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International Journal of Project Management 27 (2009) 481492 www.elsevier.com/locate/ijproman

A comprehensive model for planning and controlling contractor cash-ow

Mihaly Gorog *
Corvinus University of Budapest, Department of Strategy and Project Management, F}vam ter 8., 1093 Budapest, Hungary o Received 14 December 2007; received in revised form 3 July 2008; accepted 14 August 2008

Abstract Nowadays, because of the rapidly changing operational environment characteristic to organisations, there is a need for short project implementation period on the client side. At the same time, contractors should face a very competitive market situation. On the contractor side, in this way, there is a need for such a competitive contract price that could cover not only the cost of implementing the project work but those costs as well that are associated with nancing the negative cash-ow balance period of the project work. Simultaneously, the contract price should cover some margin for contractors, while the amount of this margin is determined (beside the contract price and the actual cost) by the contractors actual cash-ow balance to completion. Realising and considering this need, a comprehensive model has been developed by the author to plan and control contractor cash-ow associated with the project work. This model also enables contractors to elaborate such a bid price that satises the above mentioned needs while it forecasts the likely margin earned by the contractor. The copyrighted model allows planning and controlling contractor cash-ow in activity/time unit manner, and also in summarised forms, considering the entire project implementation process from the outset of the work till a specied reporting date. The term contractor in this text implies all those project-based organisations that implement project work for project client organisations. 2008 Elsevier Ltd and IPMA. All rights reserved.
Keywords: Earned value concept; Cash-ow planning; Cash-ow controlling; Margin forecast

1. Introduction Planning and controlling are twin brothers in the project implementation process. Planning does not make sense without control while control itself could not be done without plans. Planning the project implementation itself encompasses scheduling, resource allocation and cost estimation in the rst place. Techniques available for these purposes are equally applicable for both project clients and external contractors. Unlike planning, controlling adopts mainly a client-view of the problem. Especially the so-called systematic control methods, such as Committed Cost Management [5] and Earned Value Analysis [2 4] are cases in point. Most of the project management soft-

Tel.: +36 1 4825206; fax: +36 1 4825469. E-mail address: mihaly.gorog@uni-corvinus.hu

ware packages can provide the possibility for preparing earned value-based project status reports. Experience shows, at the same time, that sometimes contractors prepare cash-ow plans but these are rather monitored than being controlled. Neither the previously mentioned Committed Cost Management nor the Earned Value Analysis can provide the possibility for contractors to plan and control the contract cash-ow, especially in case of lump-sum price. Though, planning and controlling this cash-ow and the associated likely margin are vital of importance from the point of view of the long term success of the contractor organisations. During the last few year papers published in International Journal of Project Management and Project Management Journal did not pay much attention to the problem of contractor cash-ow that associated with implementing the project work. Though, Hwee and Tiong [6] introduced a computer-based model that addresses this

0263-7863/$34.00 2008 Elsevier Ltd and IPMA. All rights reserved. doi:10.1016/j.ijproman.2008.08.001

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issue in connection with those risk factors that have considerable impact on contractor cash-ow. Central to their model is the amount of capital required to nance the implementation cost, and partly the amount of interest needed to be paid to support an overdraft. Recently a dierent model was developed by the author of this paper that encompasses both planning and controlling contractor cash-ow in a robust model in order to satisfy the need of external contributors, especially contractors, in the course of the project implementation process. Since this new model utilises a few of the earned value measurements and indicators, rst the Earned Value Analysis is recalled briey. Then the measurements and the indicators of the new comprehensive model will be introduced followed by a few of the associated exhibits and graphs that could visualise the status of the project implementation in terms of nancial value. Finally, the potential advantages gained by external contractors in the course of using this model will be highlighted following an example project-case to illustrate the use of the model. 2. Measurements and basic indicators in the Earned Value Analysis These measurements and indicators are well known both from literature [24] and from project management software packages, nevertheless, since the new model utilises a few of these measurements, a brief summary of them looks wise.  BCWS (Budgeted Cost of Work Scheduled) means the estimated cost of a single activity in the project time schedule that could be considered proportionally regarding a certain reporting period in accordance with the scheduled completion rate of the activity.  BCWP (Budgeted Cost of Work Performed) means the estimated cost of a single completed project activity or the proportional part of the estimated cost in accordance with the completion rate of the given activity in case of a certain reporting period. BCWP is referred to as the earned value.  ACWP (Actual Cost of Work Performed) means the cost occurred in the course of completing a single activity or a certain part of this activity that was completed during a given reporting period.  OD (Original Duration) indicates the planned or scheduled duration time of the project implementation, i.e. the length of the critical path.  ATE (Actual Time Expended) indicates the time period elapsed from commencing the project implementation till a given reporting date.  BAC (Budgeted Cost at Completion) indicates the estimated cost of project implementation, i.e. the total sum of BCWS assigned to each project activity or the total sum of the activity based cost estimation. Turner [7] argues against the use of the word scheduled, and suggests instead of that the word planned. At

the same time, the American Project Management Institute has initiated the use of more simple acronyms in order to make the use of the reporting system easier and unambiguous. In this way, instead of BCWS the acronym PV (Planned Value) is suggested, while BCWP should be replaced with EV (Earned Value), and ACWP is suggested to be AC (Actual Cost). While Cio [1] introduced a more abstract approach to the earned value concept, and in this way PV is signed by Cs, and EV and AC are signed by Cb and Ca consecutively. For the sake of avoiding any ambiguity, in this paper the original long acronyms are used. In this way they are in line with the logic of the newly proposed measurements. By means of the above mentioned measurements the following basic indicators are calculated in the Earned Value Analysis:  SV (Schedule Variance) = BCWPBCWS, SPI Schedule Performance Index BCWP BCWS and

Both indicators show the accomplishment achieved on the project activities in comparison with the planned (scheduled) accomplishment.  CV (Cost Variance) = BCWPACWP, and CPI Cost BCWP Performance Index ACWP Both indicators sign the cost status of the accomplishment achieved on the project activities in comparison with the associated estimated cost. The indicators mentioned above could be calculated in case of a single activity considering a given reporting period or in a cumulative manner, i.e. from the start of an activity up to a specied reporting date. At the same time, one can calculate these indicators taking into account all the activities being under completion in the course of a given reporting period or also in a cumulative manner considering all the activities from the beginning of the project implementation till a certain reporting date. In the latter case the outcomes of the calculations show the status of the entire project. Based on the above measurements and indicators the following forecasts are available:  ETC Estimated Time to Completion ATE ODATESPI SPI that signs the likely completion period of the entire project at the time of a certain reporting date, based on the previous tendency.  EAC Estimate at Completion ACWP BACBCWP CPI signing the likely completion cost of the project at the time of a given reporting date, based on the previous cost tendency.

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Since ETC and EAC forecast the likely completion time and cost, calculation of them require cumulative data encompassing those project activities that were under completion during the time period elapsed from commencing the project implementation up to a certain reporting date. Measurements and indicators and the forecast outcomes make possible to evaluate:  FC SV (Forecast Schedule Variance at Completion) = ODETC  FC CV (Forecast Cost Variance at Completion) = BACEAC The outcomes of calculating the above indicators and the likely forecast date may be visualised by means of exhibits and graphs. 3. Measurements in the comprehensive cash-ow planning and controlling model for contractors Central to this model are the contractor cash-ow balance and the associated margin that could be earned by a contractor organisation. In order to plan and analyse the contractor cash-ow in case of any specied time unit or at any reporting date, and forecast the expected margin based on a given project status, there is a need for new measurements and indicators beyond those used in the previously introduced earned value system. Because of the potential integration of the earned value concept and the proposed comprehensive contractor cash-ow model, the structure of the new measurements and indicators are in line with the structure of the earned value measurements and indicators. In this way, the model requires the following new measurements in order to make calculating the necessary indicators possible:  PVWS (Price Value of Work Scheduled)

contractors point of view. This dierence justies the need for introducing the measurement of PVWS in this model. When cost-based type of payment is used, PVWS is calculated based on the estimated cost of the project activities and the proportional part of the fee to be paid for the contractor.  PVWP (Price Value of Work Performed) This measurement shows the earned nancial performance of the actual achievement on a project activity. The individual PVWP gure of an activity can be calculated based on the underlying PVWS gure as follows: PVWP = BCWP/BCWS * PVWS = SPI * PVWS. When BCWP < BCWS, and SV < 0 while SPI < 1, consequently PVWP < PVWS; or inversely. In the course of calculating PVWP gures of the project activities, one can consider a certain reporting period or the time period elapsed from starting the project activities till a dened reporting date.  IVWS (Invoiced Value of Work Scheduled) This is the measurement that expresses the value in terms of price that could be invoiced by the contractor if the actual achievement (PVWP) was as much as the scheduled achievement (PVWS). The individual IVWS gure of any activity may be calculated regarding a given reporting period or considering the time period elapsed from starting a project activity till a specied reporting date. Calculations are based on the project time schedule by means of the contract price, and the associated payment conditions and payment mechanism (breakdown of the lump-sum price or unit prices/rates) stipulated in the contract. When cost-based type of payment is used, PVWS is calculated based on the estimated cost of the project activities and the proportional part of the fee to be paid for the contractor.  IVWP (Invoiced Value of Work Performed)

This is the measurement that expresses the value, in terms of price, earned by the contractor when BCWS = BCWP, thus SV = 0 and SPI = 1, i.e. this is the scheduled nancial performance of the contractor. PVWS should be calculated in case of each project activity either considering a given reporting period or regarding the time period elapsed from the start of a project activity up to a specied reporting date. Calculation of PVWS gures requires time schedule, the contract price and payment mechanism or unit prices/rates stipulated in the contract. In case of lump-sum price the contract price should be broken down in accordance with the time schedule (payment mechanism) while the use of unit prices/rates makes calculating PVWS gures immediately possible. Summing up the individual PVWS gures results in the amount of money to be paid to the contractor by the client. That is why, from the point of view of a client organisation, PVWS = BCWS, though these two gures could be quite dierent from the

This measurement encompasses that part of the earned nancial performance (PVWP) which may be invoiced. The individual IVWP gure of an activity can be calculated based on the underlying PVWP gure by means of the payment conditions and payment mechanism (breakdown of the lump-sum price or unit prices/rates) stipulated in the contract. Generally, in case of proportional (e.g. monthly) payment IVWP < PVWP in the course of implementing the project, though these two measurements will be levelled up when the project is completed. While in case of milestone based payment these two measurements could be the same in case of each milestone. One can calculate the IVWP gures either considering a given reporting period or regarding the time period elapsed from commencing a project activity up to a specied reporting date.  AVWS (Account Value of Work Scheduled)

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This measurement shows that part (which could be 100%) of IVWS (Invoiced Value of Work Scheduled) which could be transferred to the contractors bank account if the contractors actual achievement (PVWP) was as much as the scheduled achievement (PVWS). The individual AVWS gure of a certain activity could be calculated either in case if a given reporting period or considering the time period elapsed from starting the activity up to the end of a dened reporting period. These calculations are based on the project time schedule by means of the contract price, and the associated payment conditions and payment mechanism (breakdown of the lump-sum price or unit prices/rates) that are stipulated in the contract. When cost-based type of payment is used, PVWS is calculated based on the estimated cost of the project activities and the proportional part of the fee to be paid for the contractor.  AVWP (Account Value of Work Performed) This measurement represents that part of the invoiced value (IVWP) which is transferred to the contractors bank account, thus the AVWP gures could be considered based on such data that are available on the contractors bank account and on the contractors submitted invoice. One can consider the data in case of an activity based on a certain reporting period or regarding the time period elapsed from the start of the project activities until a dened reporting date. Under normal conditions AVWP IVWP in the course of the project implementation process (in case of a certain time period) but these measurements are also levelled up after completing the project activities.  EEWS (Estimated Expenditure of Work Scheduled) This is the measurement that expresses the amount of money which would be paid out by the contractor to nance the cost of implementing project activities if the contractors actual achievement (PVWP) was equal to the scheduled achievement (PVWS). The EEWS gure of an individual project activity is calculated based on the estimated cost of the activity and the associated payment conditions regarding the resource suppliers (subcontractors, suppliers, labour forces etc.) Calculation is available in case of a given reporting period or considering the time period elapsed from the outset of an activity till a specied reporting date. From the point of view of a contractor organisaP P tion EEWS = BCWS regarding the entire project implementation process.  AEWP (Actual Expenditure of Work Performed) This measurement means the amount of money that is actually paid out by the contractor in order to nance the cost of implementing the project activities. Data for calculating AEWP gures are available on the contractors bank account (in case of subcontractors, suppliers, etc.)

and from the contractors nancial accounting system (in case of internal costs such as wages, etc.). AEWP gures may be considered based on a given reporting period or considering the time period elapsed from the start of the project activities until a specied reporting date. Since the costs generally occur earlier than they are nancially settled, thus under normal conditions AEWP ACWP (this latter measurement is understood from the point of view of the contractor) in the course of the project implementation process (in case of a certain time period). The two measurements are levelled up after the project is completed, P P i.e. AEWP = ACWP. In the course of introducing the measurements, mainly the so-called price-based type of payment (lump-sum or unit price/rate) was in the forefront since this is the most widely used payment type. On the other hand, in case of cost-based type of payment the Earned Value Analysis could help to monitor cash-ow to a considerable extent, while the contractor organisation bears the minority of risks associated with the project implementation cost in this case. At the same time, it was also mentioned that the lump-sum price should be broken down in accordance with the project time schedule, i.e. in accordance with the project activities in order to make possible calculating the measurements. However, the breakdown of the lump-sum price is also a need to make the proportional or milestone based payments manageable. Also for the sake of reducing monotony, the case of cost-based type of payment was mentioned rst of all when PVWS (Price Value of Work Scheduled) and IVWS (Invoiced Value of Work Scheduled) were introduced. Though, the solution suggested in connection with them may be applied also in connection with the other measurements as well when cost-based type of payment is used in the contract. Finally, I would like to emphasise again that when the term cost is considered regarding any measurement mentioned under this heading, one should bear in mind that it have to be taken into account from the point of view of a contractor organisation. 4. Indicators in the comprehensive cash-ow planning and controlling model for contractors Based on the previously introduced measurements the following indicators are available supporting both planning and controlling contractors cash-ow regarding the project implementation process:  FV (Financial Variance) = PVWPPVWS, FPI Financial Performance Index PVWP PVWS and

Both indicators show how the achieved nancial performance, in terms of price, progresses in comparison with the scheduled performance during a given reporting period or during the time period elapsed from the start of an activity up to a specied reporting date. While FV indicates the

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variance in numerical value, FPI shows the variance in terms of ratio. When PVWP > PVWS, thus FPI > 1 then the achieved nancial performance is more than the scheduled value. When PVWP = PVWS, thus FPI = 1 then the achieved nancial performance is equal to the scheduled value. When PVWP < PVWS, thus FPI < 1 then the achieved nancial performance is less than the scheduled value. Forecast regarding the nancial performance to completion is not interpreted since the contract price will not change because of past characteristics of completing the project activities in case of price-based type of payment. At the same time, when cost-based type of payment is applied, a contractor can forecast the likely nancial performance to completion of the project by means of computing EAC as it is used in the Earned Value Analysis. In such a case the forecasted EAC gure should be proportionally adjusted by the fee due to the contractor in order to gain the expected value of the nancial performance to completion.  PIV (Planned Invoice Variance) = IVWPIVWS, and PIPI Planned Invoice Performance Index IVWP IVWS Both indicators show how the invoice-able part, in terms of price, of the achieved nancial performance progresses in comparison with the planned invoice-able value of the scheduled performance either in case of a single reporting period or during the time period elapsed from commencing an activity till a dened reporting date. PIV indicates this variance in numerical value, while PIPI does the same as a ratio. When IVWP > IVWS, thus PIPI > 1, than the achieved invoice-able value is more than the planned value. When IVWP = IVWS, thus PIPI = 1, than the achieved invoice-able value is equal to the planned value. When IVWP < IVWS, thus PIPI < 1, than the achieved invoice-able value is less than the planned value. Though the progress of the invoice-able part of the achieved nancial performance (IVWP) is in strong correlation with the progress of the earned nancial performance (PVWP), the variety of the payment conditions makes impossible developing a reliable forecast formula. On the other hand, since the contract price will not change because of past tendency, forecast regarding the invoiceable part of the achieved nancial performance also not possible when price-based payment type is applied in the contract. Though, in case of cost-based type of payment the proportional adjustment of the likely EAC can predict the expected invoice-able value of completing the project.  IV (Invoice Variance) = IVWPPVWP, IVWP Invoice Performance Index PVWP and IPI

Both indicators show how the invoiced part of the achieved nancial performance progresses in comparison with the entire achieved nancial performance during a given reporting period or during the time period elapsed from the beginning of an activity up to a specied reporting date. IV, again, indicates the variance in numerical value, meanwhile IPI shows this variance in the form of ratio. When IVWP > PVWP, thus IPI > 1, then the performance is more than the achieved performance. When IVWP = PVWP, thus IPI = 1, then the performance is equal to the achieved performance. When IVWP < PVWP, thus IPI < 1, then the performance is less than the achieved performance. invoiced nancial invoiced nancial invoiced nancial

Forecast regarding the invoiced performance to completion is also can not be interpreted in case of price-based type of payment because of the same reason mentioned in connection with the previously introduced indicators. Though, when cost-based type of payment is used, the contractor also can forecast the likely invoiced performance to completion of the project by means of EAC, again. EAC, in such a case, should be adjusted by means of the fee due to the contractor in order to expect a reliable value regarding the nancial performance to completion.  AV (Account Variance) = AVWP-IVWP, API Account Performance Index AVWP IVWP and

Both indicators show how the money for the invoiced performance appearing on the contractors bank account progresses in comparison with the invoiced amount of money either in case of a given reporting period or during the time period elapsed from the start of a given activity till a dened reporting date. Both AV and API provide the same information but in dierent forms. AV shows the variance in numerical terms while API indicates it in terms of ratio. When AVWP > IVWP, thus API > 1, then there are passive debts. When AVWP = IVWP, thus API = 1, then there are neither passive nor outstanding debts. When AVWP < IVWP, thus API < 1, then there are outstanding debts. Under normal conditions it may not happen that the amount of the total receipts is higher than the total amount of the invoiced performance, though it could occur in case of certain reporting periods. Forecast, nevertheless, regarding the receipts of the invoiced performance is also could not be interpreted since transferring the invoiced value is stipulated in the payment conditions of the contract.

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The likely future attitude of the client in this respect could not be forecasted based on past behaviour.  PBV (Planned Balance Variance) = AVWSEEWS, and PBPI Planned Balance Performance Index AVWS EEWS Both indicators show how the contractors planned cash-ow balance progresses in case of a single reporting period or during the time period elapsed from starting an activity up to a specied reporting date. PBV indicates deviation in numerical value, and PBPI shows it as a ratio. When AVWS > EEWS, thus PBPI > 1, then the planned cash-ow balance is positive, i.e. planned cash-ow surplus. When AVWS = EEWS, thus PBPI = 1, then the planned cash-ow balance is zero. When AVWS < EEWS, thus PBPI < 1, then the planned cash-ow balance is negative, i.e. planned cash-ow decit. Since both measurements used for calculating PBV and PBPI are planned values, forecast is not considered.  ABV (Actual Balance Variance) = AVWPAEWP, and ABPI Actual Balance Performance Index AVWP AEWP Both indicators show how the contractors actual cashow balance progresses either in case of a single reporting period or during the time period elapsed from the beginning of a project activity till a certain reporting date. While ABV indicates the deviation in numerical value, ABPI does it in terms of ratio. When AVWP > AEWP, thus ABPI > 1, then the actual cash-ow balance is positive, i.e. actual cash surplus. When AVWP = AEWP, thus ABPI = 1, then the actual cash-ow balance is zero. When AVWP < AEWP, thus ABPI < 1, then the actual cash-ow balance is negative, i.e. actual cash decit. Though forecast regarding the cash-ow balance to completion can be interpreted, in reality this forecast should result in the same amount than the forecast regarding the contractors margin to completion of the project. Thus, the question of forecast will be introduced separately.  PV (Plan Variance) = ABVPBV, Performance Index ABV PBV and PPI Plan

reporting period or during the time period elapsed from starting an activity up to a dened reporting date. PV and PPI can provide the same information, the rst one in form of numerical value, while the second one in terms of ratio. When ABV > PBV, thus PPI > 1, then the actual balance exceeds the planned balance. When ABV = PBV, thus PPI = 1, then the actual balance is equal to the planned balance. When ABV < PBV, thus PPI < 1, then the actual balance is under the planned balance. Since both ABV and PBV could be negative gures, forecast is not interpreted.  MV (Margin Variance) = AMPM where AM (Actual Margin of Work Performed) = PVWP ACWP; PM (Planned Margin of Work performed) = PVWPBCWP MPI Margin Performance Index AM PM Both indicators show how the contractors potential margin progresses in case of a given reporting period or regarding the time period elapsed from the start of a project activity up to a specied reporting date. MV is to indicate deviation in numerical value, while PMI indicates it as a ratio. Both AM and PM could have negative values, even both of them at the same time. Thus, in order to gain realistic results, both of them should be considered in absolute terms. When AM > PM, thus MPI > 1, then the actual margin exceeds the planned margin. When AM = PM, thus MPI = 1, then the actual margin is equal to the planned margin. When AM < PM, thus MPI < 1, then the actual margin is under the planned margin. In the course of calculating AM, theoretically AVWP would be used instead of PVWP. While, also theoretically, AEWP would be used instead of ACWP. The use of PVWP is justied by the fact that AVWP could restrict the opportunities regarding the potential margin since it should be presumed that the invoiced amount of money would be transferred to the contractors account in accordance with the payment conditions. On the other hand, the use of AEWP instead of ACWP could beautify the opportunities regarding the potential margin since the costs occurred should be, sooner or later, nanced (nancially settled), i.e. the associated cash-outow will occur.  EMC (Expected Margin at Completion) EMC = AM + (PMCPM) MPI where PMC (Planned Margin at Completion) = IAC BAC

Both ABV and PBV could have negative values, even both of them at the same time. Thus, in order to gain realistic results, both ABV and PBV should be considered in absolute terms. In this way these indicators shows how the contractors actual cash-ow balance progresses in comparison with the planned cash-ow balance during a

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P where IAC (Invoice Value at Completion) = PVWS (i.e. the contract price). BAC (Budgeted Cost at Completion) known from Earned Value Analysis. In this way, the Forecast Margin Variance at Completion (FMVC) = EMCPMC. In connection with forecast regarding EMC, it should be noted that the reliability of the forecast depends to a great extent on the characteristic of the payment mechanism stipulated in the payment conditions of the contract. When this payment mechanism is front-loaded, the forecast will predict especially during the rs part of the project implementation process an unlikely high margin. In the opposite case, if the payment mechanism is end-loaded, the opportunities regarding EMC will be worse than the real opportunities, especially in the course of the beginning of the project implementation, again. Thus, the reliability of EMC calculation is determined by the extent of the unbalanced characteristic of the payment mechanism. 5. Exhibits and graphs used in the comprehensive model A few of the possible relationships that exist amongst the measurements have been emphasised earlier, though all the possible relationships can be visualised by means of S curves against time. Unlike the case of measurements used in the Earned Value Analysis, the number of measurements used in this model is not favourable to plot them in a single gure. Plotting the progress of all measurements against time in a single gure to visualise their relationships would result in a crammed and, at the same time, puzzling picture. In this way, such a gure would rather trouble than help professionals to evaluating the project status. Thus, it is wise to plot the graphs and the associated exhibits individually in case of each measurement and indicator. Though, there is no room in this paper to introduce all the graphs and exhibits while there is no need for introducing all of them since based on a few examples readers will have a clear idea regarding preparing and using the possible graphs and exhibits. The starting point of the model is identifying PVWS and PVWP, and the associated FV and FPI, while the nal aim is to make possible planning and controlling contractor cash-ow and margin. In this way it looks reasonable to reduce introducing graphs and exhibits to those ones that are associated with the previously mentioned phenomena. Based on these most typical graphs and exhibits one can visualise the progress of all the measurements and indicators used in the model. Based on Table 1 one can evaluate the progress of FV in case of a given project activity considering a certain time unit (e.g. FVA2) or considering the time period that elapsed from P beginning of an activity till a given reporting date the n e:g: k1 FVAk . At the same time, it is also possible to evaluate the progress of FV of those activities that are under implementation during a certain time unit P e:g: N FV1i . While, the progress of FV regarding the iA entire project, from the start of implementation up to a

Table 1 Analysis of FV Activities Time units 1 A B ... P FVA1 FVB1 FV PNN1 iA FV1i 2 FVA2 FVB2 FVN2 PN iA FV2i ... FVAn FVBn FVNn PN iA FVni P Pn Pk1 FVAk n FV Pk1 Bk n FV Pk1Pn Nk N
iA

k1 FVik

specied PN Pn reporting date, also may be evaluated iA k1 FV ik . It should be noted that either in the course of planning or in the course of controlling any time period could be considered as time unit, e.g. the time period between two milestone events as well. Fig. 1 shows the progress of PVWP and PVWS, and consequently the progress of FV against time while Fig. 2 interprets the progress of FPI, also against the time. In case of both Figs. 1 and 2 the progress of the previously mentioned measurements (PVWP and PVWS) and indicators (FV and FPI) can be interpreted either at project level or, when it looks necessary and possible, even considering a single project activity as well. By means of Table 2 one can evaluate the progress of PBV in case of a given project activity considering a certain time unit (e.g. PBVA1) or considering the time period that

Fig. 1. Progress of FV.

Fig. 2. Progress of FPI.

488 Table 2 Analysis of PBV Activities Time units 1 A B ... P PBVA1 PBVB1 PBVN1 PN iA PBV1i 2

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... PBVAn PBVBn PBVNn PN iA PBVni

P Pn Pk1 PBVAk n PBVBk Pk1 n PBV Pk1Pn Nk N iA k1 PBVik

PBVA2 PBVB2 PBVN2 PN iA PBV2i

elapsed from the beginning of an activity till a given report P ing date e:g: n PBVAk . At the same time, it is also posk1 sible to evaluate the progress of PBV of those activities that are under implementation during a certain time unit PN e:g: iA PBV2i . While, the progress of PBV regarding the entire project, from the start of implementation up to aPspecied reporting date, also may be evaluated N Pn iA k1 PBVik . Fig. 3 shows the progress of AVWS and EEWS, and consequently the progress of PBV while Fig. 4 interprets the progress of PBPI, also against time. In case of both Figs. 3 and 4 the progress of the previously mentioned measurements and indicators can be interpreted, when it looks necessary and/or possible, even considering a single project activity as well. When there is no potential for interpreting PBV at the level of the single project activities in case of a given project

context, the following tabular arrangement could be helpful to summarise the progress of PBV at project level (Table 3). Similarly to Tables 2 and 3, and Figs. 3 and 4 one can reveal the progress of ABV and ABPI, and PV and PPI as well, and in this way planning and controlling contractor cash-ow become possible in the course of implementing the project. Finally, Table 4 and Fig. 5 show the progress of MV, and Fig. 6 provides the progress of MPI. When there is no possibility or necessity to interpret MV in case of each single activity within the actual project context, a tabular arrangement similar to Table 3 could be used to summarise the progress of MV at project level. Regarding PBV and ABV, and PV and MV attention was drawn to the situation when there is no possibility or there is no need for interpreting these indicators at the level of the single project activities in a given project context, thus simplied exhibits (e.g. Table 3) could be prepared

Table 3 Analysis of PBV at project level Planned cash-ow Time units 1 AVWS EEWS PBV AVWS1 EEWS1 PBV1 2 AVWS2 EEWS2 PBV2 ... AVWSn EEWSn PBVn P Pn Pk1 AVWSk n Pk1 EEWSk n k1 PBVk

Table 4 Analysis of MV Activities Time units 1 A B ... P MVA1 MVB1 MV PN N1 iA MV1i 2 MVA2 MVB2 MVN2 PN iA MV2i ... MVAn MVBn MVNn PN iA MVni P Pn Pk1 MVAk n Pk1 MVBk n MV Pk1Pn Nk N iA k1 MVik

Fig. 3. Progress of PBV.

Fig. 4. Progress of PBPI.

Fig. 5. Progress of MV.

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When When When When When When When When

SV 6 0 then FV 6 0 or inversely. SPI 6 1 then FPI 6 1 or inversely. FV 6 0 then IV 6 0 or inversely. FPI 6 1 then IPI 6 1 or inversely. IV 6 0 then AV 6 0 or inversely. IPI 6 1 then API 6 1 or inversely. AV 6 0 then likely ABV 6 0 or inversely. API 6 1 then likely ABPI 6 0 or inversely.

Fig. 6. Progress of MPI.

at project level both in case of planning and controlling. When a contractor should face similar situation in case of the other variances, the similar simplication also could be followed. Although, the bottom line of the detailed exhibits (e.g. Table 1 or 2) expresses the status of the project at project level in terms of the dierent variances. Plotting the progress of all measurements, i.e. plotting their progress in common with each other in a single gure against time would not result in a clear picture. Although, considering the relationships amongst the indicators could contribute to the evaluation of both the present and the likely future status of the project implementation process to a great extent. In this way, a contractor organisation may have a more sophisticated picture regarding the project status. All the theoretically possible relationships will not be taken into account now, attention is given only to those direct and fundamental relationships that are important in the course of using the model. The considered relationships are mainly derived from those relationships that exist amongst the underlying measurements.

Using the word likely in case of the last two relationships looks reasonable since an actual relationship in such cases could depend on the actual measure of the outstanding debts and that of the cash-ow balance. It also should be noted that the likely trend of MV, MPI and EMC (especially during the end part of the project completion process) is signalled but is not shown in numerical terms by the progress of ABV and ABPI. At the same time, the progress of AV and API, and that of the CV and CPI also can signal the above mentioned trends. 6. Illustrating the use of the model Based on the following example project I am going to illustrate the use of the previously introduced comprehensive model. The project is a construction project that aims at a new building. Fig. 7 shows the time schedule of the project. The contract price is EUR 1,000,000 lump-sum price, and the planned direct cost in the contractor organisation is EUR 675,000 thus the planned margin is EUR 325,000. The payment conditions are as follows: there is no advanced payment, only completed activities are

Fig. 7. Time schedule of the example project.

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invoiced, thus when an activity is completed the contractor submits an invoice, and the invoiced amount of money is transferred within 15 calendar days. The contractor pays for using the resources (workers, supplies, etc.) at the beginning of each month based on the services provided during the previous month. At the end of the 8th week 5 activities are fully completed, and Activity 6 is partly completed. The contractor, till the end of the 8th week, received the money for Activities 13, and costs occurring in the course of implementing these activities are also paid out. In case of Activity 4 the contractor received the money from the client, Activity 5 is invoiced but the money is not received by the contractor yet, while Activity 6 is not completed yet, in this way it is not invoiced yet. Costs occurring in connection with Activities 46 are also not paid out yet. The project and the above mentioned circumstances are from the real life. Though, the project is very simple, and the payment conditions under which the contractor can collect revenue from the client, and pay out for the use of resources are rather unique than typical conditions. Consequently, many of the measurements used in the model have

the same gure during the analysis. Nevertheless, this project case looks sucient to illustrate the use of the model. In accordance with the previously mentioned information, the actual nancial status of the project at the end of the 8th week in comparison with the planned nancial status is revealed in Tables 5 and 6. The exhibits show clearly the positive project status at project level and in case of the completed activities as well, either in terms of the measurements or in terms of the indicators. Because of the special payment conditions the contractors actual cash-ow is fairly positive (ABV = EUR 137,000), though it is lower than planned cash-ow (PBV = EUR 145,000). It is due to the higher implementation cost. In this way, according to the forecast, there is a hope for a lower margin (EMC = EUR 276,400) than the planned gure (PMC = EUR 325,000). Thus, the Forecast Margin Variance at Completion (FMVC) is EUR 48,600. Beside the above mentioned conditions the positive project status is also due to the time period analysed (8 weeks) while the activities being under implementation during this period have short duration time, and most of them were completed in accordance with the schedule.

Table 5 Measurements of the activities Activities Measurements (thousand EUR) BCWS 1 2 3 4 5 6 Total at project level 35.0 50.0 100.0 35.0 35.0 24.0 279.0 BCWP 35.0 50.0 100.0 35.0 35.0 22.0 277.0 ACWP 35.0 58.0 100.0 37.0 41.0 26.0 297.0 PVWS 50.0 80.0 150.0 50.0 50.0 34.3 414.3 PVWP 50.0 80.0 150.0 50.0 50.0 31.4 411.4 IVWS 50.0 80.0 150.0 50.0 50.0 0 380.0 IVWP 50.0 80.0 150.0 50.0 50.0 0 380.0 AVWS 50.0 80.0 150.0 50.0 0 0 330.0 AVWP 50.0 80.0 150.0 50.0 0 0 330.0 EEWS 35.0 50.0 100.0 0 0 0 185.0 AEWP 35.0 58.0 100.0 0 0 0 193.0

Table 6 Progress of the indicators Activities Indicators (thousand EUR) SV SPI 1 2 3 4 5 6 At project level 0 1.0 0 1.0 0 1.0 0 1.0 0 1.0 2.0 0.92 2.0 0.99 CV CPI 0 1.0 8.0 0.86 0 1.0 2.0 0.94 6.0 0.85 4.0 0.85 20.0 0.93 FV FPI 0 1.0 0 1.0 0 1.0 0 1.0 0 1.0 2.9 0.91 2.9 0.99 PIV PIPI 0 1.0 0 1.0 0 1.0 0 1.0 0 1.0 0 1.0 IV IPI 0 1.0 0 1.0 0 1.0 0 1.0 0 1.0 31.4 0.92 AV API 0 1.0 0 1.0 0 1.0 0 1.0 150.0 0.87 PBV PBPI 15.0 1.43 30.0 1.6 50.0 1.5 145.0 1.78 137.0 1.7 ABV ABPI 15.0 1.43 22.0 1.38 50.0 1.5 PV PPI 0 1.0 8.0 0.73 0 1.0 8.0 0.94 MV MPI 0 1.0 8.0 0.73 0 1.0 2.0 0.87 6.0 0.6 4.0 0.57 23.0 0.85

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7. Gains that can be realised by a contractor organisation In order to highlight those gains that could be realised by the contractor organisations by means of using the previously introduced model, it looks reasonable to summarise the applicability of the Earned Value Analysis again. In case of internal projects (project activities are implemented by the clients own resources) the earned value concept can provide an unambiguous and clear picture regarding the timely completion and the associated cost while it can predict the likely completion period and the associated cost to completion. In such a case the client is the only primary organisation taking part in implementing the project. Thus, based on the time plan and the activitybased cost estimation gures the client can elaborate a reliable cash-ow plan that could be compared with the actual cash-outow. At the same time, by means of the forecast gures (ETC and EAC) the likely cash-outow also could be interpreted. In case of external projects (project activities are implemented by external contributors) there are at least two or more primary players in the project implementation process. From the point of view of a client organisation the use of the Earned Value Analysis can provide the required information either in terms of timely completion or cost occurred, and consequently the likely cash-outow also can be predicted by means of the forecast formulas. When cost-based type of payment is used in the contract, the contractor organisations also can utilise the earned value concept since the contractors cash- inow depends on the actual cost occurred (ACWP) especially in case of the socalled cost-plus-percentage model. In this way, based on the Earned Value Analysis, the contractor organisations also can predict their likely cash-inow. Unlike the above situation, when price-based type of payment (lump-sum or unit price/rate) is used in the contract, the contractors cash-inow does not depend on the cost occurred in the course of implementing the project activities. In other words: the contractor cash-inow is determined by the xed price(s) and the payment conditions specied in the contract. In such a situation there is a need for reliable cash-ow plan and reliable cash-ow control in the contractor organisations. Otherwise they are not able to nance the project implementation costs in an economic manner that could lead to nancial loss in these organisations. These organisations since they have to bear the risks associated with the cost of implementing the project should face the following questions that are vital of importance when price-based type of payment is used in the contract: What is the reliable bid price? The term reliable means, on the one hand, competitive, i.e. attractive for the client, and, on the other hand, it means that the bid price could cover even the cost associated with nancing the negative cash-ow balance periods as well in the course of the project implementation.

How does the cash-ow balance progress either in terms of planned balance or in terms of actual balance? Because of the unavoidable negative cash-ow balance at the beginning of the project, the progress of these balances could have a considerable impact on dening a reliable bid price. What is the likely margin at the end of completing the contracted works? The progress of the actual cash balance determines to a great extent the likely margin realised by the contractor. The Comprehensive Model for Planning and Controlling Contractor Cash-Flow can provide the answers to the above questions. In order to get these answers, i.e. the information involved in the answers, there is a need for the 8 measurements (apart from the measurements used in the earned value concept) and the 16 indicators introduced in this paper, and 1 forecast formula. Of course, the integration of this model and the Earned Value Analysis postulates the use of the earned value concept as well. The proper and reliable use of this model requires a reliable time schedule and a reliable activity-based cost estimation that is in accordance with the time schedule. Otherwise it is impossible to dene the measurements, and there is no potential for a reliable cash-ow plan and cash-ow control. Consequently there is no potential for a reliable margin forecast. What makes the model user-friend is the fact that data necessary to calculate both measurements and indicators (including EMC) are existing data in the information system of the contractor companies, i.e. there is no need for gathering new, previously non monitored data. Probably the greatest advantage of the model that it allows multilevel analysis (especially by means of the exhibits) in: an an all all activity/time unit, activity/time elapsed, activities/time unit, activities/time elapsed

manner. In case of both planning and controlling the time unit used could be calendar unit (day or week or month) or the time period between two milestone events, including the time period between the commencing date and an actual reporting date. In this way, the model allows a deep insight into details of the contractors cash-ow progress and the associated margin either in terms of planned or in terms of actual gures. This feature of the proposed model enables contractor organisations at the same time, to identify the most appropriate corrective actions if necessary in the course of implementing the project. References
[1] Cio DF. Designing project management: a scientic notation and an improved formalism for earned value calculations. Int J Project Manage 2006;24:13644.

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M. Gorog / International Journal of Project Management 27 (2009) 481492 [5] Harris, P. The practical application of earned value performance measurement. http://www.eh.com.au. [6] Hwee NG, Tiong RLK. Model on cash ow forecasting and risk analysis for contracting rms. Int J Project Manage 2002;20: 35163. [7] Turner RJ. Controlling progress with planned cost or budgeted cost. Int J Project Manage 2000;18:1534.

[2] Fleming QW, Koppelman JM. Reengineering the earned value process: from government into private sector. In: Proceedings of the 26th annual project management institute 1995 seminars & symposium, Drexel Hill. [3] Fleming QW. Cost/schedule control system criteria: the management guide. Chicago: Probus Publishing; 1998. [4] Fleming QW, Koppelman JM. The earned value body of knowledge. In: Proceedings of the 14th world congress of project management, vol. 2. Ljubljana; 1998.