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