You Know Project Cost and Revenue; Do You Know Your Project Margin?

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You Know Project Cost and Revenue Do You Know
Your Project Margin?

• Dina Rotem

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• RAFAEL is an Israeli company.
• About 5100 employees.
• Revenue of 1000 million USD.
• About 55 export
• Three divisions as business units

About RAFAEL
Current Release 11.5.10 CU2, with Projects
FP_M   Projects (Costing Billing), Purchasing,
Financials (GL, AP, AR, FA, CE, XTR), Project
Manufacturing, OM, Shipping, Service, HRMS.
About E-Business Suite in RAFAEL
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Introduction

• Contract project financial results depend on
  properly matching cost of sales with revenue
  recognition.
• However, cost incurred on a project may not
  reflect the accurate cost of sales.
• Key Issues
• Cost not generating Revenue at all.
• Cost Revenue in different periods (Timing)

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Cost of Sales Margin

• Period Revenue

• Period Expenses
• Cost not yet charged, although contributing to
  period revenue
• Cost charged, however not contributing to period
  revenue
• Cost not Generating Revenue
• Provision for Loss

-

• Period Cost of Sales

• Period Margin

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Cost not yet charged, although contributing to
period revenue

• Supplier rendered services or goods, while
  supplier invoice or receipt accruals not yet
  entered.

Effect of Missing Costs Revenue Methods Revenue Base
Cost of Sales understated, Margin overstated Milestones or Deliverables or Progress Percentage Progress
Revenue understated, Margin not affected Project Percent Spent or T M Contract Cost
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Cost charged, however not contributing to period
revenue
Incurred Cost that should not be in Cost of Sale Revenue Method
Supplier costs charged, however services or goods were not yet delivered. Prepayments or advances paid to suppliers Subcontractors / Partners / Sales Agents paid of customer payments. Percent Spent
Materials received and charged to the project, however still in Inventory (PJM). Products Deliverables
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Cost not Generating Revenue
TM contract (funding 80)
Internal funds (20)

• A project for R D in a Cost-Share situation.

Billing TM _at_ 80 Revenue As Billed
Internally funded RD 20 of cost incurred
Expensed
Capitalized
OR
Project Cost of Sales 80 of cost incurred.
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Cost not Generating Revenue Example
Amount Detail
1,000,000 Project Cost
900,000 Customer Agreement Allocated Fund
900,000 Billed amount Revenue
800,000 Cost of Sales (80 of Cost)
100,000 Project Margin 900,000 800,000
200,000 Internal RD (20 of Cost)
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Cost and Revenue Relationships
TM
Spent
Progress or Deliverables
Regular Cost
Actual Costs
COGS
COGS
COGS

Deferred Cost
Supplier Cost Accruals
WIP
WIP
Internally funded Cost
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Solution Supplier Cost Accruals

• Frequently, items and services are received in
  one accounting period and invoiced in another.
• On period end, when supplier costs are missing or
  delayed, you may enter miscellaneous expenditure
  items as cost accruals, and reverse them next
  period.
• Enter accrual expenditures before generating
  revenue.
• Revenue generated based on WORK (TM) or Percent
  Spent methods, is accruing revenue for all costs,
  including the accruals expenditures.

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Revenue Based Cost Accruals

• Initially, all project costs debit expense
  accounts.
• Revenue accrued based on engineering progress,
  milestones or deliverables.
• GDR is calling a billing extension, creating a
  pair of events, offsetting each other.
• Offsetting events have no effect on Revenue, UBR
  UER.
• Setup different event types.
• Event Type W for WIP (Asset account)
• Event Type C for COGS (Expense account)
• Event Type L for Cost Accruals (Liability
  account)

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Calculation of Revenue Based Cost Accruals

• Calculation steps
• R Revenue Rate ITD Revenue / Total EAC
  Revenue
• A Accumulated COGS Total EAC Cost X R
• E ITD Cost - A

If E gt 0, the amount is the project WIP value as
of the end of period date. If E lt 0, the amount
is the project cost accruals value as of the end
of period date
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Calculation of Revenue Based Cost Accruals

• For Project WIP
• Calculate the difference between current WIP
  value to previous WIP value. The result creates
  two events
• W debit WIP (asset).
• C credit COGS

For Project Cost Accruals Calculate the
difference between current CA value to previous
CA value. The result creates two events L
credit Accrual liability C debit COGS
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Deferred Cost (DC)

• When using Percent Spent Revenue, we look at
  charged costs to represent how much progress the
  project achieved.
• Exceptional costs charged on a project, which do
  not represent actual progress, should be
  excluded from revenue calculation.
• Setup separate expenditure types / categories for
  such costs, called Deferred Costs (DC).
• Those DC costs do not affect project percent
  spent.
• Based on project percent spent the DC will
  partially be COGS, and partially WIP asset or
  Accrual liability.

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Exclude DC from Revenue Calculation

• P Adjusted Spent
• . ITD Cost Accumulated DC .
• Total EAC Cost Total DC
  categories
• Q Accumulated Revenue Total Fund X P
• Current period revenue Q Previous ITD revenue

Amount charged on Deferred Cost categories, is
subject to Cost Accrual calculation.
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Accounting for Internal RD

• Setup the project with multiple customers, where
  the internal funding source is a customer
  contributing 20.
• External agreements accrue revenue and bill for
  80 of work.
• GDR is calling a billing extension, creating a
  pair of events, offsetting each other. An event
  for 20 of the period cost, another for a
  negative amount.
• Accounting by event type
• G Credits COGS
• D Debits RD investment or expense.

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Provision for Loss

• By conservative accounting regulations, when a
  project might be in a loss position, the company
  must record down a provision for the future loss.
  
• Current project margin
• Current period Revenue
• Current period Cost of Sale
• Future loss.

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Provision for Loss Calculation

• GDR is calling a billing extension, creating a
  pair of events, offsetting each other, using
  different event types.
• FM Future Margin Future Revenue Future COGS
• (Total Funding ITD Revenue) - (Total Cost
  ITD COGS).

Project will lose money If currently calculated FM lt 0
add to existing PFL Then, event FM previous FM
reverse existing PFL Else, event 0 - previous FM
Event S credits Provision for Loss
liability Event T debits Cost of Sales
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Intermediate Summary
You know your project cost and enter accrual
expenditures. You generate revenue, sometimes by
using billing extensions. You generate cost
accruals events, using billing extensions. You
generate PFL events, using billing
extensions. You generate Internally funded RD
events, using billing extensions.
How do you report on project margin ?
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Reporting EAC Project Margin

• Margin Revenue - COGS

EAC COGS EAC Costs - EAC
Internally funded costs
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Reporting Periodical Project Margin

• Period Margin Period Revenue - Period COGS

Period COGS Actual Period Costs
Increase in Cost Accruals - Increase in
project WIP - Period Internally funded
costs Increase in Provision for Loss
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Building Custom Reporting
There is no reporting solution for real project
margin within EBS (Project Status Inquiry,
Project Performance Reporting, Project
Intelligence, or any other reporting solution).

• Reporting solution developed in Rafael
• Assign a DFF attribute called Reporting
  Account to each expenditure type and each event
  type.
• The list of values for Reporting Accounts is
  setup using a special group of expenditure
  categories.
• Setup hierarchy of values for reporting accounts,
  and link each reporting account to its parent
  group, using a DFF of the expenditure category
  table.

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Building Custom Reporting Cont.

• Build summary tables of actual amounts by
  reporting accounts, cost centers, GL periods, and
  projects.
• Extract the summary amounts from Projects to DWH,
  and to OFA (Oracle Financial Analyzer).
• In OFA Rafael has a project-world integrated with
  Oracle Projects.
• Users enter their financial plans by projects and
  by reporting accounts for budgets and forecasts
  versions.
• Various project financial reports were built in
  OFA comparing budget, forecast and actual amounts.

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Enhancements Ideas for Oracle

• Recognize additional amount types, like Project
  WIP, PFL, COGS, Internally funded costs, etc.
• Build a method to record such amounts, without
  the workaround of billing events (pair of
  offsetting events).
• Build the base for more complex finance reporting.

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