Project Management

The Money Files

by
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 GirlsGuideToPM.com.

About this Blog

RSS

Recent Posts

3 Ways To Be More Strategic As a Project Manager

Introducing The Public Sector Advisory Community for Estimating

Setting Up Programme Budget Tracking

Quick Tips for the Testing Phase

Programme Management: Planning Your Finances

Programme Management: Planning Your Finances

Last month I looked at what you need to consider when setting up programme financial management, drawing on The Standard for Program Management, Fourth Edition (2017).

Today I wanted to write some more about financial planning at programme level (as we would spell it here in the UK), again, using The Standard as the foundations but sharing my experience as well.

The financial management plan for a programme

The Standard talks about having a financial management plan which is made up of:

  • Funding schedules and milestones (financial timeline)
  • Initial budget
  • Contract payment and schedules
  • Reporting activities and how reports will be managed
  • Metrics for reporting and controlling finances

This all fits into the overall programme management plan, but could be a separate document.

The document is supposed to outline a lot of information about how money will be managed during the work. It should go into detail about:

  • How risk reserves will be accessed and used
  • How the programme will deal with financial uncertainty e.g. international exchange rate fluctuations, changes in interest rates, inflation, currency devaluation etc
  • How the programme will deal with cash flow problems and if any are already identified
  • What the local laws and compliance regulations are and how these will be met
  • Incentive and penalty clauses in contracts.

In addition, as with all plans, you should include how the budget is going to be approved and what that authorisation process looks like.

In my experience, we did not have all this written out, although we did have a Finance team who were very much on the ball and probably had considered it without making it my job (thank you, wonderful Finance Manager!). In addition, the detailed technical budgets, which represented most of the cost (aside from staff) were put together by the technical architect, and were comprehensive. By the time it was my turn to look after the numbers, the paperwork seemed solid and it was very much a tracking exercise. I can’t take too much credit for the planning effort.

We were using international resources so the currency issue was very much relevant, and so was the risk reserve because we were doing something new to us with a high degree of uncertainty.

To be honest, I’m not sure we had a formal process for risk reserves either. Contingency had been added to the budget, but we did not allocate budget to risk management activities on a per risk basis. Given the scale of the investment, that was probably a mistake! I don’t recall any terrible dramas happening as a result of not having funding assigned in that way, even when the programme timeline was extended.

Contract payment schedules were documented in the contract instead. Our legal team bound up the contract and relevant schedules into little A5 booklets and I had one that sat on my desk and became my go to reference for all things to do with service level agreements, contract expectations and when I had to approve certain milestones to issue payments.

One time, I issued the payment notification and requested the funds be paid, but I had not warned Finance such a large request for cash would be coming so the actual payment was delayed a few days. That taught me I needed to start my process earlier so that Finance had notice that a large payment was due as part of our contract schedules.

Planning at a programme level feels harder because there is generally a bit more uncertainty, the timescales might be longer than your average project, more people are involved, and the numbers are higher. However, it’s never one person’s job. As you come together as a team, experts can provide their input to make sure the final result is something the governance team, finance team and programme management team can be confident with.

Posted on: April 12, 2022 04:00 AM | Permalink | Comments (2)

What to do about sunk costs [Video]

Sunk costs… what a headache when it comes to decision making. In this video, I talk about what they are and why they are a problem. If you don’t feel they are a problem for you as a project manager, then all credit to you!

In summary, sunk costs are those that have already been paid out. They are budgeted expenditure that has already been committed – the company can’t get those funds back. I agree they absolutely that this expense shouldn’t cloud your judgement, but unfortunately not everyone in the project sphere feels the same way and often decisions are made with sunk costs playing a large part in what next steps are taken.

In my view, project sponsors who feel that saving face is more important than business value are most at risk from making choices that perhaps wouldn’t stand up to too much audit scrutiny when the project is reviewed for benefits in a couple of years’ time post-delivery. Having said that, everyone is at risk of feeling invested when they have poured effort into working on something.

We have to work really hard to make sure that sunk costs, and the emotion attached to a project, don’t play a part in tough decisions about the project’s future.

Watch the video and then share your thoughts in the comments below: am I right, or is there more to it? Can’t wait to hear your views!

Posted on: March 08, 2022 04:00 AM | Permalink | Comments (7)

What is budget variance?

If you’ve been working in project management for some time, you might be familiar with the idea of variance. However, new project managers, or those who haven’t had to prepare financial information about their projects before, might find the idea a bit harder to get their heads around. Keep reading – this is for you!

I was speaking to one such project manager recently. While she had a ton of experience, she hadn’t needed to provide financial information for her projects as it wasn’t part of her stakeholders’ expectations. When the costs are mainly internal resource, many companies don’t require project managers to work that out in money terms. We tend to just estimate in days or some other unit of time and that’s good enough.

However, there will come a point in your career where you will most likely be asked to start crunching budget numbers for your projects. As you move into environments with greater levels of project management maturity, for example, it becomes more important to track things across projects in a standard way.

Budgets for money are the same in principle as budgets for time: you still need to work out how much you need and how much you are using, just like you would for time tracking on a project where you are only estimating in person hours/days. There’s another ‘however’ coming though…

However, in many organisations, including those where I have worked, it isn’t always necessary to track time. You create a project estimate at the beginning that states how many hours etc are needed from a resource in order to secure that resource, but after that, people are simply expected to manage their own time and the project is expected to conclude on the day you said it would. Timesheets don’t feature.

So, moving from this loose ‘we make a guess at how long things will take and go from there’ environment to one where you are expected to submit project reports with variance figures each week can be quite a challenge!

Luckily, the maths is not complicated and while it might seem daunting (especially if the numbers are big), variance is easy to track.

Budget variance

Here’s how to calculate budget variance.

Variance = Actuals + forecast – budget

In other words, you add up what you’ve spent so far with what you still have left to go, and compare that the original approved budget. The difference is the variance and shows whether you are under or over spent.

At the very beginning of the project the actuals are zero as you haven’t done anything yet. Each reporting period, simply pop the actuals into the right column and adjust the forecast down. Assuming you are on track, that is!

If you aren’t on track to hit your original estimates, you should be reforecasting the still-to-do work and noting those figures in the forecast column. Forecasts can change for lots of reasons including:

  • The team created estimates that were based on assumptions that haven’t held true
  • The team wasn’t very good at estimating
  • More work has been added to the project as the result of a change request
  • Work has been removed from the project as the result of a change request
  • Resources have changed and now you are working with someone less experienced who will take longer to do the tasks
  • Something else!

If you keep your forecast and actuals columns up to date, the rest is easy!

Tolerance

Normally there would be some tolerance agreed for the variance. For example, being under or over by 10% of the budget is OK but anything over that needs escalating to management or a change request etc.

Setting tolerance with your project sponsor will prevent you from having nightmares every time your project report says you are a few percentage points over budget.

How to get started

Make a spreadsheet that has the various columns. The simplest way is to have one column per field (actuals, forecast, budget, variance) and note the figures overall. As you get comfortable doing that, you might want to break them down by month to get a better idea of how things are tracking over time.

Once you’ve played with your project’s figures and have put together a spreadsheet to track them yourself (I recommend doing that instead of starting from someone else’s template so you can see how they fit together and what sums sit behind the columns) then you’ll get used to working out the numbers in this way.

I’m not a maths whizz by any means and I can manage it, so I’m sure you can too!

Posted on: February 24, 2022 06:19 AM | Permalink | Comments (5)

Maintaining the Performance Measurement Baseline in Earned Value Management

The Standard for Earned Value sets out an approach for scope management with the goal of maintaining the performance measurement baseline. You need to keep the integrity of the baseline, otherwise there is no point in having it to measure against.

And given that change happens, you need a plan for dealing with those changes. I was interested in finding out why there needed to be a separate scope management process in the Standard. Perhaps you manage change differently if the project uses EV methods?

I suspect you don’t – but you do need a way to tie scope changes back into the time and cost baselines so your EV metrics don’t go off track.

Read along with me as I dig into this Chapter of the Standard and uncover what’s different about managing scope in the world of earned value (it’s Chapter 10, if you are interested).

Inputs

There are four inputs to this process:

  • The project management plan – in particular, the performance measurement baseline and the integrated change control process
  • The performance measurement baseline. So important they mention it twice – in the plan above and in its own separate called out line!
  • Change requests – because we’re talking about what happens when a change happens
  • The integrated change control system – this is the process for change control. Is a process really another input to a process? I get that having a way to evaluate project changes is important if you want to evaluate a project change. Let’s assume this relates more to the tech, decision making framework etc.

So what do you have to do with those inputs?

What to do

There are three main things that need to happen as part of this process.

First, the change should be analyzed. The Standard suggests that a Change Control Board is convened to do that. I think the CCB is a really useful group and we relied on it in my last job. Our CCB looked at operational and project changes so the team could see the impact of ‘normal’ changes as well as the project-related ones.

I think this really needs to be done, at least at an introductory level, before the CCB gets together – otherwise what will they talk about? In reality, all these things have to happen in a logical order because you might approve the change but then need to do the analysis of what happens to the project in terms of the work.

For example, you need to update the baseline and the WBS to incorporate the change. The tasks to be done are added to a work package, and in EV, the process for doing that is a bit counter-intuitive. The Standard explains you close the current work package and move the money to the new work package, along with the new budget for the new tasks. The rationale for this is to maintain the integrity of the cost variance while removing any schedule variance. Create a new control account and carry on.

Then, the cost and schedule baseline need to be revisited. That improves the correlation between the work to do, and the baselines for budget, scope and time.

All in all, there is a surprising amount of work required for handling a scope change in an EV setting. No wonder you get the impression that it’s hard to make changes and that there needs to be adequate planning up front to avoid extra tasks arriving later.

Outputs

The outputs from this process are:

  • Performance measurement baseline updates (let’s hope you have the tools and support to make this part easy)
  • Project management plan updates (review the WBS and dictionary, plus anything else)
  • Change request status updates (update the change system to note what was approved/rejected etc).

I read this chapter and was surprised. I mean, not surprised that you have to do scope control or update the baseline, but surprised at the admin involved in re-aligning all the different aspects of the performance measurement baseline. I suppose I knew that it needed to be done hypothetically, but I had never unpicked what it would look like to have to do that work.

I have a new respect for schedulers and project control managers.

Not only do you need to deal with the change and incorporate the decision to do it into the work (which all projects need to be able to do), there’s an added level of admin required to maintain the integrity of the EV reporting.

The Standard says, for example, “Budget must never be transferred simply to eliminate variances.”

Well, back in the day, I did exactly that. On a project (where we were not using EV), our overall capex budget was set. I had the flexibility to move money around within the different capex lines, as long as overall we stayed in budget. So I did. It meant the difference between hospitals receiving the kit they needed to work efficiently or not, and it was never large sums of money. The budget remained overall balanced, and no one really minded how it was distributed as long as everyone got what was needed and we knew where the cash was going.

I learned a lot about budget tracking from that project and I quite enjoyed it. I’m not sure I would have enjoyed it as much if I had had to incorporate EV reporting as well.

There’s a worked example in the book, so if all this doesn’t really make sense to you, or you can’t see the flow of the changes, that’s helpful.

Pin for later reading

Posted on: October 19, 2021 01:00 PM | Permalink | Comments (1)

What is Depreciation?

Categories: accounting

what is depreciationDepreciation. It’s something that you have probably heard about but might not be using day-to-day in your work as a project manager. However, if you are working towards the Project Management Professional (PMP)® exam, then you might already know you have to understand the basic concepts of depreciation. You might get asked a question about it.

Depreciation explained

So what is depreciation? I write a lot about different financial aspects of project cost management on this blog but I don’t think I’ve ever covered depreciation before!

Depreciation is a way to split the cost of an item over the life of the item. It is why some insurance companies will only offer you a like-for-like replacement after a loss. If your television is 10 years old, they will pay out on the value of the 10 year old set, not the cost of a new one (which is silly, as you are most likely going to buy a new one, not seek out one that is 10 years old – but that’s a different conversation!).

Depreciation is an accounting treatment that allocates the capital cost of a purchase over the life of the item purchased. If your goods have a finite lifespan – let’s say that TV was going to last you 12 years – then each year a bit of the cost gets accounted for. You are ‘spending’ the cost of the item over multiple years.

Straight-Line Depreciation

Straight-line depreciation has this name because if you draw the cost of the asset on a graph, you get a straight line. You depreciate the overall cost by the same amount every year, based on how long you say the asset will last (this part is accounting magic – your Finance team may have guidelines on how long an asset will last in the world of finance.)

Here’s an example.

Let’s say the lifespan of a computer is 5 years. You buy the computer at the cost of £5,000. First we need to workout the rate of depreciation. £5,000 divided by 5 years is £1,000 a year. That’s 20% of the total cost. So the value of the computer depreciates by 20% each year.

You can see how the straight line appears on the graph below.

straight line depreciation

Double-Declining Depreciation

There’s another type of depreciation to learn about too.

Double-declining depreciation works on the same principle, but the value declines doubly fast (as you can tell from the name). So in our computer example, the rate of depreciation isn’t 20% per year, it’s 40%.

But – you don’t take the flat 40% off each time. Instead, you take the 40% off the new asset value.

In the first year, you take 40% off the price paid, leaving us with £3,000. This becomes the new asset value. In the following year, you take 40% off again – but off the £3,000. That brings our asset value down to £1,800.

And so on.

When you get to year 5 in this example, you actually have £388.80 left. That’s the value of the asset at the end of its lifespan, and what you would want to try to recover if you sold it as scrap (note: don’t try to sell company computers as scrap, that’s now how to dispose of them!).

The graph of depreciation for our laptop now looks like this.

double depreciation

That’s quite a drop off in year one, and then it levels out a bit as it gets more and more worthless – you know what I mean.

Why you need to know about depreciation

Depreciation is a useful concept to understand when talking to finance people about the assets your project is buying or creating. It’s not something I use day to day, but you might come across it in financial projections for your projects, for example in the business case or forecasts.

Understanding the concepts will help you better understand the way your project is being costed and budgeted.

Pin for later reading:

Posted on: January 14, 2020 09:00 AM | Permalink | Comments (9)
ADVERTISEMENTS

"Consistency is the last refuge of the unimaginative."

- Oscar Wilde

ADVERTISEMENT

Sponsors

Vendor Events

See all Vendor Events