Here are 5 common project budget problems and how to fix them. If you’ve got other suggestions for dealing with these situations, please let everyone know in the comments below!
1. Contract Expenditure is Overrunning
You’ll notice this hopefully before it causes a big overspend on your project. Your company has entered into an agreement with a supplier and now the bills are starting to rack up. This could happen if your agreement is on a time and materials basis, or a fixed price plus extra costs for changes to scope.
How to fix it: Find out why the costs are overrunning. Is it because your team is putting through too many change requests, which is hitting a contract clause that lets the supplier charge more? Or is something else at play? Whatever the cause, pin it down and work from there. Involve the supplier as well, so that they know that you can’t afford, or choose not to afford, to put up with those costs going forward. You may end up renegotiating the whole thing, but better to do that early than to put up with overspends for too long.
2. Resource Expenditure is Overrunning
When you have to pay for internal or external resources, the costs can soon mount up. It’s not difficult to find yourself with spiralling resource costs, even if they are just wooden dollars being moved between departments.
The most likely causes are poor estimating and too many change requests.
How to fix it: It’s often hard to drill down into the detail of where a resource is spending time, especially if you don’t have a timesheet application. If you don’t record time, then start doing that first! It will really help you improve your estimates over the longer term.
Short term, you need to sit down with your team and reforecast the whole project. If you then can’t afford to do all the work that you’ve planned out, you need a frank conversation with your project sponsor about what can be taken out of scope for this phase.
3. Managing Risks is Costing More
In fact, the common problem here is when you didn’t budget anything for project risk management. Then a risk pops up and you’d like to do something about it and can’t because there’s no money allocated for risk mitigation or to exploit a positive risk.
How to fix it: It’s too late to go back and ask for a risk budget now… or is it? You might find your sponsor open to that kind of conversation, and it certainly doesn’t hurt to ask.
If you don’t have additional money available then you have to adjust your activities accordingly. Perhaps your project board could accept a higher level of risk for that element, or they would be prepared to compromise on something else. Put together a proposal that explains the risks, the costs and the benefits along with some options so that they have choices.
4. You Can’t Access Management Reserves
Ah, the mythical management reserve. This hits project managers who have sponsors that are poor at following through on their promises. The sponsor says that there is some kind of ‘contingency’ or ‘management reserve’ that can be spent at their discretion if required, say, in the event of an unplanned project disaster.
Said disaster happens and suddenly they don’t have authority to access those funds, or another project has used them, or you need to write a business case to access them…
How to fix it: You will struggle to fix this one in advance but your best bet is to make sure that you have full confidence that any pot of money that is being held outside your official project budget does actually exist and is there for you. Of course, the best thing to do will be to manage the project so you don’t need to tap into additional reserves.
5. You Can’t Track Expenditure
This happens when other people are spending your project budget and not letting you know where it is going. The first you hear about resources being acquired or a deal being signed is when the invoice gets passed to you from Finance with a big question mark written on it.
When this happens you can’t accurately keep track of what is being spent, and whether it is being spent on the right things.
How to fix it: Sort out the process for spending money. Make it clear to the project team (even those people who are more senior than you) that purchase orders have to go through you for tracking, even if you don’t have the authority to actually sign them. Let the Finance team know as well so that they can be copying you in on requests and making sure that the process is adhered to. They have no interest in receiving invoices that can’t be paid or getting the company into debt with inappropriate suppliers so they will be on your side!
Olivier Lazar gave a presentation at the PMI Global Congress EMEA earlier this year and he talked briefly about how to construct your project budget. I wanted to share some of his ideas and some of my own here.
So, let’s look at the three components of a project budget.
1. The Budget at Completion (BAC)
This part of your overall project budget comes from the work breakdown structure and your estimating processes. (I’ve written a lot on this blog about estimating. Check out some of my videos on estimating terminology and processes here.)
2. Management Reserves
This is a pot of money put aside for use at management discretion. Typically you’ll get your sponsor to approve the spending from this allocation; it’s not a pot that you can dip into whenever you feel like it.
Olivier gave the example of a decision on a project that was made internally and that incurrs a cost that cannot be passed on to the client. On one of my recent projects – although an internal one, so we weren’t exactly billing the other department for our services – we did that. The change involved upgrading a system. There was no tangible benefit to the users of moving to a new infrastructure but it was part of the longer term IT roadmap. We couldn’t in good faith have passed this on, had it been an external client, as it wasn’t a change they requested or that we could ‘sell’ as having any user advantage. But it was still the right thing to do.
3. Risk Response Budget
The final section of your budget is made up of the money put aside to deal with risks if they happen. This allocation should cover the cost of putting your risk response plans into action. If a project risk has a response plan that is going to cost you £100k and a probability of 10% you would budget £10k in your risk response plan. Remember, the risk response plan is to deal with realised risks (i.e. the ones that become issues). You typically don’t put the whole amount for the risk response plan (in this case, £100k) in your budget because you are crossing your fingers that the risks won’t happen. Or at least, not all of them will happen, so you’ll have enough money to go round.
Any money is better than nothing, but the challenge here is that if this risk does actually happen it will still cost you £100k to respond to. You had better hope those other risks don’t materialise as you won’t have enough risk response funds to go around.
Those three elements make up the budget for your project. They don’t necessarily equal the price you would pitch your services at.
Create the selling price
Olivier expanded his point about budget construction to add a bit more about how you would calculate the selling price for the project, as an external contractor.
Overheads are things like heating, lighting, staff costs. They are the cost to you of doing the work and should include everything from mobile phone subscriptions to catered lunches.
Most companies I have had experience working with have had a fixed rate per employee that they add to budgets to give this figure. These are called ‘on costs’. They only relate to staff though (pension contributions, hiring costs etc). Make sure to add in any other overheads specific to this project that do not relate to people such as hiring meeting rooms.
This is how much profit you expect to make on the project. If you are a business you aren’t doing it at cost. Otherwise you’d make no money on it at all and your shareholders won’t be happy. You’ll have to work out what is an acceptable margin to make on the project – 2%? 70%?
Adding these two additional lines gives you the price at which you would be willing to sell the project to the customer.
Olivier added these caveats:
If you make people redundant and have no one to deliver your projects you’ll lose work and the ultimate situation is that you could go out of business.
That’s why estimating is important: without it you can’t keep your business profitable.
The same goes for internal project managers: you still need to know that your project is making the organisation something and adding value, not creating more cost for no benefit.
Read more about Olivier’s presentation in this article about using budgets to help manage project risk.
I’ve been going back over my notes from the PMI Global Congress EMEA which was in London earlier this year and I realised I hadn’t written anything about Olivier Lazar’s presentation on budgeting and risk. I wasn’t sure what to expect but he raised some good points about ensuring your project budget accurately reflected potential issues and gave tips on how to do that.
He talked about the project budget structure as one that acted as an early warning system, integrating cost, scope and risk.
“Everything starts with an estimate,” he said. “An estimate is a risk.”
The truth about estimating
Estimating, Olivier explained:
“You fail it you have to react,” he said. “Project management is an activity of anticipation.”
Having said that, you can’t anticipate events in the future – unless your crystal ball works better than mine – but you can put mechanisms in place to maximise the opportunity to anticipate and avoid the wilful blindness that was discussed in other presentations during the conference.
Use your plan as a baseline
We all know that what you plan isn’t going to happen exactly as you had scheduled. Olivier said that we should consider the project plan as a baseline, not a map; a speedometer, not the GPS.
Usually, he went on, projects go over time and over budget because risk has not been adequately taken into account.
Therefore it’s important to plan the risk response as early as you can, because this helps you work out the cost. Risk response budgets can then be included in your budget, lowering the likelihood that you’ll go over your planned spending.
He recommended grouping risks together then identifying common response strategies, with a minimum of 3% contingency. You’ll want to increase the contingency reserves in these situations:
These circumstances reduce your ability to accurately identify the risk and so push the contingency up. Where you have low levels of uncertainty and ambiguity you can thoroughly identify risks (for example, in projects where you’ve done the same thing before) and thus be able to reduce the contingency reserves accordingly.
When you have identified risks (or threats) that have a high probability of occurrence, Oliver suggested integrating these fully into the project plan and identifying the opposite opportunity – the one that you could enhance or exploit.
Monitoring as you go
If 30% of your budget at completion has been used and yet 80% of your risk response budget is used up then you have a problem.
These figures show that a lot of things you thought were uncertain have actually happened – no one expects every single risk to really happen on their project because they are only risks, not certainties. If you merge your budget at completion, contingency reserves and risk budget together you might not be able to identify this situation as early. You’ll lose control and you can’t know what is happening because risk and contingency, Olivier explained, are not the same thing. Your risk and contingency budgets do not inflate your project budget (or reduce it, for that matter). They only give you more control.
If you are in this position then you need to act quickly to get your project back on track.
Review the scope statement and – while acting quickly – also take the time to react and review. Currently you are within budget so you may not have some of the triggers that you would expect, but consider this tracking your early warning sign.
Olivier concluded by saying that additional control lets you “move from panic and chaos to project management” and reiterated the idea of project management plan as the overall map for y our journey, not the step-by-step walking guide.
Have you split out risk and contingency budgets on your projects? I’d like to know what you think of this practice, so let me know in the comments.
A project budgeting calendar
I could have also called this post: What money stuff do you do when?
I should start by saying that it’s difficult to give you a complete rundown of what project budgeting activity needs to happen when in the month or whenever in your project, because each company is different. So this article will cover what I think is common practice based on the project managers I work with and coach.
Project start up
At the beginning of the project, before the ‘doing’ of the work starts, you should:
Remember to write all this stuff down as part of your project initiation documentation.
During the activity part of the project where you are completing project work and achieving targets towards your deliverables you should be:
Each month on the project
Every month you should be updating your project records and doing the following:
Every couple of months on the project
Every so often – I’d do this every two months on shorter projects and every three on longer ones – review these bigger ticket items to see what your status is:
If your project falls over the year end financial accounting period you should also be preparing for anything that you might need to do in order to satisfy the internal processes around that. For example, managing accruals. If you’re lucky, someone will do this for you!
At the end of the project you should:
What else would you add to the list? Let us know in the comments.
You’ve looked at the budget tracker and – to your dismay – you can’t make the figures balance. At the current run rate you will be overspent by the end of the project. You are forecasting to be over by way more than your project sponsor has agreed in terms of tolerances. There’s only one option: you need to ask for more money.
Asking for a budget increase isn’t an easy thing to do. For one, it’s embarrassing, especially if you were involved in putting the budget together in the first place. You’ve got to admit that you got it wrong. Here are nine steps to handle that difficult conversation with your project sponsor.
1. Be honest
You can’t hide at this point. Make sure that you are working from a position of clear, transparent, justifiable data.
2. Get time with your sponsor
Don’t do this over email. Even over the phone is pretty bad. If you can, get time with your sponsor to meet them face-to-face. If necessary, book it through their PA and confirm the day before. You can do this as soon as you know you are going to need the meeting, and ask to see them as soon as possible. Your budget position is only going to get worse, so you need a steer from them about the project financials as soon as you can.
Give yourself time to work out the position and prepare some alternatives but ideally you’ll want to meet them quickly.
3. Sort out your estimating
You need better estimates. Most likely your project budget is over because you:
Estimate, and then include proper contingency reserves if you do not have confidence in those estimates.
4. Prepare a new budget
Use your new figures to revise your budget. Go back to basics. Start from scratch and do the whole thing again. There may be some elements you feel confident enough to keep but at this point nothing should be without challenge.
Because if you are going to back to ask for more cash, make sure you only do it once. Once is excusable – kind of. Twice makes it look like you don’t have a handle on the work involved and it undermines your professional credibility.
5. Prepare your rationale
You may be more interested in securing more funding, but your project sponsor is going to want to know why you need the money. Work out your arguments in advance, and make sure they are good.
You should be able to articulate why you are overspent (remember point 1 about: be honest and if you messed up, say so). Stay factual, and avoid apportioning blame even if it is really tempting to mention that you got a bad deal from a supplier.
6. Prepare some alternatives
Could you stick with your existing budget but deliver less functionality? Or deliver the same functionality over a longer period of time, perhaps with less expensive or in-house resources? Or deliver some functionality with the extra funding but not everything?
Come up with some alternatives to the whole amount so your sponsor has options. Be aware that one option is to cancel the project completely.
7. Prepare your sponsor
Don’t let your sponsor believe you are going to meet them to tell them that all is well. Nobody likes surprises, and in my experience, project sponsors hate them more than most! Send over a briefing pack for them to review in advance of your meeting, including the alternative options if securing the full amount of additional funding isn’t an option.
8. Hold your meeting
Meet your sponsor. Clearly present the current project situation and the financial position. Clearly explain what cash is needed to keep the project moving forward and why that is required. Give a level of confidence about how comfortable you are that these figures are now accurate and what is needed to complete the project on time and to the existing scope.
Talk to them about the additional options that you have come up with and ask if they see any further alternatives that would deliver business value but keep within reasonable cost.
Ultimately, your sponsor will make a decision about what to do next. The exact answer you get will depend on the situation and how far along you are in the project but it’s likely to be something like one of these:
“Here’s the extra funding. Carry on.”
“Here’s a portion of the extra funding. Let’s work out how much we can deliver with this.”
“There is no more funding. Work out what you can deliver without more money.”
“This project is no longer viable. Please shut it down and salvage what you can.”
9. Act on your sponsor’s decision
Your sponsor has spoken. Now it’s your turn to follow through. Obviously what you do depends on what route they have chosen as the most appropriate one for your project. Whatever the way forward, you should explain the situation to the project team so they are fully aware of what is going on.
Nine steps might sound like quite a lot but it’s an involved process that you need to get right. Have I missed anything out? What are your experiences of having to ask for more money to complete your project? Let us know in the comments.