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 Conditions for Legal Contracts

Categories: business case, contracts

5 Conditions for a Contract to Be Legal

It has been a long time since I did AS Level Law aged 17, and I remember contract law being the less interesting part of the course. However, some of it is still relevant to my job today. For a contract to be legal, certain conditions have to be met. There are 5 conditions to fulfil before you can say that your contract can be legally entered into.

1. There must be an offer

There must be an offer and an acceptance. If I don’t offer you something, there is no contract. If you don’t accept it, there is no contract.

I can’t contract you to do something that you don’t want to do because you haven’t accepted my offer. You’re within your rights not to sign a contract with a supplier if the deal isn’t right for you. Just like you would stand your ground with those door-to-door sales people, you can stand your ground with a supplier on your project too.

There’s often back and forth at this point (as there should be) as you refine the offer into something that you can both live with.

2. There must be consideration

This means that something has to be exchanged. Your project suppliers offer you goods or services and you pay them money in exchange.

It doesn’t have to be money. You could give them goods or services back, or exposure to your client base or something else that you both agree to. But there has to be some give and take.

Again, there’s negotiation to be done here. Once you’ve agreed on the offer you might go back and forth on the consideration (the fee) that you are willing to pay, and how this will be structured: all in one go, payment phased over the life of the project and so on.

3. There must be legal capacity

I expect this varies from country to country, but the people entering into the contract must be legally able to enter into an agreement. I remember reading about a case where a toddler had accidentally purchased some expensive stuff online through random button pressing on a parent’s device (it happens) and the case concluded that the family didn’t have to pay as the toddler didn’t have the legal capacity to enter into a contract. I think they had to return the goods though – getting your child to purchase all your supplies is not a legal method of getting resources for your project for free! I’ve looked but I can’t find a citation for that case – if you know of one, let me know and I’ll update this article to reference it. I did find this one where a 3 year old bought a car on ebay, but the case didn’t go to court for contract law to be tested.

You may have capacity in law, but you may not have capacity in terms of your company’s due process. For example, perhaps only Directors can sign contracts above a certain value, or you can only enter into a contract in certain circumstances or with certain providers. While I’m not sure that would hold up in court, it would definitely get you into hot water at work, so make sure you check your company’s contract signing policy and get advice from your Legal team. That will avoid you entering into any deals and contracting the company in ways that they would prefer you didn’t.

4. There must be legal purpose

This simply means that the subject of the contract needs to comply with the law.

In other words, you can’t contract someone to steal for you. Or do anything else illegal. But you wouldn’t do that anyway, would you?

5. There must be intention

There must be the understanding on both sides that this agreement could be enforced by a court if it came to it. You must go into the contract understanding that it is legally binding and that you intend for it to be so. You aren’t signing up to something on a best endeavours basis, or without realising that it’s a legal document.

This is all broadly common sense, but it’s there to protect businesses and individuals.

I don’t know if these are the same conditions enshrined by your local laws, but for UK and US laws these seem to hold true. What’s the situation where you are? Drop a note in the comments to let us know!

Posted on: May 18, 2017 08:00 AM | Permalink | Comments (6)

Common Financial Appraisal Techniques [Infographic]

Categories: business case

Common Financial Appraisal techniques

I put this infographic together for you to highlight the common types of ways that project leaders and project financial analysts can carry out financial appraisals. These are all techniques that you can use in a business case or project proposal. I hope it's helpful!

The content of the image is drawn from Carlos Serra's book, Benefits Realization Management.

Posted on: March 01, 2017 11:59 AM | Permalink | Comments (11)

16 Red Flags To Look for in Business Cases

Categories: business case

You’ve taken over a new project and you’re reviewing the business case. Or perhaps your sponsor has asked you to pick up a new project and you’re looking over the business case to see what you need to get started with.

In his book, Business Leadership for IT Projects, Gary Lloyd talks about the business case as a management tool. The book is of more value than just for IT projects, and I particularly like the ideas that the author provides when it comes to checking the validity and robustness of your project business case

Here are 16 red flags to look for in a business case. This is Gary’s bullet point list augmented by my take on what they mean for project managers.

1. Is the vision clear?

The vision is what people follow. If you aren’t clear about what the project is about in the business case, the people reading it won’t have a chance. It should be specific about the problem and what desirable end state is the result.

2. Is the scope unambiguous?

There’s always ambiguity at the start of a project, there has to be because you don’t yet know exactly how things are going to pan out.

However, points of ambiguity in a business case should be clearly pointed out, with risk budgets attached and plans about how clarity is going to be reached.

3. Have the key stakeholders been identified and engaged?

You might not want to do too much engagement prior to the business case being approved, but you definitely need people to know what is coming. If you are expecting them to work on the project in some way, they need to know that it is a possibility.

The red flag is when the stakeholder section in the business case looks skimpy. It should hold up to questioning: how much do these people know?

4. How was the cost saving or increased revenue calculated and tested?

The maths should be clear. A number alone isn’t going to give anyone confidence that all the variables have been taken into account. And if you can prove the numbers somehow because of desk-based research or a pilot or something else, then that should definitely be shown.

5. Is the worst case scenario really the worst case?

Is there a worst worse case? This is a good question to challenge a business case of a project that is mandatory or regulatory. Often those projects are started on the premise that ‘worst case’ is not being able to trade again, but that might not really be the situation.

You’ll also want to check what the worst case scenario is based on: if it isn’t to do with stopping trading if the project doesn’t happen, is the worst case to do with project costs, operating costs, missing out on cost savings, revenue or something else?

Dig into the facts and make sure your business case makes this really clear.

6. Does the project cost include contingency?

A no-brainer. If it isn’t there, ask where it is and be prepared to frown if the response is that the business case owner has padded all the estimates.

Contingency should be called out specifically for change budgets and risk budgets.

7. What is the change budget?

On the subject of change budgets, there is one, right?

8. What is the risk budget?

And the same for risk budgets!

9. Does the project cost include all of the non-IT costs?

This is relevant when there is a large IT element, or it’s an “IT project”. Training, temporary office space, staffing costs: they all mount up and might not be covered by the IT budget.

10. Does the NPV include all the operating costs?

See if the business case calculations include licences, infrastructure and staff costs as well.

Find out more about NPV in this video.

11. Is the discount rate visible?

And Gary adds: does it reflect the risk of the project? This might be defaulted into the calculations that sit behind the business case but you can at least check that they’ve used the standard calculations and didn’t feel the need to bespoke the maths in anyway.

12. What are the comparators that were used to calculate the discount rate?

Again, this is a good question but might be something set by the Finance team in the spreadsheets used for the business case template.

13. Is the time horizon used for NPV realistic?

 A high NPV is better and NPV generally is used to help show which project is more valuable to the organisation. That comparison is really only valid if you are all comparing projects over the same time horizon. Or if you aren’t, that it’s clearly different and realistic.

14. Are the performance criteria realistic?

Check that the performance criteria are something that you can sign up to. Is this what you thought you would be measured on and do you believe you can achieve it?

15. What risks are missing?

There’s nearly always something missing! That happens because you are a fresh pair of eyes and you’ve just combed through the business case looking for mistakes. There might be risks that jump out at you by their absence but you may also want to discuss the project business case with the team and check that the risks they raised made it into the document.

16. What key assumptions are missing?

And the same for assumptions. You may spot some because you are coming to the business case fresh, and ask the team what they had that perhaps didn’t make it to final version.

Posted on: December 28, 2016 11:59 PM | Permalink | Comments (8)

Payback Period: A Beginner’s Guide

Categories: business case

Payback period is an investment analysis technique and it’s personally one of my favourite tools to use for investment appraisal because in my view it’s the easiest to understand of the tools at my disposal.

Today I’m going to work through an example to show you what it looks like. But before we do that, let’s remind ourselves why we might want to use it at all.

Why Do An Investment Appraisal?

Investment appraisals are what goes into your business case to show why your project is financially viable. They are decision-making tools.

The investment appraisal also allows the decision makers to compare your project with others, which they’ll need to do as all the projects are competing for the same corporate funds. The figures from the investment appraisal, and the associated blurb in the business case, confirm why the project is worth the investment based on forecasted cost and time. It justifies the project based on the expected benefits.

So, investment appraisals matter because they help get your business case approved. Obviously, if the numbers don’t stack up then your project doesn’t get approved. Investment appraisal techniques help you show the cost and benefits of your project in a way that makes it easy to compare with others.

What Is Payback Period?

There’s a little video I made about payback period here, but in essence it’s this:

Payback period is the time taken to recoup the project investment.

Let’s take an example.

A project costs £1,000,000. The benefits are:

  • Year 1: £500k
  • Year 2: £300k
  • Year 3: £200k
  • Year 4: £200k
  • Year 5: £200k

As you can see from the graph below, the project investment equals the benefits for the first three years, so the payback period is three years.

Payback period

In other words, you’ll earn back the amount spent on the project through the project’s benefits once three years have passed. At that point you ‘break even’. Benefits from Year 4 are cash in the bank.

From a business case and project justification point of view, the shorter the payback period, the better.

Problems With Payback

So far, so straightforward.

The problems come when you try to be a bit more sophisticated.

For example, payback period doesn’t take into account discount rates (how much money will be worth in the future: is the £200k benefit in Year 4 really worth the same as £200k would be today?).

As with all investment appraisal techniques you can’t measure intangible benefits in this way. Payback is only good for working out the financial side of benefits: the monetary cost and the financial benefit gained.

That makes payback period a bit crude but as long as everyone is aware of the limitations, it can still be a useful tool to forecast when the project will break even and start to turn a profit.

There are other ways that you can put financial information into your business case: Net Present Value and Discounted Cash Flow are others.

What investment appraisal techniques do you use?

Posted on: September 02, 2016 10:49 AM | Permalink | Comments (4)

7 Things That Should Be In Your Project Business Case

Categories: business case

Always a fan of a snazzy graphic, I put this one together to summarise the things that you should be including in your project business cases.

Do you (or your management team) include all of these in your business case template? What else do you think should be in there that I haven't covered below?

7 Things That Should Be In Your Business Case

Posted on: August 20, 2016 11:28 AM | Permalink | Comments (6)
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