Cost Value Reconciliation and Earned Value - Coursework Example

Cost Value Reconciliation and Earned Value Number: COST VALUE RECONCILIATION AND EARNED VALUE Introduction Every project faces high levels of risk in terms of financial loss and in most times the profits obtained are much less than the expectations. Since the main objective of each company is to obtain maximum profit, methods and tools need to be implemented to reduce the high levels of uncertainty experienced (Horngren and Foster, 2003). The study focuses on cost management, and the following techniques are going to be undertaken. They include:- Cost value Recognition Earned value COST VALUE RECONCILIATION This is the criteria used in determining and reporting profitability in a company. It involves the comparison of cost with value per time, the difference being the aggregate profit or loss on the task. CVR provides the management data to assist in solving problems and preventing loss repetition. In addition, it also has a high level of progress monitoring of work as the responsibility lies on the assigned representative. CVR effectiveness in providing information on cost: Through the standard statement of accounting practice, clear guidelines are to be followed to ensure adjustments, disputes and variations are to be included to meet the agreed plan before activating the process of paying the contractors or the representatives in this case the site managers (Maher and Rahan, 2005). It provides a glimpse of the financial status at a specified time, without presenting information that concerns the final results of the project. Through legal requirement guidelines, recommendations and requirements found in the construction company; hence, promoting easy identification of any loss or potential losses incurred so that the entity does not claim to be more profitable than it is. The Art Institute states that problems are recognized easily as it provides management information such the reasons for losses incurred to prevent repetition (2008). a.) CVR effectiveness in monitoring progress of works CVR ensures a high level of monitoring in different levels of works through the use of external entities. A representative undertakes independent valuation with the purpose of benefiting the contractor’s CVR process. b.) Party that will benefit most from CVR use The CVR primarily benefits the contractors as it undertakes the budget monitoring, cost and value thus coming with accurate results so good cut off deal reached between the involved parties. The periodic of accounts met, thus making it possible for management to access data that it uses in decision making. c.) CVR ease of use in practice: Through the use of CVR, information obtained is mostly accurate thus there is the less repetition of cost valuation, and thus profit maximization obtained as workflow goes faster and smoothly. The client has little workload when using the CVR and thus much satisfaction obtained at work leading to quality results in the long run (Potts, 2008a). d.) Advantages of the CVR I. Financial difficulties within the construction company pointed out and this helps in controlling the project finance activity. II. Accurate information provided on profits and losses incurred in the project in a particular financial year. III. Time frame for the agreement significantly reduced as minimum calculations undertaken externally. IV. Ease of work as adjustments accomplished faster thus reducing resources in the project (Fleming and Koppelman, 1994) since clear guidelines are to be followed, V. Since much information provided to the management, problem identification becomes easy, and losses avoided. VI. CVR provides greater control outside the scope of the project. Organizational level measures are applied to enable the project performance meet its financial goals and objectives. Disadvantages of CVR: I. It becomes tedious to transfer information from various projects due to difficult cut off dates to determine the cost to date. II. There must be an accompanied examination of the ultimate position of the agreement for the CVR to be meaningful thus it is mostly meaningless. III. It is not meaningful when using the small value and short term contracts as the value may not reflect the cost incurred for the various levels of financial control (Cooke and Williams, 2009). IV. For a resourceful CVR assessment to be undertaken, more information would be required to establish the present economic position of the project. An effective CVR delivers initial expected profits, forecast figures within completion for value and profit, the current amount application by the contractors, the current certified value, the cost to date at the accounting period in question. V. There is no breakdown of profit figures between the types of work of different locations. It thus only provides guidance on which project needs senior cooperate attention. EARNED VALUE It is the measure of performance in order to give the position of a project in terms of cost and time consumed over a defined period (Hansen, Mowen, and Guan, 2007). It is an approach used where the big picture needs to be reviewed in every month. If EV is employed in a given company, the rate at a given milestone can be identified. It defines the company’s progress and total expenditure of each item. Problems are tackled at the onset of the project. There are three significant elements of earned value. They include: Planned work Actual work Cost of the mentioned actual work A full analysis of elements ensure of project growth and also its performance. A real state of a project is achieved comparing these elements ensures. The reason is that the project manager would be able to identify why the actual cost is less than the estimated budgeted cost. If all the activities are moving as planned, then the project is headed on the right direction. This minimizes the cost incurred and, therefore, more profit is generated. In case of delay, it means that what was planned is more than what is generated. This is thus not clear sign and thus an alarm that the project is not doing well. Earned value applies various practical steps which include: 1. Having an established work breakdown. This provides a well defined structure for analyzing at different levels or angles. 2. Stating the possible activities. The breakdown structure gives an illustration of the work for identifying the activities in the project. 3. Set the cost aside. It involves allocation of cost estimated on each activity. 4. Schedule Setup. This defines how resources would be distributed among different activities. 5. Analysis and Plotting. It contains the tabulation and plotting of information and finally analyzing it. 6. Updating the drafted schedule. It involves making change after every step. 7. Actual cost filling. This contains the details from the time sheets 8. Print and plot calculation. This concerns report printing, and various charts drawn for analysis. 9. Final analysis and Reporting. The results finally analyzed thus providing a uniform methodology. a.) EV effectiveness in providing cost information Management can tell why the real cost is less than the budget cost. Through the elements of earned value, managers can calculate different terms, and thus be able to envisage the time needed to complete a project. The budget can also be predicted and thus reducing incurred cost that might be associated with guessing. This ensures the company meets its objectives of profit maximization (Walker and Wilkie, 2002). b.) EV effectiveness in monitoring progress of works Management can make a full analysis of a project’s progress and performance by comparing key elements of earned value. Actions undertaken in a timely manner when there is the measure of performance, and thus a proper, average budget obtained, therefore, leading to reduction in cost. c.) The party that will benefit most from EV’s use The Steps involved may not be clear to the client as a lot of calculation is needed, and this may confuse the client. Its main emphasis is on time, and thus the contractor might demand more money than initially anticipated (Kuehn, 2010). This might present a significant loss to the client, especially if the project is small scale. It is easily read and does not go into the details. It benefits the client more than the contractor as there is no much digging into the real details. d.) EV ease of use in practice Since the earned value technique uses a consistent procedure to arrive at the cost, there is much reduction in errors which may result in inaccuracy thus bringing losses to the projects operations. e.) Advantages of the EV I. A consistent method of analysis always provided by this technique. II. The sponsors of the project are mostly satisfied and thus investing more. III. It does not limit on the project size as it works best in all manner of projects. IV. EV is used in the management of all capital projects in any organization while employing any approach of contract. V. The output understood easily when EV is used in prediction. Disadvantages of the EV I. A critical path never addressed thus making the technique deterministic. II. Since it may require much time, it is not suitable for small projects as it emphasizes much on time. III. EV does not address or handle management reserves. IV. While doing the analysis of EV, we do not take quality into much concern. It will, therefore, result to the project scoring high on earned value performance, but the quality of works being low. V. Cost of implementing EV causes managers not to use it widely. f.) Conclusion on CVR and EV: In conclusion, CVR appears to favor the contractor. However, it also helps to meet requirements by providing a series of account statements, both in the project and organizational levels. This technique gives value to both the client and contractor and mostly appears to be more detailed in analysis. On the other hand, EV is concerned with cost and value, which is mostly limited, and only suitable in large projects. It appears to favor the client as it is exceptionally easy to comprehend and does not go into much detail. QUESTION 2: a.) Report to the board of directors Following a recommendation made by one of our former company’s clients Mr. Andrew, I hereby air my proposal to the company concerning this issue. It concerns the redevelopment of a neglected 19th century three storey storehouse structure situated adjacent to a river in the South of England. Mr. Andrew has secured the buildings freehold but feels new the mentioned project. He, however, wants to convert the building to 20 luxury one and two bedroom apartments. There appears to be a serious problem since the Mr. Andrew faces some financial constraints. However, he has not appointed architects or engineers and wanted to know if the company may take these roles. The basic outline and sketch drawings , as well as an outline specification are available. The risks involved First, the company’s involvement in the contract despite the uncertainty in the recovery of the funds poses a formidable challenge and high risk. Mr. Andrew, for instance, wants the company to take the contract of designing and building a new luxury building yet at the moment the company has not made much profit and thus funds are low. This is a serious risk to both the company and the client. The company has to ensure achievement in Mr. Andrew’s requirements as it is our responsibility, including the production and the statuary approvals. In addition, the building has not been inspected yet by the engineer and architect, it is, therefore, very difficult to be certain with the project’s success. The fact that the structure stands along a riverbank also posses high risk. This means that its foundation might have been weakened by water. In addition, the building is old; hence, its stability cannot be ascertained. The river may be having some chemicals which might corrode the foundation materials thus further weakening the building. Since the foundations are extremely old, chances are that the people who will live in the apartments will be at risk as the building might fall thus injuring or even killing many people. The construction workers may also be in the same risk as the building may weaken and fall while they are undertaking their duties. This makes the cost of paying the workers to be high and also much expensive materials used. Mr. Andrew may find the project being too expensive. The fact that he does not have the necessary funds poses another risk as he may drop the entire project without much consideration. The site may also need time for preparation before construction can begin. Specialists and junior contractors may be required for this purpose, thus increasing the costs of the project. The building being along the river might be affected by floods, and this is a substantial risk considering that most people would be living in that surrounding. The river might also burst and affect all the surrounding people living around. This comes with serious effects such as the spread of diseases, which would cause a substantial risk to residents. The company as it appears needs to have a clear analysis of the Mr. Andrew’s proposal. A justifiable contract would be established. This would ensure less risk involved between the company and the client. Along with the risks involved, the company will need additional information in order for Mr. Andrew to have accurate price on the project. Information needed The most valuable information we will require is the returns that the business is going to reap in the long run once the project comes into conclusion. We require a summary which is clear stating the exact project requirements and stipulations of the materials it intends to use. It is also necessary that we are sure of the duration the project would take, as well as the time of completion, so as to approximate how it is going to stand without the used funds. The approximated budget is another critical requirement. We must be aware of the costs that will ensure the project completed. It will need to employ early planning and evaluation mechanisms to take care of this factor. There is also need to check the site conditions to make sure they would not elongate the project duration. Unless this is done, it could result into unforeseen extra charges that would be required to handle emerging challenges. Designers Role Mr. Andrew has given the company the responsibility of designing the apartments due to its long experience in design. Since we have our own architects and engineers, it will be easy to assess and design the project. In addition, we would have substantial interaction between the company’s designers and team members, thus benefiting us as a company in recognizing potential workers and also enhancing better communication skills. Conclusion: Since it appears that the project involves a lot of factors, a clear analysis should be done so that the company does not enter into an agreement which is not justifiable. This could affect the status of the company and also bringing losses. It is thus vital that the issue is addressed quickly and with much consideration for the client to start the project within the stipulated time to beat the estimated schedule. b.) Mr. Andrew’s concern regarding quality and price certainty as the works progress and methods of cost control Mr. Andrew is concerned about quality and price certainty and thus the aspects should be considered well. Since the plan is to stick to the project schedule, we need to obtain all materials and equipment before the project begins. This will make sure that no delays occur due to late delivery. The company also needs to ensure that it uses recommended materials and methodology. This will enable us achieve quality by adhering to the set standards. Quality management is crucial as it provides quality control systems which reflect the steps taken in each stage of the project. We should also analyze the possible challenges that might derail the project in the initial phase. These aspects are to be considered highly and are of excellent use in execution of the works. The following factors will be taken into account when managing price, quality and cost. Quality control: As the design role is done by our company, it is easier to achieve maintenance of the connection between the two and thus having quality products. Quality can be achieved by the company employing self discipline and in compliance with the specification. Since this contract mainly focuses on comprehensive statement of requirements, there is certainly a better chance of producing a high quality than there would be writing a bill of quantities. A reliable way of encouraging is by obtaining a clear statement and defining a client needs, and to have requirements being in the employers requirements. We need to plan as planning plays a vital role in ensuring quality control achieved. Planning involves five stages: Planning how to achieve the required quality, materials, equipments and construction methods. Initial construction phase. Having quality standards, which are clear, and designed as per the requirements. Correct of errors experienced. Long term quality strategic mechanism systems and quality culture. Cost control Cost control is an important aspect of producing and maintaining accurate records of all materials. It is entirely dependent on the manager’s decisions and translation of the decisions into practice. Cost control has a number of elements which include: Comparing desired standard and the observation made Corrective action to be taken early in the early stages of the project. Cost control information systems will perform tasks such bookkeeping, including the recording of accounts payable and other financial accounts. Progress estimations also needs the distribution of responsibilities, regular job gatherings to discuss setbacks and solutions, the determination of quantities of work produced, analysis of cost and filling weekly progress reports. Management materials like earned value may be employed. The actual work completed is realized through the help of Earned value. It gives the comparison of the estimated amount of the work completed to the actual amount of work completed. This comparison is done in terms of money and time. Cost value will integrate schedule, cost, and work using a work breakdown analysis. It is essential to evaluate estimates; a critical path technique is used in collaboration with other techniques. A critical path technique is an advanced system of planning and scheduling. It graphically shows each activity and the interrelationship from the beginning to the end of the activities. It also gives the status of the project at any given time. Earned value is also beneficial in estimating the new cost at the final stage of the project. It also enhances the analysis of showing if the project is on schedule or not on schedule budget and thus necessary actions are taken in the early stages. This reduces unnecessary cost that the company may experience. c.) Effects of being the only bidders for the works The concern of our competitor contractor backing out from the project poses a sizeable impact. Since the company has a lot of experience and believes in itself, would reduce the risk of taking the contract. Thorough analysis would be done, and accuracy maintained, to ensure quality achieved and fewer errors experienced. Since the designers and contractors bear more risk, their rate of compensation would be higher since they face immense risks. This would drive the cost of the project upwards. More attention is paid in getting the best results and thus minimizing the occurrence of errors. This concern ensures that increase by additional percentage to keep a considerable amount of funds. As designers, we are bearing high risk; hence, the profit percentage will increase. This includes additional costs the company incurs in keeping sufficient data, including other external people who would be working on the venture, for various tools like earned value. There are various cost elements for the provisional funds and would be discussed below: The Design possibility The construction concern contingency to cater for the cost growth during construction. External sources management contingency. This includes other areas that might show a high risk and change possibility. Mr. Andrew’s insurance name and our company will need to be taken so that the risk may be mutual and to both concerned parties. Estimates must be reviewed and checked for consistency and precision as a disappointment in the right estimate may result in Mr. Andrew leaving the project midway thus having significant effects on the company. In regards to the above serious concern, the following points need to be considered. Estimating the possibility or probability of such situations occurring Potential challenges analysis. Having an estimate of the likely consequence Making a decision on risk intolerance. Risk categorizing into matrices Having a review of design to reduce risk to a considerable low level It is also crucial that Mr. Andrew gives additional information. This is in regard to securing finances as this will play an important role in the project. If this concern is neglected, then the project would be at the risk of being incomplete. Therefore, the project demands a high analysis in planning for correct estimation of budget and the probability of the mentioned risks occurrence. List of References Art Institute 2008. Purchasing, cost control, and menu management. New Jersey: Wiley- Blackwell Cooke, B., and Williams, P., 2009. Construction planning, programming and control. New Jersey: Wiley- Blackwell Hansen, D. R., Mowen, M. M., and Guan, L., 2007. Cost management: Accounting and Control, 6th ed. Ohio: South-Western College Pub. Horngren, D. and Foster, C., 2003. Cost accounting – A managerial emphasis. 11th ed. London: Prentice Hall. Kuehn, U., 2010. Integrated cost and schedule control in project management. 2nd ed. New York: Management Concepts. Maher, L., and Rahan, G., 2005. Fundamentals of cost accounting, 1st ed. New York: McGraw- Hill. Potts, K., 2007b. Construction cost management: Learning from case studies. New York: Routledge. Potts, K., 2008a. Construction cost management. Kentucky: Tayrol & Francis. Walker, I, and Wilkie, R., 2002. Commercial management in construction. New Jersey: Wiley- Blackwell Read More