The Money Files

Project budgeting is all about using your best estimates to work out how much the project is going to cost. But it never costs what you think. Something always gets in the way. There will be an issue, or a schedule overrun, or an addition to scope that makes the original budget estimate different from what the final cost is.

So, you know the final cost of the project at the end, right? When everything is accounted for and all the project-related costs are spent.

Michael Cavanagh, author of Second Order Project Management (2012, Gower), doesn’t think so.

“Although it has been said often that the only time you know the cost and duration of a project is when it has been delivered, in truth, you don’t,” he writes. “Post-delivery costs including fault correction, maintenance, support and disposal are all subject to the vagaries of implementation in the real world and should be addressed and included in the estimation process.”

Cavanagh is talking about putting together a comprehensive contract with a third party supplier, but the same holds true even if you are building your project deliverables in house. However, I don’t completely agree.

I have to say that I hadn’t considered the cost of fault correction as a project cost. For me, the delivery of the project does not happen at the point that the deliverable is launched. There is a handover to support period, and in that time you would warrant that the products provided are fit for purpose. If the deliverables have been signed off, but a bug is identified six months later, then this is not a project cost. It’s a cost related to potentially a change in the way the product is used, and is part of the product lifecycle costs but not the project lifecycle costs.

I do believe that maintenance and support are project costs, at least for Year 1. Typically – and this will depend on your company’s accounting rules – maintenance and support for the first year are included in the project budget. Maintenance and support for Year 2 onwards are business as usual costs. A lot of this is to do with whether you can capitalise maintenance and support fees, and whether your project has an opex budget or not. Check with your finance team if you are unsure on whether you can include maintenance and support in your project budget, and for how long.

Disposal costs are also part of the product lifecycle in my opinion. I would never include in a project budget the costs for disposing of an asset my project brings into service. How would I know what it would cost to dispose of in ten years time? Or longer, depending on what it is?

However, there may be some products that are decommissioned directly as a result of your project. For example, as part of a project to replace a piece of software with something new, the old software becomes defunct. The cost of decommissioning this is a project cost.

The full product lifecycle costs including disposal, servicing and maintenance should be included in the project business case. That document is all about making good business decisions so they decision makers should know exactly what they are signing up to, both now and in the future in terms of recurring costs like maintenance. But what goes into the business case does not automatically go into your project budget.

When you budget, do you take into consideration the life-long costs of the project, or just the implementation and set up costs? Do you agree with Cavanagh?

As part of your project status reporting you probably include metrics. You might even have a project dashboard that calculates the metrics from an enterprise PM tool and displays them for you. Project metrics are things like resources consumed and estimate to complete. Some metrics mean more to stakeholders than others. Personally, I am not a fan of percent complete for tasks, for example.

As least one of your project metrics should relate to your budget – assuming you have the responsibility for tracking how much the project is spending. There are a number of different ways to track the budget, for example:

• Earned value management metrics
• Variance to forecast
• Percent of total budget spent
• Budgeted estimate at completion

Again, project stakeholders will respond better to some measures than others. It depends who they are, what they want, what they need to do their jobs and what their previous experience is. A project sponsor with a finance background is likely to want a far greater degree of visibility of your budget than someone whose main focus is quality. Your job is to find out what they want and provide it.

It really doesn’t matter what the metric is that you use, provided it fulfils two criteria:

1.      It must make sense to the people who are using it

2.      It must have clear boundaries defined so that you all know what ‘red’ means.

There is no point in having Red, Amber, Green (RAG) or any other categorisation method (click here for a Gantthead discussion on how to categorise projects) if no one knows what the different categories mean.

Set thresholds. Define what the tolerance levels are for each metric and publish them. Then stick to them. Your budget RAG status could look like this:

Green: within +/-1% of budget

Amber: within +/- 5% of budget

Red: over +/-6% of budget

Choose figures that make sense to you: 1% of a £5m is not very much in the grand scheme of things so you could probably agree different tolerances with your project sponsor. As long as you are clear about what ‘Red’ means, everyone will be operating from the same information and your metrics will be meaningful.

How do you define Red?

In this video, I look at the hidden cost of project changes.

Today I’m interviewing Todd Williams, author of the popular book, Rescue the Problem Project. In the book, Todd talks about cost audits. Even if your project doesn’t need rescuing, cost audits are a useful technique to use, so I talked to Todd to find out more.

Todd, what is a cost audit?

A cost audit is a relatively simple task of reviewing all of the costs on a project and ensuring they are in line with the project’s anticipated spend. It validates the right amount is going to the right people at the right time.  Simple, right? The sticky part is usually that last clause—at the right time. Projects have specific milestones for when items should be paid for. Usually it is when a tangible item is delivered. Some form of acceptance document is signed and the vendor gets paid.  Internally, the demarcation point is resources moving on to new tasks. If they still have lots of loose end to tie up, then you keep spending money on something that is supposed to be complete.  In other words, money starts leaking out of the project.

It can, however, be a little more tricky. When you are determining the cost of internal resources, you need to determine they are performing to expected goals. Are they spending time on non-project tasks or inefficiently getting toward deliverables? They may be salaried and simply billed to your project.  In this case you need to be diligent ensuring hours (which translate to money) are spent on completing their work and that these hours are in compliance with industry standards. If time gets excessive you have a problem.

The best measure of this is a cost performance index. But that indicator is imperfect. If deliverables are being signed off as complete when there is still work to do, then people need to keep working to get a workable product. Money to cover the expense, with the best of intentions, can get pulled out of some other budget. This is similar to the Ponzi schemes we have seen in the headlines recently and can be hard to find until after it is too late.

OK, so I guess you don’t want to wait until the end of the project to carry out a cost audit.  When is the best time to do one?

The minute you get a funny feeling in your gut that something is not right. This goes for the Project Manager or the project sponsors and executives. Often the latter can get someone to come in and find the problems in short order, before they get too big. Always assume positive intent—the mistakes are honest misunderstandings.

For some organizations it is a matter of course; however, it takes a significant amount of time. This is far from a lean process and I do not recommend it. If you are dealing with the government, you are often required to have some audit process in place. In any case, if you see the cost performance index starting to go awry, it is a good time to do one.

You mentioned bringing someone in. Can project managers carry out cost audits themselves or should someone else do it?

Using and internal or external auditor? Answering this question with a question will make my point. Would you trust a company where you have a significant amount of your savings invested if you knew they did their own audits instead of having an independent auditor do the work? Of course not. You would want them to have an outside firm review the books to ensure there were no mistakes. It is of little value to have the person that was making the mistakes try to find them—it is harder for me to discover that I do not understand something than for someone else. In addition, if someone is cooking the books, the exercise of an internal audit is a waste of time.

Right, so say I get someone in to do a cost audit on my project. What form does the output take?

I am sure there is a formal layout that finance people like to see, but I simply put the variances items in a spreadsheet showing the anticipated cost, actual cost, and whether it can be recovered. Then I total out what is lost and what can be recovered. The last step is to give a set of recommendations for fixing the issues and preventing them from recurring.

I bet the reports have lots of interesting things in them. You must have uncovered some sneaky deals.

Although I said to always assume positive intent, there are times when people do not have the best intentions. I have seen people who were buying equipment that was not needed so they could get a gift from the vendor. They labeled the purchase order as if it was an item that was needed and the audit found it sitting unused on a shelf. The buyer had a positive intent (beyond the gift)—to improve the capabilities of the deliverable. Unfortunately that functionality was out of scope and it was questionable if the purchased equipment would meet original scope.  

In cases like this, the report, or that section of the report, should be confidential. Covert and clandestine discoveries are the exception. The information should be an educational tool to reduce the chance of the mistake recurring. Remember that the data can be sensitive and publicity can cause a lot of pain. I am sure the readers can think of some big items in the press.

I know that now you are very experienced in doing cost audits, but tell us about the first time you were asked to carry out this type of review.

I am not a finance guy. After all, I have a bachelor of science in chemistry. Being called in by the CFO, I was certain I was being set up and was scared to death. I started by reviewing all the invoices and reconciling them to the material we had on hand and the functions that were supposed to be delivered. Finding numerous major discrepancies, I got even more nervous thinking I was doing something wrong. After double-checking the numbers, I called a couple vendors. They got very defensive. It turns out that the vendors had learned the client would pay anything without validating the fit of the deliverable. They could meet their revenue numbers by delivering and billing early.

Unfortunately, the vendor’s management would not let them work on the items that had been delivered and invoiced since there was no more revenue to gain. There were hundreds of thousands of dollars that had been spent on partially delivered items. With new confidence, on a regular basis I would walk into the CFO’s office and write the new funds found and recovered. The value dwarfed my billings by an order of magnitude.  Needless to say, the CFO was pleased.

I’m sure he was! Thanks, Todd.

About my interviewee:

For twenty-five years, Presidents, V-Level, and C-Level executives of manufacturing and service companies have asked Todd Williams to help them build leading-edge systems, improve organizational efficiency, and rescue problem projects. From this experience, he has developed methods to streamline organizations, turn-around troubled projects, and help prevent recurring failures.

As President of eCameron, Inc. and a professional member of the National Speakers Association, he is an expert in project rescue, failure prevention and engaging people in the solution.  He maintains a blog that has been quoted on CIO Update, ZDNet, IT Business Edge, Center for CIO Leadership, and CIO Essentials, among others. He has been chosen to speak to numerous companies including NASA, AMA and PMI.

I’ve been working on my new book, Customer-Centric Project Management, and one of the main concepts my co-author Phil Peplow and I discuss is how projects define success.

The current draft of the book (no guarantee it will make it into the final version) includes the construction of the Scottish Parliament building as an example of how different stakeholder groups interpret success differently.

The design of the building was the result of a competition, and architectural firms responded to a brief with the hope of being selected as the company that would win the work of designing the prestigious new building. The Secretary of State for Scotland at the time, Donald Dewar, launched the competition saying that architectural quality, value for money, accessibility and a design “worthy of the hopes and aspirations of the Scottish people” were important.

The building user brief that the contest entrants were issued with also stressed the importance of a stunning architectural design, saying it must “reflect the Parliament’s status,” “promote good environmental practice” and “be an important symbol for Scotland” while offering value for money. In other words, these were the critical success factors for the project, and from the beginning there was a focus on the design and the budget. As experienced project managers will realise, this situation created the risk of conflict between these two factors. Could you really have a fabulous design while still delivering value for money?

Scottish Parliament Debating Chamber: Photo: copyright andrew_j_w

Building projects are notorious for going over budget, and this project was no different. The guideline at the beginning of the procurement process was for a budget of £50m but an inquiry into the overspend concluded that in reality quality was more important than cost. The project suffered from not having realistic budget estimates.

Poor communication also played a part in the rocketing costs. Messages were filtered for political reasons before being passed on to management. For example, a quantity surveyor produced an estimate of £89m, including a margin in case of risk; after all, this was a one-of-a-kind project, and it was highly likely there would be some unforeseen circumstances. The actual estimate passed up the line did not include this risk prediction, and was given as £62m.

The project involved a number of different contractors, all of whom used different jargon. Is ‘estimate’ the same as ‘forecast’? Putting jargon aside, if you don’t have project reports at all you have no chance of knowing what is going on. There were concerns over whether or not the project would be completed within budget as early as November 1998. However, it took until March 1999 before Dewar was given formal warning of any potential cost rise. If budget was a key success criteria for the project, it seems it was not communicated adequately to those responsible for reporting against it – or they were providing the information to the wrong stakeholders.

The Scottish Parliament building has been open for years now – the Members met there for the first time in 2004, three years later than expected. The project finished late, and went significantly over budget. The estimated final cost reported to the Finance Committee was £431m! That’s a long way from the original £50m.

Scottish Parliament building. Photo: copyright ajnabeee

If sticking to budget was important for the project, the team didn’t do a particularly good job of delivering successfully. Was it value for money? That’s a different matter altogether, as value for money is subjective.

The building attracted 100,000 visitors in the first 3 months. It has won nine design awards. The three main parts of the building have been rated as ‘Excellent’ for environmental performance and the development has increased biodiversity in the area. The carbon footprint of the Holyrood complex has been reduced by 12% in 5 years.

These results show that the success criteria of accessibility, stunning design and good environmental practice have been met. Maybe that does mean the project achieved value for money. What do you think?