A commercial report should support decisions about the remaining work, not simply explain the month just ended. The assumptions behind cost to complete, recovery and margin need to be visible to the people managing the project.
Look beyond the month’s result
A commercial report can reconcile to the accounts and still give an unreliable picture of the project. Costs posted to date are only part of the position. Management also needs a considered assessment of what remains to be spent and what the project is likely to recover.
The report should make it possible to understand the expected outcome, the reasons it has changed and the decisions that could affect it. If those answers are buried beneath transaction detail, the report is not doing its job.
Build the remaining cost from the work
Subtracting actual expenditure from the original budget produces a budget balance. It does not establish the cost of finishing the project. Quantities, productivity, procurement and the construction sequence may have changed since that budget was prepared.
Review the remaining work with the people responsible for delivering it. Check outstanding quantities, current supply prices, subcontract commitments, supervision, plant and the expected period on site. Include work performed but not yet invoiced and explain how those accruals have been estimated.
Take care with commitments. A subcontract order may include amounts already recorded as cost, amounts still to be paid and adjustments not yet agreed. Adding the whole order to actual expenditure would count some costs twice. Excluding outstanding adjustments could understate the final position.
Distinguish a claim from expected recovery
The value submitted in a variation or claim is not necessarily the amount the project will receive. For internal project reporting, show the status and basis of the recovery assessment rather than presenting every submitted amount as settled income.
Separate agreed adjustments from unresolved items. For a significant unresolved item, explain the entitlement, the evidence, the valuation and the main point of disagreement. State the allowance made in the forecast and who has reviewed it.
For example, a project may have submitted a $400,000 variation while its forecast includes $250,000 pending agreement on the remaining scope. Management should be able to see both amounts and the reason for the difference. Neither silently including the full claim nor hiding it outside the report provides an adequate explanation.
This project assessment also needs to be reconciled with the organisation’s financial reporting policies. The commercial team should be able to explain differences between the operational forecast and the figures recognised in the accounts.
Explain movements in margin
Show what has changed since the last report. Useful explanations identify the work or decision responsible: a revised subcontract settlement, a slower production rate, additional supervision or a change in expected recovery.
A movement labelled “forecast adjustment” tells the reader very little. Equally, offsetting an adverse cost movement against an optimistic claim can conceal deterioration. Show the two movements separately, even if their net effect is small.
Where an allowance has been released, explain why the underlying exposure has reduced. The approaching end of the financial year is not evidence that a construction risk has disappeared.
Show uncertainty without counting it twice
A forecast will contain assumptions. Make the important ones visible and identify what would cause them to change. Where the range is material, show the effect of a credible alternative rather than attaching a general statement that the project remains at risk.
Suppose the forecast assumes completion in November, while unresolved access could extend the site period into December. State the assumption, the potential additional cost and the date by which access must be available. That gives management a decision to address.
Check that the same exposure has not been included in the work-package forecast, a general contingency and the risk register allowance. The reverse check matters too: a risk described in the narrative should not be absent from the numbers without explanation.
End with the decisions required
The review should identify a short set of actions: settle a subcontract account, resolve an instruction, change a procurement decision or investigate a productivity assumption. Each needs an owner and a date.
The project manager, commercial manager and planner should be working from compatible assumptions. A cost forecast based on November completion cannot be relied upon if the delivery team is already planning for January.
A useful commercial report allows senior management to challenge those assumptions before the outcome is fixed. It should explain the project’s likely final position plainly enough that the difficult questions can be asked.
