Ask the Experts: Jason Westland on budget management processes
From the The Money Files Blog
by Elizabeth Harrin
A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts.
Written by Elizabeth Harrin from RebelsGuideToPM.com.
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Date
Last time I asked Jason Westland, CEO of ProjectManager.com, about his tips for preparing a comprehensive project budget. Today, our interview continues with his advice about budget management processes.
Jason, one of the hardest budget processes to get right is contingency funding. How should project managers make it work?
You do need to add in contingency, especially if you haven’t done this type of project before or it is particularly risky. But most companies don’t have a process for calculating contingency or even accessing it to spend.
It’s hard to calculate how much contingency to add to your budget, because it’s rare that there is another similar project that you can use as a guideline. Start off by working out how risky your project is going to be. Projects with a high level of risk require more contingency funding. Having said that, some parts of the project may be riskier than others, so consider whether you add contingency to the overall budget pot or to particular tasks or phases. You could, of course, do both, if you are particularly risk adverse.
So if you don’t know where to start, what is a good figure?
That’s hard to answer! But my advice would be – if you really don’t know where to start – add 10% of your overall project budget as contingency. Although it is better to work it out as scientifically as you can, as you will get challenged on that figure if your sponsor is doing a good job. You should be able to explain, rather than just saying that you made it up!
Talking to your sponsor about the level of financial risk that they are prepared to accept is another way to manage this. If you explain that contingency funding is there to offset unforeseen risks, they may allow you to have more, because they are risk averse and want to be sure that those kind of situations are covered. Having said that, this conversation could result in you getting less funding if they aren’t worried about riskiness.
What about spending the money?
Yes, you absolutely need to know how to spend it! Both for your contingency fund and your main budget, and they will probably have two different processes.
For your project budget, your Finance team will probably be able to tell you what to do about raising purchase orders, receiving goods, authorising invoices and keeping track of expenditure. While it might be quite bureaucratic, it is normally pretty easy. Get someone in the right team to tell you what your local process is and where to charge expenses to, as I have noticed that they differ widely between companies, and sometimes even within the same company.
And for contingency funds?
Spending the contingency fund normally requires approval from the project sponsor. The best way to manage this is to find out how you can access the fund before you need to use it. The last thing you want to be doing when something goes wrong and you have to sort out a risk mitigation plan at short notice is to be trawling the intranet looking for some obscure policy or trying to schedule time with your sponsor’s PA for them to explain it to you.
Once they have approved spending the funds, it’s normally a similar process to spending ‘ordinary’ money, but it might be tracked separately.
Thanks, Jason!
About my interviewee
Jason Westland is CEO of ProjectManager.com, a software firm, and author of The Project Management Life Cycle.
Posted on: August 07, 2013 07:21 AM |
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Comments (7)
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Diego Ferrer
Managing Principal| Quant16
Chicago, Il, United States
Talking to project sponsors about contingency funding is a tricky task. In my experience I've seen project sponsors puzzle when I talk about it. At the moment of budget allocation some sponsors can't figure out what kind of situations may need to be mitigated because thy can't imagine unforeseen risks.
That makes for a hard conversation, Diego. It helps to have worked out the risks you can forsee before having this discussion, at least to provide some background for the sponsor.
fosco frongia
Senior project manager| ENTE PATRIMONIALE CHIESA GESU' CRISTO SUG
Fino Mornasco, Como, Italy
I think it is due to a lack of contingency culture. If Project sponsor puzzles about risk possibly it will due to a bad previous experience. It is a normal practice to “baptize” contingency anything that is more a lack of analysis coverture.
Probably we can have more possibility of success if we will discuss the matter with a defensible analysis based on objective information
Staying objective and factual is important. I agree there's a lack of contingency culture, because when things go well, people don't realise that contingency was part of that.
David Hamil
Implementation Project Manager| Imaging Business Machines, LLC (ibml)
Somerville, Al, United States
Like Diego Ferrer, I've also found talking about contingency funding to be a tricky task. I've also found throughout much of my career as a PM (> 20 yrs) that it has been an "unwelcome" subject to be bringing up to the sponsor or senior management as they state "it is, what it is." I've only found one instance in my career - when the organization had a CMM Level 5 maturity where such discussions were welcome and the organization fully understand the need for such contingency. I get it but selling it to others is often like trying to "push a wet noodle," so to speak ...
David, "push a wet noodle" I've not heard that before! Maybe it's a bit like throwing an idea against the wall to see if it sticks. We do that with spaghetti to check if it's done....
funds are critical in any project.thanks for article
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