Dale R.

Labitzke, PE
Professional Chemical Engineering
http://www.born2process.com

PROJECT ACCOUNTING

THE AIM OF PROJ ECT ACCOUNTING
The aim of project accounting is:

1. To measure project spending on a timely basis and compare it to budgets.
2. To provide auditable financial records suitable for managerial reporting,
planning, and control.
3. To maintain up to the minute project spending projections for use by
project management.

ACCOUNTING METHODS
The accounting profession is regulated profession and as such performs its
service to a regimented set of standards. We have nothing to offer to improve
upon the profession.

Most Owners engaged in manufacturing have a regimented Code of Accounts
that is used to distribute costs for future use. It may be used to track capital and
fixed expense from a project against the manufacture of certain products, assign
other fixed costs, and assign variable costs of manufacture. This is information
vital to the operation of a business. The amount of information and level of detail
necessary for the business should be determined in the early project planning
stages.

PROJ ECT ACCOUNTING
Unfortunately traditional accounting information is not as useful to the
management of a project as it could be. Although the information is accurate in
every detail the information usually does not arrive in time to facilitate useful
project decisions. Even a smaller project could have spending authorized at the
rate of $20,000 to $30,000 per hour when all crafts are on site. Allowing for the
traditional monthly billing, time for checks to be issued, and reports prepared, on
the average accounting reports are about 6 to 12 weeks behind on the
authorization. A 15% spending problem for 6 weeks could be a $6 million
problem when detected in Accounting by traditional controls.

A common practice is to delay payment of invoices to take advantage of market
conditions for as long as possible. This should not be done on a project. First of
all, most contractors have to pay for labor, equipment, and fuel very promptly and
most do not have cash reserves to use. The other reason is when a contractor
cannot pay bills, he stops working, and that can have a very serious
consequence on the Owners timing on bringing a new product to market.

For these reasons we strongly suggest that the Project Manager insist that the
Project Accountant:

1. Maintain the Commitment Register. This is a log of money committed to
be spent prior to receiving the actual invoices. This register is not any
form of official record for the business. It is a tool that helps predict project
financial performance prior to the actual spending.
2. Pay invoices when received.

THE ESTIMATE TO COMPLETE
The estimate to complete (ETC) is simply the sum of all money spent (invoices
paid), plus all money committed but not invoiced, plus all money budgeted. The
power of the ETC is that it will predict project over-run and under-run earlier than
any other method.

The commitment register should be reconciled with the purchasing register and
the ETC for the project prepared for the Project Mangers review weekly.

ACCOUNTING SOFTWARE
There are a number of good accounting software suites available. The mark of a
good program for project use is the way it handles the expenditure categories.

1. When the project budget is made, it should reflect the anticipated invoices
on the job. That is to say if the Project Manger anticipates building 12
buildings and each one has concrete work, each building could have
excavation, fill and compaction, forms, reinforcing, pour, finish, and clean-
up. A budget for the concrete contractor could have 84 budget entries.
This is desirable because estimating in detail helps with the budget
accuracy. The software should be capable of presenting accounting
information in a way that speeds up information retrieval for the weekly
ETC.
2. The other consideration is retrieval of information for either auditing or
competitive pricing information. In other words it may be interesting if the
software could provide information that showed that Contractor A installed
pump foundations for $500/cubic yard and Contractor B installed for
$780/cubic yard.

PROJ ECT CONTROLS
Here are some pointers with respect to controls which should be followed by the
Project Accountant in establishing auditable records.

Consignments.
The Project Accountant must verify that mathematically, requisitions are correct.
He must verify that there are sufficient dollars in the control estimate for the
consignment or that proper approval for deviations from the estimate has been
obtained. The Project Accountant is responsible for verifying that the
consignment does not exceed the Grant of Operating Authority of the Project
Manager or the Grant of Commitment Authority of the Purchasing Agent.

Expenditures
1. Fixed Price or Lump Sum Commitments
a. Check the invoice for mathematical accuracy.
b. The prices, quantities, and terms must correspond with the
commitment document,
c. Obtain written certification from the Construction Manger or Project
Engineer that the property or equipment has been
received/installed per the contract.
d. The construction manger or Project Engineer must confirm that the
percent complete claimed on the invoice is accurate.
2. Unit price commitments
a. Check the invoice for mathematical accuracy.
b. The prices, quantities, and terms must correspond with the
receiving reports,
c. Match the invoice with the commitment document to verify that
prices, quantities and terms are all identical.
d. The construction manger or Project Engineer must confirm that the
percent complete claimed on the invoice is accurate
3. Cost plus commitments. These commitment require the greatest amount
of detailed verification
a. Verify on a test basis that all labor hours as claimed are accurate.
b. Verify that the contractors supervisory personnel are not being
billed under direct labor.
c. Verify that all overtime was properly authorized and properly
calculated.
d. If equipment rental is with operator, verify that time is not charge for
operating the equipment.
e. If the contractor furnishes material, ensure he validates the invoice
with purchase orders and receiving reports.
f. If the contractor made returns, verify that the proper creditor is
passed along to the Owner.
g. If small tool s are not included in the contract, ensure that the
contractor presents purchase orders and receiving reports for small
tools
h. If insurance and taxes are reimbursable, ensure that the contractor
has actually paid these fees.
4. Engineering services contracts. Basically the same verification as for cost
plus work as described above should be used.

General Dangers
The construction industry is subject to rapidly changing business cycles.
Because of this, all project personnel are to be constantly alert to inherent risks in
the industry which may endanger project objectives. These dangers range from
outright fraud to errors of commission or omission.

Here are some of the points which must be constantly kept in mind:
1. Payment Holdback. Has a contractor been keeping his payments to
subcontractors and suppliers up to date?
2. Front Loading. Hs the contractor engaged in the practice of billing in
advance of work done?
3. Insurance. Laws vary. Some states require that the contractor pay
insurance if subcontractors men fail to receive their wages. Check the
contractors insurance certificates.
4. Cash and checks
a. Check the system of internal control as to opening mail and
handling of bank deposits.
b. Check the entries for purchase discounts and returns to see that
they have not been understated.
c. Cash receipts from sale of scrap materials should be controlled
carefully.
d. Unclaimed wages should be controlled properly.
e. Make a thorough examination of all checks drawn payable to cash.
Be alert to the possibility of fraud in the cashing of company
checks, especially payroll and travel expense checks.
5. Requisitions. Requisitions are susceptible to fraud where the system of
internal control is weak. Collusion may exist when a requisition for the full
amount is not issued against a blanket order or when the entire invoice is
not recorded.
a. Check the system of distribution of labor costs to individual
contracts.
b. Check the contractors payroll records and labor costs against the
foremans time sheets and superintendents labor reports.
6. Sales of materials. The material on hand is vulnerable to theft or fraud.
a. Check the system of internal control over the withdrawal of
materials from stock, and the return of unused material from the job
to the warehouse.
b. Check the system of internal control over the invoicing of cash
sales of materials.
c. The warehouseman should be charged with the responsibility of
preparing the "stock withdrawal vouchers" which should be pre-
numbered by machine and should indicate clearly the area to be
charged. The employee taking the material should sign for
withdrawals
7. Material costs. Because material and supply costs are a large factor in
the overall cost of construction the adequacy of the internal control system
over pilferage and diversion is important.
a. Check whether a particular type of material charged to the job was
actually used in the construction of that job.
b. Insist upon checking delivery slips for job site material, as well as
the creditors' invoices, especially when a company person has
been constructing his own home during the project duration.
c. Be alert to the possibility of collusion with the representative of any
supply house or any subcontractor,
d. where costly job materials or supplies may be delivered to
someone's home,
e. Where material inventory items may be deliberately over-priced,
and
f. Where physical quantities may be deliberately overstated.
g. Check total quantities charged to the job against quantities as
shown on contractor's estimate sheets.
h. Check the purchasing system to determine that all purchases of
materials for jobs are made from those creditors who have the best
quality and the lowest prices, rather than on the basis of friendship,
gifts, or secret rebates and commissions.
i. Establish proper internal control by making the warehouseman
responsible for checking incoming material against purchase orders
and attaching receiving slips and purchase order to the invoice.
The invoice should clearly indicate the contract to be charged.
8. Padding Expense Accounts. The expense accounts of mechanics while
working on a job at a distant location may prove to be sizable and
susceptible to padding. Verify their expense vouchers against hotel bills
and other invoices, and examine the approvals of the superintendent and
foreman on the job. See to it that all creditors invoices are cancelled as
soon as they are paid, so that there is no possibility of paying an invoice
twice.
9. Bonding employees. See to it that all proper employees have been
bonded by an insurance company. The surety bond secures protection to
the contractor and as well serves to discourage defalcations on the part of
employees