This Can Make Or Break Your Project
It's not the most exciting part of project management but projects are measured against it and how you manage it can determine the success of your project
Creating a project budget, monitoring and controlling it are one of the biggest challenges for any project manager. Projects are measured against how well they keep to their budget, so it’s important that, as a project manager, you can develop and control your budget.
The project budget is based on the scope of work. It is important that the scope of work is locked down so you know what you have to deliver. If the scope is not locked down, there is a risk that the budget may blow out. The change control process is key in monitoring and controlling the project budget.
Once the project scope has been locked down and the solution has been approved and the various systems and components identified, the next step is to request the various teams to provide an estimate and resourcing to deliver the work.
The various teams will use their expertise and previous experience, and data from similar projects and development work to provide an estimate and resource profile. The component teams will also provide a resource schedule that shows the resourcing and cost across the lifecycle of the project.
Other Costs
With these deliverables provided by the teams, you will need to consider whether there are any additional costs that need to be taken into account. These fall into direct and indirect costs. Direct costs are costs that are paid directly to the project, for example, costs for developers, testers, etc. Indirect costs are costs that are shared, and the project pays for a portion of them, for example, costs for seating and offices.
To identify costs, work through the scope and solution with the team and business SMEs, and review previous similar projects. Use the work breakdown structure to identify what needs to be completed for this task or this deliverable.
Think of things in broad categories of people, travel and accommodation, meetings and workshops, any professional services, any vendor engagement, training and change management, communication, marketing collateral, procedural documents, and external vendors. You will also need to consider Opex costs for the first year. This depends on how your organisation manage Opex costs.
Contingency
Once the project budget has been identified, you will need to consider how much contingency is required. Some teams include contingency in their estimates, and some don’t. You will need to check and take it into account. Contingencies are usually the first thing that gets cut by Finance, so you will need to make sure you have a strong argument for it. Linking the contingency to the mitigation activities of identified risks makes it hard for the contingency to be removed or reduced. Check with the PMO, Finance or other project managers how much contingency is usually acceptable and how they are treated, as it differs from organisation to organisation.
The budget approval is not done in isolation. The project plan, which includes the budget and all the other components of the project like communication, vendor management, etc, gets approved. Once the approval is provided, it is the baseline against which the budget is tracked.
Monitoring and Controlling
Timesheets are used in the majority of organisations to track time spent on a project. These are then captured in the project’s actuals for the month. As part of your process to monitor and control the project budget, you need to track the actuals compared to forecast spend at the end of each month.
You will need to determine the cause of the overspend and underspend. In the case of overspend, is it because the work is more than what was estimated or is it because of under forecasting for this month or phase? You will need to adjust the forecast for the remainder of the project based on your analysis.
You’ll also need to review whether the invoices charged to your project are correct or not. And identify any accruals and inform your finance contact.
Reforecast after going through the actuals for the month, making sure that you keep to the project budget. If your reforecast indicates that the project budget is going to be higher than the approved budget, then there are steps that you can take.
If your reforecast indicates that your project will come under budget, don’t give any funds back until near the end, as you may face some unexpected events that would require funding to resolve them, eg, the current vendor goes bust and you need to engage a new vendor as a replacement. You may use the funds to pay for additional scope for the project to deliver.
Your change control process is key to controlling your project budget. The process will help manage the scope of the project and deliver only what is necessary, and identify the cost impact of the proposed scope changes. Make sure you have a robust change control process that the team follows.
What to do if your project budget blows up?
The first step is to double-check the calculation and ensure that the budget actuals vs forecast is accurate. Sometimes it is a simple mistake in the spreadsheet. Check that the calculation and formulas are correct, all assumptions are valid, there are no duplicate costs or missing costs or costs that have been incorrectly charged to the project. Also, review the rates of the team members and verify that the number of resources is correct and aligned to the resource schedule provided by the various component teams.
The next step is to analyse the variance and understand why there is an overrun in the budget. What has changed since the budget was approved? Was there a change in assumptions in the estimates? Has the scope increased? Have the rates changed? Were there delivery delays? Was it due to one deliverable or component?
Once you have done the analysis, you’ll need to look at options. Make sure you collaborate with the teams to work through the options. Some of the options that you may propose include reducing scope, deferring low-priority items to a later phase, looking for cheaper options, for example, cheaper vendors or products, and reducing discretionary non-essential items like travel. And the last option is to request more funding.
You will need to provide these options, along with their pros and cons, the impact of each, and your recommendation for the way forward.
Make sure you communicate the challenges with the budget to your stakeholders. Don’t surprise them. Frame the initial discussion as an early warning, not as a confirmation of overrun. Be transparent, calm and clear in your communication. It’s how you craft your message that is the key.
Once you have resolved the budget overrun by whatever option that was agreed, baseline the budget and forecast and any changes to scope or schedule. Make sure you keep a record of all documentation. The last step is to communicate the changes to the project teams and stakeholders.
Mastery Through Practice
Even if you’re not a numbers person, developing, managing and controlling a project budget is a skill that can be developed through practice and repetition. The key is to have a process and use the support of the finance team and your stakeholders to help you along the journey.
Managing a project budget is critical in ensuring project success. Don’t fear it, embrace the challenge and soon you will be confidently and competently managing project budgets and all the challenges that come with it.
Glossary
Below are some common finance terms that project managers need to know.
Capex = funds used to acquire or upgrade an organisation’s assets.
Opex = Ongoing costs for running products, services or systems.
Forecast = an estimate of future financial outcomes based on current trends.
Actuals = Actual money spent to date on the project.
Variance = The difference between forecast and actuals.
Accruals = Costs incurred but not yet invoiced or paid. This is particularly important at the end of the month and the financial year.
Committed spend = spend that is contractually committed but not yet paid.
Burn rate = The speed at which the project is spending its budget.
Cost baseline = approved version of the budget for tracking project performance.
Contingency reserve = a reserve of funds set aside to mitigate identified risks.
Quote
"Just because something doesn't do what you planned it to do doesn't mean it's useless." ~ Thomas Edison
This quote highlights the importance of identifying the lessons learnt from your failures and how it can be done differently next time around.
Resources
I am currently reading this practice guide. It’s a bit dense and can be dry. Very useful and insightful in managing project and program complexity.
My Resources
Below are some of my free resources if you’re new to project management.
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