What happens when you can’t track project cost?
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! Read more here:
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In this video I explain what sunk costs are and why they are so emotive on projects, especially when projects are challenged or no longer viable.
I try to give you some background on sunk costs so that when you’re faced with execs who are looking at sunk costs as a reason to continue with a project, you’re armed and ready to at least debate with them about why that isn’t a good idea!
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Project managers often get concerned about project cost control. This video talks about what project cost control actually is and why you shouldn’t be worried about getting to grips with your budget. Most of what you have to do is the same type of ‘monitoring and controlling’ you do on other areas of the project, so it isn’t really that different… just with large amounts of cash attached!
This video aims to demystify project cost control and share some thoughts about just getting started.
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There are different types of project cost – your budget isn’t made up of one big lump of cash. Although it can sometimes feel like that!
Understanding the different types of project cost is helpful because they help you review the different categories of spend. You can use mindmapping to check that you haven’t left out any budget items.
The infographic below shares the 5 different types of project costs that you should consider for your budget. However, what it doesn’t make clear is that the project cost categories overlap. You can have fixed direct costs and variable indirect costs, for example. Sunk costs remain sunk!
Within the different categories you can break down your budget even further. For example, cost of quality might be something you consider for your budget formulation, but it could be a fixed, variable, direct or indirect cost, depending on how you are going to build quality into your project.
Your project plan is made up of lots of different elements, and cost management is one of those. When you’re planning your project, your cost management plan sets out the processes required to make sure that your project hits its budget targets.
Your cost management plan should include these items:
1. Process descriptions
What processes are you doing to be using on the project for cost management? These include planning, estimating costs and how you will establish the overall budget. Add in some detail about what processes you’ll be following and where these can be found, for example if you intend to do bottom-up estimating or bypass the standard cost planning process on advice from your project accountant.
2. Accuracy levels
How accurate do you intend to be? Of course it would be great to say that you’ll be 100% accurate in all your estimates, but that’s unrealistic! State here what you are aiming for. You can also add that this will change as the project progresses. For example, you will start the project with lower accuracy targets because you won’t have as much information as you will later on. Then as you get further into the project you can amend your estimates with the latest, more accurate figures. Set out here whether you intend to do that and how you will go about doing those revisions.
3. Variance thresholds
What variance is going to be acceptable before you have to flag a problem to your sponsor? Talk to them about how much leeway you have in your measurements and when they expect you to be bringing them issues. You may find that they are prepared to give you quite a big bracket either side of your target before it becomes a problem.
Set out the percentage deviation from each of your major measures such as baseline budget so that you know exactly where your boundaries are.
4. Performance measurements
If there are any specific rules for performance measurements, make a note of them in this section of the cost management plan. This is particularly relevant if you are following Earned Value processes. If you aren’t, you’ll probably find that you don’t need this section. If in doubt, talk to your Portfolio Office about what they expect to see.
5. Units of measure
How are you measuring things? It might seem obvious to you that ‘25’ refers to days of effort, but someone else could read that as hours of effort and come to a very different conclusion! Specify how you will be measuring time and budget figures. This is especially important if you are working in multiple currencies as you’ll need to specify that here.
6. Reporting protocols
When are you reporting? How frequently? Who to? These are all questions to answer in the reporting section of your cost management plan. Agree the format of your plans with the project sponsor and anyone else who will be receiving them. Then set out exactly how often you’ll produce these reports. It is also worth including what you’ll put in them so that there are no surprises. It can be difficult to gather new data items once the project has started if you haven’t built in a way to record them, so get a clear idea now about what your stakeholders want to see.
7. Anything else
Finally, don’t take this list as the only items to be included in your cost management plan! Your Portfolio Office may have other ideas and your corporate template may require you to complete other sections. Even if it doesn’t, you can still amend your document and add in anything else that will help you manage costs on this project – be flexible, even if you use a template.
Other things that may be useful include roles and responsibilities of those involved in cost management, a note referring back to any criteria set out in the business case, a link to any corporate policies that you will be following or any critical dates such as end of year reporting timelines or reforecasting milestones.
Your cost management plan should give you a working document to help manage spending on your project, so make it work for you and adapt any template (and this list) so it is a practical, comprehensive guide for everyone on the team.