The Money Files

Last time in this series about project cost management I looked at the process for determining your budget. Today I want to cover the last process: controlling costs. The main purpose of controlling your project costs is to understand where you are creating variances (i.e. over or under spending) so you can put them right before you create a massive problem for yourself and your sponsor. It’s another way of minimising risk on your project, and it’s good housekeeping too.

So, let’s start with the process inputs.

The inputs

There are four inputs to this process. None of them are things you won’t have come across before. They are:

Project management plan

You need this because it contains the cost baseline. See what makes up the cost baseline in this article. The overall project plan also includes the cost management plan, which sets out how you are going to monitor and control the budget. I hope you haven’t forgotten, but if you need a reminder it’s all there for you.

Project funding requirements

You’ll get the forecasted expenditures and any liabilities (such as loan repayments) from this.

Work performance data

This is useful to track what has been worked on so far and how much money you are burning through as a result.

Organisational process assets

Yep, these again. They crop up a lot! This time you are looking for things that can influence the Control Costs process, like:

• Policies
• Procedures
• Guidelines
• Tools or tracking software
• Reporting templates.

The tools and techniques

This is where the process starts to get more tricky. There are 5 tools and techniques available to you for controlling costs, and they do take a bit more understanding than some of the tools we find in the processes. They are:

Earned value management

Not all organisations use EVM, but those that do typically find it really helpful. It’s a way of combining schedule, scope and resource information to see how the project is progressing. It gives you early notice about being behind schedule or over budget, but it is only as good as the information you put in. I’ve not known people to calculate it manually either. Life’s too short for that – the people I know who use it rely on tools to do it for them.

There are whole books written on EVM so I won’t go into it in any more detail here.

Forecasting

Forecasting simply means looking forward and working out how much you anticipate having spent by the time the project completes. This is likely to be different from your original budget as things change during the project life cycle. Depending on how different the forecasted estimate is from your original budget you might take a number of steps:

• Not different: carry on as you are
• A bit different: if it’s within tolerances agreed with your sponsor there’s no need to do anything yet
• A lot different: talk to your sponsor urgently and establish whether the project is still viable, whether you need to tap into management reserves and create a plan of action to correct the budget issue.

To-complete performance index (TCPI)

This technique lets you measure the cost performance required in order to meet your project’s goals. In other words, what run rate are you aiming for in order to complete the project with the current resources and budget? There are equations to work all this out but it’s essentially a ratio to track your performance numerically and give you early warning that you aren’t working efficiently enough to complete the work on time.

Performance reviews

Performance reviews are a technique whereby you compare the cost performance on the project with the estimates needed to complete the work. Think of them as just another type of project audit or peer review. You can look at the project’s variances, earned value management reports and pretty much anything else to give you an assessment of how the project is performing in budgetary terms.

Project management software

This one is easier – use your project management software to calculate the EVM measurements, work out forecasts or just add up your expenses so you can track them.

Reserve analysis

This is a fancy name for keeping an eye on how much contingency money you have left. Track this element of the budget, and the management reserves, in the same way that you’d track expenditure on any other part of the budget. Equally, controlling these budget elements lets you establish if you need any more.

You can also plan to release contingency or reserve funds if the risk event they were linked to passes without incident. No need to hang on to the cash if another project could use it more effectively.

The outputs

Finally, we’ve got the outputs, and again it’s quite a long list. The point of doing this process is to ensure you’ve got these 6 outputs, half of which are updating documents you already have:

Work performance information

This just means that you should share the budget tracking information and your cost control metrics with your stakeholders. If they are interested.

Cost forecasts

Again, once you’ve calculated the cost forecasts, write them up and include them in documentation to your stakeholders.

Change requests

All this cost control analysis might throw up areas where you need to raise a change in order to secure additional funding, remove items from scope, carry out preventative actions or similar. Change requests are an output of this process if you need to do that.

Project management plan updates

If you do make changes to your budgets as a result of your cost control activities, remember to update the cost baseline and cost management plan in the project management plan – it’s tidy that way, and you won’t forget what’s happened.

Project documents updates

And update any other documents, like the estimates or assumptions. Complete that lessons learned document as well, while you are at it, as what you have learned managing this budget is bound to be useful knowledge for the future.

Organisational process asset updates

Again, update anything that needs updating, like financial databases.

And that’s it! Quite a long description of the cost control process, but there is a lot to do in here. Do you have any tips for managing and controlling your project budget? Let us know in the comments.

The project budget isn’t just one big lump sum of cash. It’s made up of various different components, and if you understand how it all fits together then it’s easier to manage it.

The diagram in A Guide To The Project Management Body of Knowledge (PMBOK Guide) – 5^th edition, which I have adapted here, does a good job of explaining the component parts. I find it easier to read it from left to right.

You start with the activity cost estimates. These are the estimates for the money needed to deliver each individual task, and if necessary you add on contingency for those tasks at task level.

The activity cost estimates grouped together into work packages + contingency gives you the budget for each work package. If you need to add contingency at a work package level as well then add it on here. Just be aware that if you’ve got contingency at task level too then you might be padding the budget unnecessarily.

Work package cost estimates + work package level contingency gives you the total for your control accounts, if you use them. If not, it gives you the cost baseline for the project. That makes sense: it’s the cost of all the work packages added together with any contingency included too.

At this point you might add additional management reserves to deal with any problems. This is added to the cost baseline but kept separate: it’s not funds you can draw on easily and you’ll need to work out a process for getting hold of that money if you need it (normally you’ll use the change control process).

The overall cost baseline + management reserves gives you the project budget to track against.

Personally I would also track at lower levels so that you can see which elements of your project budget are going over or are under spent. Otherwise you risk spending all your funds early in the project without actually knowing if you have enough to get through all the work (but budget tracking is the subject of another article).

Do you think this is a comprehensive view of your project budget? Are there any elements that you don’t use (or use in addition to this)? Let us know in the comments.

This presentation shares 5 facts from Gerald Bradley's book about managing project benefits: Benefit Realisation Management (2nd Ed).

Did you get a new job in 2014? Or are you hoping to get one next year? ESI have released a new report that looks at career trends over the last 12 months.

Starting salaries

As this in the inaugural report, ESI don’t have historical trend data on starting salaries. Even so, their assessment is interesting. In US Dollars, they report starting salaries as:

• Graduate entry level: $38,957
• Small project: $53,291
• Moderate project: $64,768
• Large, highly integrated project: $74,264

Note to self: put together justification for pay rise to present to my manager.

Getting the big money

The study found that if you want to be ‘proficient’ and earn the big bucks, you need to start off with 2 years on small projects, 5 years on medium sized projects and then 7 years on large, complex projects. That’s a career trajectory of 14 years! I hope that it doesn’t take the new project managers on my team that long to become a valuable, proficient project manager.

Note to self: plot out the career plans of the project managers in my team so they can see how they are advancing on to larger projects

Earn more with training

Just 5 days of training a year can make you a better project manager, and in turn, lead to a higher salary, the report says.

• On small, low risk projects a week’s training can advance your career by 5 months
• On moderate, medium risk projects, a week’s training can advance your career by 9 months
• On large, highly integrated projects, a week’s training can advance your career by 13 months.

Targeted training can accelerate your ability to take on more complex and larger projects, jumping you ahead of your peers.

Note to self: find a course and get training booked for 2015.

Experienced PMs are in demand

Let’s say that you’ve done your time, you’ve advanced with training and you are now an experienced, proficient project manager. How hard is it to get a job?

Not very hard, according to the ESI study.

They report that it is difficult to find suitable, skilled project managers at all levels but it’s really, really hard when you want someone capable of managing a big, complex project.

• 36% of respondents found it hard to find staff for small, low risk projects
• 67% of respondents found it hard to find staff for moderate, medium risk projects
• 88% of staff of respondents found it hard to find staff for large, highly integrated projects.

So there should be plenty of opportunities around for people at the experienced end of the scale, if you are able to take the time to seek them out.

Note to self:  update CV for all those great opportunities!

What are your career goals for the next 12 months? Share your thoughts in the comments below.

And as another year draws to a close it’s time for some reflection. With all the rushing and deadlines and pressure to get tasks done, how well did you do with hitting all the best practices you know you should have?

Here are 15 things that you should have done this year related to your project budget. How many can you tick off and say with confidence that you achieved?

1. Set a baseline

The cost baseline is your marker in time for how your project financials look. It should be a snapshot of your approved budget. Use it to track your actual expenditure and then compare. Ideally, your baseline should end up a close reflection of your actual costs but if not at least it will help you identify where you hit problems.

2. Agreed contingency

Did you talk to your sponsor about the contingency levels for this project? Contingency gives you some comfort and flexibility. Although you should still make it clear and ask permission if required when you come to use it, having a pot there to deal with unforeseen issues is very helpful.

Contingency should be based on what you think you’ll need to manage the things you don’t know, based on an assessment of project risk.

3. Agreed a management reserve

Management reserves are normally calculated by the back of an envelope method but they are useful pots, especially if you are working on something which is innovative or unusual for your company. These reserves are emergency money only to be used in difficult situations, and you should get your sponsor’s permission before dipping in.

Read more about the difference between management reserves and contingency reserves.

4. Got it approved

You did get your budget approved this year, didn’t you? Good.

5. Tracked project management costs

You should be tracking all the costs on your projects and it’s useful to split out prject management costs (the overheads) from the delivery costs (see below). Project management costs cover the cost of doing the project – your time, your project team’s time, any short term, project specific things you need to get the project completed like temporary office space.

6.  Tracked project delivery costs

Project delivery costs are related to what it is that your project is delivering. These could include software licences, fixtures and fittings for the new building and so on. They are what you normally think of when you work out a project budget and should be clear from your work breakdown structure.

Read more about the 5 different types of project costs.

7. Allocated some cash for rewarding the team

If your project was due to end this year did you put some money aside as part of your closing activities to celebrate? I hope so. It’s good to be able to reward the team for a job well done and it doesn’t cost much to go out for a meal to mark the end of a project.

Haven’t got any budget for this? Read more about how to motivate your team with spending anything.

8. Calculated the risk budget

Each risk should have mitigating actions. These will either make the risk less likely or less impactful should it happen (in the case of a negative risk) or more likely to happen or more impactful (in the case of a positive risk). The risk budget covers the cost of the tasks required to achieve this.

Read more about the 4 factors that make a project risky.

9. Shared it

Did you talk to your team regularly about the project budget and their performance against it? If not plan to do this as part of your team meetings next year. It’s a really good idea because it helps the team see how their work directly relates to cost and achieving the project’s goals.

10. Estimated it

How did you pull together your project estimates this year? Hopefully with input from the right people and using a selection of tools to give you the best, most accurate results. Watch this video on 4 pitfalls of project estimating and see if you can spot anything you did that you should be avoiding in 2015.

11.  Agreed tolerances

Tolerances are great and one of the things I get sorted at the beginning of a project. They give you boundaries in which to work – amounts over and under the budget (and dates on the schedule) that you can come in on without needing management approval. Did you sort that out? No? Talk to your sponsor in January: it will make your life less stressful and give you clearer authority.

12. Set up change control processes

Hopefully your project change control processes are already in place but if not, you should have created a process specifically for your project and…

13. Approved changes

…made sure that any of the changes that you needed to put through on your project went through it. This should include a step to estimate the cost and make the necessary changes to your project budget to account for the addition or removal of work.

14. Reported it

Your project budget and progress against your targets should have been included in your project status reports. This is, after all, the one thing that most sponsors care about above all else. Make it easy for them by including the data on your reports along with ways to get more detail if they really want to dig into it.

Learn more about producing better project status reports.

15. Closed contracts

Did any deals with suppliers come to an end this year? You should have formally closed down the contracts. This draws a line under the work and makes closing out the project easier, as well as giving you a better position from which to handover the project deliverables to the operational team.

Learn more about the different types of project contracts.

If you didn’t manage to say ‘Yes’ to the whole list then that could be because the item wasn’t relevant to your project. Or it could be because you didn’t have time or the skills to get that task done.

If it’s a time and skill problem think about what you are going to do differently during 2015. Maybe you could ask your manager for training? Set yourself some goals now so that you can reflect on this list again in 12 months and feel confident in your ability to manage your project’s finances.