The Money Files

Project budgets – don’t you just love them? Your sponsor gives you a complicated project to manage with a relatively low available budget, and you’ve got to take it from there. When you start a project, here are 4 important questions to ask about your budget so that you are completely prepared for the project.

How much have I got?

This is important to know! While it’s great to think that you will have the luxury of working out the full scope, detailing the project schedule and resource plan, then costing it out and submitting that number, plus tolerance, to your project sponsor for approval, the reality is very different. By the time the business case and Project Charter have been approved, there is already a good idea of how much money is available for your project. That’s your budget, whether you like it or not.

So, it’s important to know what that figure is so that you can track expenditure towards it. If you do find then that you can’t achieve the project objectives within the amount that you have been given, that’s the time to put forward a change request to get the budget increased.

What’s my authorisation limit?

Can you sign off invoices and purchase orders? And if so, up to what value? There is normally a sliding scale of sign off authorisation limits in a company depending on the level of management. You may find that you have complete authority to sign off anything related to the project but it would be more normal to find that you have a capped ceiling on what you can authorise.

For example, you may be able to authorise expenditure up to $50k, but anything over that needs to be approved by your manager. Anything over $500k may need to be approved by a director, and anything over $1m by the board.

Establishing your authorisation limit now will save a lot of time later and avoid purchase orders being bounced around waiting for someone to approve them.

What’s acceptable tolerance?

Talk to your project sponsor about what levels of tolerance they are prepared to accept. For example, if you forecast that a particular cost will be $100 with a +/- tolerance of 10%, you can spend $90 or $110 without having to let the sponsor know about it. They may be happy with this, or say there is no tolerance, or set another percentage.

Knowing the tolerance levels gives you a little bit more flexibility with managing the numbers and ensures that you aren’t always asking them to approve a tiny bit more. You can have tolerances per budget area or for the overall project, so agree with your sponsor how they want you to manage tolerance on the project tasks.

How do I access the contingency fund?

Last time I asked Jason Westland, CEO of ProjectManager.com, about his tips for preparing a comprehensive project budget. Today, our interview continues with his advice about budget management processes.

Jason, one of the hardest budget processes to get right is contingency funding. How should project managers make it work?

You do need to add in contingency, especially if you haven’t done this type of project before or it is particularly risky. But most companies don’t have a process for calculating contingency or even accessing it to spend.

It’s hard to calculate how much contingency to add to your budget, because it’s rare that there is another similar project that you can use as a guideline. Start off by working out how risky your project is going to be. Projects with a high level of risk require more contingency funding. Having said that, some parts of the project may be riskier than others, so consider whether you add contingency to the overall budget pot or to particular tasks or phases. You could, of course, do both, if you are particularly risk adverse.

So if you don’t know where to start, what is a good figure?

That’s hard to answer! But my advice would be – if you really don’t know where to start – add 10% of your overall project budget as contingency. Although it is better to work it out as scientifically as you can, as you will get challenged on that figure if your sponsor is doing a good job. You should be able to explain, rather than just saying that you made it up!

Talking to your sponsor about the level of financial risk that they are prepared to accept is another way to manage this. If you explain that contingency funding is there to offset unforeseen risks, they may allow you to have more, because they are risk averse and want to be sure that those kind of situations are covered. Having said that, this conversation could result in you getting less funding if they aren’t worried about riskiness.

What about spending the money?

Yes, you absolutely need to know how to spend it! Both for your contingency fund and your main budget, and they will probably have two different processes.

For your project budget, your Finance team will probably be able to tell you what to do about raising purchase orders, receiving goods, authorising invoices and keeping track of expenditure. While it might be quite bureaucratic, it is normally pretty easy. Get someone in the right team to tell you what your local process is and where to charge expenses to, as I have noticed that they differ widely between companies, and sometimes even within the same company.

And for contingency funds?

Spending the contingency fund normally requires approval from the project sponsor. The best way to manage this is to find out how you can access the fund before you need to use it. The last thing you want to be doing when something goes wrong and you have to sort out a risk mitigation plan at short notice is to be trawling the intranet looking for some obscure policy or trying to schedule time with your sponsor’s PA for them to explain it to you.

Once they have approved spending the funds, it’s normally a similar process to spending ‘ordinary’ money, but it might be tracked separately.

Thanks, Jason!

About my interviewee

Jason Westland is CEO of ProjectManager.com, a software firm, and author of The Project Management Life Cycle.

In this instalment of my occasional series interviewing project management experts, I spoke to Jason Westland (pictured), CEO of ProjectManager.com to get his advice on preparing good project budgets.

Jason, it seems like a very basic question, but tell us why it’s important to have a good budget prepared for your project.

A clear budget makes it possible to manage your project – without it you can’t even start to get things done. As a result, working out how much the project will cost should be one of your first tasks.

So, talking to your sponsor is a must?

Yes. It’s important for project managers to be able to have professional conversations about money, as you can’t afford to be shy about asking questions about hard cash.

Project sponsors sometimes already have an idea of what the budget should be, but you should do your own sums as well, if only to give yourself confidence that the sponsor has a realistic view of how much they will be spending over the lifecycle of the project. That will help you manage their expectations.

The project manager and the sponsor, then, work together on the budget. Who else gets involved?

You can’t prepare a budget by yourself. Think about who has the answers to some of your more complicated questions about costs, like how much the consultancy is going to be. Get your subject matter experts involved.

You can use your work breakdown structure or task list and get your team together to try to cost each element. Essentially, you should involve whomever you need in order to get realistic estimates.

You talked about consultancy costs. What other costs should you consider in your budget?

Well, you’ve talked about this yourself: there are two types of costs:

• the cost of delivering the product or outcome – deliverable costs
• the cost of running the project – project management costs

Yes, I remember writing about those.

To summarise, deliverable costs are related to producing your final deliverable or product, like hardware, software, licences and so on. Project management costs relate to temporary fees incurred from working on the project itself, like having to hire a separate office space, or a digger to lay cables, or a painter to decorate your new office.

There’s another type of cost isn’t there? The cost of shutting things down.

Yes, people often forget to include decommissioning fees. As projects involve change, things are different when the change has happened. And normally, the old way of working is left behind. The danger is that if you don’t take out the old way of doing things, staff members will continue to use that and your new implementation will be wasted. You can’t achieve the benefits of the change if they still insist on working in the old ways!

One way round this is to budget for decommissioning what was there before. That way people have to use the new deliverables. This could involve things like decommissioning old software, closing down user accounts, deleting training material from the intranet and so on. As well as it being a professional and tidy way to end the project, it stops people from slipping back into doing things the old way.

Thanks, Jason.

Next time I ask Jason about contingency and budget management processes.

About my interviewee

Jason Westland is CEO of ProjectManager.com, a software firm, and author of The Project Management Life Cycle.

Are you struggling to keep your project finances on track? With stakeholders coming up with ‘critical’ amendments to the scope and more and more pressure on resources I wouldn’t be surprised if you, like many other project managers, were finding it difficult to stay within budget.

Here are 5 ways that you can try to keep your project budget on target, but be warned, they aren’t easy!

1. Say no

Yes, the first and simplest way to keep your project on budget is to just say no. Say no to cuts in your budget when senior executives want to make savings across the board. Say no to giving up project team members to other projects if that will make yours take longer and cost more because you’ll have to hire an expensive contractor. Say no to making costly changes.

As you’ll probably have realised, you need to have some significant influence in the business to be able to make these kind of statements, as most of the time it is your sponsor who is the decision maker and you are there to implement their decisions. So you may find that they only thing you can do is recommend that the sponsor says no. Try it – you never know what might happen!

2. Change the scope

You could recommend that the scope be slimmed down. Projects often go over budget because they try to achieve too much in one go. An alternative is to introduce phases. Suggest to your sponsor that Phase 1 delivers the basics (cheaply) and then alternative funding is secured for future developments.

The downside of this approach is that sometimes the future funding is never forthcoming and you end up with the basics, permanently.

There could be little areas of scope that you could negotiate excluding with your stakeholders. In exchange for ensuring the project meets budget they could be willing to forgo some additional bells and whistles. Ask them. They might agree with you.

3. Focus on the right changes

Change on a project is inevitable and it’s very likely that your project will see a lot of it. Unfortunately, changes can be costly. So focus on doing the right changes – the ones that will help you meet the stated strategic objectives of the project. If it’s a change that will make the product blue instead of green and it’s for internal company use only, talk to your stakeholders. Explain the additional time and cost involved in making the change and encourage them to stick to blue.

4. Avoid gold-plating

Is your team doing additional work that they really shouldn’t be? This is gold-plating. It’s when the project team add in new features because they can and because they think the customer will appreciate them. In many cases, the customer does appreciate them, because they’ve got a whole lot of extra features for free!

Don’t let your team gold-plate your deliverables. Stay on top of the scope and ensure they are only doing what they have been instructed to do. Anything else needs to be put forward as a change request and approved through the normal channels.

5. Cut quality

This is going to be an unpopular one, but it is something that you can do to save cash. Say your project is to set up a facility to make bricks and the bricks need to be of a certain standard. If you currently quality check 15% of all bricks to ensure they meet the standards, could you cut that to 10%? Lowering the rate for inspection would help save time and money, and unless your customer has specified that you must inspect 15% of the bricks before they will accept the facility, then you could make that change and still stay within your contracted terms.

Alternatively, say you are creating a new website. Customers enter their data and get a quote back for your services. If the response times for getting the quote could be increased, you’ll most likely save development time and perhaps even money on computer kit with faster processing power.

Have a look at your project and see if and where you could make some small changes to quality to save money, without compromising the overall integrity of the project.

That’s 5 ways to keep your budget under control, but I’m sure there are plenty of others. What techniques do you use to make sure your project comes in at its budgeted cost?