David KrauseThe textbook works through a series and job-order manufacturer. This article transfers the same method to project business — special-purpose machinery, plant engineering, one-off production with a high share of purchased parts. The worked example is fictitious and deliberately simple.
1 · Why post-calculation comes too late here
In series production, post-calculation corrects the next lot (Chapter 12). In project business there is no next lot: the plant is built once. Whoever only calculates at the end merely learns how much margin was lost. A project can only be steered while hours and purchase orders are still open.
| Calculation | When | Question | Use |
|---|---|---|---|
| Quotation costing | before the quotation | What will it cost? | Price and budget |
| Concurrent costing | monthly during the project | Where do we end up if nothing is done? | Corrective action |
| Post-calculation | after acceptance | What did it cost? | Learning for the next quotation |
2 · The formula: actuals plus commitments plus estimate to complete
Actuals = booked costs: delivered purchased parts, reported hours × hourly rate
Commitments = ordered, but not yet delivered or invoiced
Estimate to complete = material not yet ordered + hours still to be worked × hourly rate
The first two figures come from the ERP. The third is an estimate by project management — and that is exactly where the quality of the forecast is decided.
Calculating the estimate to complete as “budget minus actuals”. The forecast then always equals the budget, and every overrun stays invisible until the budget is used up. The estimate to complete must be built bottom-up: which work packages are open, and how many hours do they still need?
3 · Worked example: a plant with €400k cost of production
Quotation: €220k purchased parts and 3,000 hours of in-house work at €60/h. Status after three months:
| Item | Quotation | Actuals | Commitments | To complete | Forecast | Variance |
|---|---|---|---|---|---|---|
| Purchased parts | 220 | 90 | 110 | 35 | 235 | +15 |
| In-house work (€60/h) | 180 | 84 | — | 114 | 198 | +18 |
| Cost of production | 400 | 174 | 110 | 149 | 433 | +33 |
Only €174k has been booked — less than half the budget, the project looks healthy. Only commitments and the estimate to complete reveal the overrun of €33k or 8.3 %. For the hours it sits in project management's estimate: 1,400 hours worked, 1,900 still open, 3,300 in total instead of 3,000. With “budget minus actuals” that line would show 1,600 hours and the forecast would report zero variance.
4 · Separate the variance before acting
| Variance | Cause | Who steers | Lever |
|---|---|---|---|
| Purchased parts, price | part more expensive than costed | Purchasing | renegotiate, alternative supplier |
| Purchased parts, quantity | parts forgotten or concept changed | Design, project management | charge the change to the customer |
| Hours, quantity | effort underestimated, rework | Project management | clarify scope, raise a change order |
| Hours, rate | hourly rate no longer correct | Controlling | re-derive the rate from the BAB |
The most important distinction is between an in-house error and a customer change. An extra hour caused by a customer change is not a loss but a change order — if it is recorded as such in time.
5 · Percentage of completion: what to measure it by
Measured by cost, the project is 174 / 433 = 40 % complete. Against the old budget it would be 174 / 400 = 43.5 % — the overrun makes the project look further along than it is. Milestones are more robust: design released, main components delivered, assembly completed, acceptance. A work package is finished or it is not; experience shows that “90 % finished” lasts a long time.
6 · Result and liquidity are two calculations
A project can be profitable and still tie up cash. Purchased parts fall due on delivery, the customer's final instalment only after acceptance. The cost forecast therefore belongs next to a payment plan: down payments and milestone instalments on one side, supplier payments and wages on the other. If the forecast shows a loss, that is also a matter for the financial statements — German commercial law requires a provision for anticipated losses from pending transactions.
7 · Link to the textbook
| Building block in project business | Derivation | In the book |
|---|---|---|
| Hourly rate per area (design, assembly, commissioning) | like the machine hour rate: cost of the cost center divided by productive hours | Ch. 5–7 |
| Surcharge on purchased parts | material overhead; with few expensive components better per transaction | Ch. 9.6 |
| Quotation price | costing scheme from cost of production to price | Ch. 10 |
| Accept a project below full cost? | contribution margin and free capacity | Ch. 13.4 |
8 · Checklist
- 1Is a forecast calculated monthly for each project — not just actuals reported?
- 2Are commitments from purchasing included?
- 3Does project management estimate the remaining effort bottom-up instead of budget minus actuals?
- 4Are purchased parts and hours shown separately?
- 5Are customer changes recorded as change orders before the hours are worked?
- 6Is there a payment plan next to the cost forecast?
