration. A singre project activity invorves
numerous cost account categories.

Example: An activity for the preparation of a foundation wourd invorve cement,


workers, concrete forms-reinforcement, transportation of materials and other
resources. Even a more disaggregated activity such as erection of foundation
forms would involve numerous resources such as forms, nails, carpenters, labour
and material transportation.

'

Different cost accounts wourd norma[y be used

to

record these various

resoufces.

similarly, numerous activities might involve expenses associated with particular


cost accounts.

Example: A particular material such as standard piping might be used in

numerous schedule activities. To lntegrate cost and schedule information,


the
charges for specific activities and speciflc cost accounts must be the
basis of
analysis.

A method of relating time and cost information is to define individual

work

elements representing the resources in a particular project activity. Work


elements represent an element in a two-dimensional matrix of activities and
cost

accounts.

20