The Money Files

Project financial analysis is what happens before a project is approved, and is a way of making sure that the company is spending its investments wisely by making smart choices about what projects to take forward. Thorough analysis is important to ensure that you don’t end up doing projects that lose money.

According to The Harvard Business Review Project Management Handbook: How to Launch, Lead, and Sponsor Successful Projects by past PMI Chair Antonio Nieto-Rodriguez, there are 5 common financial metrics: opportunity costs, payback period, IRR, NPV and ROI. Let’s take a look at those.

Opportunity Costs

Opportunity costs are a way of looking at what you aren’t going to do because the business’ resources will be tied up on this project. If the other projects are worth more to the business (however that is decided), then this project should be put on hold and instead the other projects should be taken forward.

You’ll need a relatively mature portfolio management approach to do this because you’ll have to identify the other projects that will be put on hold, and have budget/resource assessments for them to calculate what it would cost to do those – and have information about their benefits. If you’re in the kind of business that only does full business cases when the idea is pretty much ready to go, then this could be hard.

Even so, you should be able to include a paragraph in the financial evaluation that talks about the fact other projects will not be going ahead if the company decides to invest in this work.

Payback Period

This measure relates to how long it takes before the project starts to generate a return. On a programme, that could be before the end (and I’d hope it would be) because individual projects should be generating benefits as they complete.

Nieto-Rodriguez talks about the duration of the payback period being set by the organisation. Then if the project earns back the investment before that time is up, it’s a worthwhile investment. If it’s going to take longer than that, it’s time to think again. Typically, shorter payback periods are better, as it means the project starts to earn back more than it cost to do in a shorter time.

Internal Rate of Return (IRR)

I used to find IRR a difficult concept to understand, because rate of return is quite clear, but what’s the ‘internal’ all about? IRR refers to the amount the project ‘earns’ for the business. IRR is expressed as a percentage, and relates to the efficiency of the investment.

Let’s say you put your project budget in the bank and didn’t do the project. Instead, you just claimed the interest that the bank paid on the money. Your investment is safe, and you make some money back. But bank interest rates are pretty rubbish for the most part.

What if you did the project instead? The IRR calculation tells you what the ‘interest’ rate would be – it’s a different way of looking at the way project’s generate return. If the IRR is better than what you’d get in a bank, then the project is worth doing. If the IRR is less than what the bank could offer, you may as well save your time and effort and put the cash in the bank – assuming that financial returns are what you want to get.

Net Present Value (NPV)

NPV is really useful, because it helps you work out project financials as they relate to what money is worth today. A positive NPV is what you are looking for: that translates as the project forecasts being worth an amount that generates future cash at an acceptable rate.

NPV targets, minimum rates and discount rates may be set as industry standards or by your finance team, so check how if there are any specific variables or values you are expected to consider in the calculations (or better still, get a finance person to give you a template where you just plug the project forecasts in and get the NPV out). NPV is expressed as a financial value.

Return on Investment (ROI)

This measure relates to the project’s financial return given the investment made to deliver the project. In the business case or financial documents, it is expressed as a percentage of the total anticipated project cost, often including the Year 1 to 5 opex or running costs too, but the exact calculation will depend on the criteria set by your finance team.

ROI is a way to clarify what the business gets back from its investment. Typically, the higher the ROI, the better, as it means that the company is going to receive more income from the investment and it will pay off in a better way.

How much do you really know about that supplier you are thinking of using on your project? They’ve sent you a quote, and you’ve got a nice glossy presentation with photos of their account managers, but what’s it really going to be like?

In this video I share some of the things I’ve found important when starting a relationship with a new third party – in fact, before the relationship even gets going it’s important to ask these questions.

If you prefer to read, there’s an article here on what to check before you sign on the dotted line: What you need to know about your supplier.

If you’re a video kind of person, and you want to hear my personal experience, then click Play on the video below! Let me know in the comments under the video what else you consider when you are assessing what organisations to partner with for project delivery. I’m sure you’ve got some great stories too!

There are loads of different ways to estimate, from looking back over past projects and using that information to help you work out what this new project might need in terms of resourcing and costs to detailed modelling techniques and more.

You probably use a bunch of different ways to estimate, depending on what you are estimating and how much information you have about the thing being estimated. But did you realise that estimating techniques fall into three categories?

Two of those are the ones you probably studied on your project management courses: quantitative and qualitative. The third is a category that you might not have come across unless you work with agile or iterative techniques: relative estimating. Let’s have a look at each of those.

Quantitative

Quantitative (I hate typing that word!) is a way of estimating that relies on you having data and numbers to be able to make a definitive, mathematical estimation of how long things will take or how much they will cost. As the name suggests, this type of calculation is based on quantities. If you know how many of something you need (resource hours, bricks, units, etc) then you can work out the cost because you know (or can find out) the price for a single item.

Of course it’s not always quite that simple. If the cost of a brick is 1p, and you need 100,000, you might get a discount on such a large quantity. But basically, these types of estimating are quantity- driven.

Types of quantitative estimating include:

• Analogous estimating
• Parametric estimating
• Bottom-up estimating

And you may have other techniques you use on your projects that rely on the same kind of approach: find the numbers that relate to the tasks and use them to extrapolate the total estimate for the project based on amalgamating all the figures for all the tasks.

Qualitative

Qualitative estimates are data-led. You don’t necessarily have quantities, so you need other ways of working out the time/cost. For example, how long will it take for the subject matter expert to update the policy? There’s an element of research in there, plus an approval process, and the time to write up and publish the new policy. That’s hard to quantify in terms of hours because it’s knowledge work, and we don’t use our brains in simple to understand units. You might get a burst of policy inspiration in the shower, or you might need a couple of days to let the ideas mull around in your head before you sit down and write the updates in 20 minutes.

Types of qualitative estimating include:

• Expert judgment (that old favourite: the educated guess)
• Observation (basing the estimate on what you see)
• Interviews (another form of expert judgement: getting info from other people)
• Surveys (sourcing info from the wisdom of crowds).

These are all suitable types of estimating that are OK in specific circumstances, and we do need a range of ways to size project work.

Relative

Finally, we come to relative ways of estimating. They are relative in relation to each other – the project tasks. I wouldn’t say these were particularly reliable techniques for estimating project costs (beyond resource time if that is chargeable) because sponsors tend to like actual figures for budget forecasts, not a statement about whether an activity is more or less expensive than something else. However, that could be useful information for a prioritisation exercise as it would help them understand what they could get for their remaining budget.

Relative estimating, when used for sizing project tasks, is about comparing the effort involved in doing the work to other tasks also on the table.

Types of relative estimating include:

• Planning poker or T-shirt sizing
• Affinity grouping

I use T-shirt sizing with my own work, although I don’t truly work in an agile environment. It’s a case of looking at the tasks (which, in an agile environment would be user stories) and deciding whether the effort involved is big, medium or small. In a team environment, we’d be doing that together but as a way to structure my To Do list, I do the exercise alone.

All of these types of estimating have a place in your toolbox and they offer a selection of ways to think about and plan our work. It’s easy to fall into the trap of thinking you have to use the same estimating method for every task on the project but you really don’t. Estimating approaches should be tailored to the task/activity/item. For some, parametric will be the standout winner and the most relevant way of working out the time required. For others, you’ll be relying on expert judgement or using planning poker to get a view of effort. Pick and mix your approaches from the three categories and you’ll end up with a rounded, appropriate way of planning your work.

Which of these categories do you use the most? Let us know in the comments below!

Time-phasing your budget is not the most exciting part of project management for most people (oh, is it just me??) but it’s so important if you are going to use EVM on your projects. EVM lives and dies on being able to compare PV, EV and AC over time – that’s how you work out whether your project is on track. The performance metrics and reporting are fundamentally based on those measures, so if the data underpinning them is wrong… well, your whole set of EV reports are going to be pretty pointless.

That’s why time-phasing is important. You should be able to pinpoint when the money (and effort) is going to be spent in order to plan out the work. Then your PV (Planned Value, but you knew that, right?) is an accurate representation of the baseline budget and how that is spread over the life of the project. PV is also a major part of the EV calculations, so if you get it wrong, the numbers coming out in your EVM reporting are not going to reflect “real” project progress. And that doesn’t even take into account any errors in capturing Actual Costs.

Normally on projects – at least the ones I’ve worked on that have not used EV – we know the budget, and we might have a broad overview of when that money will be spent. Monthly budget checks allow the team to stay on track, but generally as long as the numbers look OK and we’re still within tolerance of the forecast, that’s enough. In an EV environment, that’s not enough. The budget has to be split over time because that is how you track performance and variances.

Here are some examples of situations where the team might find it hard to get the information correct during the planning phase.

Too many Level of Effort work packages

Work packages are the bread and butter of EV: each work package contains the information to deliver, monitor and control the work, along with time and budget estimates. However, level of effort work packages don’t have any special information: basically, you just split the cost evenly over the work package. This is perfect for activities that are hard to track like ‘project management activity’. I always have difficultly apportioning my time on a project as sometimes it’s more, sometimes it’s less, and I never count the time thinking about the project on the bus or while I’m cooking dinner. It’s hard to truly estimate what it takes to do the project management on a project.

However, if you have work packages that could be tracked differently and are not, because it’s too hard or you are too busy to come up with a better way, then that is going to skew the overall reporting. EV is all about the details!

Accounting for large costs

Let’s say in one work package you need to buy a whole lot of computers. We had to do this on one project and most of the cost was incurred in a single month, because bulk buying is obviously more cost effective than buying PCs here and there throughout the project. I attributed all the costs in the month that we spent the money, but the finance team apportioned the costs across the project evenly based on the depreciation of a capital asset. From then on our reports did not match up. That’s not specifically to do with EV, but it goes to show how different ways of apportioning costs can create an issue with reporting.

If you have a large cost coming up, that’s going to skew your EV reports. Consider the impact that will have and whether there are other ways to reflect that so your performance metrics stay true to reality.

Time management

The simplest situation that creates an issue with EV reporting on a time phased basis is simply not doing the time phasing. For example, you haven’t allowed for there to be more effort required at the start of the project or during project testing, in comparison to the steady state of delivery during the execution phases.

Time-phasing needs to reflect the way that EV is credited to the project too, as not all work packages will use the same approach. I’ve written before about ways of tracking effort, using split milestones (like counting 25% of the work complete as soon as it begins, then 50% when you hit the halfway mark and then 100% when the work is done). If the EV is “supposed” to be phased more evenly than that, you will get blips in the reporting.

That’s quite a simplistic way of explaining it but I’m sure you see what I mean.

Overall the take-home message from today is: make sure your PV is time-phased in an appropriate way that reflects how EV is being credited to the project. Easy, right?

It’s holiday time! I do love December, even though the evenings are now so dark here. Perhaps that’s why it’s so special to be considering things to do to brighten up the mood. Last year was a bit of a wash out in terms of team celebration. We would have normally gone out, and we did nothing (along with the rest of the world). This year, while we’re still a virtual team working from home, perhaps we’ll have the opportunity to organise something a bit more fun. I’m thinking a virtual escape room? There are quite a few that have popped up over the past 12 months and the opportunity to do something together that isn’t work is quite appealing.

The infographic below shows some things to think about when you are planning festive celebrations for your team, if you intend to do something to mark the end of the year. Over here, we can take a Christmas theme, but if you don’t celebrate Christmas, think about how you can join in with the festivities relevant to you – or just celebrate getting through another 12 months!

My top tips are:

Plan early and get your booking in soon as many people this year will be attempting to organise something to make up for last year when teams weren’t able to get together in the same way.

Think beyond meals out: restaurants are one option but there are other things you could consider as a team, like an escape room, for example.

Send holiday cards to your team and supplier. I have digital templates every year that do the job – message me if you would like them.

Include the whole team. If someone on the team doesn’t feel ready to go out into the world yet and meet up in person, then I believe the team should adjust the celebrations to revolve around activities that everyone can do.

Know your tax: In the UK, there is a limit to what employers can spend on team gatherings for the holidays. Anything more than that and there is a personal liability involved for participants, and trust me, no one wants to get taxed on the “fun” office party. Talk to your manager or finance team if you think that’s an issue for you. In my experience, it tends to be a problem if there is a corporate event and you also want to do something as a project team, as that means some people are effectively attending two events.

Have fun! And best wishes for 2022 😊