At some point in your career as a management accountant you are almost certainly going to encounter, be involved in and manage a project of some kind.
Perhaps the launch of a new product, the installation of a new finance system or the relocation of the accounts department to another place. Or you may work for an organisation whose business itself is project-based, such as a construction company, or a pharmaceutical business.
The three considerations you will need to manage in any project, time, cost and quality, are often referred to as the “project triangle”.
For each project there will be a strict hierarchy which orders these into a scale and as such they should not be thought of as separate, isolated factors: the important thing is the inter-relationship and co-dependency between them.
For some projects this will be the most important factor. Consider the project to build Olympic Park in Rio for the 2016 Games last year. The opening ceremony took place on the 5 August 2016 and 342 million people worldwide tuned in to watch it. Imagine if it hadn’t been ready on time.
Lateness on a project of this kind is not an option unless you want to run the risk of 342 million people tuning in to watch a building site whilst the athletes have to run their races on the beach. This means that the other two constraints – or points in the triangle – have to be subordinated to (made secondary to) this single over-riding concern.
If the budget has to go over the limit – so be it; if the specification of the stadium has to be reduced to ensure it is delivered on time (changing the seats to a different design because they are quicker to install for example) – so be it.
Project managers and accountants will use time-management tools such as Gantt charts to record budgeted times for project-dependent tasks versus actual times and will analyse and report on the consequences of any over-runs to management.
Network diagrams with critical path analysis (CPA) will be produced to show where the time-pressures are most intense and which tasks have “float” or slack in them.
Efficiency variances – a long-time favourite for management accountants – will help identify trends in the project where the final deadline may be jeopardised by delays and over-runs and these trends may be extrapolated using linear regression techniques to predict future delays and their effects on the project’s success.
Some projects do not have critical deadlines but the budget may be tightly constrained. This may include public sector projects such as the construction of a new hospital or a new school where public funds are being used and the political/media focus on expenditure and potential over-spends is the most sensitive factor.
If the hospital needs to be delayed to stay within budget (perhaps to avoid construction staff working overtime for example) – so be it; if the school playing fields need to be left unfinished until the next budget cycle – so be it. Everything is subordinated to, and made dependent upon, the financial constraints of the project.
The role of the management accountant will be crucial in this scenario – closely budgeting for all costs, producing daily or weekly expenditure variances and updated rolling budgets to track current costs. Management accountants will also focus on the inter-relationship between this constraint and the one above.
As Benjamin Franklin famously said, “time is money” and one of the roles of the accountant will be to quantify the financial cost of delays and then to incorporate that into the rolling project budget. For example missed milestones in the project could lead to higher overtime costs, penalty payments or perishing materials which will need to be factored into the latest budget forecasts.
Other projects may not be time-critical or financially constrained to the same degree. For these projects it will be quality (sometimes referred to as “scope”) which is the principal constraint. This may be because safety is at stake, for example, or because the design of the project is a major factor in its success.
The Burj Al Arab Hotel in Dubai is one of the most famous hotels in the world. The uniqueness of the design, the location (it is built in the sea in the shape of a huge dhow sail) is unprecedented and although a budget of US$1billion was loosely set when the project began in 1994 the actual cost exceeded US$1.6billion. If you are building a unique, global icon you can’t be too concerned about a US$600million overspend!
Begun in 1994 it also took until December 1999 for it to be completed as every detail had to be perfect – including the 265,000 litre restaurant aquarium hosting over 4,000 tropical fish (including sharks) and the 1,800sqm of 24 carat gold leaf which were used to decorate the interior.
On projects such as these both time and cost will be subordinated to quality to ensure the project meets or exceeds expectations. The accountant’s role here may include the costing of quality-focused activities which are designed to create the uniqueness of the project – sourcing unique materials at the most economic cost, benchmarking cost cards against competitors and rivals, for example.
The construction of customer-focused performance management tools such as balanced scorecards will also include the management accountant’s involvement, as would quality audits on the completed stages of the project.
Determining the hierarchical order of the three project constraints is one of the first and most important tasks the project manager faces in any project – however big or small – and, as all the professional accountancy qualifications acknowledge, the role of the accountant in this process is becoming ever more vital as projects increase in complexity.
Andy Booth is a trainer for AAT Mastercourses on Financial Performance, Management Reporting, and Budgeting topics.