A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts.
Written by Elizabeth Harrin from RebelsGuideToPM.com.
I like to think that I know a lot about managing money on projects – after all, it’s something I do as part of my day job – but there is always more you can learn. I spoke to J. LeRoy Ward, PMP, PgMP, Executive Vice President, Product Strategy & Management, at ESI International recently about his top tips for project managers handling project finances.
It turned out to be quite a long interview, but it was so interesting that I didn’t want to edit any of it out. Here’s the first bit, and I’ll publish the second half here next week.
What's the one top thing project managers should bear in mind when handling project finances?
Regardless of what people claim, money is ultimately the most important element on a project. Even if the schedule is more important from a project objective point of view (in other words, the company is willing to pay more to get the job done earlier), being able to account for all the funds and where they were spent is the thing in which the organization -and its auditors- is most interested.
So, you need to know how much was actually budgeted to the project, and you need to keep accurate, comprehensive, and detailed records of all actual (i.e., expenses and payments) costs. This may not be as simple as it sounds. Many organizations don’t do project accounting; they have systems for general accounting. You need to sort out how your organization does it first; thereafter, you can make adjustments accordingly. In addition, as a project manager you probably won’t be able to be the project financial controller at the same time you’re managing every aspect of the project, so hire someone capable and trustworthy for that job.
That’s a good tip. Project accounting can be a lot of work.
It is no accident that in many organizations the CFO/Controller has his office right next to the CEO’s. Take a page from their playbook. Have your project financial controller always by your side, and always know the financial status of your project. In other words, always know what you have spent and how much you have left and what the unfinished work is going to cost. This way, you’ll know if you need more money well in advance of asking for it.
What advice do you have for budgeting properly so you don’t have to ask for more money later?
Simply put, you need to figure out how you are going to allocate your money across the project’s components. When Emaar Properties developed Burj Khalifa in Dubai (the world’s tallest building) I doubt the project manager and developers just said to everyone, “We have a lot of money, so let’s start working.”
The budget was broken down and allocated to ‘pieces’ of the work. Therefore, each element of that project had a budget, there was someone responsible for each element, and it was their job to monitor and control their piece of the budget. Project financial information was then collected and aggregated so the project manager and developers could see the big picture and then were able to make certain decisions across the board for the good of the project. So, for example, if one element of the project, buying and installing windows was ahead of budget, but the HVAC [heating, ventilating and air conditioning] piece was over budget, the project manager could take some of the money from the windows piece and reallocate it to the HVAC.
I see. So splitting up the budget into manageable chunks is the best way to do it?
It is simply impossible, and ill-advisable, to try to manage a budget at the highest level without having the lowest level budgeting and monitoring taking place on components of work. Of course, if the project is small, this can be done, but I would suspect most people reading this don’t work on projects that are that simple; rather, they work on complex undertakings that are comprised of many pieces. To be sure, the best way to approach financial management is to have a thorough and complete work breakdown structure (WBS). By using a WBS, each major deliverable, at the very least, has its own budget to be monitored.
Next week you can find out what J. LeRoy Ward had to say about starting out managing project finances and his tips for handling budgets on international projects.
More on my interviewee:
J. LeRoy Ward, PMP, PgMP, Executive Vice President, Product Strategy & Management, ESI International, brings more than 30 years of expertise in project and program management to the refinement of ESI’s portfolio of learning programs. He works closely with ESI clients worldwide to guide the assessment, implementation and reinforcement of knowledge and skills that allow for the effective measurement and successful adoption of learning program objectives.
I had the opportunity to speak to Gary W. Patterson recently, the self-styled FiscalDoctor. He gave me a copy of his eBook, Five Areas Where Risk Can Lurk, which is an extract from Stick Out Your Balance Sheet and Cough: Best Practices for Long-Term Financial Health. It’s chapter 4, and it looks at how you can assess your company’s financial fitness, which will give you some ideas of places to look for project risk.
Click here to download the eBook in .pdf format. [link removed May 2020 - no longer available]
Last week I shared with you some questions and answers from my recent webinar on managing money on projects. I wasn’t able to answer all the questions after the presentation, and those questions I didn’t get a chance to answer in person I am answering here.
Here’s another batch of Q&A.
Can you give a definition of "Consultancy"? Is that research/consulting on tasks OR the hiring of outside resources to assist with the project tasks?
I think it’s both. If you don’t have the skills amongst the permanent staff in your organization, you need to hire those skills in. The people hired could be doing specialist tasks like research or technical consulting, or they could be an extra pair of hands to help you get the project done, like an extra project manager on a large program. Either way, these are additional, external resources and that’s what I mean by ‘consultancy’. Essentially, it is paying for people who are not permanent staff.
Do you ever find that being transparent with $$$ leads the funding away from your project and onto another "priority" thereby interjecting project risk? Seems like the norm is to cloak the budget until successful completion and then release at completion with the rest of the resources.
I think this is very dependant on the culture of your organization. Fortunately I have not worked anywhere where I have seen this happen, although I wouldn’t be surprised to learn it did go on in some organizations. It is all to do with what the company thinks are its strategic priorities and unfortunately your project might not be one of them. A strong PMO can help here, as well as a mature project management culture where people understand the value of not chopping and changing their minds about projects every five minutes. Projects cost what they cost, and if the investment is worth it and you haven’t padded out the budget unnecessarily, you shouldn’t have to worry about sharing the figures.
If your project is no longer a strategic priority it seems sensible to me to divert the funds on to something else that will deliver great value for the organization. If you are worried that your management team doesn’t have the foresight to do this which leads you to hiding your budget until the project is over, they all need to go on Sponsor training!
Do you consider utilities, rent, etc to be a project management cost or deliverable cost?
Utilities, rent and so on are project management costs. Let’s recap the difference:
Project management costs are the costs of doing the business of project management e.g. paying for your team members, training including the costs of a trainer, room hire, refreshments, delegate transport and accommodation, hosting large meetings off-site and hiring equipment.
Project deliverable costs are expenditure directly related to what the project is going to deliver e.g. software, hardware, purchasing equipment, licensing and things like buying software and funding anything that will change as a result of your work like new stationery or user guides or paying for documents to be translated.
Might training be considered a deliverable cost associated with quality assurance? What about testing resources?
Yes, I suppose they could be. The purpose for me of categorizing costs in this way is simply to provide a starting point for preparing a comprehensive budget. People often think about what they need to buy to deliver the deliverables – a new server, new office equipment, software licences etc – but they forget about the costs required to make it all happen. These are what I call project management costs and are the overhead of running a project. In real life it doesn’t matter at all if you categorise training as a deliverable cost or a project management cost – the important thing is that you have considered it and included the cost in your budget.
This video looks at the impacts of the recession on budgets and covers the benefits of home working as well as the green elements of saving money. There's a white paper here (.pdf) with more information.
Sometimes on projects companies need to hire space to work in, for example, if they are relocating members of different teams to put them in the same location for the duration of the project. Office space could be in the form of a ‘project war room’ or a model office which can be used to run through the new processes. Even small companies may need to hire desk space in a shared office or meeting rooms for large meetings if they do not have the facilities in-house. Renting office space costs money, and that should be factored in to your project budget.
Are there Excel templates that will be provided?
No, sorry, I don’t have Excel templates I can share. There are a number of places online where you can download project management templates.
I know under-budgeting on a project is bad but will it get you fired?
Good question! I think it depends on the culture of your organization. If you under-budget for a project and it costs a lot more than you thought, it could make you look incompetent, so if redundancies are on the horizon you may be in a weaker position than a top-performing colleague.
The company may have borrowed money unnecessarily if the estimate is significantly higher than actual spend. The costs of that will hit the company but may not be included in your project cost. Project managers should be aware.
Thanks – this is an excellent point to note. If projects are funded from debt instead of working capital the interest rates and terms of the loan will have an impact on the company that you may not see through your project accounts.
Have you worked on projects where the mgt does not allow contingency?
Yes! Which is why I recommend you put contingency in if you are allowed to. Unfortunately, things happen on projects that mean you can’t accurately predict the future, and contingency funds are a useful risk mitigation tool.
Are project salaries considered project management costs or deliverable costs?
Salaries for people working on the project team are project management costs. Let’s recap the difference:
Project management costs are the costs of doing the business of project management e.g. paying for your team members, training including the costs of a trainer, room hire, refreshments, delegate transport and accommodation, hosting large meetings off-site and hiring equipment.
Project deliverable costs are expenditure directly related to what the project is going to deliver e.g. software, hardware, purchasing equipment, licensing and things like buying software and funding anything that will change as a result of your work like new stationery or user guides or paying for documents to be translated.
Could you please repeat the difference between contingency and tolerance?
A contingency fund is money set aside at the start of a project to be used in case of need, for example to offset unforeseen increases in costs. The amount of this ring-fenced budget depends on the level of risk the project faces and also on the overall project budget itself.
Tolerance is the amount by which the project can be delivered over (or under) budget without anyone being concerned. It’s usually a small amount represented as a percentage. Tolerance is either calculated as a straight percentage of the core budget estimate or as a percentage of the core estimate plus the contingency fund. As you should assume the contingency will be spent, it’s better to agree a tolerance based on the latter.
I like to think that I know a lot about managing money on projects – after all, it’s something I do as part of my day job – but there is always more you can learn. I spoke to J. LeRoy Ward, PMP, PgMP, Executive Vice President, Product Strategy & Management, at 
I recently gave 
