Project Accounting, sometimes referred to as job cost accounting, is the practice of creating

financials specifically to track the financial progress of projects. Project Accounting enables the
professional services organization to monitor the progress of their projects from a financial
position, separately from standard organizational accounting such as by departments, divisions
or by company, which are tracked over time periods, typically weeks, months, quarters or
years. Projects frequently cross these boundaries as they may last from a few days to years.
Most companies invest a lot of time and energy into the process of job cost accounting because
of the importance of estimating the performance of the company in relation with its expenses and
revenue. Job cost accounting takes into consideration various jobs in the organization, and
studies the expenses which have been incurred by the function against the revenues it has been
able to generate.
There are several parameters that come clear with the use of job cost accounting. The first helps
ensure that there is a certain level of profitability which is maintained in each function of the
organization. This also helps understand which the weakest link is, and helps take more specific
remedial action.
Another important aspect of job cost accounting is being able to correlate targeted revenue
against the actual revenue, and similarly, estimated costs against actuals.
Job cost accounting actually begins by studying the job and being able to monitor all the costs
which are associated with a particular job. It then tries to collect all invoices and make sure that
they are forwarded to the customer in a comprehensive manner. Further, they also need to
document and establish how the revenues justify the costs which have been incurred.
To be able to collate an accurate record, you must be extremely meticulous and track every
record. Make sure that expenses and revenues match and ensure all invoices have been
presented properly. Rather than using vague, general terms which could end up confusing later,
make sure you use precise terms when making any entries.
Job cost accounting may seem like a laborious, complex affair, but it is extremely critical to the
organization as it charts progress at every stage and sets direction for future action.
Definition

Accounting is the process of collecting and communicating financial information to meet legal
requirements, business management requirements, plus internal and external stakeholders needs.

General

Different forms of accounting are used in an organisation to provide information for statutory
purposes and for running the business.

Financial accounting follows strict procedures to monitor the business and provides accounts that
meet the needs of the tax authorities, shareholders, internal and external stakeholders, and the
board. Management accounts are much more flexible in content and provide information that is
essential for the business to function and for managers to make day-to-day decisions.

P3 managers need to understand at least the basics of financial accounting terms and techniques.
However, the world of the P3 manager is dominated by the need to track and control finance. So, a
detailed understanding of the accounting needs of projects, programmes and portfolios, plus an
understanding of the relationship with the organisations financial accounting systems and reporting,
is essential.

It is useful for P3 managers to be able to interpret and evaluate a balance sheet and profit and loss
statements. This enables them to understand, for example, the finances of the host organisation,
partners or providers. Particularly at programme and portfolio level, P3 managers will need to
communicate with sponsors and finance directors where a mutual understanding of financial terms is
essential.

Financial accounting is not designed to provide information specifically for the needs of P3
management. These are met by tools and reports that track expenditure in real time and produce
forecasts that allow decisions to be made. Reports from P3 accounting are aggregated at programme
and portfolio level to enable strategic decisions.

Financial information from an organisations range of projects, programmes and portfolios needs to
be monitored and tracked. In many organisations this is achieved through links between P3 IT
systems and the financial accounting IT systems.
 Roles and Responsibilities of the Financial Manager
This information will assist in understanding the roles and responsibilities of construction financial
managers. Specifically, this information is designed to assist:

(1) financial managers who are new to the construction industry;

(2) newly-promoted construction financial managers;

(3) existing construction financial managers who seek to broaden their influence on the success of
the organization; and

(4) construction company owners who are considering the skills, attributes, and sophistication
needed in the financial manager position.
Construction financial managers sometimes wonder how their duties, responsibilities and relations
with others within the organization compare to other construction financial managers. Similarly,
construction company owners sometimes wonder what skills are needed and what expectations
should be held of their construction financial manager. This information will help provide the
answers to such questions. We will review how a construction financial manager works with the
senior management team to accomplish financial goals while helping other managers accomplish
their goals, how financial managers administer the finance department, their responsibilities to the
companys owners and creditors, their administrative responsibilities and the related ethical
considerations.

In todays environment, the role of the financial manager in a construction organization is essential
to organizational success, and more importantly, is vital to avoiding failure. That may sound
extreme, but in many circumstances, competition is so fierce and margins are so thin, reliable
financial information and analysis certainly can make the difference between success and failure.

The construction financial managers role may vary from company to company, partly because
different financial managers have different skills and personalities. The role also varies depending
on the size of the company. A construction financial managers background often indicates the
areas in which the manager will concentrate. For example, a construction financial manager whose
background is in construction operations (estimating and project management) initially will
concentrate on the proper recording of job costs. A construction financial manager whose
background is in public accounting probably will initially emphasize financial reporting and income
tax planning. The financial manager should recognize these influencing factors and make efforts to
compensate for any deficiencies.

The skills and personalities of the other members of the management team also affect the role of
the construction financial manager. The majority of a companys administrative work can be
performed in any department and will be allocated among departments partly based on the skills
and personalities of the respective department managers. For example, most construction financial
managers feel that cash management is their responsibility. If the other management team
members share this feeling, responsibility for cash management probably will be assigned to the
finance department. However, if another management team member feels that responsibility for
cash management should be shared, some compromise will be made. To a great extent, sharing of
responsibilities depends on the skills and personalities of the management team members.
Successful financial managers respect the need for compromise in sharing responsibilities.

As already mentioned, the size of the company frequently affects the role of the financial manager,
because roles and responsibilities are more specialized in larger companies than in smaller
companies. In small companies, responsibilities are assigned to a smaller group of managers and,
accordingly, each manager must handle a wider range of responsibilities. For example, the
financial manager in a small company with three senior managers (owner, operations manager
and finance manager) will typically be responsible for all administrative and financial tasks. The
other two senior managers will typically concentrate on marketing, estimating and project
management. In larger companies, with responsibilities assigned to a larger group of managers,
each manager will be assigned more specialized responsibilities. For example, the financial
manager of a large company with several senior managers often has limited responsibility for
administrative tasks involving contact with customers and subcontractors. The department with
primary responsibility for customer and subcontractor relations (usually the construction
operations department) will prefer to be the primary contact in order to minimize the possibility of
misunderstandings between the parties. Because there is no one standard set of construction
financial manager responsibilities, each financial manager should be alert for areas of responsibility
that are not clearly defined in the organization. The financial manager should take the initiative in
assuring that all significant responsibilities are assigned.
Members of the Management Team
Management Team Members
Objectives
The financial managers effectiveness depends on the managers ability to contribute as a member
of the management team. Serving as a management team member means helping the other
managers achieve their goals, while at the same time satisfying the financial managers direct
responsibilities.

To assist the other managers in achieving their goals, the financial manager should first consider
what the other team members need from the financial management function in order to achieve
their objectives. For example, the financial manager should understand that the manager of the
estimating department relies on the accounting department to maintain accurate historical job cost
records. The estimating department uses these records to prepare estimates of future jobs. In
keeping the accounting records, the financial manager may periodically prepare accrual entries
when preparing the companys financial statements. When the financial manager prepares these
accrual entries, the manager should consider the impact these accruals have on job cost records.
If accrual entries impact the usefulness of the job cost records to the estimating department, the
financial manager should implement procedures to ensure that the accruing of job cost expenses
does not interfere with the use of the records by the estimating department. Another example is
the project managers need to track payments to subcontractors on a cash basis. Recording
accruals of subcontract expenses may impede the project managers ability to use accounting
records to track cash disbursements to subcontractors. The financial manager should take the
initiative to think these issues through and should ensure that other departments informational
needs are met.

The financial manager should also be sensitive to other department managers when distributing
internal financial information such as financial statements, budget variance reports, and
comparisons of job margins as bid with as earned. In most such situations, the financial
manager should review internal financial reports with the other department managers before
reviewing them with the chief executive officer, partly because the other department managers
may be asked to explain variances in the financial reports. Beyond simply showing consideration
for the other members of the management team, previewing information regarding various
departments with the managers of those departments will help ensure the accuracy and reliability
of information. The financial manager should ensure that internal financial reports are a resource
to all members of the management team. Yet, at the same time, financial managers should
question information that appears contradictory or doesnt make sense. While it is incumbent upon
the financial manager to be an effective member of the management team, it is equally incumbent
upon the financial manager to ensure the integrity and reliability of the financial information.

Financial Managers Objectives

The financial managers responsibilities and objectives include monitoring the companys
profitability, liquidity, and solvency while ensuring timely and accurate financial reporting and
making sure that the company has established and maintains an effective set of internal
accounting controls.

Profitability
The financial manager is responsible for monitoring and accurately reporting company profitability.
This task may be divided into four components:

(1) job profitability;

(2) unapplied contract related costs;

(3) general and administrative expenses; and

(4) financing related expenses and investment income.

Job Profitability
The financial manager should ensure that margins on jobs are maximized through cost recovery.
As used here, cost recovery refers to those situations in which the proper recording of job costs
affects the revenues earned. The clearest example is time and material contracts, under which the
contractor bills allowable costs to the customer, with a percentage or stipulated amount added for
overhead and profit. For these contracts, neglecting to record an allowable job cost has the same
effect as neglecting to bill for the costs, overhead and profit involved. The opposite situation is
fixed price contracts, for which the amount billable to the customer is the fixed price, and
maintaining job cost records has no direct effect on the amount billed. In between these two
examples are the more common contracts that are either (1) fixed price contracts with provisions
for change orders or (2) guaranteed maximum price (target price) contracts that allow for the
allocation of any net cost savings between the contractor and the customer. In these situations,
the proper recording of job costs is important because costs incurred are the basis for change
order and cost savings calculations. It is important to maintain job cost records even for fixed price
contracts, because such records are needed for project management, financial reporting, income
tax reporting, performance evaluation, and historical costs used in future estimates and may also
be needed to support a request for an extra or a contract claim.

The financial manager should ensure that job cost records are maintained that: (1) are supported
by independent documents (time cards, vendor and subcontractor invoices or equipment job cost
records); (2) are consistent with each individual contract; and (3) properly reflect all costs
incurred.

Supporting documentation may be needed to substantiate job cost records for an audit of the
contract by the customer, by the state or federal income tax authorities or by a CPA retained by
the company. Customers and income tax authorities believe that because the contractor is in a
position to maintain independent documentation to support job costs, the contractor will maintain
this independent documentation for all supportable job costs. Accordingly, they often take the
position that any costs the contractor is unable to support with independent documentation should
be disallowed (deducted from the amount billable under the contract).

Financial managers are likely to face certain challenges when administering several different
contracts simultaneously. Accounting and other administrative personnel sometimes assume that
different construction contracts have more in common than is actually the case. The financial
manager should ensure that employees are aware of the differences between the various contracts
that are in progress. For example, if the company typically performs only fixed price contracts,
employees may not be sensitive to ensuring that all allowable expenses are charged to jobs. If the
company obtains a guaranteed maximum price contract, the financial manager should ensure that
everyone involved is aware of the differences between job costing the guaranteed maximum price
contract and the companys fixed price contracts.
As noted above, it is important to charge all allowable costs to the appropriate jobs; identifying the
allowable cost is one way to ensure that this is done. Some costs, by their nature, are clearly
either job costs or overhead expenses. Other costs (unless specified in the contract or
governmental purchase regulations), such as the cost of company-owned equipment, materials
taken from the companys inventory, and the variable portions of liability and workers
compensation insurance, may not be clearly defined as either billable or non-billable. In some
cases, the contractor must make an arbitrary decision regarding how to charge these costs. For
example, a company-owned truck that is used on several jobs over a period of four or five years
could be charged to the jobs several ways. One method is to charge the jobs with the cost that
would have been incurred for renting a similar truck for the time it was used. Another method is to
charge the jobs with the trucks maintenance and depreciation costs, allocated to the jobs in a
systematic manner. Because most private construction contracts do not specify the method to be
used to charge the job for contractor-owned equipment, the contractor must make a decision in
this matter. The financial manager should review these matters in detail to ensure that the
contract is complied with and all allowable costs are charged to jobs.

The financial manager should also be familiar with expected gross margins on each job and should
compare job margins as bid with job margins recorded as the job progresses and at job
completion. The results of these comparisons should be discussed with the other management
team members responsible for job performance to ensure that the team knows what job margins
are being achieved.

The financial manager should understand the companys method of estimating job costs. The
manager should ensure that those estimates that are based on accounting records are calculated
properly and that everyone who uses the estimates understands how the accounting information
included in them is computed.

Unapplied Contract Related Costs

As previously discussed, the company may have additional items of expense which are related to
contract performance, but which are not charged into job expense, or an estimate may be charged
to job expense, but actual expense may differ from estimates. Beyond the examples already
discussed, this may include project manager salaries, year-end bonuses, warranty expenses, and
similar items which perhaps are not charged to projects as they are incurred, yet are expenses
that are related to overall project operations. In fact, it is not uncommon for a contractor to
estimate an average gross margin on projects which is higher than the gross margin on its
financial statements. It is imperative that the financial manager not only understand the project
related costs that are included in job costs, but also the unapplied contract related costs that
impact financial statement gross margin and be able to reconcile between gross margin in the job
cost system and financial statement gross margin.

General and Administrative Expenses

The financial manager should ensure that general and administrative expenses are reviewed and
controlled by management. The financial manager should consider using a budgeting system in
which general and administrative expenses are forecast, approved, and compared with actual
costs as incurred. The financial manager should ensure that the budgeting system is used properly
by the management team.

Financing Related Expenses and Investment

Income
The financial manager should ensure that the company earns the maximum return on its liquid
assets and incurs the minimum interest expense on borrowed capital. Many financial managers
consider this (treasury) function their primary opportunity to contribute to the companys financial
performance. While many financial management responsibilities are oriented toward minimizing or
avoiding expenses, the treasury function is an opportunity for the financial manager to earn
income for the company. Often, the financial managers unique viewpoint as administrator and
treasurer enable the manager to identify opportunities to increase cash flows to the company.
Because the financial manager is particularly sensitive to the time value of money, the financial
manager may identify situations in which cash disbursements may be deferred or cash receipts
accelerated without negative impact on the companys vendors, subcontractors and customers.
While most people are generally aware of the time value of money, the financial managers unique
position within the company often presents the manager with opportunities that are not apparent
to others.

Liquidity
While much space here has been devoted to the topic of profitability, managing the companys
liquidity is just as important (and sometimes even more important) than ensuring adequate
profitability. Having sufficient liquidity is essential to the viability of the company. The financial
manager must be sufficiently familiar with company operations to be able to foresee future cash
needs and to plan for meeting those needs. The financial manager must also forecast and monitor
the companys financial condition to ensure that the company remains creditworthy and is able to
obtain surety bonding as needed. The financial manager normally meets these needs by
forecasting the companys financial condition and financing requirements and periodically
comparing these forecasts with actual conditions. Further, the financial manager is responsible for
ensuring that billings are prepared timely, receivables are collected, and suppliers and
subcontractors are paid at the appropriate interval. Along the way, the financial manager should
keep the other members of the management team informed of the companys financial condition.

Financial Reporting
The financial manager is responsible for the companys internal and external financial reporting.
Internal financial reporting consists of such items as the financial statements, budget variance
reports and job financial performance reports that management uses to monitor the companys
financial status. External financial reporting consists of financial statements prepared using
generally accepted accounting standards, plus any specific reports that bankers, equipment
lenders, sureties and prospective customers may request.

The financial manager may find it useful to prepare written summaries of the significant
accounting policies followed, primarily to assist others within the company in complying with the
companys practices. In the absence of written accounting procedures, the company may be
dependent on the presence of the financial manager to record transactions and prepare financial
statements. An example is the companys system of assigning job numbers. Most companies adopt
systems under which the individual job number digits indicate such matters as the type of contract
used for the job, the project manager assigned, and the year the contract was signed. Unless the
details are put in writing, the job numbering system is partly dependent on the person who
designed it. Another example is the companys policy for accounting for fixed assets. Most
companies adopt threshold amounts below which assets purchases are charged to expense,
standard methods of depreciating assets in the year of purchase and the year of disposal, standard
economic lives for classes of depreciable assets, etc. These details are communicated best in
writing. In the absence of written procedures, financial managers may find they have to
periodically reinvent the wheel, because of uncertainty regarding details of the accounting
policies that were used in the past.

Financial managers often organize the financial reporting process by preparing a closing schedule
that lists individual tasks to be performed, the person responsible and the scheduled completion
date. A closing schedule facilitates organizing the individual tasks and allocating them among the
employees involved. Many financial managers have found that many of the tasks involved in
closing the general ledger and preparing financial statements may be performed before the
balance sheet date. This allows the work to be spread over a greater period and provides for
completion of the financial statements at an earlier date.

Internal Accounting Controls

The financial manager should ensure the company has an appropriate system of internal controls.
Internal controls can address risks in three areas: financial reporting, regulatory compliance, and
operations.
1. Internal Controls over Financial Reporting: Financial Reporting controls help mitigate risks in the
area of accuracy of management/financial reporting, fraud, and safeguarding of assets. These
controls are designed to help prevent a material misstatement in the companys financial records
from occurring, or, if one occurs, from remaining undetected. In addition to assurance that the
companys financial reports are accurate, these controls add reliability to the companys
accounting system. This is important because an error that may be immaterial to the companys
financial statements may be material to the estimating or construction operations departments.
Financial reporting controls are also designed to help prevent and/or detect loss from fraud or not
safeguarding company assets (i.e. contracting, project management controls, etc.).

Internal controls over financial reporting primarily consist of account reconciliations, review and
approval of entries/financial reports, and segregation of duties. A major consideration when
allocating accounting responsibilities is to ensure that employees do not have unsupervised access
to assets and to the accounting records related to the same assets. For example, the employee
who prepares accounts payable checks has access to the disbursing checking account.
Accordingly, an internal accounting control over this employees access to the checking account
would be to prevent the same employee from having access to the accounting records for the
checking account. Access to accounting records includes the ability to conceal unauthorized
transactions by alteration of the related bank account reconciliation, journal or other entry to
adjust the checking account balance. In companies with small accounting departments, where
such segregation of duties is impractical, management oversight may be substituted for
segregation of duties. Continue with the example of the accounts payable employee with access to
the disbursing checking account. If it is impractical for another employee to prepare the bank
account reconciliation for that account, the financial manager could use the compensating control
of reviewing the bank reconciliations or of having another employee do so.
2. Internal Controls over Regulatory Compliance: These controls are designed to help prevent
and/or detect areas of non-compliance with regulations.
3. Internal Controls over Operations: These controls are designed to help the company achieve its
overall strategic and operational objectives. For example, if a construction company has a safety
objective, these would be the controls in place to help the company achieve this objective.

Financial managers sometimes prepare a list of potential accounting errors and the related internal
controls over financial reporting to assist in evaluating these controls. This procedure may also be
useful in detecting conflicting responsibilities and other opportunities for improvement in the
allocation of accounting duties.
Advances in computer-based information technology in recent years have led to a wide
variety of systems that managers are now using to make and implement decisions. By and
large, these systems have been developed from scratch for specific purposes and differ
significantly from standard electronic data processing systems. Too often, unfortunately,
managers have little say in the development of these decision support sysems; at the same
time, non-managers who do develop them have a limited view of how they can be used. In
spite of these drawbacks, the author found that a number of the 56 systems he studied are
successful. And the difference between success and failure is the extent to which managers
can use the system to increase their effectiveness within their organizations. Thus, the author
suggests that this is the criterion designers and managers should jointly ascribe to in
exploiting the capabilities of todays technologies.

What can managers realistically expect from computers other than a pile of reports a foot
deep dumped on their desks every other week?

Everyone knows, for instance, that computers are great at listing receivables. But what about
all the promises and all the speculations over the past few decades about the role of the
computer in management? While there have been advances in basic information retrieval,
processing, and display technologies, my recent study of 56 computerized decision support
systems confirms the common wisdom that very few management functions have actually
been automated to date and all indications are that most cannot be.

Instead, my findings show what other researchers have reported: applications are being
developed and used to support the manager responsible for making and implementing
decisions, rather than to replace him. In other words, people in a growing number of
organizations are using what are often called decision support systems to improve their
managerial effectiveness.1

Unfortunately my research also bore out the fact that while more and more practical
applications are being developed for the use of decision makers, three sizable stumbling
blocks still stand in the way of others who might benefit from them.

First, managers and computer users in many organizations are familiar with only a few of the
types of systems now in use. As a result, different types of innovative systems have often
been conceived and nurtured by internal or external entrepreneurs, not by the system users
or their superiors.

Second, and closely related to my first finding, these entrepreneurs tend to concentrate on
technical characteristics. Too often, this myopia means that they fail to anticipate the ways in
which such systems can be used to increase the effectiveness of individuals in organizations.

Finally, highly innovative systemsthe very ones management should find most usefulrun
a high risk of never being implemented, especially when the impetus for change comes from
a source other than the potential user.
Quite simply, my purpose in this article is to discuss, without getting into the technology
involved, the high potential of a variety of decision support systems, the challenges and risks
they pose to managers and implementers, and a wide range of strategies to meet these
challenges and risks.

Types of Decision Support Systems

While there are many ways to categorize computer systems, a practical one is to compare
them in terms of what the user does with them:

Retrieves isolated data items.

Uses as a mechanism for ad hoc analysis of data files.
Obtains prespecified aggregations of data in the form of standard reports.
Estimates the consequences of proposed decisions.
Proposes decisions.
Makes decisions.

As Exhibit I indicates, EDP reporting systems usually perform only the third function in this
list of operations, which I have organized along a dimension from data-orientation to
model-orientation. Hence, unlike the EDP user who receives standard reports on a periodic
basis, the decision support system user typically initiates each instance of system usage,
either directly or through a staff intermediary.
Exhibit I Comparison of Uses, Purposes, and Characteristics of EDP Systems vs. Decision
Support Systems
Although decision-oriented reporting systems often grow out of standard EDP systems, I will
concentrate on seven distinct types, briefly describing one example of each type.

Incidently, it is interesting to note that external consultants developed the systems cited in my
second, fifth, and seventh examples, while those of the first, third, and sixth were the
creations of people acting as internal entrepreneurs through staff roles; only the fourth system
was developed on direct assignment by the user. This same pattern of initiation of innovative
systems by people other than the users was present in many of the 56 systems.

1. Retrieval onlya shop floor information system.

In order to help production foremen improve the percentage yield on a newly developed 50
stage process for manufacturing micro-circuits, the management of one company has
installed an on-line, shop floor information system. Operators submit daily piecework reports,
which include yield, release date, identification of the person who does the work, and so on.
The foremen then juggle this information to obtain productivity data by operation, operator,
machine, and lot.

Thus they are able to use the system in a number of ways. They can monitor work flow,
pinpoint yield problems, and settle day-to-day questions such as who worked on which lot
when, and which operators are ahead of or behind schedule, or below standards. The foremen
have 13 standard commands by which they can retrieve the data stored in the system and
display them on a cathode ray tube terminal. The commands permit them to tailor reports to
their needs.

2. Retrieval and analysisa portfolio analysis system.

Before advising clients or making authorized trading decisions, the portfolio managers at a
bank I studied use an on-line system to analyze individual portfolios. The managers can
bypass time-consuming manual methods and obtain up-to-date and clearly organized
portfolio information in either graphic or tabular form.

Depending on the situation, a manager can inspect both individual portfolios and groups of
portfolios from different viewpointsfor example, rank them in different ways, obtain
breakdowns by industry or risk level, and so on. With this kind of flexibility, the banks
portfolio managers make more effective use of a vast amount of information, most of which
had existed prior to the system, but had been accessible only through tedious manual analysis.

3. Multiple data bases plus analysissales information systems.

Greater flexibility was also the reason that two consumer products companies and one
manufacturing company I looked at developed sales information systems which are quite
similar. Standard EDP functions were too inflexible to produce ad hoc sales analysis reports
in a timely and cost-effective manner for those in the companies marketing and planning
areas. In each case, information extracted from the EDP systems is now maintained
separately in order to have it handy and, in two instances, to be able to analyze it in
conjunction with externally purchased proprietary data bases and models.

Basically, each system is a vehicle by which a staff man or group tries to help decision
makers. Their modus operandi is incremental: identify a problem; bring the current system
and existing expertise to bear on it; develop a solution in the form of an analysis or additional
system module; and incorporate the results into an expanded version of the system.

4. Evaluating decisions using an accounting modela source-and-application-of-funds

budget.

To expedite operational decision making and financial planning over a two-year horizon, an
insurance company is using an on-line, source-and-application-of-funds budget system.
Inputs are projections of future business levels in various lines of insurance and investment
areas, plus assumptions concerning important numbers such as future money-market rates.
The output is a projected overall cash flow by month.

An investment committee uses the model to allocate funds across investment areas and to
minimize the amount of cash left idle in banks. The committee compares projected cash
flows based on different allocation decisions; the decisions that it actually adopts are those
that produce adequate projected cash flows and that are acceptable to the various groups in
the company.

Actually, the system is an accounting definition of the company. There is no question about
the accuracy of the relationships in the model, so the only way projected results can be in
error is if estimates of business activity levels or money market rates are incorrect.

5. Evaluating decisions using a simulation modela marketing decision system.

In order to provide a more rational basis for repetitive marketing decisions, a consumer
products company uses a model that relates levels of advertising, promotions, and pricing to
levels of sales for a particular brand. The model was developed in a team setting by
reconciling an analysis of historical brand information with an individuals subjective
feelings concerning the effects on sales of various levels and types of advertising and other
marketing actions.

The model was validated by tracking its accuracy in predicting sales based on the competitive
actions that were taken. Unlike the accounting model I just mentioned, this is a simulation
model in which some of the most important relationships are estimates at best. For instance
there simply is no rule by which it is possible to predict sales with certainty based on
advertising levels. In fact, this was the heart of the issue in developing the model.

Even though it has turned out to be useful for prediction, much of the value of the model lies
in the companys improved understanding of the market environment.

6. Proposing decisionsoptimization of raw materials usage.

Another consumer products company, faced with short-run supply problems for many of its
raw materials, has developed an optimization model to solve the mathematical puzzle of
choosing and balancing among various product recipes.

The inputs to the model include a series of different recipes for many products, short-run
supply levels for raw materials, and production requirements for finished products. The
output is the choice of recipes that maximizes production using existing supplies. When the
short-run supply situation shifts, the model can be revised and a new set of recipes chosen.
The system has had a major impact on the way managers view allocation policy. Initially,
they considered allocating scarce raw materials to products by setting priorities among
products. The model showed that it was more advantageous to start with production
requirements and then allocate scarce resources by optimizing the mix of product recipes.

7. Making decisionsan insurance renewal rate system.

As an outgrowth of an overhaul of its group insurance information system, an insurance

company has developed a system to eliminate part of the clerical burden associated with
renewal underwriting and to help assure that rate calculations are consistent and accurate.

Instead of calculating renewal rates by hand, underwriters fill out coded input sheets for the
system, which calculates a renewal rate based on a series of standard statistical and actuarial
assumptions. Since these assumptions might or might not apply to a particular policy, the
underwriters review documentation accompanying the policies and decide whether the
standard calculations are applicable. If they are not, the coding sheet is modified in an
appropriate manner and resubmitted.

In effect, the system makes the decision in completely standard situations, while the
underwriter decides whether the situation is standard and, if not, what adjustments are
required. As a result, the underwriters can concentrate on the substance of their jobs rather
than the related clerical chores.

Spectrum of possibilities

These seven systems represent a wide range of approaches in supporting decisions. The first
one helps production foremen by simply providing rapid access to historical information such
as who worked on what lot, and when the work was done. But the foremen must decide what
should be done once they have the information. At the other extreme, the system supporting
the underwriters virtually makes the decision in some cases. Between the two extremes,
analysis systems and model-oriented systems help people organize information and also
facilitate and formalize the evaluation of proposed decisions.

Although managers in most large companies have used budgeting or planning systems similar
to the source-and-application-of-funds model I mentioned, the spectrum of possibilities for
other kinds of decision support systems is surprisingly wide. Obviously, some of these
systems are of no particular use in many settings. Still, their variety suggests that most
companies should have a number of genuine opportunities for applying the concept of
computerbased support for decision making.

Motives of Managers
What do decision support systems do that actually helps their users? What is their real
impact? In my survey, answers to these questions proved elusive in many cases since the
users valued the systems for reasons that were completely different from initial ideas of what
the systems were to accomplish. In fact, a wide range of purposes exists for these systems.
While many decision support systems share the goals of standard EDP systems, they go
further and address other managerial concerns such as improving interpersonal
communication, facilitating problem solving, fostering individual learning, and increasing
organizational control.

Such systems can affect interpersonal communication in two ways: by providing individuals
with tools for persuasion and by providing organizations with a vocabulary and a discipline
which facilitates negotiations across subunit boundaries.

Tools of persuasion

Standard texts on systems analysis totally overlook the personal use of decision support
systems as tools of persuasion. But consider the following offensive (persuading someone
else to do something) uses to which various companies have put these systems:

The manager of a chemical plant was attempting to meet output goals (quantities by product)
that were being set by a marketing group. Unfortunately, the group was setting goals without
much consideration of raw material shortages under which the plant was operating. The plant
had been using a model to calculate production mixes.

At one point, it occurred to the plant manager that he could use this model to investigate
whether marketing was setting goals that resulted in poor plant utilization and made him
appear inefficient. As he ran the model under a series of different production mix goals, it
became clear that this was the case, and he used the results to persuade marketing to change
his plants production mix.

A data retrieval and manipulation system first received wide exposure in a transportation
company when a number of the companys top executives used it to develop a good
quantitative rationale for a proposed merger. With the system, it was possible to explore and
manipulate a large data base of information on the industry.

Although the merger was not approved, management thought that the system helped it put up
a good fight.

The management of a shipping company found that a system it used in consolidating and fine-
tuning strategic investment plans also helped it negotiate with banks. The banks and other
sources of financing seemed to be uniformly impressed by the careful computer-based
analysis on which management based its financing requests. The resulting edge in credibility
was small, but, in managements opinion, noticeable.

Now that we have seen illustrations of the offensive tools of persuasion, let us turn to
examples of the defensive (persuading someone that the user has done a good job) uses of
these systems:

When asked whether he ever made direct use of a case tracking system, the head of an
adjudication group in a government regulatory agency said that he remembered only one
instance. This was when he spent a lunch hour generating a report to make his groups recent
performance appear as favorable as possible in spite of some unfortunate delays and problems
that made the standard report look bad.
The new president of a large conglomerate used a one-year budgeting model to leam about
the budgeting choices that existed, as well as to help him discount what people in various
areas claimed concerning their own budgetary needs.
The class scheduler of a training school for a companys service personnel had found his job
frustrating because it was always difficult to justify the budget on explicit grounds.
With a model that generated optimal training schedules, the scheduler could protect himself
very easily by saying: Using these assumptions concerning attrition, acceptable peak-time
shortfalls, and other considerations, this is the best budget. If you (the budget cutter) would
like me to change these assumptions, I would be glad to generate a new budget. What level of
shortfall do you suggest? Thus the system not only helped the scheduler make decisions, but
also helped him defend them.

Many people suspected that a new product venture in a consumer company might not be
worthwhile, but no one knew exactly why. When a risk analysis was carried out with a model,
the reason became clear: the venture had a very substantial downside risk. In addition to
sealing the decision, the analysis provided an understandable response to the people who had
proposed the venture.

A cynic might contend that the people in these situations were taking advantage of or abusing
the systems. A more practical conclusion is that these systems simply serve to improve
managers effectiveness in their organizations by helping them communicate with other
people. My point is that much of the benefit of many of the decision support systems in my
sample was of this sort.

Aids to communication

Decision support systems also help managers negotiate across organizational units by
standardizing the mechanics of the process and by providing a common conceptual basis for
decision making.

During my survey, managers frequently commented that consistent definitions and formats
are important aids to communication, especially between people in different organizational
units such as divisions or departments. In a number of instances, the development of these
definitions and formats was a lengthy and sometimes arduous task that was accomplished
gradually over the course of several years, but which was also considered one of the main
contributions of the systems.

For example, one of the purposes of some of the model-oriented systems in my sample was to
estimate beforehand the overall result of decisions various people were considering
separately, by filtering these decisions through a single model. In these cases, the system
became an implicit arbiter between differing goals of various departments. Instead of arguing
from their own divergent viewpoints, marketing, production, and financial people could use
the model to demonstrate the effect of one groups proposals on another groups actions and
on the total outcome. As a result, issues were clarified and the negotiation process expedited.

The production foremen I mentioned earlier noted the same kind of facilitation. It helped
them in work-scheduling discussions and problem investigations by providing immediate
access to objective information about who did what, when, and how well on any
production lot in the shop.

Value to user

Although the implementers of a number of the successful systems I studied found it necessary
to go through the motions of presenting a cost/benefit rationale which attributed a dollar
value to personal effectiveness, they didnt believe these numbers any more than anyone else
did. Management usually decided to proceed on the basis that the proposed system seemed to
make sense and would likely have a beneficial impact on the way people interacted and/ or
made decisions.

Monetary savings are obviously a very important and worthwhile rationale for developing
computer systems, but it should be clear at this point that the EDP-style assumption that
systems should always be justified in these terms does not suffice in the area of decision
support systems.

Equally obvious, there is a definite danger in developing a system simply because someone
thinks it makes sense, especially if that someone is not the direct user of the system. In fact,
the systems I cited as my first, second, and fifth examples began this way and encountered
resistance until they were repositioned as something that users would want in order to
become more effective.

Again, the general problem here is a common tendency for technical people to concentrate on
the technical beauty of a system or idea and to assume that nontechnical people will
somehow see the light and will be able to figure out how to use the system in solving
business problems. This sort of overoptimism was present in the history of almost every
unsuccessful system in the sample.

The message is clear: try to take advantage of the creativity of technical experts, but be sure
that it is channeled toward real problems. The challenge, of course, is how to accomplish both
of these goals. There are a number of ways, which I shall now discuss.

Patterns of Development
Despite the common wisdom that the needs of users must be considered in developing
systems and that users should participate actively in implementing them, the users did not
initiate 31 of the 56 systems I studied and did not participate actively in the development of
38 of the 56.

The results, illustrated in Exhibit II, are not surprising. Intended users neither initiated nor
played an active role in implementing 11 of the 15 systems that suffered significant
implementation problems. Conversely, there were relatively few such problems in 27 of the
31 systems in which the users had a hand in initiating and/or played an active role in
implementing.
Exhibit II Systems Resisted by Users

But it would be wrong to infer from these findings that systems should be avoided totally, if
intended users neither initiate them nor play an active role in their implementation. For one
thing, 14 of the 25 systems I studied in which this was the pattern were ultimately successful.
More important, many of the genuinely innovative systems in my sample, including 5 of the
7 that I described earlier, exhibited this pattern.

On the other hand, many of the systems initiated by users do little more than mechanize
existing practices. While such mechanization can be very beneficial, and while Im certainly
not suggesting that major innovations must come from outside sources, the real challenge is
to be able to use insights regardless of their source.

One way to do this is to devise an implementation strategy to encourage user involvement

and participation throughout the development of the systems regardless of who originated the
concept. Examples of successful strategies follow.

Impose gracefully: Marketing and production managers in a decentralized company did not
relish the extra work (format changes and data submission requirements) needed for a yearly
budgeting system, which top management was installing. Initially, they were especially
unenthusiastic because they thought the system would not really help them.

So at every stage the designers made a point of developing subsystems to provide these
middle managers with sales and materials usage information that had never been available.
This quid pro quo worked well; instead of seeing the system as a total imposition, the
manager saw it as an opportunity for them to take part in something which would be
beneficial to them.

Run a dog and pony show: Central planning personnel in two companies designed systems
for budgeting and financial analysis. In one company, the system never caught on despite
lengthy training demonstrations for divisional staff and other potential users. These
individuals seemed enthusiastic about the systems possibilities, but never really used it
unless corporate planning people did all the work for them.

In contrast, the training program for the system in the other company fostered immediate and
active involvement. In order to attend the workshops, people were required to bring their own
financial analysis problems. They learned to use the system by working on these problems.
When the workshops ended, many users were enthusiastic: not only did they know how to
use the system, but they had also proved to themselves that it could help them.

Use a prototype: Two ever-present dangers in developing a system are creating a large,
expensive one that solves the wrong problem or creating one that some people in the
organization cannot live with.

Either can happen, not only when the system is designed without consulting the user and
affected parties, but also when there is no one having enough experience with the particular
kind of system under consideration to clearly visualize its strengths and weaknesses before it
is built.

Implementers of a number of systems in my sample avoided these traps by building small

prototypes, which gave the users something specific to react to. As a result, the large-scale
version could be developed with a realistic notion of both what was needed and what would
fly in the organization. A similar approach, also successful, was simply to build systems in
small pieces that could be used, changed, or discarded easily.

Hook the user with the responsibility: Each new module or application developed as an
outgrowth of one of the three sales information systems I mentioned earlier goes through
three stages. The first stage consists of general, uncommitted discussions of any current
problem areas with which user groups are concerned. Following research by the management
science staff, the second stage is a brief formal problem statement written in conjunction with
the user group. In addition to describing the problem, this statement goes over the
methodology and resources that will be required to respond to it. The third stage is a formal
request for authorization of out-of-pocket expenses.

Sell the system: In one of the companies I studied, a marketing analysis group used a direct
selling procedure to convince people of the merits of a sales forecasting system. The pitch
was very simple: they compared manual monthly forecasts for one year with the systems
forecasts. The systems forecasts proved to be more accurate in ten months out of twelve,
with less error overall than the manual ones. The system was adopted.

In another company, management had a real-time system installed for monitoring the largely
automatic production of an inexpensive consumer item in order to minimize material loss due
to creeping maladjustments in machine settings. During the initial installation, the
implementation team discovered suspected, but previously unsubstantiated, cheating by
piecework employees; more pieces were leaving many machines than were entering them.
Discreet hints were dropped that the monitor had to be checked because it was registering
impossible results. The employees were sold on the new system: they knew very well that
it worked.

Fundamental Changes
Despite extensive experience with EDP, many organizations have used no more than one or
two of the seven types of decision support systems I have illustrated here.
One reason for this is that justifying such systems can be difficult: quantifying the impact of
replacing ten clerks with one computer is one thing, while quantifying the impact of
improved individual effectiveness of line personnel is quite a different thing. Another reason
is that implementation can be tricky: many of the ideas come from people other than the
users.

Nevertheless, developing a decision support system makes sense when it becomes clear that a
fundamental change may be needed in the way decisions are reached and implemented.
Often, the process of defining the system is every bit as valuable as the system produced.

My final point is that the concept of decision support systems itself can help managers in
understanding the role of computers in their organizations. As the name implies, data
processing systems systematize and expedite the mechanics of carrying on business activities
by processing masses of data automatically. On the other hand, the decision-oriented
extensions of these systems help people make and communicate decisions concerning
administrative and/or competitive tactics and strategy.

The decision support systems I have discussed go one step further. Instead of starting as
extensions of existing data processing systems, many decision support systems are built from
scratch for the sole purpose of improving or expediting a decision making process. The
underlying philosophy is that the use of computers to help people make and communicate
decisions is every bit as legitimate and worthwhile as the use of computers to process masses
of data.

There is evidence that this viewpoint has caught on to a certain degree and is becoming more
widely accepted. The implication is not that all organizations should get on the bandwagon,
but rather that managers should be aware of the opportunities and challenges in this area and
should attempt to assess whether their organizations should move in this direction.
Constraints

Constraints can be categorized into two different types of limits placed on your business: deadlines and resource
limitations. "Time-constraints" refer to a project's overall deadline. "Resource-constraints" refer to more
controllable elements, such as staffing, materials and access to needed equipment. Frequently these constraints
are at odds with each other. For example, limited resources might make it impossible to meet a project's
deadline, or an unreasonable deadline might tax your resources beyond the point of profitability.

Costs

Balancing time and resource constraints significantly impacts a project's cost-effectiveness. For example, you
may be able to hire enough extra personnel to meet a difficult deadline, but if the cost of hiring those people
exceeds the projected profits it may not be worth it to meet your time constraints. In addition, if the tasks
involved in your project must be performed in a certain sequence, then additional staffing may go underutilized.
Understanding both time and resource constraints can help you manage project bids and resource scheduling for
projects more effectively.

Meeting Time Constraints

Some projects come with a strict deadline. Tax preparers know that April 15 is a firm deadline and penalties can
be incurred for filing later than that. Time-constrained projects sometimes require increased budget allocations
for resources to meet the deadlines. A good manager knows which budget item increases will best benefit the
project. For example, increasing personnel will only benefit a project if the company owns sufficient equipment
for more people to be fully utilized. Conversely, renting additional equipment may only help if the company has
enough trained personnel to utilize the new machines, and getting both may be cost prohibitive.

Meeting Resource Constraints

Successfully completing projects hampered by significant resource constraints requires creative problem-solving
skills. Often a creative manager can shift resources such that budget constraints can be adhered to without
pushing back deadlines too much. In some cases, constraints such as budget restrictions mean a project cannot
be completed or must be postponed. For example, a toy store's inability to hire additional staffing in the fourth
quarter may cause customers to shop elsewhere. A good manager might decide to buy less additional inventory
or to make other cuts, such as buying less expensive gift wrap, in favor of being able to hire additional staff.
Less inventory is a gamble because it means fewer items are available to sell during the holiday rush, but poor
customer service might be more detrimental.
Time constrained resource scheduling is one of the two basic resource
scheduling procedures performed by the majority of scheduling software.
Unfortunately, the majority of research and papers have been devoted to
resource constrained resource scheduling, the other basic resource scheduling
procedure (Seibert and Evans 1991). Resource constrained resource
scheduling will be discussed in the next section.

The starting point for time constrained resource scheduling is a CPM

network of a project for which the forward and backward passes have been
completed. Each activity is then assigned its required resources based on
unlimited availability of the required resources. Each activity can then be
moved or slid within its available free and total float in order to minimize the
changes in required resource levels between time periods. The process is
carried out for each non-critical activity in the project for the simple reason
that the critical activities have no float. Any change in the scheduling of a
critical activity would either violate the relationships between the activities or
delay the early finish of the project. In time constrained resource scheduling
there are no set limits on the amount of resources available. The only hard

10

criteria is that the fixed completion of the last activity not be delayed. As
mentioned in section 2. 1 above, the fixed completion can be either the early
finish of the overall project as calculated by the forward pass, or an imposed
date such as the required project completion. Time constrained resource
scheduling is considered necessary as fluctuations in resource levels "are very
undesirable because they often present labor, utilization, and financial
difficulties to the contractor." (Easa 1989)

The methods of time constrained resource scheduling can generally be

categorized as either heuristic or optimization. The heuristic approach uses the
application of various rules of precedence to decide which of several activities
will be scheduled first and which will be postponed when an undesirable
change in resource requirements occurs. An optimization approach on the
other hand examines all possible scheduling scenarios and then chooses the
best solution based on a given measure or metric.

The principle advantage to a heuristic approach is that significantly less

calculation time is required. Conversely, the principle disadvantage of an
optimization approach is that each possible scheduling scenario must be
evaluated. The number of calculations required and the associated time for this
approach typically limits its applicability to desktop computers, even for short

11

simple networks. For this reason, the majority of scheduling software products
utilize a heuristic approach to time constrained resource scheduling.

The principle disadvantage to a heuristic approach can best be

described as the approximate nature of the result. A heuristic method, by its
very nature will not necessarily find the one best solution. Rather, it uses the
application of various rules to decide which activities should be scheduled and
which should be postponed. The choice of priorities in scheduling activities
can significantly affect the outcome. On the other hand, the optimization
approach can choose which scenario provides the "best" solution by evaluating
each and every scheduling scenario.

There are two common metrics used for evaluating the effectiveness of
time constrained resource scheduling procedures. The first metric is the sum
of the absolute values of the changes in resource requirements between time
periods. The second metric being the sum of the squares of the changes in
resource requirements per time period. Either metric provides a measure of
the effectiveness of the procedure at reducing the variation in resource
requirements per time period for a particular project or network. It must be
pointed out that neither metric can be used to compare time constrained
resource scheduling results between projects. The metrics are only useful in
comparing the results of a scheduling procedure with the original CPM

12

network or baseline. The unique characteristics of each individual network

such as number of activities, amount of float, and percentage of critical
activities precludes comparisons between networks. The squaring metric does
provide an advantage in the exaggeration of small differences in time
constrained resource scheduling performance. For this reason, the squaring
metric was chosen in evaluating the effectiveness of the time constrained
resource scheduling procedures used in this thesis.

2.3 Resource Constrained Resource Scheduling

The second basic resource scheduling procedure, which is conducted

by scheduling software, is known by a variety of terms. The most commonly
used terms are resource allocation, resource constrained scheduling (Drexl and
Gruenewald 1993) and (Oguz and Bala 1994), and unfortunately, resource
leveling (Primavera 1991). As with the procedure for time constrained
resource scheduling discussed above, resource constrained resource scheduling
begins with a resource loaded CPM diagram with the relevant calculations of
early and late, start and finish, and free and total float completed. For resource
constrained resource scheduling the early finish of the last activity is not fixed
or locked. Rather the total amount of a resource or resources available is

13
given a set maximum amount available per time period. Hence the
terminology, resource constrained resource scheduling. The maximum
available limit of a resource may be constant over the duration of a project, or
in some cases, variable with time. The limits imposed may be the result of
actual resource availability or management decisions. Once the resource limits
are set the project is rescheduled one activity at a time. When there are
insufficient available resources to accomplish a given activity it must be
postponed until the resources are available. There are two basic variations on
these rules which should be considered. The first allows for an activities total
duration to be adjusted without changing the total required resources to
complete the activity. This is commonly referred to as effort driven
scheduling. The name derives from the fact that the anticipated effort and
available resources determines an activities duration. The second variation is
to allow activities to be temporarily suspended or interrupted to accommodate
resource requirements in other, more critical activities. This is commonly
referred to as splitting an activity. Some software products allow splits as an
option when performing scheduling.

Resource constrained resource scheduling methods can also be

classified into the same two general categories of heuristic and optimization
methods discussed for time constrained resource scheduling. The heuristic

14

method follows preset rules and priorities to determine the order in which
activities are rescheduled. The optimization method examines all possible
scheduling scenarios and then chooses the best solution.

Similar advantages and disadvantages apply for resource constrained

resource scheduling as do for time constrained resource scheduling.
Optimization is calculation and memory intensive while the heuristic approach
offers only an approximate solution. Oguz and Bala (1994) provide a good
description of just how calculation intensive the optimization method is. The
majority of scheduling software uses the heuristic method due to the limitations
of desktop computers.

One point which must be stressed for the heuristic method of resource
constrained resource scheduling is that the order, or priority, in which activitie
s
are rescheduled can significantly affect the outcome. For example, the election
to schedule a non-critical and resource intensive activity ahead of a critical
activity may significantly delay the early finish of the last activity.

For either the heuristic or optimization method of resource constrained

resource scheduling the typical metric of performance is the overall delay in the
completion of the project as compared to the unconstrained early completion.
A shorter scheduling delay being preferred over a longer one due to the
relatively high daily overhead costs associated with most projects. The analysis

15

in this thesis uses the metric of the overall delay in the project expressed as a
percentage of the original duration. The one drawback to this metric is, again,
that the results can not be compared between two different networks. This is
even true when the overall delay in completion is expressed as a percentage of
the original duration. The reasons for this lack of comparability are the same
as for time constrained resource scheduling.

The literature on resource constrained resource scheduling is much

more plentiful and varied than that for time constrained resource scheduling.
This is probably a direct result of the much more troublesome problem of not
having enough resources as compared to the somewhat idealistic problem of
minimizing variations in resource requirements. Moder et al. (1983) provide
an excellent and thorough discussion of the theory and methodology of
resource constrained resource scheduling. Shanmuganayagam (1989), and
Drexl and Gruenewald (1993) provide some innovative approaches to the
mathematical aspects of resource constrained resource scheduling using
optimization methods. Finally, Russell and Caselton (1988) discuss the
application of resource constrained resource scheduling to projects with a
highly repetitive series of activities.

Resource scheduling is a collection of techniques used to calculate the resourcesrequired

to deliver the work and when they will be required