In this video I look at 3 common reasons for going over budget, and point out some quick things you can do to put them right.
In this video I talk about the 5 project costs you might have forgotten to account for in your budget.
For more details, this article has more about the costs you might have overlooked.
Project budgeting is one of the harder parts of managing projects, because the consequences of getting it wrong are significant. People tend to be more forgiving when it comes to delivering a little bit late or having to take shortcuts on the scope. But ask for more money or spend too much? That provokes strong reactions from project stakeholders!
I’ve made a short animated video about 3 of the more common budgeting mistakes that you might come across on your project: consider them things to watch out for.
Here are 5 common project budget problems and how to fix them. If you’ve got other suggestions for dealing with these situations, please let everyone know in the comments below!
1. Contract Expenditure is Overrunning
You’ll notice this hopefully before it causes a big overspend on your project. Your company has entered into an agreement with a supplier and now the bills are starting to rack up. This could happen if your agreement is on a time and materials basis, or a fixed price plus extra costs for changes to scope.
How to fix it: Find out why the costs are overrunning. Is it because your team is putting through too many change requests, which is hitting a contract clause that lets the supplier charge more? Or is something else at play? Whatever the cause, pin it down and work from there. Involve the supplier as well, so that they know that you can’t afford, or choose not to afford, to put up with those costs going forward. You may end up renegotiating the whole thing, but better to do that early than to put up with overspends for too long.
2. Resource Expenditure is Overrunning
When you have to pay for internal or external resources, the costs can soon mount up. It’s not difficult to find yourself with spiralling resource costs, even if they are just wooden dollars being moved between departments.
The most likely causes are poor estimating and too many change requests.
How to fix it: It’s often hard to drill down into the detail of where a resource is spending time, especially if you don’t have a timesheet application. If you don’t record time, then start doing that first! It will really help you improve your estimates over the longer term.
Short term, you need to sit down with your team and reforecast the whole project. If you then can’t afford to do all the work that you’ve planned out, you need a frank conversation with your project sponsor about what can be taken out of scope for this phase.
3. Managing Risks is Costing More
In fact, the common problem here is when you didn’t budget anything for project risk management. Then a risk pops up and you’d like to do something about it and can’t because there’s no money allocated for risk mitigation or to exploit a positive risk.
How to fix it: It’s too late to go back and ask for a risk budget now… or is it? You might find your sponsor open to that kind of conversation, and it certainly doesn’t hurt to ask.
If you don’t have additional money available then you have to adjust your activities accordingly. Perhaps your project board could accept a higher level of risk for that element, or they would be prepared to compromise on something else. Put together a proposal that explains the risks, the costs and the benefits along with some options so that they have choices.
4. You Can’t Access Management Reserves
Ah, the mythical management reserve. This hits project managers who have sponsors that are poor at following through on their promises. The sponsor says that there is some kind of ‘contingency’ or ‘management reserve’ that can be spent at their discretion if required, say, in the event of an unplanned project disaster.
Said disaster happens and suddenly they don’t have authority to access those funds, or another project has used them, or you need to write a business case to access them…
How to fix it: You will struggle to fix this one in advance but your best bet is to make sure that you have full confidence that any pot of money that is being held outside your official project budget does actually exist and is there for you. Of course, the best thing to do will be to manage the project so you don’t need to tap into additional reserves.
5. You Can’t Track Expenditure
This happens when other people are spending your project budget and not letting you know where it is going. The first you hear about resources being acquired or a deal being signed is when the invoice gets passed to you from Finance with a big question mark written on it.
When this happens you can’t accurately keep track of what is being spent, and whether it is being spent on the right things.
How to fix it: Sort out the process for spending money. Make it clear to the project team (even those people who are more senior than you) that purchase orders have to go through you for tracking, even if you don’t have the authority to actually sign them. Let the Finance team know as well so that they can be copying you in on requests and making sure that the process is adhered to. They have no interest in receiving invoices that can’t be paid or getting the company into debt with inappropriate suppliers so they will be on your side!
Olivier Lazar gave a presentation at the PMI Global Congress EMEA earlier this year and he talked briefly about how to construct your project budget. I wanted to share some of his ideas and some of my own here.
So, let’s look at the three components of a project budget.
1. The Budget at Completion (BAC)
This part of your overall project budget comes from the work breakdown structure and your estimating processes. (I’ve written a lot on this blog about estimating. Check out some of my videos on estimating terminology and processes here.)
2. Management Reserves
This is a pot of money put aside for use at management discretion. Typically you’ll get your sponsor to approve the spending from this allocation; it’s not a pot that you can dip into whenever you feel like it.
Olivier gave the example of a decision on a project that was made internally and that incurrs a cost that cannot be passed on to the client. On one of my recent projects – although an internal one, so we weren’t exactly billing the other department for our services – we did that. The change involved upgrading a system. There was no tangible benefit to the users of moving to a new infrastructure but it was part of the longer term IT roadmap. We couldn’t in good faith have passed this on, had it been an external client, as it wasn’t a change they requested or that we could ‘sell’ as having any user advantage. But it was still the right thing to do.
3. Risk Response Budget
The final section of your budget is made up of the money put aside to deal with risks if they happen. This allocation should cover the cost of putting your risk response plans into action. If a project risk has a response plan that is going to cost you £100k and a probability of 10% you would budget £10k in your risk response plan. Remember, the risk response plan is to deal with realised risks (i.e. the ones that become issues). You typically don’t put the whole amount for the risk response plan (in this case, £100k) in your budget because you are crossing your fingers that the risks won’t happen. Or at least, not all of them will happen, so you’ll have enough money to go round.
Any money is better than nothing, but the challenge here is that if this risk does actually happen it will still cost you £100k to respond to. You had better hope those other risks don’t materialise as you won’t have enough risk response funds to go around.
Those three elements make up the budget for your project. They don’t necessarily equal the price you would pitch your services at.
Create the selling price
Olivier expanded his point about budget construction to add a bit more about how you would calculate the selling price for the project, as an external contractor.
Overheads are things like heating, lighting, staff costs. They are the cost to you of doing the work and should include everything from mobile phone subscriptions to catered lunches.
Most companies I have had experience working with have had a fixed rate per employee that they add to budgets to give this figure. These are called ‘on costs’. They only relate to staff though (pension contributions, hiring costs etc). Make sure to add in any other overheads specific to this project that do not relate to people such as hiring meeting rooms.
This is how much profit you expect to make on the project. If you are a business you aren’t doing it at cost. Otherwise you’d make no money on it at all and your shareholders won’t be happy. You’ll have to work out what is an acceptable margin to make on the project – 2%? 70%?
Adding these two additional lines gives you the price at which you would be willing to sell the project to the customer.
Olivier added these caveats:
If you make people redundant and have no one to deliver your projects you’ll lose work and the ultimate situation is that you could go out of business.
That’s why estimating is important: without it you can’t keep your business profitable.
The same goes for internal project managers: you still need to know that your project is making the organisation something and adding value, not creating more cost for no benefit.
Read more about Olivier’s presentation in this article about using budgets to help manage project risk.