Today I’m interviewing Todd Williams, author of the popular book, Rescue the Problem Project. In the book, Todd talks about cost audits. Even if your project doesn’t need rescuing, cost audits are a useful technique to use, so I talked to Todd to find out more.
Todd, what is a cost audit?
A cost audit is a relatively simple task of reviewing all of the costs on a project and ensuring they are in line with the project’s anticipated spend. It validates the right amount is going to the right people at the right time. Simple, right? The sticky part is usually that last clause—at the right time. Projects have specific milestones for when items should be paid for. Usually it is when a tangible item is delivered. Some form of acceptance document is signed and the vendor gets paid. Internally, the demarcation point is resources moving on to new tasks. If they still have lots of loose end to tie up, then you keep spending money on something that is supposed to be complete. In other words, money starts leaking out of the project.
It can, however, be a little more tricky. When you are determining the cost of internal resources, you need to determine they are performing to expected goals. Are they spending time on non-project tasks or inefficiently getting toward deliverables? They may be salaried and simply billed to your project. In this case you need to be diligent ensuring hours (which translate to money) are spent on completing their work and that these hours are in compliance with industry standards. If time gets excessive you have a problem.
The best measure of this is a cost performance index. But that indicator is imperfect. If deliverables are being signed off as complete when there is still work to do, then people need to keep working to get a workable product. Money to cover the expense, with the best of intentions, can get pulled out of some other budget. This is similar to the Ponzi schemes we have seen in the headlines recently and can be hard to find until after it is too late.
OK, so I guess you don’t want to wait until the end of the project to carry out a cost audit. When is the best time to do one?
The minute you get a funny feeling in your gut that something is not right. This goes for the Project Manager or the project sponsors and executives. Often the latter can get someone to come in and find the problems in short order, before they get too big. Always assume positive intent—the mistakes are honest misunderstandings.
For some organizations it is a matter of course; however, it takes a significant amount of time. This is far from a lean process and I do not recommend it. If you are dealing with the government, you are often required to have some audit process in place. In any case, if you see the cost performance index starting to go awry, it is a good time to do one.
You mentioned bringing someone in. Can project managers carry out cost audits themselves or should someone else do it?
Using and internal or external auditor? Answering this question with a question will make my point. Would you trust a company where you have a significant amount of your savings invested if you knew they did their own audits instead of having an independent auditor do the work? Of course not. You would want them to have an outside firm review the books to ensure there were no mistakes. It is of little value to have the person that was making the mistakes try to find them—it is harder for me to discover that I do not understand something than for someone else. In addition, if someone is cooking the books, the exercise of an internal audit is a waste of time.
Right, so say I get someone in to do a cost audit on my project. What form does the output take?
I am sure there is a formal layout that finance people like to see, but I simply put the variances items in a spreadsheet showing the anticipated cost, actual cost, and whether it can be recovered. Then I total out what is lost and what can be recovered. The last step is to give a set of recommendations for fixing the issues and preventing them from recurring.
I bet the reports have lots of interesting things in them. You must have uncovered some sneaky deals.
Although I said to always assume positive intent, there are times when people do not have the best intentions. I have seen people who were buying equipment that was not needed so they could get a gift from the vendor. They labeled the purchase order as if it was an item that was needed and the audit found it sitting unused on a shelf. The buyer had a positive intent (beyond the gift)—to improve the capabilities of the deliverable. Unfortunately that functionality was out of scope and it was questionable if the purchased equipment would meet original scope.
In cases like this, the report, or that section of the report, should be confidential. Covert and clandestine discoveries are the exception. The information should be an educational tool to reduce the chance of the mistake recurring. Remember that the data can be sensitive and publicity can cause a lot of pain. I am sure the readers can think of some big items in the press.
I know that now you are very experienced in doing cost audits, but tell us about the first time you were asked to carry out this type of review.
I am not a finance guy. After all, I have a bachelor of science in chemistry. Being called in by the CFO, I was certain I was being set up and was scared to death. I started by reviewing all the invoices and reconciling them to the material we had on hand and the functions that were supposed to be delivered. Finding numerous major discrepancies, I got even more nervous thinking I was doing something wrong. After double-checking the numbers, I called a couple vendors. They got very defensive. It turns out that the vendors had learned the client would pay anything without validating the fit of the deliverable. They could meet their revenue numbers by delivering and billing early.
Unfortunately, the vendor’s management would not let them work on the items that had been delivered and invoiced since there was no more revenue to gain. There were hundreds of thousands of dollars that had been spent on partially delivered items. With new confidence, on a regular basis I would walk into the CFO’s office and write the new funds found and recovered. The value dwarfed my billings by an order of magnitude. Needless to say, the CFO was pleased.
I’m sure he was! Thanks, Todd.
About my interviewee:
For twenty-five years, Presidents, V-Level, and C-Level executives of manufacturing and service companies have asked Todd Williams to help them build leading-edge systems, improve organizational efficiency, and rescue problem projects. From this experience, he has developed methods to streamline organizations, turn-around troubled projects, and help prevent recurring failures.
As President of eCameron, Inc. and a professional member of the National Speakers Association, he is an expert in project rescue, failure prevention and engaging people in the solution. He maintains a blog that has been quoted on CIO Update, ZDNet, IT Business Edge, Center for CIO Leadership, and CIO Essentials, among others. He has been chosen to speak to numerous companies including NASA, AMA and PMI.