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

About E-Business Suite in RAFAEL 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

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…)

Cost of Sales & Margin Period Revenue Period Cost of Sales 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

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

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

Cost not Generating Revenue T&M contract (funding 80%) Internal funds (20%) A project for R & D in a Cost-Share situation. Billing T&M @ 80% Revenue = As Billed Internally funded R&D = 20% of cost incurred Expensed Capitalized Project Cost of Sales = 80% of cost incurred. OR

Cost not Generating Revenue Example Amount Detail 1,000,000 Project Cost: 900,000 Customer Agreement = Allocated Fund Billed amount = Revenue = 800,000 Cost of Sales (80% of Cost) 100,000 Project Margin = 900,000 – 800,000 200,000 Internal R&D (20% of Cost)

Cost and Revenue Relationships T&M % Spent % Progress or Deliverables Regular Cost Actual Costs COGS COGS COGS + Deferred Cost Supplier Cost Accruals WIP WIP Internally funded Cost

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 (T&M) or Percent Spent methods, is accruing revenue for all costs, including the accruals expenditures.

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)

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 > 0, the amount is the project WIP value as of the end of period date. If E < 0, the amount is the project cost accruals value as of the end of period date

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

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.

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.

Accounting for Internal R&D 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 R&D investment or expense.

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.

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 < 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

How do you report on project margin ? 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 R&D events, using billing extensions. How do you report on project margin ?

Reporting EAC Project Margin Margin = Revenue - COGS EAC COGS = EAC Costs - EAC Internally funded costs

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

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 it’s parent group, using a DFF of the expenditure category table.

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.

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.

Questions? Responses? Ideas ? The End Dina Rotem dinar@rafael.co.il