The Money Files

Every so often I’m asked questions about project budget. Here are a selection of your questions and my responses.

How can I manage my project cost when the actual budget is controlled by the functional prime in my organisation?

Marco, thanks for your question. This is a tough one. I don’t think you can be expected to have full control of your project costs when the budget is controlled by a functional manager. In a functional organisation (or even a weak matrix organisation) when you are not in control of the budget or resources, it is very difficult to manage in the way that you would in a projectised organisation where you have complete control over the resources and finances. I have worked in this way and it ended up getting quite messy with the functional manager approving additional work, additional purchases and the use of additional staff (to do what I considered business as usual tasks) and all of this resulted in the budget going over the forecast. However, he didn’t seem to mind, so in a way that’s OK!

What you can do is prepare a budget forecast and meet with your functional manager to go through it. Ask what their understanding of the scope is and whether there are additional tasks that he or she thinks should be included. Then your role is really about tracking the expenditure and reporting the progress against the forecasted budget. All you can do is flag up to your operational manager that it looks like you’ll be going over the predicted project budget. And ask for their help in correcting that, or to approve further spending.

Good luck!

Why is it important to categorise costs between Project Management Costs and Project Deliverable costs?

Diane, this is a great question. And it’s worth starting out by explaining the difference between project management costs and project deliverable costs. Project management costs are the costs of running the project. That includes things like setting up a special project office if you need one, the cost of temporary project staff, overheads, software (if you need to buy a new project management tracking system or a wiki tool etc) and so on. Project deliverable costs are the costs of the stuff needed to produce the project deliverables – what you would traditionally think of as project costs. These are things like equipment (new servers, machinery, furniture for the new store you are opening etc) and software or maintenance costs, such as the cost of purchasing new software and licences for an IT systems project.

You can categorise costs however makes sense to you, your project team and your accountants, but I find the distinction between management costs and deliverable costs very useful. It helps make it clear what the project management overhead is – the cost of doing the project at all. The deliverable costs would be incurred whoever ran the project. The management costs will be different if the project is being run in house or by an external project consultancy.

When budgeting, accounting departments want one number and not a range for their budget accounting systems? How do you choose what number in the range for the total project cost?

By a range, you mean a total project cost figure that is between $x and $y. In the early days of putting your budget together I do recommend that you use a range instead of presenting a single figure. This is because it highlights the fact that there are certain unknowns at this point and it encourages stakeholders and project sponsors to think widely about the likelihood of achieving an individual target figure.

To answer your question, I think you should work with your finance department to enable them to record a range in their systems! However, I know this isn’t going to be practical in many cases, so it is your choice which number from your range you choose. Being quite conservative, I would suggest that you choose the largest figure. That gives you a bit to play with even if you don’t ever intend to use it. And it can always be released or amended later. So, if your project budget forecast is between $700k and $900k, I would tell the finance team to use the $900k figure in their accounting systems.

Remember to keep an eye on how your actuals are shaping up so that you can reforecast and amend this appropriately later.

Last year I gave a webinar on managing project budgets, which also included the answers to many questions. You can see the whole presentation online here, via a recording of the webinar. I’ll have some more Q&A for you soon! Got any questions? Leave me a comment and I’ll answer them in a future post.

These days project budgets don’t stretch to nice things like bonuses for all team members for when the project completes on time. If the team members don’t work for you then you probably can’t give them a pay rise either. You might not even get enough in the budget left over for a party at the end of the project. Even if you do, you might be hampered by local tax laws that specify how much you can give gifts in lieu of financial amounts, and you could make it harder for people to complete their tax returns by giving any sort of bonus at all.

Common practice on projects is to take people out for a meal or even to a bar for drinks, but if your budget is tight you might have to resort to getting people to pay for themselves, or for you to pay for the first round of drinks, for example. There are other ways to motivate your team without it looking like you are being too stingy.

So, if you can’t motivate people to do a good job with financial incentives, what can you do to ensure they perform well (or to reward people who did perform well)? Here are some ideas.

Grant time off

You might have to check with their line manager, but granting someone time off in lieu of extra hours worked can be a great way to reward project team members who have put in extra hours during a push on a project, or a go live weekend. It’s also worth checking with HR about the policy for this, as you could be setting a precedent, but it is definitely worth considering.

Training courses

Being ‘allowed’ to go on a training course might not seem like much of a reward. After all, surely this is part of your normal contract of employment with your boss – they should be providing training anyway. But in times like these where extra cash for training is hard to come by, operations managers might not have a training budget. You, on the other hand, could offer developmental activities as part of the project, and then encourage people to try out their new skills. There’s even a process for this in thePMBOK® Guide – Develop Project Team.

Time off for study

If someone is taking a professional credential like PMP or working towards an MBA, could you give them time off to study? Many companies have study leave policies but managers don’t always know about what their employees are studying for outside of the office. If you can find out, you can apply the policy terms and make sure that those employees feel supported during their learning.

Thanks!

This is probably the fastest, cheapest way to build good will in the team. Saying thank you is completely free and people appreciate it a lot more than you think. Say it often, and every so often do it in writing so that they can keep your email for their end of year review, or to show it to their manager.

Remember to say it in a timely manner – it’s no good thanking someone for a job well done when that was last month as they might not even remember what they did that was so deserving!

References for contractors

Most contractors will expect a reference at the end of a contract, but knowing that you are prepared to give a positive one can be a motivating factor. People appreciate that they are appreciated, and are prepared to put the work in if it means they get something out of it at the end.

Talk to your contractors about their expectations for a reference or recommendation and see what you can jointly do to ensure that their skills are recognised elsewhere in the organisation where they may be able to get their next contract.

Bring your own picnic

OK, it’s not as glam as going to a restaurant, but you could organise a pot luck picnic with everyone bringing their own food. If your office has a garden or outside space, or even a park within walking distance, you can camp out there. Otherwise, book a meeting room and get all the food on the table. This can also be a good team building exercise – after all, you don’t want everyone turning up with a bowl of green salad!

What other ways have you motivated your employees without hard cash? Let us know in the comments.

OK, so we all know budgets change from time to time (normally being reduced unless you’ve got a great reason for your sponsor to give you more, like a change). But aside from office politics and the change control process, there are other things that can affect your project budget. Here are 4 risks to consider when both putting your risk log together and your budget.

1. Gold plating

Gold plating is where the project team adds stuff into the project scope without the customers asking for it. It often happens on software design projects, where the developers know they can add extra functionality to improve the product, so they do. Even if the customer didn’t want it, and didn’t know they could ask for it, the team do it.

You’d be forgiven for thinking that gold plating is a good thing. After all, what project customer isn’t going to want more for their money? It’s the bells and whistles that set your project team aside from any other project team.

However, if your team is working on tasks that are not on the project schedule, that costs you money. It takes time to do extra work, so whether they realise or not, they are helping the project go over budget through their enthusiasm. Talk to the team about the proper change control process and make sure that they are only working on what is approved.

2. Scope creep

Scope creep is something that all project managers have come across at some time in their career. You start off with a narrow, well-defined scope and by the end of the project it’s become a rambling monster of requirements. This is different from gold plating – the team are working on things that are approved, it’s just that the approved work stretches the scope way beyond what was originally agreed.

Scope creep takes many forms, and can be through a poor change control process. If everything gets approved, then you know that your change process is not rigorous enough! While many changes put forward will be good, useful suggestions, some will take the project outside of its original goals and objectives. Should they really be included in this project or would it be better to manage those requirements in another way?

Scope creep adds time to your project, and therefore cost.

3. Failed QA systems

Quality Assurance (QA) makes sure that your deliverables are fit for purpose. Whether your QA system is peer reviewing lines of code or stress testing bricks off a production line, you should have some method of checking your work before you give it to the client.

Poor QA means that deliverables will make it through to the customer only to be rejected. The customer will not sign off on poor quality work, so it is far more beneficial for you to catch mistakes early on. This will reduce the amount of testing required and also give you more of a chance of your deliverables being approved by your client.

Deliverables that are rejected will have to be done again, and by the time the work has got into the client’s hands for approval, it is likely to be costly to make changes and complete rework. It is far better to catch poor quality early so that you can rectify it while it’s still cheap enough to do so.

4. Currency fluctuation

Not all projects will suffer from currency fluctuation, but if you are working with an international team, this could happen to your project. The problem comes when you budget at a certain exchange rate but of course are charged the exchange rate of the day when the invoices come in. In some cases the discrepancy between what you had planned to pay and what you actually pay can be hundreds of dollars (or euro, or yen etc).

It’s hard to plan for this, but you can make your budget a bit more robust by including a percentage contingency to cope with currency fluctuations. Only you will know what seems appropriate given the overall spend of your project and the amount to be spent in foreign currency. Talk to your accounting department as they may be able to advise on how best to manage this.

You can probably think of many more risks to your budget, but these 4 make a good starting point for budget risk planning with your team. What else do you normally include on your risk register when it comes to money?