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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4 Reasons Why People Need Estimates

4 Reasons Why People Need Estimates

Estimating take up far too much time and are, as my 3-year old says about everything right now, ‘a bit boring’. I have no idea where he picked that up from. Don’t judge me!

I digress. We need to do estimates. And if you are one of those strange people who LOVE doing estimates, then skip this article and go and read this one instead!

Take a deep breath, and think for a moment about why we bother to do estimates. In his book, Project Management for Humans, which is soon to be released, Brett Harned provides 4 reasons why estimates are important for people on the team.

1. Estimates help you cost the project

“Estimates are based on a level of effort and times,” Brett writes. “Typically, the cost of a project is based on the time spent on a project. Your estimate helps calculate a rough determination of that cost and sometimes whether or not the project is worth the investment.”

A giant estimate normally comes with a giant price tag, and that might mean you don’t go ahead with the project. Or you scale down the scope significantly so you still get some benefit and don’t have to spend half your annual budget on this one project.

Either way, knowing how long things are going to take gives you valuable information to make informed decisions about your project and whether or not it should go ahead in the current form.

2. Estimates help you staff the project

Estimates are created around specific tasks and the skills required to complete those tasks.

Your estimate therefore gives you clues about who you need to do the work. And in turn, that gives you a good idea about how long the work will take.

For example, a senior developer might take a week to complete a task, but your apprentice developer would take a month, and need someone else working alongside them to help check the work and support them during the coding. Knowing this you can then decide what’s more important: having the work done quickly or upskilling the apprentice. Or maybe you won’t have a choice, if the skilled developer is working on something else and isn’t available.

Either way, estimating the work and thinking of who is involved in doing it will give you invaluable information for your plan.

3. Estimates help you plan dependencies

If you know how long a task will take you can better plan for the impact it is going to have on other tasks or on other projects. The duration of a task can help you schedule the next set of tasks, or tell another project manager when they’ll be able to start work on their project (or task).

For example, if you are tying up your senior developer for 4 weeks, in a business that only has one developer with those skills, the next project to use that person will have to wait until they are free. That’s a dependency on that skilled person.

You have a number of options to deal with that dependency including changing the project priorities so the other project gets the resource before you if that project is ‘more important’, buying in external skilled resource if you want to do both at the same time, or even having someone else with less ability work on it so you can at least make a start. But you need to know that you have a problem with resourcing and dependencies before you can start to come up with solutions to address it.

Here’s an introduction to dependencies and constraints on projects. Even knowing that your project doesn’t have dependencies on any other work is a big help with your planning because it frees you up to get on with things safe in the knowledge that your team isn’t messing anything up for anyone else. (Of course, that might change if a new project is approved – so don’t take it for granted.)

4. Estimating creates agreement and buy in

“Working with a team can often be a challenge, particularly when no one is in agreement on the project,” Brett writes. “Working together to produce an estimate can be a great way to pull the team together to talk about staffing, responsibilities, process, and timing. And guess what, that all helps produce a solid estimate.”

I covered this in my book too, Shortcuts to Success: Project Management in the Real World. I highly recommend that you share all your budget information with your team, from the moment you start to work on estimates through to the budget spreadsheet and forecast rates.

Working together will help you gain collective responsibility for the dates and scope of the work. You can hold each other accountable and no one can turn around and say that they weren’t aware of the deadlines or their responsibilities. That’s huge, especially on projects with tight deadlines and remote teams.

So, estimates benefit you and your team in lots of ways, and they are a part of your project to just get on with, get done and then start using. They can feel like the start of the real detailed work, the prelude to the fun part of building, but they help set you up for success and a smooth delivery. What do you feel about estimates? Let us know in the comments below!

Posted on: June 21, 2017 09:59 AM | Permalink | Comments (6)

5 Quick Estimating Tips [Video]

Categories: estimating, video

Here are 5 quick tips to help you with project estimating.

For a more in-depth look at some of these points, check out this article on project estimating.

Posted on: January 08, 2017 11:59 PM | Permalink | Comments (2)

Estimating 101 with Cesar Abeid

Categories: books, estimating

Cesar Abeid has a new book out, called Project Management for You, and it’s a step by step guide to everything you need to get started with managing a project. You may feel that you have enough experience to not need a beginners guide to project management, and you may be right. Still, it doesn’t hurt to refresh ourselves on the basics every so often, and that’s never more true that on topics relating to project budgets. Because if you mess up your project’s finances it is very difficult to recover your credibility and the lost cash!

Here’s what Cesar has to say about project estimating for budgets.

Estimating a Work Package

Cesar breaks down estimating the cost of a work package into three areas: people, tools and materials.

People: “Estimate how many hours/days will be required by the person responsible for the work package, and calculate how much that will cost,” he writes. This, he says, is the best way to go if you are paying your team members for their time and they are billing you in hours or days. If you plan to pay them a flat rate for the task, then he points out you’ll need a quote to use as a estimate.

Tools: Think about the tools you need to complete the work package. “This determination will include actual tools, equipment, and software that you might have to purchase to enable your team to do the work,” he writes. Many of these you may already have but you might need additional tools in order to deliver this particular project.

Materials: If tools are what you need to do the project management, materials are what you need to do the work. Small projects, digital projects and other types of project may have very little here. “If you are building a deck or a garage, then materials might be the largest part of your estimate,” Cesar writes.

These three mini-estimates make up the components of the budget estimate for your work package. Add them up and that’s the total cost for the work package.

Estimating Your Project

“Once you have the estimate for each work package, add them up,” Cesar writes. “The resulting number will be the cost estimate for your project.”

This isn’t rocket science but you’d be surprised how often elements get left out. Check that you’ve included all your work packages in your overall estimate.

Then check your workings the other way. If it’s a budget item that you know needs to be spent but there is no work package that goes along side it, should you be creating a work package to cover that element? If not, how are you going to track and monitor that expenditure as the project goes along? Don’t make it easy to trip yourself up later.

Work with Ranges

I am a big fan of working with ranges because they help set expectations for project stakeholders and provide you with a bit of leeway. Cesar says the same. He advises estimating twice for each element. The first estimate is based on the best case scenario (say, $100) and the second on the worst case (say, $200). Together they give you a range of financial confidence (the task will cost between $100 and $200).

It can be difficult to convince your sponsor to understand ranges. There’s a good range (ha ha!) of comments on this article about how challenging it can be to talk to your project sponsors about why this way of thinking is beneficial when it comes to project finances. Sponsors like hard, precise numbers and with many projects that have an uncertain outcome that isn’t as easy as they’d like.

Plan with Confidence

Cesar concludes by saying that your estimating gives you the data you need to plan with confidence. If you’ve done the same for duration estimates as well you are in a good position to know how long your project will take and what you need to pay for it. With this information, you can make decisions about tasks and expenditure as well as the people you need to involve.

He writes:

“If you can estimate your cost and time based on the requirements of your project, the constraints that are present, and the resources available to you, you can plan with confidence and make promises that you know you can deliver on.”

How do you plan with confidence? Let me know your tips for estimating and planning in the comments below.

Cesar Abeid’s book, Project Management for You, is available in print and ebook. Find out more on Cesar’s website.

Posted on: October 16, 2015 12:00 AM | Permalink | Comments (4)

How to Construct Your Project Budget

Categories: budget, estimating

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.

Add overheads

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.

Add margin

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 mis-estimate the tasks, the margin goes down.
  • If you eat the margin then you may breakeven on the project – chalk it up as a lesson learned.
  • If you eat all the margin and go into your overheads then the end result might be laying people off.

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.

Posted on: October 02, 2015 09:07 AM | Permalink | Comments (6)

4 Estimating Terms You Need To Know [Videos]

Categories: estimating, video

This article summarises four of the key terms that you'll come across when you start working with project estimates.

Bottom up estimating

This estimating term describes how you break down your project and estimate (as the name suggests) based on the smallest components.

Watch the video here: Bottom up estimating video

Parametric estimating

This term describes how you can use statistical and logical calculations to work out how long a project will take, based on what you know about the individual activities.

Watch the video here: Parametric estimating video

Analogous estimating

Analogous estimating relies on previous experience to calculate the estimate.

Watch the video here: Analogous estimating video

Three point estimating

Three point estimating is discussed in more detail in this article but the basic premise is that you use a formula to calculate your overall estimate. The formula is:

This calculation will leave you with a weighted estimate of the budget for the activity (although you could use it for scheduling time and work out your estimate in days). It will be weighted in favour of the most likely cost for that task, but it will also allow for the fact that things might go well – or not.

Posted on: September 24, 2015 11:59 PM | Permalink | Comments (7)
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