Financial control

Why Financial control ?

The key factors of profitability are managing your income and controlling and forecasting expenses. Therefore, having a good financial control of your project is necessary. It is then recommended to have a cost controller on the project who will monitor the performance of the project and provide the economic and financial indicators to analyze the operational and strategic management of the project.

Budget lifetime

On a financial point of view, a budget lifetime can be split in three phases :

1. Tender : Budget estimation & negociations
2. Work execution : Expenses control as per the initial budget
3. Operation & Maintenance : O&M Expenses and Asset performance controls as per initial cash flow prediction

Budget phases

Tender & Commercial phase

From the early stage of the project, until the project is signed on a agreed budget and the Contract enter into force.

During this phase, main goals are to :

• Estimate properly the project cost, including potential risks of non forecasted expenses
• Run cash flow and profitability analysis depending on the energy production estimation and business model
• Optimize & Negotiate with project stakeholders to agree on a final price for the project

Work execution phase

This phase last from the entry into force of the contract until finilization of the work, including commissionning and client reception.

Cost of the project has already been agreed with projects stakeholders, hence the main goal during this phase is to monitor all the expenses and forecast the end of project budget.

This phase is called Financial control or Cost control and aim is to provide to the project manager the knowledge of where will end the project. Same apply for the planning.

O&M phase

Similarly to the construction / execution phase, Financial control during O&M is needed in order to :

• Control O&M expenses to stay within the budgeted O&M costs
• Perform effective cash flow analysis (Income & Expenses) between what was initially forecasted before project launch, and real figures

Role of Financial control

Among other things, Financial control main missions are to :

• Monitor project costs and check whether the established objectives have been reached, highlighting any differences with respect to forecasts and identifying, if so, the causes of such deviations, and implementing corrective actions
• Carrie out the reviews of the end-of-site forecasts;
• Performs risk analysis;
• Perform cash analysis and cash forecasts
• Prepare monthly reporting

Steps of Financial control

In order to produce the best monitoring, the cost controller must first:

• Read carefully the contract (terms of payment, penalties, bank guarantees, insurances, etc.)
• Understand the milestones and establish a cash-in follow up that will be revised monthly with the operational staff
• Establish a client invoicing follow-up
• Establish a bank guarantee follow-up
• Establish an insurance follow-up
• Understand perfectly the budget allowed to the project and set up a detailed budget breakdown with cost codes (cf Cost Codes section)
• Create processes for Purchase Orders and a subcontractor follow-up (cf Purchase Requisition Procedure section)
• Create a monthly monitoring framework (cf Topsheet section)

Budget Breakdown and Monthly Reporting

The production team responsible for the project is committed to forecasting end-of-work expenses that we can call the Objective. The Objective is an intangible reference which represents the common commitment of the production. Every month, the cost controller will compare the reality of expenditure to this initial forecast and present it on a topsheet. This reporting will make it possible to:

• Know the results at the stage and at the end of the work
• Compare achievements with forecasts
• Appreciate the future trajectory by assessing the obstacles and risks
• Decide on actions to influence the trajectory in order to achieve / improve the objectives set

Cost Codes

Once he possesses the budget breakdown, the cost controller needs to allocate each category of costs with an analytical code that will help him to allocate all the costs in front of the right budget. The breakdown can be more or less precise, depending on the level of cost analysis desired. An example of the breakdown is given on the right:

Cost code example

Topsheet

The topsheet is the main document of the monthly reporting = it synthetizes the results at the stage and at the end of the works and compares it with the budget.

It gathers all the costs, here is an example of a topsheet for the follow up of a solar project:

//To be updated

Purchase Requisition Procedure

Overall Process Summary

Example of a Purchase Requisition Form

Tracking Follow up Example

Risks & Opportunities

Some costs or incomes might not be certain (work progress may vary depending on the rain, on the breakdown of a machine...) which would impact the end of work forecast. So, it is important to have a follow up of those risks and opportunities that need to be revised monthly with operational staff in order to avoid bad surprises at some point in time.

Once all the processes are properly set up, the management controller can get down to his main mission which is data analysis, alerting, optimization of expenses and, if necessary, implementing corrective actions to solve deviations.

Performance management

The cost controller is responsible for interpreting and evaluating business activity to allow the monitoring of performance. He:

• Determines areas of optimization and helps operational managers in their decision-making
• Support operational staff in their development projects
• Anticipates drifts, alerts operational staff and recommends corrective actions
• Sets up tools for controlling and monitoring actions and measures the effects

For example, one of the main sources of expenditure is labor. The cost controller must analyze hirings and departures on a monthly basis. He must check if all of them have been planned and if not why they are necessary. Labor must be related to the pace of work. For this, the manager must work with the operational teams to determine the remaining work to be done and what manpower is needed for this. In this example it is important for the cost controller to visit the site regularly in order to sensitize the teams if staff are underutilized.

His on-site visits also allow him to check, for example, the rate at which small tools or HQSE equipment is used and whether he needs to review his expenditure budgets.

Making engineers and site managers aware of the expenses and sensitize them about importance of cost management gives momentum to the project and allows everyone to look in the same direction in order to get the project out in the best possible way.

Monthly cost control review

Goals:

• Analyze figures
• Inform teams
• Learn lessons

It is a time for dialogue, discussion and exchanges between the production manager and his hierarchy.

It results in practical decisions, corrective measure if necessary, and actions follow-up.

Free Template

If you're still here, you disearved it : Here is a template of cost control sheet.

// Will be uploaded very soon.