The Money Files

At the PMI Hungary Chapter international Art of Projects conference in Budapest this month, Rick Graham spoke about risk management in the globalised world. He talked about how Monte Carlo analysis is used to establish risk and how companies gather sophisticated data to make good decisions about the actions they need to take as a result of identifying risk.

Rick said that there are three levels of risk management that apply to projects.

1. Project risk

This is perhaps the most obvious. These risks do not recognise interdependencies and risks outside the scope of the project. Rick recommended doing Monte Carlo analysis at this level to identify project risk. He also talked about scenario building as a good tool for project risk identification and management, giving the example of Shell.

Shell was the only company which modelled the risk of the OPEC countries putting up the price of oil. Because of their analysis they were able to adapt their plants to deal with less refined oil and gained a two-year head start on the competition when the prices did go up.

Rick recommended “building limited models around sensitive areas”: in other words, not spending time on modelling when the risk is low or when it isn’t worth doing. Models and analysis help explain the risk you are taking at the project level in comparative terms, which helps set them in context for team members and stakeholders.

2. Project selection risk

At this level the question relates to how risk plays a part in making decisions about which projects should be started. The challenge here is whether the business just says yes or no to a project without looking at the overall position and the wider business requirements.

For example, a risky project may not be inherently bad for the business. If you always say no to risky projects you end up with a portfolio full of low risk but also probably low benefit projects that present reduced opportunities for the company.

This level links to the strategic objectives and how the deliverables will be achieved in the organisational context.

It should also include the risk of not doing or deferring the project, as that decision presents a different path forward for the business with its own challenges.

3. Project portfolio risk

This is where you start to look outside the projects as individual initiatives and start to gather rich data about the organisation’s approach to risk management as a whole.

Rick recommended doing Monte Carlo analysis at programme level to identify risks across dependent streams of work. He then talked about using this output to identify the right combination of projects to work on at portfolio level.

The problem I found with this model is that there isn’t any level that I can see where risks fit that fall outside the project but that are managed in some shape or form by the project manager. For example, dependencies on other projects – the risk that the other project may not deliver on time. Or the risk that the company might go bust – this is out of scope of the project but something like this could feasibly be on your risk register.

This model also assumes that you have a process to apply risk management to.

Rick said that you can only do portfolio level risk management if there is one single repository of project data. This isn’t the case in many businesses where project managers are based in functional silos and even if there is a PMO it serves one business unit and not the enterprise as a whole.

A spreadsheet is good enough for this: no need to invest in anything more complicated, he said. You can start to put some science behind your spreadsheet once you have everything documented in one place.

Do you measure and manage risk at these three levels? Let us know how it works for you in the comments.

Last time I looked at the process of cost management planning. Today I’m going to look at the next process in the cost management area, that of estimating. Let’s look at the inputs, tools and techniques and outputs for this process as defined by the PMBOK Guide® – Fifth Edition.

The point of this process is to estimate how much your project will cost overall, with as much science as possible. This involves looking at all the options and discounting those that aren’t appropriate, as well as polishing up estimates that will form your final budget.

Inputs

Cost management and human resource plans

Take the cost management plan that you created in the last process as this talks about how costs will be managed and controlled. The most important part of it for this process is the section that defines how you are going to estimate and what level of accuracy you need to find.

The human resource plan will help you establish who is going to be working on the project and you can estimate the people costs based on that. Don’t overlook the reward and recognition elements – it isn’t just base salary that the project has to fund.

Scope baseline

The scope baseline includes:

• The scope statement. This explains what your project is going to do and the constraints. All of these will have an impact on cost as you need to know what you are estimating for.
• The work breakdown structure. This gives the relationship between deliverables. It’s a good way of cross-referencing the project and making sure you have estimated for all the deliverables.
• The WBS dictionary. Use this to work out the exact requirements for each element on the WBS. There is useful information in here which will determine how much something costs.

Project schedule

As you would expect, the project schedule has a bearing on your estimates. If you have to do things faster, you’ll need to put more people and more resources on the project. Take a look at who is doing the work and where it is being carried out and estimate accordingly.

Risk register

How risky is your project? Take the risks into account when estimating the work. The higher the level of novelty or difficulty, the more you should put into your budget. If your risks have firm, costed mitigation plans then these should be taken into account too.

Enterprise environmental factors and organisational process assets

Yes, these turn up again. You’re looking for things that affect how you will estimate such as:

• The market conditions – you may have to pay more for experts in certain countries, for example.
• Published cost data, such as figures about resource rates or information from quotes.
• Estimating policies
• Templates
• Lessons learned
• Historical information.

Tools and techniques

Expert judgement

Wheel out your experts again – you are going to need them to help you estimate. Draw on their expertise and previous experience to help you establish how much things are going to cost. They can also advise on the best way to estimate certain activities.

Estimating

There are several types of estimating that you can use on projects.

Check out these videos on:

Bottom up estimating

Parametric estimating

Analogous estimating

You can also use three-point estimating.

Reserve analysis

This is where you set the levels for the management and contingency reserves.

A contingency reserve is there to account for cost uncertainty, so for example rework when a project deliverable isn’t up to scratch.

Management reserves are for unforeseen work that is added to the scope of the project. You’ll have to set an estimate for both of these reserve types and work out how and when you will call on them, and what the approval process will be.

Cost of quality

This is the place to document any assumptions about the cost of quality.

Vendor bid analysis

This involves looking at bids from vendors and assessing the responses. You might have to add up several quotes from different suppliers, add in contingency and include human resource costs. And, of course, tax, which most quotes will leave off.

Project management software and decision making techniques

You’ve got these tools available to you throughout the project. Your project management software will most likely be capable of managing project budgets – even if you only use a simple spreadsheet. I doubt anyone manages their project budget on paper any longer, but it is worth looking at the different tools available and finding one that you find easy to use.

As for decision making techniques, when it comes to finalising those budget estimates, you’ll need the input from the team so it helps to have some tools available to manage the discussion. Group facilitation techniques and those that help you come to agreement are key and include brainstorming and the Delphi technique.

Outputs

Activity cost estimates

These are your understanding of how much each project activity will cost. You can do them as a summary or in lots of detail, as long as they cover the estimate cost for everything to do with that project task.

Basis of estimates

You’ll have to document how you have come up with your estimates. This is really useful, even if it seems like a headache, because at some point in the future someone is going to ask why you decided that X would cost Y and you can pull out your document and explain.

Project documents updates

Update all your project documentation to date with your cost estimate information. Let’s keep our records tidy now – it will save time in the long term.

Next time we pick up this series I’ll be looking at the process to determine your budget – what to do with your estimates now you have them.

Project cost management is the process that forces you to think about the procedures, policies and documents you need to manage your project finances. Many of these will already be in place but you’ll use the process to work out how you will apply them in your project and to make sure that you’ve got everything you need to be able to adequately manage, spend and control your budget.

As with all PMBOK® processes, there are inputs, outputs and the tools and techniques you need to get the job done.

Inputs

Your project management plan

Your project management plan is critical for a lot of the processes, so it’s definitely something that you’ll be looking at here. In fact, your cost management plan is one of the sub-plans, so you should pull out your overall plan and start to think about how managing costs fits in with the rest of your project processes.

Your project charter

Your overall summary budget comes from the charter. You’ll use this figure, and any other bits of information from the charter, to develop a detailed project budget. Ideally your charter will give you lots of leeway each way because you can guarantee that the person who came up with the summary budget figure didn’t have as much information about how much the project will cost as you will in a few weeks.

Enterprise environmental factors and organisational process assets

These crop up all over the PMBOK. They really relate to how your company does business so they include things like:

The market conditions in your region and industry that may affect how you work

• Currency exchange rates
• Your organisational culture and your senior managers’ approach to spending
• The cost of resources in your area
• What software you have available to help you manage project budgets
• What requirements and controls the Finance team puts on you with regard to policies, reporting and governance
• Company estimating procedures
• Historical information from lessons learned databases around how much similar project activities costs.

Tools and techniques

Expert judgement

You’ve got to love your subject matter experts. When you need to put together your cost plan, experts are essential. They’ll be able to give you a view of what’s realistic, based on their prior experience, previous projects and their background.

Analytical techniques

You might have several different ways that the project could be funded and analysis will help you determine which is the best approach for this project. That’s not as complicated as it sounds – you’ve probably made ‘make or buy’ decisions before without realising that they formed part of this section of the process.

Meetings

Who doesn’t like a good meeting? I’m surprised meetings don’t appear more often in the PMBOK. Putting together the cost management plan isn’t something that the project manager can do alone, so throw a meeting and invite some buddies along to thrash out how you are going to manage the cash.

Outputs

The cost management plan

The output of all of these meetings, expert discussions is the cost management plan. The document sets out how you will apply the processes and principles necessary for managing the budget, any assumptions you’ve made and key decisions such as funding and timescales.

Check out these 7 things for your project’s cost management plan to check that you’re progressing along the right lines.

Next time in this series I’ll look at estimating project costs. In the meantime, what questions do you have about cost management? Let me know in the comments and I’ll answer them in a future article.