Provisions Overview
Introduction
The purpose of the provision functionality is to provide for situations when there is the potential for an overrun on Effort (i.e. Effort may exceed Budget) and a provision for the potential loss is required. Without the provision feature turned on (default behavior), when Effort at Completion values are different to the Budget Effort, this causes the revenue being earned on a project to be earned at a rate different to the effort earned. For example, a Project with a budget of 100,000 shows the following revenue and effort numbers:
| Month 1 | Month 2 | Month 3 (project complete) | ||||
|---|---|---|---|---|---|---|
| MTD | PTD | MTD | PTD | MTD | PTD | |
| Effort | 40,000 | 40,000 | 40,000 | 80,000 | 40,000 | 120,000 |
| Effort at Completion | 120,000 | 120,000 | 120,000 | |||
| Revenue | 33,333 | 33,333 | 33,334 | 66,667 | 33,333 | 100,000 |
With the Provision feature turned on, as soon as Effort at Completion exceeds Budget or Effort exceeds Budget, a provision is made for that difference and Revenue continues to be earned based on Effort. Using the above example, with the Provision feature enabled, the following revenue and effort numbers will be used:
| Month 1 | Month 2 | Month 3 (project complete) | ||||
|---|---|---|---|---|---|---|
| MTD | PTD | MTD | PTD | MTD | PTD | |
| Effort | 40,000 | 40,000 | 40,000 | 80,000 | 40,000 | 120,000 |
| Effort at Completion | 120,000 | 120,000 | 120,000 | |||
| Revenue | 40,000 | 40,000 | 40,000 | 80,000 | 40,000 | 120,000 |
| Provision | -20,000 | -20,000 | -20,000 | -20,000 | ||
The provision in the financial system will offset revenue.
For example:
| Income Statement (PTD) | |||
|---|---|---|---|
| Month 1 | Month 2 | Month 3 | |
| Revenue | 40,000 | 80,000 | 120,00 |
| Provisions | (20,000) | (20,000) | (20,000) |
| 20,000 | 60,000 | 100,00 | |
| Balance Sheet (PTD) | |||
|---|---|---|---|
| Month 1 | Month 2 | Month 3 | |
| WIP | 20, 000 | 60,000 | 100,000 |
Whether an actual overrun occurred is assessed at the closure of the project (i.e. Project Status becomes Inactive or Ignore) and any true overrun is recorded as a result on closure using a Revenue Adjustment. The result is calculated as the difference between the Revenue and the amount billed. Once the result is calculated, the provision is reversed. Using the above example:
| Month 1 | Month 2 | Month 3 (project complete) | Month 3 (after project closure) | |||||
|---|---|---|---|---|---|---|---|---|
| MTD | PTD | MTD | PTD | MTD | PTD | MTD | PTD | |
| Effort |
40,000 |
40,000 |
40,000 |
80,000 |
40,000 |
120,000 |
40,000 |
120,000 |
| Effort at Completion |
|
120,000 |
|
120,000 |
|
120,000 |
|
120,000 |
| Revenue |
40,000 |
40,000 |
40,000 |
80,000 |
40,000 |
120,000 |
40,000 |
120,000 |
| Provision |
-20,000 |
-20,000 |
|
-20,000 |
|
-20,000 |
20,000 |
0 |
| Billings |
|
|
50,000 |
50,000 |
50,000 |
100,000 |
50,000 |
100,000 |
| Result (Rev Adj) |
|
|
|
|
|
|
|
-20,000 |
Entries in the financial system after closure:
| Income Statement (PTD) | ||
|---|---|---|
| Before Closure | After Closure | |
| Revenue | 120,000 | 120,000 |
| Provisions | (20,000) | |
| Result at Closure | (20,000) | |
| 100,000 | 100,000 | |
| Balance Sheet (PTD) | ||
|---|---|---|
| Before Closure | After Closure | |
| WIP | 100,000 | 100,00 |
Provision Rules
- Provisions can be enabled on a project-by-project basis. To enable, select the Use Revenue Provision option in Project - Info Tab (Extended or Default) in the Extended view.
- Provisions are calculated at the variance level of the project.
- Provisions will also consider the Project controls (Organization Variance Responsibility and Budget Category Variance Responsibility).
- Provisions are only calculated when the fee type for the variance task is using a Lump Sum or Cost Plus Max revenue rule. Provisions will never be calculated when the Cost Plus revenue rule is in use.
- Provisions are only considered for overruns. If Effort at Completion (EAC) is less than the Budget, no provision is calculated.
Provision Calculation
- Provisions are calculated when Effort or Effort at Completion exceeds the budget. In which case Provision will equal the greater of
- Effort At Completion less Budget, or
- Effort (less Write-offs) less Budget
- Provisions will be computed when Budget, Effort, or Effort At Completion change.
- If needed, the calculated Provision can be manually overridden. The effect of a manual change will impact the Effort At Completion. Using the above example, if in month 1 the calculated provision was adjusted to 10,000, the EAC would be reduced from 120,000 to 110,000.
- The revenue shown in Project inquiries will include revenue earned, Revenue Adjustments, and Provisions. Using the above example, Month 1 will show 20,000 as revenue in the project system.
Provisions at Project Status Change
Once a project status is changed to Inactive or Ignore, the following happens:
- Provision PTD is set to zero and no further calculations of provision will occur.
- The Result at Closure is calculated as:
- Revenue less Billings
- The Result at Closure is recorded as a Revenue Adjustment and posts against the WIP Adjustment Task.
- The WIP Adjustment Task is selected on the Info tab of the Project Extended view. An error message is displayed if a task has not been selected when changing the Project status to Inactive or Ignore and provisions are enabled.
- By removing the provision and creating a revenue adjustment for the result at closure results in clearing any outstanding WIP balances for the project.