In this video I share 5 differences between what it means to do accounting on your project (and manage the financials/budget) and how financial accounting can work. Understanding these differences makes it easier for you to work with your Finance teams and run your project budgeting processes.
5 Facts from Project Management Accounting
In this video I talk about 4 pitfalls of project estimating.
OK, so we all know budgets change from time to time (normally being reduced unless you’ve got a great reason for your sponsor to give you more, like a change). But aside from office politics and the change control process, there are other things that can affect your project budget. Here are 4 risks to consider when both putting your risk log together and your budget.
1. Gold plating
Gold plating is where the project team adds stuff into the project scope without the customers asking for it. It often happens on software design projects, where the developers know they can add extra functionality to improve the product, so they do. Even if the customer didn’t want it, and didn’t know they could ask for it, the team do it.
You’d be forgiven for thinking that gold plating is a good thing. After all, what project customer isn’t going to want more for their money? It’s the bells and whistles that set your project team aside from any other project team.
However, if your team is working on tasks that are not on the project schedule, that costs you money. It takes time to do extra work, so whether they realise or not, they are helping the project go over budget through their enthusiasm. Talk to the team about the proper change control process and make sure that they are only working on what is approved.
2. Scope creep
Scope creep is something that all project managers have come across at some time in their career. You start off with a narrow, well-defined scope and by the end of the project it’s become a rambling monster of requirements. This is different from gold plating – the team are working on things that are approved, it’s just that the approved work stretches the scope way beyond what was originally agreed.
Scope creep takes many forms, and can be through a poor change control process. If everything gets approved, then you know that your change process is not rigorous enough! While many changes put forward will be good, useful suggestions, some will take the project outside of its original goals and objectives. Should they really be included in this project or would it be better to manage those requirements in another way?
Scope creep adds time to your project, and therefore cost.
3. Failed QA systems
Quality Assurance (QA) makes sure that your deliverables are fit for purpose. Whether your QA system is peer reviewing lines of code or stress testing bricks off a production line, you should have some method of checking your work before you give it to the client.
Poor QA means that deliverables will make it through to the customer only to be rejected. The customer will not sign off on poor quality work, so it is far more beneficial for you to catch mistakes early on. This will reduce the amount of testing required and also give you more of a chance of your deliverables being approved by your client.
Deliverables that are rejected will have to be done again, and by the time the work has got into the client’s hands for approval, it is likely to be costly to make changes and complete rework. It is far better to catch poor quality early so that you can rectify it while it’s still cheap enough to do so.
4. Currency fluctuation
Not all projects will suffer from currency fluctuation, but if you are working with an international team, this could happen to your project. The problem comes when you budget at a certain exchange rate but of course are charged the exchange rate of the day when the invoices come in. In some cases the discrepancy between what you had planned to pay and what you actually pay can be hundreds of dollars (or euro, or yen etc).
It’s hard to plan for this, but you can make your budget a bit more robust by including a percentage contingency to cope with currency fluctuations. Only you will know what seems appropriate given the overall spend of your project and the amount to be spent in foreign currency. Talk to your accounting department as they may be able to advise on how best to manage this.
You can probably think of many more risks to your budget, but these 4 make a good starting point for budget risk planning with your team. What else do you normally include on your risk register when it comes to money?
It’s not too late to start thinking about financial planning for the year. If you didn’t get a chance to catch your breath in January, make this the month that you sit down and think strategically about the year ahead. Here are 5 themes to consider – all things that your C-suite executives will be thinking about as the calendar year starts and financial years come to an end about now.
Yes, everyone is concerned with staffing levels. How many people do you need on your project, and could you manage with a few less? This will be the question everyone is asking this year. Despite the economic situation looking a little bit better than it did a while ago, cost saving is still the watchword.
Look out for project sponsors, PMO Directors and other senior managers asking you about what you can achieve with fewer people. Be prepared to have a few reasons why you can’t manage with a smaller project team (if you believe that you can’t – of course, if you do feel that the team is a bit bloated, this could be a great reason to get rid of some of the dead weight!).
Equally, if you need to recruit, start putting together plans for why your project team needs additional people. Pull together a person specification and start thinking about interview questions.
Strategic planning has to include money. Capital costs are those that are part of the initial outlay for the project and are the main part of any investment. Capital is hard to come by in some companies and may have to be borrowed. Borrowing money always comes at a cost, so you may have to factor in debt repayment into your business case (it’s more likely that this will be managed at a corporate level by the treasury team, and you won’t need to bother about this at all).
3. Operating Costs
Operating costs are the costs of running the project. They include staffing, but also things like meeting room hire. This is how much it costs to run your project team or department and to deliver what you have been tasked to do this year. Essentially, all these costs are overheads. As such, senior executives are always looking for ways to reduce them. This could mean cutting the level of staff (see above) but will also include things like cancelling away days.
Cost savings can come in various different forms. The UK government recently issued a document highlighting 50 ways that local councils could make savings including improving procurement. It gives the example of Birmingham City Council, which adopted a collaborative approach to all energy procurement in partnership with local energy providers, and has saved £4.7 million per year.
High on the list of things to consider for strategic plans is project benefits. Which projects in the company are set to deliver the most benefit? Do we even know? Be resourceful and if you can, offer information to decision makers about the projects that you have on the go at the moment and the benefits that they will deliver. This helps show that you are aware of strategic priorities but also points out that you aware of what you are working on and how it will help the company overall. It also highlights that you are working on benefit-producing work (aren’t you?) and therefore are a key player in the department or company.
Finally, strategic plans also need an element of forecasting. You should be able to look backwards and use that data to forecast forward. Forecasting includes all elements of resource planning from how many people you will need in which department when to when big bills will be paid so that the company can make sure its cash reserves are available at the right times.
You can use project management software to forecast your resource utilisation and cost predictions, and then these can be fed into the overall model for the department or PMO. At a company level, you may have to provide some very high level figures to contribute to corporate planning.
Even if you are not asked to forecast, it is a sensible idea to have a go – this is a good time of year to be thinking ahead about what you will need to complete your project, so why not set up your own spreadsheets and turn your hand to forecasting?
Strategic planning in your company may involve lots of other elements, but starting with these 5 things will certainly give you enough to talk about if you meet a C-suite executive or are asked to contribute to the strategic plan for your area.