The Money Files

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A blog that looks at all aspects of project and program finances from budgets and accounting to getting a pay rise and managing contracts.

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Managing Money Q&A (Part 8)

Categories: FAQ

Every so often I’m asked questions about project budget. Here are a selection of your questions and my responses.

How can I manage my project cost when the actual budget is controlled by the functional prime in my organisation?

Marco, thanks for your question. This is a tough one. I don’t think you can be expected to have full control of your project costs when the budget is controlled by a functional manager. In a functional organisation (or even a weak matrix organisation) when you are not in control of the budget or resources, it is very difficult to manage in the way that you would in a projectised organisation where you have complete control over the resources and finances. I have worked in this way and it ended up getting quite messy with the functional manager approving additional work, additional purchases and the use of additional staff (to do what I considered business as usual tasks) and all of this resulted in the budget going over the forecast. However, he didn’t seem to mind, so in a way that’s OK!

What you can do is prepare a budget forecast and meet with your functional manager to go through it. Ask what their understanding of the scope is and whether there are additional tasks that he or she thinks should be included. Then your role is really about tracking the expenditure and reporting the progress against the forecasted budget. All you can do is flag up to your operational manager that it looks like you’ll be going over the predicted project budget. And ask for their help in correcting that, or to approve further spending.

Good luck!

 

Why is it important to categorise costs between Project Management Costs and Project Deliverable costs?

Diane, this is a great question. And it’s worth starting out by explaining the difference between project management costs and project deliverable costs. Project management costs are the costs of running the project. That includes things like setting up a special project office if you need one, the cost of temporary project staff, overheads, software (if you need to buy a new project management tracking system or a wiki tool etc) and so on. Project deliverable costs are the costs of the stuff needed to produce the project deliverables – what you would traditionally think of as project costs. These are things like equipment (new servers, machinery, furniture for the new store you are opening etc) and software or maintenance costs, such as the cost of purchasing new software and licences for an IT systems project.

You can categorise costs however makes sense to you, your project team and your accountants, but I find the distinction between management costs and deliverable costs very useful. It helps make it clear what the project management overhead is – the cost of doing the project at all. The deliverable costs would be incurred whoever ran the project. The management costs will be different if the project is being run in house or by an external project consultancy.

 

When budgeting, accounting departments want one number and not a range for their budget accounting systems? How do you choose what number in the range for the total project cost?

By a range, you mean a total project cost figure that is between $x and $y. In the early days of putting your budget together I do recommend that you use a range instead of presenting a single figure. This is because it highlights the fact that there are certain unknowns at this point and it encourages stakeholders and project sponsors to think widely about the likelihood of achieving an individual target figure.

To answer your question, I think you should work with your finance department to enable them to record a range in their systems! However, I know this isn’t going to be practical in many cases, so it is your choice which number from your range you choose. Being quite conservative, I would suggest that you choose the largest figure. That gives you a bit to play with even if you don’t ever intend to use it. And it can always be released or amended later. So, if your project budget forecast is between $700k and $900k, I would tell the finance team to use the $900k figure in their accounting systems.

Remember to keep an eye on how your actuals are shaping up so that you can reforecast and amend this appropriately later.

 

 

Last year I gave a webinar on managing project budgets, which also included the answers to many questions. You can see the whole presentation online here, via a recording of the webinar. I’ll have some more Q&A for you soon! Got any questions? Leave me a comment and I’ll answer them in a future post.

Posted on: September 23, 2013 12:47 PM | Permalink | Comments (0)

Managing Money Q&A (Part 7)

Categories: FAQ

Every so often I’m asked questions about handling project finances. Here are a couple of questions from reader James about contingency budgets:

“In our construction project I put certain percentage of contingency into the budget for each individual job. This varies from one job to another in the budget, say 10% for job A, 8% for job B, 5 % for job C and etc. By adding each percentage, we can get to an overall figure, let's say $2 million. My questions are:
 
“1. When job A completed and no contingency budget for this job was used, (say we had $500k contingency set for this job), are we going to take out this $500k from total contingency budget and reduced it to $1.5
million for the rest of jobs, or should we still keep the $2 million as it is even though job A has completed successfully?
 
“2. When job A completed over budget by $600k ($500k contingency spent and $100k additional on top of the contingency budget), but at the same time there is still $200k contingency left for job B, can we offset job A's $100k by using the remaining amount in the contingency of job B, assuming job B also completed, or will not use full contingency as we predicted?”

 

Fist of cashThanks, James, for getting in touch with your questions. My views on this are as follows.

If job A completed and did not use the contingency budget, you should release it. If the contingency was set aside for a specific task and that task is now completed, you no longer need it. That is the 'proper' way to do it, because contingency is linked to risk. I assume that other project tasks are no more risky now, so you don’t need to keep that contingency to offset increased risk on the project.

However, in real life if your project sponsor will allow you to keep the money and you think it will come in handy then hang on to it! You never know what is coming up later, but don’t assume that you can spend it just because you have it.
 
To answer your second question, if you have contingency per task then you shouldn't move it between one task and another. However, in real life (again) provided your sponsor is happy for you to do so then you can.
 
It sounds as if you actually have one pot of contingency money and are using it to offset changes as and when they occur, regardless of the task. This is fine: you do not have to have contingency per task, although you should have an idea about how much you need overall so that you don't spend all your contingency budget on the first task and 
then have nothing left for later tasks.

Hope that helps!

If you have a question, drop me a line and I’ll try to include it next time. Or check out the previous episodes of the FAQ (links below) or the webinar on managing project budgets (which is free to watch).

Posted on: May 17, 2012 02:52 PM | Permalink | Comments (0)

Managing Money Q&A (Part 6)

Categories: FAQ

Every so often I’m asked questions about handling project finances. Here is another batch of Q&A. If your question isn’t answered here, drop me a line and I’ll try to include it next time.

Today we are focusing on tolerance.

You've recommended ranges for budgets as well as tolerances - can you recommend whether to combine these or keep them separate?

Estimates are better if they are ranges. You might estimate your budget to be £90-110k, for example. This will become a narrower and narrower estimate as the project progresses. But when you are discussing budgets at the business case stage, a range is a more appropriate response to uncertainty.

Tolerance is the amount by which the project can be delivered over (or under) budget without anyone being concerned.  It’s usually a small amount represented as a percentage. If your tolerance is a percentage, you will express it as something like +/-5% i.e. you can be up to 5% under budget or up to 5% over budget and still be delivering the project appropriately.

I would not combine tolerance and budget estimates. Set your budget. Then agree a tolerance level with your project sponsor. Apply the tolerance to the budget. You will end up with a statement like:

“The budget for Project Banana will be £90-110k with a tolerance of +/-5%.”

Is tolerance the difference between total cost and contingency?

No. Don’t think of tolerance as ‘real money’. It is simply a parameter in which you operate. It’s the same as saying, “I’ll aim to be at the cinema to meet you at 7pm but the trains aren’t running to the timetable because of engineering works so I could be there anytime between 6.45pm and 7.10pm. That should still give us plenty of time to get tickets and sit down for the film.”

Total cost is the amount (in range form if your sponsor will let you) your project will cost. Contingency is a pot of money put aside in case of unforeseen developments. It is not part of your overall budget and with any luck you won’t have to draw on it. It is for managing project risk.

What is the normal level of tolerance as a percent?

That’s a difficult question! It depends on the project. A project that has many elements that have been done before, an experienced team who have put together comprehensive and accurate estimates, with low levels of innovation and without the risk of new technology could easily have very low or no tolerance. This is because you’ll already know enough to ensure that you won’t need the ‘safety blanket’ of tolerance in delivery as you’ll be pretty sure that you will hit the estimates straight on.

The ‘right’ answer is whatever your sponsor says is appropriate. For organizational politics reasons, or financial constraints, the answer might be zero.  Talk to your sponsor about what tolerances they consider acceptable for the budget.

If you are pushing me for an answer I would say +/-5%. That gives you a window of 10%. If you are swinging outside of that window you will either be tying up money that you don’t really need for the project that could be better spent elsewhere, or you’ll need to go back and ask for more money as your project costs have risen.

Is it customary to add % of budget as ‘miscellaneous etc’ to the project budget and is this the tolerance you are talking about?

Yes, it is customary to add a budget line for unforeseen items. But no, it isn’t tolerance. This is your contingency fund.

Is it any different for PRINCE2?

No. PRINCE2 doesn't specify any particular way to manage project finances. You can read more about project tolerances in PRINCE2 here.

 

Last year I gave a webinar on managing project budgets, which also included the answers to many questions. You can see the whole presentation online here, via a recording of the webinar.  I’ll have some more Q&A for you soon!   Got any questions?  Leave me a comment and I’ll answer them in a future post.

Read Part 1 here
Read Part 2 here
Read Part 3 here
Read Part 4 here
Read Part 5 here

Posted on: June 12, 2011 04:33 AM | Permalink | Comments (0)

Managing Money Q&A (Part 5)

Categories: FAQ

It seems ages ago now that I gave a webinar on managing money on projects, but it is taking a long time to answer all the questions that I didn’t get round to doing during the live session.  Thanks to all the fabulous participants, who asked such brilliant questions!  I am still trawling through them hoping to answer them all, and here is today’s batch of managing money Q&A. 

Is there an industrial standard for a ball-park of the Project Management cost during estimation for all IT projects? Does it vary for Application Development projects versus Application maintenance projects? Also, does platform matter?

There is no industry standard for ball-park project management costs for IT projects.  It depends on the complexity of the project.  A small project that requires very little oversight, with competent and experienced developers and engineers, may only need a small amount of project management time.  A complex, never-been-done-before project might need project management effort at practically full time.  I don’t think the type of project, or the platform, matters much.  What matters is the skill of the project manager and the complexity of the project.  Look back at the statistics that your PMO has about percentage of project management time per developer day.  If you really, really, don’t have a clue, start with 20%, which is one day of project management time per developer week.

Should I track project costs if I have never been required to do this? And if so, where would I begin since this would be for my information only, for now, with the intent of presenting to upper management (sponsors) to show value?

If you want to do this as a learning exercise, then go ahead.  You are not required to do it, so don’t let it take up too much of your time.  Are any other project managers required to do it?  If so, why?  Maybe they work on projects of greater strategic significance or with higher external costs.  Ask your PMO why you don’t have to track costs – you might be reassured by the answer.

If you’d still like to do so, you could start with tracking your time, and then talking to the Finance department about the daily rate for resources so you can put a financial value on that.  If you are only managing a project with people resources, and not other expenditure, you can track how much effort it is taking to complete the project. If you are spending money on other things, like buying computers or hiring a contractor, you can add those in too.

Do you have publicly available SharePoint templates (e.g. budget tracker)? Or url?

No, sorry. Although this is an excellent suggestion.  I’ll see if I can sort something out. On another note, why would you want to use a SharePoint template as a budget tracker?  It’s not designed to be a spreadsheet so that is going to give you a lot more work to do.  Use a spreadsheet programme, and get it to do all the maths for you.

Salary and contractor costs are sensitive information.  How do you share the entire budget with the team without divulging this sensitive information?

You don’t.  Sharing capital expenditure – buying things – is different from sharing operating expenditure.  To be honest, not many project mangers have access to salary information for the people on their teams anyway.  That’s normally data belonging to the line manager.  You may have day rates set by the company for different types of resources, which are not the same as salary figures.  These will be publicly available.

Read Part 1 here

Read Part 2 here

Read Part 3 here

Read Part 4 here

 

You can see the whole presentation online here, via a recording of the webinar.  I’ll have some more Q&A for you soon!   Got any questions?  Leave me a comment and I’ll answer them in a future post.

Posted on: December 17, 2010 05:41 PM | Permalink | Comments (2)

Managing Money Q&A (Part 4): Why do projects go over budget?

CalculatorIt was a while ago now that I gave a webinar on managing money on projects, but it is taking a long time to answer all the questions that I didn’t get round to doing during the live session.  Thanks to all the fabulous participants, who asked such brilliant questions!  I am still trawling through them hoping to answer them all, and here is today’s batch of managing money Q&A.  

What is the difference between the contingency and a reserve?

Nothing.  Call it whatever you want.  The idea behind both contingency and a reserve is to have a pot of money put aside in case of unforeseen developments.  Regardless of what you call it, you can’t draw on it as a matter of course.  Accessing the contingency fund is only done with the permission of the sponsor – it’s not there for you to use as a buffer because you haven’t managed to keep the project costs on track.

If you choose the biggest number in the range of total project cost, would you then use that as the basis for applying a percentage as contingency?

What you are talking about here is presenting budget figures as a range to key stakeholders during the decision making process.  This is a great idea, and it encourages people at the early stages of a project to take into account the fact that the planning is not yet completely finished.  If you then want to apply a percentage amount as contingency – say, 10% - choose the biggest number in the range. So if your budget prediction is a range of £250k to £280k, you would work out 10% contingency as 10% of £280k, giving you £28k.  You can always hand your contingency back if you don’t need it, or reforecast it to a more accurate level later.

How we can handle project cost in a software product development company where the same resources are being used both for Development and production support and trouble shooting the issues of the live product?

Timesheets!  The project costs you must be referring to here are resource costs.  All other costs could be attributed directly to the cost of brining a new product to market, like buying a new server to host it on or marketing for new clients.  Accurately predicting and monitoring resource costs on a project are going to be hard unless you know how your teams are spending their time. Get them to do timesheets for a couple of months to get a baseline of what percent of their time is spent on support and troubleshooting.  This will give you a basis on which to forecast going forward.

On the other hand, if you aren’t worried enough now to be tracking time and working out how much effort your teams put into managing projects, why do you want to going forward?  Consider the reasons why knowing this information is important to you before going to the effort of introducing a time recording system that won’t give you all the data you need to make useful business decisions.

Would you say an initial budget has a +/- % deviation and encourage revisiting the initial estimate to reduce the deviation or wait till you expect to exceed initial budget?

Never wait until you expect to exceed the initial budget to reforecast.  Typically, project budgets are reforecasted at the same time as the rest of the company accounts are reforecasted, so once a quarter is normal, if the project is large or costly.  You can set points in the project lifecycle where it is sensible for you to revisit the costs.  For example, after the first phase, or once the development is complete could both be good examples of where it is an appropriate time to look again at your projections.  

I would say a budget has a +/-% deviation, and I think this is a good habit for sponsors to get into – they should be used to looking at ranges of numbers, and you can then revisit this estimate to reduce the deviation once more detail is known.

What are the reasons for going over budget and how can I control it early?

Where do I start?!  Here are some reasons:  poor estimating, equipment costing more than you first thought, forgetting to add in the tax (I’ve done that), not calculating formulae properly so your sums are wrong before you start (done that too), a risk materialising and not having budgeted for problem resolution, resources costing more than you thought i.e. having to pay for overtime or weekend working. The list goes on, and I’m sure you have your own suggestions of why projects go over budget.

Mainly it all comes down to poor monitoring and control.   If you have estimated accurately, keep the project on track, manage the resources effectively, and forecast estimate to complete properly, you should at least have an early warning that you are going to go over budget, and you can address this appropriately.  That could be through increasing the budget, using the contingency fund, trimming down the scope or dropping the quality of some deliverables, or through other means.

Read Part 1 here
Read Part 2 here
Read Part 3 here

You can see the whole presentation online here, via a recording of the webinar.  I’ll have some more Q&A for you soon!
 

Posted on: August 06, 2010 04:45 PM | Permalink | Comments (0)
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