The Money Files

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A blog that looks at all aspects of project and program finances from budgets and accounting to getting a pay rise and managing contracts.

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5 Costs That Could Cost Your Project [Video]

5 Costs That Could Cost Your Project [Video]

Categories: cost management, video

In this video I look at 5 costs that you might not immediately think of but that could have a drastic impact on the profitability of your project.

 

Posted on: December 11, 2016 11:59 PM | Permalink | Comments (2)

Project Finances in the Execution Stage [Video]

Categories: cost management, video

 

Here’s a summary of what’s covered in the video.

During project execution you are putting your plan into action. Part of the monitoring and controlling of your project is to make sure that you understand how much work has been carried out so that you can work out the costs.

It boils down to two questions:

  1. How many days have you already worked on the task?
  2. How many days have you got left?

Armed with the answers to those questions you can calculate the additional cost, if any of completing the work.

During execution you may also be using earned value calculations, which are beyond the scope of this video today, but definitely worth a look if your sponsor wants a really detailed understanding of project performance.

As well as monitoring cost performance you can also monitor and control your risk response budget, review your quality efforts and costs and check that your resource planning is still accurate and you’re on track to deliver for the budget you set.

You’re likely to have to do some kind of course correction as it is a rare project that moves ahead perfectly to plan. This will involve handling change so you’ll be drawing on a change, contingency or management reserve budget or moving numbers around so that you can deal with the costs of change.

The biggest challenge during the execution stage is communication, and the authors of Project Management Accounting talk about that a fair bit. Without good communication you won’t have an accurate picture of project performance and you won’t be able to track and monitor any aspect of your project, let alone the budget.

You also have to work out what is the right level of detail to be sharing about your numbers – while you need all the detail your managers might not want that. If you don’t have a standard project management reporting template then you’ll have to make one up and getting the level of detail right could be trial and error as it depends so much on what your audience is interested in.

Tracking project financials is a really important part of the execution stage because it’s how many projects are judged – cost control is essential. Make sure you are spending enough time on it, and know enough about how to do it, to keep your project financials under control.

Posted on: March 15, 2016 11:59 PM | Permalink | Comments (3)

4 Tools for Cost Control

Categories: cost management

In Project-Driven Creation, Jo Bos, Ernst Harting and Marlet Hesslelink talk about 4 instruments for cost control – and by ‘instruments’ they mean tools.

They describe 4 different tools that you can use as your project progresses.

  • In the Initiation Phase, use cost estimates.
  • In the Planning Phase (which they call Definition), use a budget.
  • In the Execution phase, use cost monitoring.
  • In the Closing phase, use financial evaluation.

Let me talk a little bit more about each of those tools and how you can best use them.

Cost Estimate

During the project’s very early days you won’t have a lot of detail. The first financial planning you do for the project is in the form of cost estimates. And there’s a ton of stuff on this blog about estimating. (Start here).

At this point all you are doing is working out whether the project is financially viable or not. You might still go ahead even if the finances don’t stack up. There’s often good reasons to do projects that are going to cost, rather than make money, such as compliance and regulatory obligations. But even if that is the case, your sponsor will still want to see an early view of how much the project is going to cost.

Cost estimates are how you do that.

Budget

When you’ve got approval to go ahead and you’re planning out the work, you take the cost estimates and turn them into a working budget. It’s more accurate than your early estimates but it’s still only a forecast.

You build your estimate from the work breakdown structure, details of how much tasks will cost and expert input from your team. Then build in a margin, just in case you’ve got it wrong.

Cost Monitoring

Now the project is fully underway and you’re working your way through the tasks in the Execution Phase.

This is where you use cost monitoring to check that your project spending is broadly in line with what you said it would be. Monitoring your costs regularly lets you see if there are any overspends or trends towards performance that you want to investigate further. The faster you spot it, the faster you can do something about it.

The authors write:

“This comparison is only useful if the monitoring includes evaluating whether the project activities are also on schedule.”

That’s really important, because you could burn through all your money and only be 20% through the tasks. Doing this in any formal way normally includes using Earned Value but for many projects that is overkill. Use your professional judgement to monitor your costs and if you aren’t comfortable tracking expenditure and tasks and taking a position on whether they are progressing as you expected, then talk to your finance team, your PMO or someone else who’s opinion you respect.

Financial Evaluation

Finally, you’ve reached project closure. Your cost control work doesn’t stop just yet: first you can complete your financial evaluation.

This lets you see if the project has hit the financial targets that were set, especially around benefits. So, did it achieve the increase in revenue or cost savings that were expected? This is an evaluation around the outcomes of the project.

Second, you want to measure the project management effectiveness of the project. Did you do the work in line with the budget? Or was your budget woefully wrong? How did you deal with any surprises or overruns and what caused them? And most importantly, what can you and the team learn from them so it doesn’t happen again?

Taken together, these 4 tools give you a good handle on cost control. Even if you didn’t do anything else on your project, these would let you manage the financials adequately.

Do you agree? Let me know what you think of the 4 instruments of cost control in the comments below!

Posted on: March 09, 2016 12:00 AM | Permalink | Comments (10)

Project Finances in the Planning Stage

Categories: cost management, video

 

Here's a summary of what the video talks about:

In the planning stage of the project you are working out all the project costs and building a resource plan against which you can track later.

Your wbs and the project schedule is really important when it comes to understanding your project budget. You need to know how long tasks will take and how much work needs to be performed before you start seeing a return.

During the planning stage you have to work all this out so that you can monitor against it during execution.

You also have to work out the other costs on a project. for example, the cost of the people doing the work in terms of salary  or day rates, and other expenses like materials or equmpment.

There might also be a cost associated with procurement.

I’d also plan for risk in here too: you’ll want to know that your risk profile is covered and that you’ve got plans in place, and a budget to fund them, to address your major risks and current issues.

Finally, you’ll be planning for quality and including the cost of prevention, correction and warranty.

I’ve drawn my advice here from this book Project Management Accounting. I recommend it if you’d like to learn more about project financial management.

Posted on: February 22, 2016 11:59 PM | Permalink | Comments (2)

Cost Management Documents (And Which Ones You Really Need)

Categories: cost management

Project cost management has a huge documentation overhead. Or does it? Below I breakdown the 5 cost management documents that are common across project management processes and tell you which ones you really need to.

1. Cost Management Plan

What is it?

The cost management plan is a component of your overall project management plan. It talks about how the project costs are constructed and controlled. You document your cost management processes, tools and techniques in the cost management plan as well.

Do you really need it?

It depends. On huge projects I can see the value. On projects that are using a new financing model or a different procurement approach to the norm – there’s a value there too. There’s a potential use if you are the first project manager in your organisation and you want to set things out clearly from the beginning. But in companies with established cost management processes then no, I don’t think you do.

The reason you don’t need it in those circumstances is that the information contained within it is implied in the way you do business. It’s not that there isn’t a cost management plan for your project – it’s simply that it isn’t written down in a way that a PMP following A Guide To The Project Management Body of Knowledge (PMBOK Guide) – Fifth Edition to the letter would recognise. It might not be written down at all, but it’s likely to be codified in the Finance processes that control how money gets approved and spent in your organisation.

A compromise position would be to put the relevant information into a small section your main project management plan and dispense with the need for a separate (albeit component) one.

2. Activity Cost Estimates

What is it?

Activity Cost Estimates are a way of documenting what each activity is going to cost. In A Project Manager’s Book of Forms (which, incidentally, I still find useful even though I have the Fourth Edition not the Fifth), Activity Cost Estimates are documented in a table with the following fields:

  • WBS ID
  • Resource
  • Direct Costs
  • Indirect Costs
  • Reserve
  • Estimate
  • Method
  • Assumptions/Constraints
  • Additional Information
  • Range
  • Confidence Level.

You are supposed to fill in each column for each activity and then the ‘Estimate’ column gives you the proposed budget for that item.

Do you really need it?

No, I don’t think so. I’ve never produced a document with all the details in including things like cost of financing and inflation allowance for each item. It seems like an overhead to write it all down like this.

What you do need is a record of how you came to each estimate. Personally I used the comments functionality in Excel to add a remark to the cell with the figure in. This is a reminder of what version of the supplier proposal it relates to, or how many days effort I’m basing the estimate on.

You do have to work out how much each task or resource is going to cost on the project, but you don’t have to create a whole table to list every one – incorporate the data into the budget spreadsheet you need to construct anyway and save yourself a job.

As with anything, you’ll have to use your professional judgement to assess whether it’s worth doing this document on your project.

3. Cost Estimating Worksheets

What is it?

This is a document mentioned in A Project Manager’s Book of Forms. It helps develop cost estimates when you’re using estimating techniques like parametric, analogous or three-point estimating because it gives you somewhere to store the calculations.

Do you really need it?

It depends on if you are using an estimating approach that requires a lot of calculations, and you want a single place to go back and look at how you arrived at those estimates.

For projects with a supplier who tells you the work is going to take 62 days, then no, you won’t need to work out your estimates in the same way.

4. Cost Baseline

What is it?

A Guide To The Project Management Body of Knowledge (PMBOK Guide) – Fifth Edition defines this as:

The approved version of the time-phased project budget, excluding any management reserves…a summation of the approved budgets for the different schedule activities.

It’s your budget, and it’s what sponsors really want to see.

Do you really need it?

Yes. You need somewhere to consolidate the costs for the project. In my world, this is a budget tracker spreadsheet. It’s a working document and it has to be, because money gets spent and estimates change as you challenge your assumptions and find out more detail.

5. Cost Forecasts

What is it?

Cost forecasts in A Guide To The Project Management Body of Knowledge (PMBOK Guide) – Fifth Edition are the estimate at completion in monetary terms for the project. You should document this and share it with stakeholders.

Do you really need it?

Yes. It’s not difficult to work out if you are on top of your project tracking and you don’t need to be using Earned Value to do so. I wouldn’t create a separate document for it though. It’s just a data point, so include it as appropriate in your project reporting.

Posted on: February 10, 2016 11:59 PM | Permalink | Comments (4)
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