A critical process in most organizations executing Fixed Fee or Lump Sum Projects is the periodic revision of Estimated Costs at Completion. Other terms used include Forecast of Project Costs, EAC (Estimate at Completion process), ECAC (Estimated Cost at Completion process) and Cost to Complete process. The goal is to estimate the cost of the project at completion. As a business practice, this primarily applies to fixed fee projects that may span multiple financial periods.

So, the question is, why is this a critical process?

The reasons include operational and financial compliance. From a financial compliance perspective, GAAP requires that margin for Fixed Fee Projects be booked based on percentage of completion on a cost to cost basis. Percentage of completion cannot be determined unless the Project Cost at Completion is reasonably accurate and therefore the need to re-estimate the cost at completion. Other than pure compliance, of more significant importance, is visibility and management of margin variance.  This is because the actual margin for a project is unknown until the project has been completed and closed. Surprises at the end of the project resulting in reversal of prior period income are the worst kind.

From an operational perspective, there is substantial benefit when the estimates can revised on demand because of the visibility it provides to the Project Manager. The best way to create and manage estimates is by tracking and reporting variances by Cost Category by Task, Phase or Cost Code. Not only does it allow ongoing management of variances, but it can provide feedback to the organization to determine and understand trends and behavior across projects by Task and allow estimating these properly for risk.

Very simply, lack of a defined ECAC process, can negatively impact financial compliance and introduce unnecessary risk in Project based Organizations executing Fixed Fee Projects.

Please call us for a deeper understanding of how Dynamics AX and SIS PCM can facilitate this process for your organization.