Budget “overs” are a way of filling the gaps in your budgeting process and acting as a safety net for when things go wrong, right?
Management reserves and contingency reserves are two very specific types of “extra” money in your project budget. They both have distinct roles to play in helping the business achieve the deliverables in line with the forecasted expenditure.
In this infographic I summarise the differences between these two different types of funding. Personally, I think contingency reserves are the more useful as they are tied to a specific event so they help improve risk management as well. What do you think?
You can read more about some of the ideas on this infographic in this article.
You’ve looked at the budget tracker and – to your dismay – you can’t make the figures balance. At the current run rate you will be overspent by the end of the project. You are forecasting to be over by way more than your project sponsor has agreed in terms of tolerances. There’s only one option: you need to ask for more money.
Asking for a budget increase isn’t an easy thing to do. For one, it’s embarrassing, especially if you were involved in putting the budget together in the first place. You’ve got to admit that you got it wrong. Here are nine steps to handle that difficult conversation with your project sponsor.
1. Be honest
You can’t hide at this point. Make sure that you are working from a position of clear, transparent, justifiable data.
2. Get time with your sponsor
Don’t do this over email. Even over the phone is pretty bad. If you can, get time with your sponsor to meet them face-to-face. If necessary, book it through their PA and confirm the day before. You can do this as soon as you know you are going to need the meeting, and ask to see them as soon as possible. Your budget position is only going to get worse, so you need a steer from them about the project financials as soon as you can.
Give yourself time to work out the position and prepare some alternatives but ideally you’ll want to meet them quickly.
3. Sort out your estimating
You need better estimates. Most likely your project budget is over because you:
Estimate, and then include proper contingency reserves if you do not have confidence in those estimates.
4. Prepare a new budget
Use your new figures to revise your budget. Go back to basics. Start from scratch and do the whole thing again. There may be some elements you feel confident enough to keep but at this point nothing should be without challenge.
Because if you are going to back to ask for more cash, make sure you only do it once. Once is excusable – kind of. Twice makes it look like you don’t have a handle on the work involved and it undermines your professional credibility.
5. Prepare your rationale
You may be more interested in securing more funding, but your project sponsor is going to want to know why you need the money. Work out your arguments in advance, and make sure they are good.
You should be able to articulate why you are overspent (remember point 1 about: be honest and if you messed up, say so). Stay factual, and avoid apportioning blame even if it is really tempting to mention that you got a bad deal from a supplier.
6. Prepare some alternatives
Could you stick with your existing budget but deliver less functionality? Or deliver the same functionality over a longer period of time, perhaps with less expensive or in-house resources? Or deliver some functionality with the extra funding but not everything?
Come up with some alternatives to the whole amount so your sponsor has options. Be aware that one option is to cancel the project completely.
7. Prepare your sponsor
Don’t let your sponsor believe you are going to meet them to tell them that all is well. Nobody likes surprises, and in my experience, project sponsors hate them more than most! Send over a briefing pack for them to review in advance of your meeting, including the alternative options if securing the full amount of additional funding isn’t an option.
8. Hold your meeting
Meet your sponsor. Clearly present the current project situation and the financial position. Clearly explain what cash is needed to keep the project moving forward and why that is required. Give a level of confidence about how comfortable you are that these figures are now accurate and what is needed to complete the project on time and to the existing scope.
Talk to them about the additional options that you have come up with and ask if they see any further alternatives that would deliver business value but keep within reasonable cost.
Ultimately, your sponsor will make a decision about what to do next. The exact answer you get will depend on the situation and how far along you are in the project but it’s likely to be something like one of these:
“Here’s the extra funding. Carry on.”
“Here’s a portion of the extra funding. Let’s work out how much we can deliver with this.”
“There is no more funding. Work out what you can deliver without more money.”
“This project is no longer viable. Please shut it down and salvage what you can.”
9. Act on your sponsor’s decision
Your sponsor has spoken. Now it’s your turn to follow through. Obviously what you do depends on what route they have chosen as the most appropriate one for your project. Whatever the way forward, you should explain the situation to the project team so they are fully aware of what is going on.
Nine steps might sound like quite a lot but it’s an involved process that you need to get right. Have I missed anything out? What are your experiences of having to ask for more money to complete your project? Let us know in the comments.
Do you have contingency on your project? In Eliyahu Goldratt’s book Critical Chain he calls it safety, but whatever name for it you use, most projects have an element of budget provision put aside in case of emergency.
Let’s start with a definition of what management reserves and contingency reserves are, taken from Michel Thiry’s book, Program Management.
Contingency reserve: “a planned amount of money or time which is added to an estimate to address a specific risk.”
Management reserve: “a planned amount of money or time which is added to an estimate to address unforeseeable situations.”
Can you see the difference?
When you work out the contingency reserve for a task or project estimate, you do so based on project risk. How do you want to respond to that risk? Most times risk responses require cash or extra time to put a plan in action. The amount of contingency allocated depends on the risk and also on the risk response.
As contingencies are linked to particular risks, if the risk passes and is not realised, the need for the contingency goes away. That means returning the cash, or taking any extra time out of the task schedule. You don’t get to keep the contingency ‘in the bank’. If you feel that you need to, it’s probably because another risk is looming on the horizon. If that is the case, you should increase the contingency related to that risk and make your plans accordingly. It is OK to change your contingency strategies as you go forward with the project – after all, as you get nearer to a particular risk event you find out more about it and have more knowledge about how you would deal with it and that is quite likely to change your response.
Every project could do with one of these! However, in my experience few projects have them. A management reserve is a pot of money of a size that is based on the overall uncertainty of the project. For example, if you are doing an innovative project that your company has little experience of, you would want a big pot of money (or time) as your reserve. If you are working on something relatively straightforward, perhaps something that your company has run several times before, you wouldn’t need such a large amount or in some cases any amount of management reserve at all.
Management reserves are generally calculated using that well-known finger-in-the-air method, although it would be good to think that they are scientifically worked out based on the experience of the company and historical data extrapolated from previous relevant projects both at your company and across your industry. However, it is more likely that you just guess.
Management reserves are only used in emergencies, and that is the reason (in my opinion) that many projects don’t have them. The default for projects without management reserves is to go back to the project sponsor, explain the situation and ask for more cash, or more time. If you can do that anyway, what’s the point in having a management reserve? You still have to ask permission before you dip into the reserve, so the actual process for getting your hands on the money or authority to change the delivery date is the same.
A management reserve means that at least the money is put aside for you, and you avoid the situation where the project sponsor says that there is no additional budget available for your project – in which case you’d be stuck finding a way to deliver what you needed with the available money, which would probably involve changing the timescale or compromising on quality (the classic iron triangle constraint).
You don’t give back what is left of your management reserve when the crisis has passed. The pot stays active until the end of the project, although you may find that towards the end of the project when you have more certainty about how things will unfold, you can give back some of the money or use it for something else.
Now that you know more about management and contingency reserves, do you have these on your projects?
It was a while ago now that I gave a webinar on managing money on projects, but it is taking a long time to answer all the questions that I didn’t get round to doing during the live session. Thanks to all the fabulous participants, who asked such brilliant questions! I am still trawling through them hoping to answer them all, and here is today’s batch of managing money Q&A.