Saturday, October 1, 2005

Percent Complete methods from Project Accounting and Project Management

I found a great discussion on difference thought of percentage completion between accounting and project management in Earned Value Management's Noteboard -> % of completion method in GAAP

I want to summarize it in below:
  • For accounting purpose, revenue, expenses, and gross profit are recorded based on the percentage of completion of the project. It is officially defined by GAAP. Both input based (cost or effort based) and output based (work quantity based) percent complete methods are allowed under GAAP. Although the former method is more familiar to accountants.
  • There is a disconnection between the accountant and the project management. The focused problem they tried to solve are different and the tool and technique developed are not well linked. Therefore, there are hardly softwares can handle both views. The problem can only resolved via seamlessly integration between project cost control and project accounting system.
  • Some project accounting systems do not know earned value since the cost and revenue data captured in the accounting systems are not used for project control purposes. The actual cost and revenue, plus the estimated cost and revenue based on the % complete method (unbilled receivable and unearned revenue) can be recorded as accounting entries.
  • The project management discipline, on the other hand, does not deal with revenue or profit. They believe that project management is to ensure the cost is not overrun and project is finished on schedule.
  • Accountants sometime mix the % spent with % complete since they do not really know the project performance. However, it is incorrect to say that GAAP requires % spent or only accept the cost based % complete method. They just do not deal with this in such detail. If I am a owner, I definitely don't want my client to bill me based on % spent if they know the current baseline is unrealistic and a design change is under the way.
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