Budget confidence vs budget optimism
Categories:
budget
Categories: budget
| Last time I wrote about the change of project management behaviour and skills needed as you shift from managing the early stages of a project and the latter stages, and today I want to take that a bit further. Project budgets also fall into the category of needing to be managed differently. They can be a little – can I say it? – optimistic at the beginning of a project. Your forecast, however well put together, might end up including an element of hope or luck as well as evidence. I think this is particularly true of knowledge work or unique technologies, and perhaps less true of projects where there is an element of repeatability or reliability, so let’s go with those ‘not-done-it-before’ projects for this article. Early in the year, the forecasts might have held water, but by the time we get to autumn in the northern hemisphere, we’re into Q4 and reality is here. This is the point where confidence needs to replace optimism. The difference between optimism and confidenceJust so we’re all on the same page with the terms, optimism assumes things will work out. Confidence is based on evidence, learning, and updated assumptions. Stakeholders can usually sense the difference because those senior leaders who are interested in the numbers will easily be able to judge if something is off. Sometimes, it feels like optimistic estimates hang around longer than they should, perhaps because people are reluctant to rock the boat or through fear of losing stakeholder trust (although what’s faster than losing it than leaving it too late in the year to do anything about needing more cash to deliver?) It could also happen as a result of relying on early plans that no longer reflect reality, so not through any nefarious means or insecurity, just not getting round to updating the schedules. What to look out forHere are some signs that optimism is driving your budget view. Watch for these and then you can start to address them to bring more confidence into your Q4 estimates and forecasts!Forecasts that stay flat despite changesHave you changed something on the project? You updated the forecasts, right? If you didn’t, you might be carrying invisible extra work.Risks described but not costedA long risk log but one that is completely detached from your budget is a problem. Can you work out which risks require money or time to manage and add that into the forecast?Heavy dependence on contingency without clear triggersHow healthy is your contingency fund, if you have one? Make sure there are clear guardrails on how to use it so you’re not whittling it away before the end of the year with no audit trail.Explanations that rely on future fixes rather than current evidenceYou might have seen this on projects in the past – project managers saying that some other project will deliver something that they need, or that we’ll fix it when we get there. Moving to confidence-based estimatingBy this point in the year you probably have a few changes, and if you’ve incorporated those you can use them as examples of how knowledge is improving the confidence levels of your forecasts. You can start talking about what has changed since the forecast and why, giving examples, and if necessary, asking for input on decision-making before you choose a route. This is a harder one because it puts the team under scrutiny, but you can also separate uncertainty from poor performance – call out where things changed because you didn’t know about them or are working in an unpredictable environment, in comparison to where things changed because someone did a poor quality job. Overall, involving sponsors in trade-off discussions early helps them feel like they are both being consulted and that they are shaping the decisions. And that can help them feel like things are under control – and hence there is more confidence in the estimates. Being realistic builds trust. Budget confidence comes from transparency and predictability, and there is still time this year to get your forecasts into good shape for year end, to avoid any December surprises. |
Who really owns the project budget? Clarifying financial accountability
If you work in a matrix environment, you’ve probably had this thought: who really owns the budget? I’ve certainly had situations in past roles where I’ve thought I could make decisions and then found out these were overruled, or held back from making decisions only to find someone else thought I was empowered to do so.  Budget ownership confusion is common, especially in matrix environments, and leads to weak financial control. It sometimes happens because people don’t know who has final sign off, and sometimes because people don’t want to take responsibility for fear of getting it wrong or overstepping. However, if there are assumptions about budget accountability but these aren’t made explicit, then how is anyone supposed to know what’s going on? It ultimately doesn’t matter where accountability sits, as long as the person who is accountable knows it is them, and so does everyone else. Typical budget ownership modelsTypical budget ownership models, in my experience, fall into three buckets: Sponsor-owned: Where all budget decisions run through the exec sponsor. PM-managed: Where you get given a pot of funding and are expected to manage it. Shared accountability: The hardest type, where there is a mix of what needs to be approved by the sponsor and what the PM can sign off. Different organisations adopt different models. In some cases, the sponsor owns the budget and the project manager runs day-to-day tracking. In others, the project manager has delegated authority within agreed tolerances. And it can differ between projects as well, so just because you used one model on your last project doesn’t mean it will be the same this time round. Risks of unclear ownershipWhen you don’t know who owns the project budget, you risk slow decisions and surprise overruns, neither of which are great for the project. When changes are needed, you should know who to go to for approval for the change, if there is a cost aspect to it. And definitely avoid surprises – I’ve never met a stakeholder who is happy to be kept in the dark about financial pressures! Clarifying financial decisionsWe can help the situation by clarifying financial decision rights early. Who approves changes that affect cost? Who decides how contingency is used? Who is accountable for explaining variances to senior stakeholders? These conversations can feel awkward (especially if the answer is, “you, of course!”), but they prevent much bigger issues later. And clear ownership doesn’t mean working without help. Good financial governance relies on collaboration between the project team, sponsor, and finance colleagues aligned to the project, maybe the vendor as well. When everyone understands their role, financial conversations become more straightforward. At least you know who to ask! Clarity on budget ownership reduces friction and creates space for better decisions, and it’s not that difficult to sort out. As part of project governance, these are the kinds of conversations to have early on, to make sure that you know who’s doing what, and in particular, what falls to you. Then you can plan your time appropriately so you’ve got time to focus on the financial management of the project in the right way. How does it work for your projects? Let us know in the comments whether you’re “in charge” of the budget or whether the accountability sits elsewhere. I’m sure there will be lots of variations! |
End-of-year budget scramble: Maximising financial efficiency
| OK, this might not be relevant to everyone reading, but sometimes project managers are left with ‘spare’ budget in December. How are you going to make use of any available funds – assuming you are not under pressure to give them back – to maximise project value. Here are some ideas.
Conduct a year-end financial review First, make sure your budget trackers and up to date, and that everything that should have been accounted for has been added on. That will give you a true picture of your actuals, so you can review the financial status of the project, including how much budget is left and what key areas need funding. If you need to move money around, talk to the finance team so that the right amounts can be journalled to the right budget lines to tidy up your accounting. Prioritise high-impact investmentsNext, think about where you could use leftover budget in the remaining weeks of the year to make the most impact. That could be new tools (testing software licences are always a win), training for project team members, especially if that will help them develop skills they will need next year, or risk mitigation activities. Perhaps you can buy a few days of consultancy time that will speed up a particular task? Perhaps there are licences that need renewing, or equipment that you could invest in? Perhaps you could talk to suppliers about getting a discount if you place an order now instead of in January – many suppliers have targets to hit at year end and might be open to negotiation. I think that spending money on training and certification is a good choice. It helps team morale as individuals see that their future is being invested in, and you get skilled team members who have the skills required to continue to support the project, or future projects. So my recommendation would be to look at investing here, in team development, if you aren’t sure what use you can make of additional funding. If you need to buy anything, make sure to get approval and move quickly before the year end deadlines. Don’t spend for the sake of itWe want to avoid wasteful spending. Be aware of what is going on in the rest of the organisation. For example, other projects might be struggling, and the most prudent thing is to always offer the money back to the ‘pot’ as a first point of call. In my experience, budget that is not spent is not carried over to the new year unless it can be accrued against a committed spend. In other words, if you have got £20k sitting waiting to be spent, there is a high chance that you will lose it unless it is spent on something. Talk to your Finance team to find out whether that is likely to apply to your budget, and what they recommend you do at this time of year. Work with Finance to reallocate fundsTalking of working with Finance – they are the guardians of spending rules and regulations, and they will help you maintain compliance and an audit trail for spend. They will know if it is possible to carry budget over – and it might be, if your financial year does not end in December. |
How to conduct a successful year-end project audit
Categories:
Quarterly Review,
budget,
financial management,
reports,
audit,
Scope Management,
Risk Management,
Lessons Learned
Categories: Quarterly Review, budget, financial management, reports, audit, Scope Management, Risk Management, Lessons Learned
| Are you thinking about year-end project audits? Perhaps your PMO is thinking about how to learn from the past year. Perhaps you want to set a good foundation for projects next year. Perhaps you just had a rubbish past few months and want a second opinion to see if there was anything you could have done differently to avoid the outcomes you got. Whatever your reason, many project leaders’ thoughts will be turning to audits at this time of year, so let’s talk about how to make the most of this exercise – it’s not as awful as you might be thinking!
Planning the auditFirst up, make sure the audit is planned in. Schedule it in advance to ensure key team members are available. Look out the documentation that is required, which is normally things like financial reports, scope changes, and risk logs. You’ll also want to make sure that the business case, project plan, and schedule are available, as well as any change requests that changed those, so the auditor can compare the original planned baselines to the current baselines. Key areas to auditSo what is your audit going to look at? Whether you have been asked to audit someone else’s project, or you want projects in your PMO to be audited, here are some things you’ll probably want to put on your checklist.
Identify lessons learnedThe main purpose of an audit is to review what worked, what didn’t and what needs to change (or be continued). So you can think of the output of the audit as a sort of lessons learned report. If you already have scheduled lessons learned activities, you can feed those in to the audit report. If not, it never hurts to have a lessons learned conversation with the team. Set the stage for next yearIf your project is running into next year, discuss how the results of the audit can be used to improve processes, define new standards or ways of working, and inform the next year’s project strategy. There might be some easy things you can do to change up how things work to make them more effective. Whether the outcome is a lot of things to change or the reassurance that you are doing everything right, it’s a good time of year to be reflecting on project management practice. Take stock of where you are and how far the project has come, and if an audit is offered, say yes! It really is a good learning experience. |
How to keep a business case up to date
| You’ll see that at various points in the project management lifecycle you are supposed to review the business case and check it is still fit for purpose, but what does that actually mean? What are you looking for? I’m not sure that continuing commercial justification of a project sits solely on the project manager’s shoulders, but you can do a first pass review and raise any concerns with the sponsor. After all, power sits with them to make changes to the project or cancel it, should it no longer be fit for purpose and likely to achieve its goals. Here’s what to look for when you do a business case review to check if the project is still viable.
Strategic alignmentHopefully your strategy doesn’t change that often, but if you’re managing a multi-year project or program, or you’ve just had some strategic change at the top, it’s worth checking to see that your project still aligns with the organisation’s goals. AffordabilityCan you still afford to do the project? In other words, have costs spiralled due to unforeseen issues, scope changes, requests from the client that have to be included because the contract was so vague they are saying you have to pay for it (of course, that never happens…) and so on. The challenge with assessing for affordability is that it then opens up a conversation about sunk cost. If you’re three weeks off finishing the project, it may well be worth the cost uplift to get you across the line. If you’ve got two years still to go, not so much. RiskinessLook at whether the riskiness of the project has changed. Hopefully as you know more, risk levels have decreased. But a portfolio manager would probably want to assess the risk of this project along with the risk of the portfolio overall, and if the whole portfolio risk profile has changed, there are some conversations to have. Look at whether your risk budget or contingency time in the schedule is adequate to cover the risk. If not, if you added more, would that make the project unviable? AchievabilityConsider whether you can still complete the work. Achievability might be challenged if key resources have left, deadlines have changed, a supplier has gone bust, or there are plans for a merger. Anything might affect your ability to achieve the plan as it is today. If you can’t achieve the baselined plan, would a replan mean other criteria for viability are not met? For example, you could achieve the plan with more time and more money, but that would mean the project would not be a cost-effective initiative. BenefitsCheck that you are still going to get the benefits, or enough of the benefits to make it worthwhile from a cost/benefit analysis. If the project ticks all the other boxes, it might not tick the box for benefits. For example, a delay in the schedule may push back realisation of the benefits to a point that undermines the business case. Additional resources pushing the price up will eat into benefits. Perhaps the project no longer represents value for money. Carry out these checks at key governance points and gate reviews. Highlight where there are issues to resolve, and come up with a plan if you can. Then discuss that with key stakeholders, the client and sponsor, and see if you can resolve any business case challenges without having an impact on viability of the project. Ultimately, if the business case is no longer viable, the decision is around cancelling the project – and that’s a tough conversation for everyone. However, if the business case no longer stacks up, cancelling could be the best thing to do. |
