The Money Files

You can’t do many projects to change something without spending a bit of cash. And when money is involved, a contract is essential! Generally you’ll come across one of three types of contract on a project: fixed price, cost-reimbursable (also called costs-plus) or time and materials. However, the contract is for the whole deal, so if it makes sense to have some services from a vendor on a fixed price basis and others on time and materials, then the contract would include both these terms. You wouldn’t have a different contract for both elements simply because they were on different terms. There may be other reasons to have contracts for different terms but they are likely to be because the deal was agreed at a different date or similar.

OK, let’s take an example. You want to buy software consultancy and development services from a vendor. They will help you spec out the software so it is fit for use by the users, then they will build it. The requirements gathering part of this deal is on a fixed price basis. They know that it will take them 6 workshops and some prep time to prepare the complete requirements, so they can cost for that in one hit (fixed price). But they don’t know how long it will take to build the software, because they don’t have the requirements yet. If it’s a lot of work they want to be compensated, but they don’t want to overcharge you if it’s not much work, so they’ll price that based on the effort it takes (time and materials). They do know that there is a software licence that they will have to buy on your behalf, and you plan to pay them for this at the purchase price (cost-reimbursable). The one contract between your company and theirs will cover all these elements.

You choose your contract terms based on the best procurement arrangement for your company and theirs depending on what you both want to get out of it and making sure that everyone’s interests are covered. So let’s look at those three contract types in a bit more detail.

Fixed price contracts

With a fixed price contract the buyer (that’s you) doesn’t take on much risk. This is great for the project’s risk register, but not so great for the project budget. As the seller adopts all the risk they normally add a bit to the price to allow for any risks. For example, just because our software consultancy firm thinks it is going to take 6 workshops to define requirements because it has done on the last 10 occasions this doesn’t mean it actually will this time round. They have never worked in your industry before so they add enough into the fixed price proposal to cover them in case they have to do more.

What sometimes happens is that vendors want to win your business so much that they price too low. The problem there is that if something does go wrong and all the risk is on the vendor’s side, they then don’t have enough profit in the deal to make it worth their while, and they may even lose money by working on your project. If this happens then you should watch out – they may start to cut requirements or drop quality to try to claw something back.

However, the advantage for you with a fixed price contract is that you know exactly how much it is going to cost you before you begin the work, and for many project teams this is very valuable.

Cost-reimbursable contracts

With a cost-reimbursable contract you pay the vendor for the actual cost of the work. This could be materials, equipment, whatever and will normally include direct (e.g. salaries) and indirect costs (e.g. electricity for running the office). Indirect costs will be a fixed percentage amount – they won’t send you their electricity bills and ask you to pay a proportion.

So how does the vendor make any money? Obviously they aren’t working for you for nothing, and while you are covering all their expenses they want there to be some kind of financial return. The contract will include a clause that allows them to claim a profit over the cost price, either a fixed fee or some kind of incentive payment. It’s common, but if your vendor proposes this make sure you fully understand what you are signing up to.

Time and materials contracts

Time and materials contracts see the vendor being reimbursed for materials purchased plus a per day or per hour rate for time spent. The developers building the software in this example will charge on a time and materials basis. In this case, there probably won’t be many materials and they will charge their daily rate for time spent writing and testing the new product. They will act pretty much as if they are a salaried member of your project team, and you’ll have a fair amount of control over what they do (as you are paying for it, after all). They might ask you to sign timesheets or at least submit their own timesheets for your approval along with the invoice as proof of the hours spent working on your software.

This sort of contract is great for projects where you don’t know exactly what you want when you start out. Provided you keep a close eye on costs and manage the budget and the work so that you don’t overspend, this can be a really cost effective way to add more resources and skills to the team.

Which of these have you used on your projects? Let us know your experiences in the comments.

Your project plan is made up of lots of different elements, and cost management is one of those. When you’re planning your project, your cost management plan sets out the processes required to make sure that your project hits its budget targets.

Your cost management plan should include these items:

1. Process descriptions

What processes are you doing to be using on the project for cost management? These include planning, estimating costs and how you will establish the overall budget. Add in some detail about what processes you’ll be following and where these can be found, for example if you intend to do bottom-up estimating or bypass the standard cost planning process on advice from your project accountant.

2. Accuracy levels

How accurate do you intend to be? Of course it would be great to say that you’ll be 100% accurate in all your estimates, but that’s unrealistic! State here what you are aiming for. You can also add that this will change as the project progresses. For example, you will start the project with lower accuracy targets because you won’t have as much information as you will later on. Then as you get further into the project you can amend your estimates with the latest, more accurate figures. Set out here whether you intend to do that and how you will go about doing those revisions.

3. Variance thresholds

What variance is going to be acceptable before you have to flag a problem to your sponsor? Talk to them about how much leeway you have in your measurements and when they expect you to be bringing them issues. You may find that they are prepared to give you quite a big bracket either side of your target before it becomes a problem.

Set out the percentage deviation from each of your major measures such as baseline budget so that you know exactly where your boundaries are.

4. Performance measurements

If there are any specific rules for performance measurements, make a note of them in this section of the cost management plan. This is particularly relevant if you are following Earned Value processes. If you aren’t, you’ll probably find that you don’t need this section. If in doubt, talk to your Portfolio Office about what they expect to see.

5. Units of measure

How are you measuring things? It might seem obvious to you that ‘25’ refers to days of effort, but someone else could read that as hours of effort and come to a very different conclusion! Specify how you will be measuring time and budget figures. This is especially important if you are working in multiple currencies as you’ll need to specify that here.

6. Reporting protocols

When are you reporting? How frequently? Who to? These are all questions to answer in the reporting section of your cost management plan. Agree the format of your plans with the project sponsor and anyone else who will be receiving them. Then set out exactly how often you’ll produce these reports. It is also worth including what you’ll put in them so that there are no surprises. It can be difficult to gather new data items once the project has started if you haven’t built in a way to record them, so get a clear idea now about what your stakeholders want to see.

7. Anything else

Finally, don’t take this list as the only items to be included in your cost management plan! Your Portfolio Office may have other ideas and your corporate template may require you to complete other sections. Even if it doesn’t, you can still amend your document and add in anything else that will help you manage costs on this project – be flexible, even if you use a template.

Other things that may be useful include roles and responsibilities of those involved in cost management, a note referring back to any criteria set out in the business case, a link to any corporate policies that you will be following or any critical dates such as end of year reporting timelines or reforecasting milestones.

Your cost management plan should give you a working document to help manage spending on your project, so make it work for you and adapt any template (and this list) so it is a practical, comprehensive guide for everyone on the team.

Last time I looked at 4 soft benefits that go into project business cases and are a factor in project selection. They were:

• Increased customer satisfaction
• Improved brand awareness
• Better staff morale
• Improved processes.

Today I’ll look at another 4. You may be able to include these in your next project proposal alongside the financial measures and with any luck they will help get your project approved.

1. Increased user satisfaction

Customers are one thing, but it also pays to improve the experience for internal users. So if you are designing software for use in-house or for clients, improving their satisfaction with the product will be a significant project benefit.

Project selection should take this into account as (generally) happier users are more productive and are more likely to stick to the processes. If the products they are using are not easy to navigate, they will find ways around the processes in order to make their lives easier. This negates any benefits the software or process is designed to offer. In my experience, going outside the process means that data isn’t collected in a standard way so any measures are incorrect. Many user satisfaction improvements could be done to systems to improve data collection and make it less obtrusive for users – a better experience for them and a better standard of management information for others, so everyone benefits.

2. Improved corporate image

Improving brand awareness is one thing, but what if everyone thinks your brand doesn’t represent value for money? Or that it is not socially responsible? Some projects are designed to improve the image of your brand and while these won’t directly impact the bottom line they could result in more sales or a brand that is ‘worth’ more.

3. Increased safety

Safety measures at work normally cost money, so health and safety projects can find it difficult to justify the investment. But how do you put a price on the health and safety of workers? Projects that implement new measures or better processes that will help avoid accidents are essential in some cases.

And they do indirectly contribute financially: lower insurance premiums, fewer sick days so better staff productivity, better staff morale from knowing they are with a responsible employer and fewer court cases, one would hope. But putting a financial measure on this can be difficult: your finance department may have some models that will help, but otherwise it’s probably best to leave this as an intangible project benefit unless you can categorically link it to a financial figure.

4. Meeting regulation

As I mentioned in a footnote last time, sometimes projects are done for no financial benefit at all because change is required to meet new regulations. There isn’t much decision making involved in project selection when it comes to regulatory projects because you have to do them. You could make the link to financial benefits such as reduced risk of being fined by your industry watchdog, but in reality you are going to do the project anyway, so there isn’t any need to spend hours working out the financial figures – just get to work on the project!

Project selection processes differ from company to company depending on what your business considers important. For some it will be to make tactical changes, for others project choice will be limited by the resources available or by corporate strategy or by the technology available to support projects. All project selection should consider the chance that the project will be successful: there really is no point kicking off a piece of work that has very little chance to succeed as this is simply a waste of resources and time.

Selecting projects effectively, even if the business case is made up of ‘soft’ benefits, will ultimately benefit the firm financially as it means project teams will not be tied up working on initiatives that are wasteful, not a good fit for business strategy and that won’t contribute to the company. Pick your projects with care and use your project time wisely!

When we select what projects to do, return on investment is one of the major decision-making factors for many companies. Financial measures like cash flow and ROI are essential: after all, who wants to work on a project that isn’t going to contribute to the bottom line? What’s the point?*

The financial justification of a project is normally worked out by whether the financial benefits outweigh the project’s total lifecycle costs, by how much and when this happens. Your finance team or portfolio office will probably have a selection of measures that they use to calculate the important sums behind project selection.

However, financial benefits aren’t everything.

What else needs to be considered?

You’ll probably have worked on projects that don’t have huge financial benefits but contribute to the company strategically or tactically in other ways. Here are 4 additional ‘soft’ benefits that can (and should) be taken into account during project selection:

1. Increased customer satisfaction

Happy customers generate return business and it’s a commonly held belief that it costs less to keep a customer than it does to attract a new one. So it really does pay to get your customers on side and keep them happy. How do you measure customer satisfaction? Whether it is through surveys, an Exceed customer satisfaction review, focus groups or amount of ‘likes’ on social media sites, you’ll need to take a baseline first before your project implements anything so that you can do a comparison later on.

While customer satisfaction is often considered a soft benefit, customers do spend money so there are financial implications of keeping customers happy. Normally though, this is really hard to work out in terms of adding numbers into a business case, so unless you’ve got some complicated models it gets lumped under the ‘soft’ benefits category. Pair it with increased revenue as a hard financial measure.

2. Improved brand awareness

While brand management and PR agencies would probably say that there are tangible financial measures relating to brand awareness, it is hard to measure and in my experience isn’t worked out for project business cases. If you are opening a new store, for example, this will increase brand awareness of your business in the area where the store is, but how do you measure this? It’s tricky. And even if you can measure it reliably, can you link it to a financial measure? Just because people know about the company doesn’t mean they will spend money with you.

3. Better staff morale

Lots of internal projects are done to improve staff morale, whether that’s decorating the staff canteen or implementing a suggestion scheme. Staff morale is something that can be measured and many companies run internal staff surveys to track how employees feel about the company. Compare these results year on year and you’ll be able to see how morale changes, but there are many factors at play so tying these results to one particular project is difficult.

I’ve read research that shows happier staff are more productive, so if you equate productivity with revenue, you can see that there is a financial link. However, it’s one of those that is again tricky to prove or to calculate without some complex models. Still, go for it if you feel you can!

4. Improved processes

OK, some processes do link directly to cash. If it takes a couple of hours less to complete a process you can work out the salary savings of the people involved. But normally with this sort of project you don’t move those staff on to a contract that says they work fewer hours per week. They will fill the time with other things, so the gain is in productivity and the ability to complete more work rather than in direct salary savings.

Even so, improved processes are a good thing, so whether your tangibly calculate the saving or report it as a soft benefit, it’s definitely something to record in the business case for project selection.

Of course, not all business cases will include all these elements, and many will include other soft benefits as well as all the financial measures. Next time I’ll be looking at 4 more soft benefits that could be a deciding factor in project selection so stay tuned!