Understand the Surprising Effects of Percentage-of-Completion Accounting on Project Financial Results

While Project Managers are rightfully focused on the end result of their projects (forecast at completion), they need to be aware that changes in their forecast will be amplified by the accounting methods when it comes to the short term profit recognition for large projects spanning over multiple years. Accounting principles sometimes lead to counter-intuitive results, and great opportunities from the Project Manager point of view could even turn into a short term loss that needs to be recognized by the organization! Our new White Paper 2014-10 explains in detail what are these effects and how to manage them from the perspective of the project manager.

The Percentage of Completion accounting Roller CoasterPercentage-of-Completion (POC) accounting is the most used accounting method when it comes to lump-sum construction projects profit & loss (P&L) accounting. The Project Manager must be aware that POC accounting introduces a double whammy effect when it comes to the amplification of variances in EAC forecast. This is of course, particularly applicable to multi-year projects.

In the White Paper we describe the main effects: amplification of project forecast variance between accounting periods, effect of changes in the time phasing of costs (without change in the project forecast). The case of an unsigned change order introduces a double whammy situation where the two previous effects add up.

It should be clear that the main focus of Project Managers should be their EAC profit at the end of the project, on which they are accountable.
However, Project Managers must be sensitive to the fact that changes to the forecast and cost time-phasing changes will have a very significant impact on the company’s performance, as these changes will be dramatically amplified by the POC accounting method. Project Managers need to understand these effects: read our new White Paper 2014-10 “Understand the Surprising Effects of Percentage-of-Completion Accounting on Project Financial Results”!

Find all these principles of Project Cost Control exposed in a comprehensive manner in our new Handbook, Practical Cost Control Handbook for Project Managers: coverPractical Project Cost Control for Project Managers (now published – click on the link to see it on Amazon!)