And as another year draws to a close it’s time for some reflection. With all the rushing and deadlines and pressure to get tasks done, how well did you do with hitting all the best practices you know you should have?
Here are 15 things that you should have done this year related to your project budget. How many can you tick off and say with confidence that you achieved?
1. Set a baseline
The cost baseline is your marker in time for how your project financials look. It should be a snapshot of your approved budget. Use it to track your actual expenditure and then compare. Ideally, your baseline should end up a close reflection of your actual costs but if not at least it will help you identify where you hit problems.
2. Agreed contingency
Did you talk to your sponsor about the contingency levels for this project? Contingency gives you some comfort and flexibility. Although you should still make it clear and ask permission if required when you come to use it, having a pot there to deal with unforeseen issues is very helpful.
Contingency should be based on what you think you’ll need to manage the things you don’t know, based on an assessment of project risk.
3. Agreed a management reserve
Management reserves are normally calculated by the back of an envelope method but they are useful pots, especially if you are working on something which is innovative or unusual for your company. These reserves are emergency money only to be used in difficult situations, and you should get your sponsor’s permission before dipping in.
Read more about the difference between management reserves and contingency reserves.
4. Got it approved
You did get your budget approved this year, didn’t you? Good.
5. Tracked project management costs
You should be tracking all the costs on your projects and it’s useful to split out prject management costs (the overheads) from the delivery costs (see below). Project management costs cover the cost of doing the project – your time, your project team’s time, any short term, project specific things you need to get the project completed like temporary office space.
6. Tracked project delivery costs
Project delivery costs are related to what it is that your project is delivering. These could include software licences, fixtures and fittings for the new building and so on. They are what you normally think of when you work out a project budget and should be clear from your work breakdown structure.
Read more about the 5 different types of project costs.
7. Allocated some cash for rewarding the team
If your project was due to end this year did you put some money aside as part of your closing activities to celebrate? I hope so. It’s good to be able to reward the team for a job well done and it doesn’t cost much to go out for a meal to mark the end of a project.
Haven’t got any budget for this? Read more about how to motivate your team with spending anything.
8. Calculated the risk budget
Each risk should have mitigating actions. These will either make the risk less likely or less impactful should it happen (in the case of a negative risk) or more likely to happen or more impactful (in the case of a positive risk). The risk budget covers the cost of the tasks required to achieve this.
Read more about the 4 factors that make a project risky.
9. Shared it
Did you talk to your team regularly about the project budget and their performance against it? If not plan to do this as part of your team meetings next year. It’s a really good idea because it helps the team see how their work directly relates to cost and achieving the project’s goals.
10. Estimated it
How did you pull together your project estimates this year? Hopefully with input from the right people and using a selection of tools to give you the best, most accurate results. Watch this video on 4 pitfalls of project estimating and see if you can spot anything you did that you should be avoiding in 2015.
11. Agreed tolerances
Tolerances are great and one of the things I get sorted at the beginning of a project. They give you boundaries in which to work – amounts over and under the budget (and dates on the schedule) that you can come in on without needing management approval. Did you sort that out? No? Talk to your sponsor in January: it will make your life less stressful and give you clearer authority.
12. Set up change control processes
Hopefully your project change control processes are already in place but if not, you should have created a process specifically for your project and…
13. Approved changes
…made sure that any of the changes that you needed to put through on your project went through it. This should include a step to estimate the cost and make the necessary changes to your project budget to account for the addition or removal of work.
14. Reported it
Your project budget and progress against your targets should have been included in your project status reports. This is, after all, the one thing that most sponsors care about above all else. Make it easy for them by including the data on your reports along with ways to get more detail if they really want to dig into it.
Learn more about producing better project status reports.
15. Closed contracts
Did any deals with suppliers come to an end this year? You should have formally closed down the contracts. This draws a line under the work and makes closing out the project easier, as well as giving you a better position from which to handover the project deliverables to the operational team.
Learn more about the different types of project contracts.
If you didn’t manage to say ‘Yes’ to the whole list then that could be because the item wasn’t relevant to your project. Or it could be because you didn’t have time or the skills to get that task done.
If it’s a time and skill problem think about what you are going to do differently during 2015. Maybe you could ask your manager for training? Set yourself some goals now so that you can reflect on this list again in 12 months and feel confident in your ability to manage your project’s finances.
The last part of this ongoing series on project cost management looked at the estimating process. Today we’re going to look at how to determine your budget.
What’s the process for?
This process is where you establish the overall cost of the project. At the end of the process you’ll have the following outputs:
So what goes into creating a budget?
You’ll need lots of information in order to start putting together your overall project budget. There are 9 inputs to this process and they are:
Cost management plan
The cost management plan sets out how you are going to manage the project’s finances, and it helps to give you the framework for creating your budget.
This is essential for working out how much the project will cost – you can’t do the calculations unless you know what is in scope. Use the scope baseline to make sure that you don’t forget to cost any elements of the project. Your Work Breakdown Structure is a massive help here and probably the document that I would rely on the most to ensure everything is accounted for.
Activity cost estimates
These tell you how much effort and money is required for each activity, building on the detail in the scope baseline. You can already see how adding these up is going to give you the overall project budget, so it pays to do the work in earlier processes to get these as good as you can.
Basis of estimates
This just explains the assumptions around your estimates. It’s useful when it comes to the overall project budget because it helps you determine what, if any, contingency you should add. These assumptions are often circulated with the final budget because they help other people understand if things like indirect costs are included.
This is helpful if you have to account for work phases. You could, for example, create a budget for the first stage of the project and then a second budget for the next chunk of activity. These would then be added together to give you your overall budget. If your sponsor only wants to authorise the initial work you can use the schedule to establish what should be in and what should be out of that.
It can also be useful if you are expected to calculate the project’s costs in any given financial year or reporting period. Roll up the estimates into date-constrained packages to give you the total cost over a certain time.
These are only really useful if you have to include resource costs in the project budget. If you are working mainly with internal resources you’ll find that you don’t often need this data. However, if you are cross-charging a client for your time then you’ll definitely find it helpful to check who is working on what and what their daily rate is.
The risk register may include details of the cost of risk mitigation activities. Pull these out and put them in your project budget as well. Many a project comes unstuck because risks were identified but there was no money put aside to mitigate potential problems.
These are the contracts relating to what goods and services you require as part of this project. They may also relate to things that have already been purchased. These costs also need to be included in the budget and having the original documents can help because it’s useful to cross-check to see what taxes, delivery charges and other elements have been added in to the quote.
Organisational process assets.
These appear as an input to lots of processes but in this scenario we are referring to:
Tools and techniques
The tools are techniques for the Determine Budget process aren’t rocket science. In fact, the whole process is really about adding up your estimates, making sure nothing is overlooked and then presenting the total as a summary figure.
Having said that, it does help to work through the process because it is remarkably easy to overlook something and getting the budget wrong is embarrassing (trust me, I’ve been there).
The tools and techniques you can draw on to prepare your project budget are:
I cover these in more detail in this video on 5 tools for project budgeting.
The end result
The main output of this process is the cost baseline. This is the approved, time-phased budget for the project but it does not include management reserves. You use this cost baseline as a snapshot in time and compare it against actual expenditure.
What works for you when preparing your final project budget? Let us know your tips in the comments.
1. Euro invoices still require VAT
From time to time I get invoices in euro from suppliers who are based in mainland Europe. The invoices arrive without VAT. But according to local UK regulations, we still have to pay VAT on the services received. Check your local rules! Your accountancy team should be able to help clarify what taxes are required in your country, whether or not these are specified on the final bill.
2. EVM is really not that complicated
There’s lots of jargon and statistics around Earned Value Management (or Earned Value Analysis, whatever you choose to call it) but the basic principle is easy. It’s just a toolthat shows whether you are over or under budget, behind or ahead of schedule, at any given moment in the project. As EVA takes time and effort to do properly I find that it adds limited value to small projects. With a larger project you may find the EVA method useful to help you understand where you are.
3. Tolerance is there to be used, that’s why you agree it
Don’t feel bad about using your tolerances. Your project sponsor really doesn’t want to be bothered by every small change that affects the budget or time delivery for your projects, especially when they don’t make a material difference to what you have already agreed with him or her.
4. On a capital project you can’t capitalise everything
If you are working on a project where pretty much everything is capitalised, even the staff (which local rules might let you do in some circumstances if you are bringing an asset into service), then it’s tempting to think that you can pay for everything out of your capital budget. Unfortunately (again, depending on your local rules), you can’t. For example, even in situations where you can capitalise staff costs you can’t capitalise training. Of course, local accountancy regulations vary from country to country and even within a country, so check with your Finance team before you assume that you can capitalise all your project costs.
5. Accruals are complicated if you don’t plan for them
At the end of the year you will have to accrue for work that has been done but not yet paid for. That ensures that when the bill does turn up, it comes out of this year’s budget, not next year’s – very important if you are trying to balance the books and have budgeted for it this year! But that means you need to tell someone to keep that money aside for when you receive the invoice.
Keep good records as this will be a massive help come year end and it will make a real difference to how time consuming this task is. Take advice from your Finance team and plan early so that you aren’t trying to work out what’s been done but not paid for at the very last minute.
Even better, get your capital accountant to do it for you if you can!
6. One template doesn’t suit all
Your project sponsor wants a different view of the project budget to what works for you on a day-to-day basis. Your detailed tracking spreadsheet is probably too in depth for your sponsor and even some of the project team. Be aware that you may have to present different options for viewing the same data or different types of reports, but be sure that whatever you do, the data is consistent. You really don’t want your own records to be showing one set of figures and then the reports you send out to the Project Board to add up to something different. That’s a sure-fire way to damage your credibility!
|In this video I look at a 3-step approach to reducing your project costs.|