4castplusUNDERSTANDING THE RELATIONSHIP BETWEEN BUDGET AND PROCUREMENT IN 4CASTPLUS

In 4castplus, there is both Budgeting and Procurement in the same system

There are many advantages to this …

It’s good to know, for example, that you have sufficient budget to cover the value of the items and services you want to purchase (procure).

And it’s also key for sharing a common set of codes, and the WBS, so that you can report on the project from all perspectives

When using 4castplus however, you need to understand the difference between what you’ve “Budgeted”, as compared to what you’ve “Committed” to purchase.

The reason it’s necessary to discuss this distinction, is because for many organizations, they consider Committed Cost to be their project Budget.

And that’s because, the vast majority of their project work is performed by subcontractors. Therefore, the majority of project cost is what they procure.

So, in this presentation, I’m going to help you understand Budgets, Committed Costs, Requisitions, and Actual Costs – and how they relate to each other.

I’ll also help you to understand how Change Orders fit into all that – in addition to how Purchase Order Revisions tie-in.

Confused?

If all that sounds confusing, just hang in there, and I’ll explain.

First, let’s talk about the Project Budget

On a new project, the ‘Budget’ typically starts out as an ‘Estimate’ of all the work and resources that will be required to complete the project.

After an iterative process of refinement and approvals – and budgeting levels – eventually what was estimated gets approved and becomes the new project Baseline Budget.

If you’re an Owner, you’d be given an Approval for Expenditure (AFE) and if you’re a contractor, you’d be awarded a Purchase Order. Or something similar.

The way this part works in 4castplus is like this …

On a new 4castplus Project, you can create a bottom-up “Estimate”. Which can be found in the Estimates tab …

Estimates can be built directly in 4castplus

The Estimate is built-up by the Work Breakdown Structure “Workpackages” – Using resource disciplines with estimated quantities and unit rates.

Once you have approval, you can Baseline the estimate – which creates the Baseline Project Budget.

Once the project is ready to go, you can Baseline the Estimate. This creates the Baseline Project Budget.

Your Budget is intended to capture ALL costs.

The Budget is intended to capture ALL project costs including :

1. Internal Costs. For example, employee labor, owned equipment, etc.

2. Materials & Equipment to be purchased or rented

3. Vendor services to be subcontracted

4. Other Consumables & Expenses

The Budget is also broken out into Cost Codes. The Cost Breakdown Structure (CBS) defines the hierarchy of cost areas for your project.

And with 4castplus, the Budget is Time-Phased over the project schedule & spend-forecast timeline.

Time-Phasing ensures you can monitor expected cost, or Planned Value, at any point in time during the project. This is key for comparing budget with Actual Cost.

A Time-Phased Budget looks like the orange line in the chart below. The Green line is the actual costs.

The orange line in the previous slide is known as a “Spend Forecast”, because it uses the total project budget to forecast how the project costs will play out over time.

Remember, none of this has anything to do with committed costs with subcontractors yet. We’re just creating a model for the project for cost and time.

Think of it as a detailed Control Budget. It’s there to monitor and control the project spend:

• When• How much• On which project codes

So now that we have a control budget, we can look at the details of how that budget is to be spent.

In other words, we can start making Requisitions to Buy – or Purchase Requisitions – to award the work, and schedule the purchase of equipment & materials, etc.

The Purchase Requisition is the first phase of the Procurement Process. It leads to RFP/RFQ and Purchase Orders.

Now, before we go too far into the procurement process, you might argue that …

What your subcontractors & suppliers quote you will have a significant effect on your budget.

So, shouldn’t you figure that out well before you baseline so that your budget reflects real numbers rather than just estimated numbers?

That’s a fair point in theory, but in reality you may not have that luxury. In other words, if you have firm, committed numbers, by all means, use them in your budget.

But it’s likely that you may not have ALL the numbers by the time you start the project.

And further to that, if you’d prefer to launch an RFP/RFQ process to get firm bids before baseline – that’s also a valid method of planning.

Ultimately, there are many ways to build that Control Budget – it all depends on how your process works.

In any event, after the Budget is created – by baselining – you won’t see the Estimating Tab in 4castplus anymore for that project …

Instead, you’ll see a Progressing tab that enables you to create and submit Progress Measurements.

You’ll also now see a Change Management Tab. This is where you can create Change Orders to represent the budget modifications that occur over time through Project Changes. The Baseline Budget cannot change.

We’ll discuss Change Management a bit later on. Now, let’s show how the procurement piece fits in.

Procurement

As mentioned above, the Purchase Requisition is the first entry-point for the Procurement process. The whole process looks a bit like this:

Purchase Requisition RFQ/RFP Purchase

Order Receiving Invoice Match & Approval

Start Here

The Purchase Requisition is where you can specify any materials & equipment to buy; or for services that need to be subcontracted.

It’s at this entry point that a lot of project, cost code and budget validation occurs.

Each item to procure needs to be procured against a valid project cost code and workpackage.

Once you have valid items specified onto purchase requisitions – those items can be moved onto either a Request for Quote, Purchase Order, or both.

When a Purchase Order is ready to be issued to the Vendor, those items get Committed onto the PO. See the diagram in the next slide for details on the “States” of the procured items.

Purchase Requisition RFQ/RFP Purchase

Order Receiving Invoice Match & Approval

Requisitioned In RFQ Committed Incurred Invoiced

These terms define the State of the procurement Items as they move through the procurement process

Getting back to how this relates to the Budget …

An important thing to understand is that: Creating Purchase Requisitions can be done independent of the Project Budget.

The system will check that you have sufficient budget available on that cost code to cover the purchase – but it won’t deny you from requisitioning and purchasing.

Project Controls can be notified about any potential overruns, and can run a variety of reports that show Budget compared to Requisitioned & Committed on all cost codes.

But the system won’t FORCE you to have budget available. Have a look at the report in the next slide…

That report tells you a lot of things that we’re discussing in this presentation

It tells me I have a $7.2m Current Budget – over the initial $6.9m Baseline.

And, of that $7.2m, $4.3m has been Requisitioned. And of that, $3.3m has been Committed onto Purchase Orders.

As I mentioned earlier, it’s possible for the Requisitioned (and Committed) values to be greater than the available Budget.

Which means – in those cases, you’re heading for a cost overrun and you should probably go get a Change Order to ensure you have the appropriate amount of budget.

Or, start thinking of some excuses for why you went over budget

And start planning your next career journey.

To avoid that scenario, it’s key is that you have the Control Budget there to monitor where you’re at to plan.

Having that Control Budget in place is a fundamental principle of Project Controls

The Control Budget allows you to compare:• What’s been Requisitioned to spend,• What you’ve Committed to spend, and• What you’ve Actually spent

… against what you’ve Budgeted to spend

Appropriate control of your spend is a matter of process and policy for your team. 4castplus provides you all the tools, notifications & reporting to easily enact & enforce that policy.

Let’s have a look at how change orders fit into this

Change Management

Change Orders are obviously pretty common, and will most often affect the Project Budget in some way.

Changes in 4castplus can be applied to both Budget and Schedule.

For the purposes of this discussion, we’ll be focused on changes to Budget.

There are four different Types of changes that can be created which will affect the budget …

There are 4 Types of Changes in 4castplus:

1. Change Order: Scope Change

2. Budget Transfer: Controlled movement of funds within the project budget

3. Contingency Drawdown: Withdrawal from the Contingency Reserve into the project

4. Change Forecast: Forecasted potential for Change and Change Trends

Check out this article for more on this topic: http://www.4castplus.com/whats-the-difference-between-a-change-order-change-forecast-and-budget-transfer/

The Change Management Dashboard in 4castplus, looks like this:

Regardless of the type, Change Management will only affect the Budget; and will not automatically modify any purchase orders in procurement.

Any scope or budget changes that require a modification to a purchase order, will need to be done through a Purchase Order Revision.

In other words, Change Orders modify the Project Budget, and PO Revisions modify Purchase Orders.

Change Orders and Revisions are similar in that they’re both auditable, reportable and financially controlled.

Revisions, in other words, will only change the Committed amount of a PO, not the Project Budget.

The next slide shows where to find Purchase Order Revisions …

As mentioned earlier, the Cost Code is what establishes the connection between the items being revised on a PO and the Project Budget

So, in keeping with Project Controls Best Practice…

When you have a scope change and require an extension to a subcontractor’s contract …

You can go ahead and create one or more PO Revisions and up the Committed amount on the Cost Code. But …

You should enforce the policy that a Change Order is required to also up the budget for that cost code before revising any PO.

That’s it.

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