Project Management

The Money Files

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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.

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The Psychology of Estimating

James Lea, founder of Project Science, spoke at EVA 26 earlier this year. He talked about the psychology of estimating. “People,” he said, “are just as important as the techniques and data.”

He went on: “Plans and estimates are built by and used by people. Psychology matters.”

The talk was very interesting, and here’s what I took from it.

He started by asking us our experiences of estimating and the emotional responses we had at the time. Think about your own experience of estimating. Did you feel:

  • Under pressure?
  • Worried about how the numbers would be used?
  • Unsupported by colleagues
  • Unsure what the estimate was for?

That’s all (unfortunately) normal, and we all nodded along as he talked.

Challenge how will estimates be used

James talked about how we should challenge how estimates should be used. “Uncertainty drives variable reactions in our teams,” he said. “It drives emotions and responses.” If you are open about how estimates are going to be used and how they should be used, that can help people feel more comfortable with the process.

Make estimating positive

How can we enable our teams to experience planning and estimating as a positive, creative experience? Instead of the stressful, “I suppose I can give you a number,” experience that it is mostly?

It’s hard for an organisation to accept that it doesn’t know the answer, and that can sometimes lead to a poor experience of the estimating process for the people involved.

Here are some ways he suggested we could turn the experience into a positive one:

  • Develop the models
  • Turn the work of an individual into the work of a team with reviews
  • Use the past as a guide to future performance
  • Frame everything as a change
  • Refine the estimates.

Creating a route to predict the future

James talked about asking the question about whether we have a route to predict whether the estimate is a robust one or not. We need to understand what is in and out of our control. Where things are out of our control, accept that and track it.

Estimates are only a guess without a map of how you got there and a set of viable routes.

We often hear that people can’t estimate where there is no historical data. Well, data science should make it easier now to estimate from past performance and the vast tracts of data we store about projects. If leaders can give teams the data, in a way that helps with estimating, that should make our estimates better.

Building defensible plans

James talked about showing your workings and documenting the bases of estimates. Steve Wake, the conference chair, shared his thoughts too, namely that the audit office regularly says people don’t know the basis of estimate and therefore the best ‘proof’ that your estimates are good is that you can justify them.

He talked about bounding your plans carefully, describing the world around the estimate as well as the estimate itself to provide rigour.

He suggested we quantify and compare with data science, applying risk appetite to the delivery methodology to round out what we know.

That, and the other points discussed, are ways to shape the emotional response and create a safe space for people to estimate their work.

What do you think? Let me know in the comments below.

Posted on: June 21, 2022 04:00 AM | Permalink | Comments (4)

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)

Comparing Management Reserves and Contingency [Infographic]

Categories: budget, contingency

Budget “overs” are a way of filling the gaps in your budgeting process and acting as a safety net for when things go wrong, right?

Not exactly.

Management reserves and contingency reserves are two very specific types of “extra” money in your project budget. They both have distinct roles to play in helping the business achieve the deliverables in line with the forecasted expenditure.

In this infographic I summarise the differences between these two different types of funding. Personally, I think contingency reserves are the more useful as they are tied to a specific event so they help improve risk management as well. What do you think?

You can read more about some of the ideas on this infographic in this article.

Posted on: September 06, 2018 04:58 PM | Permalink | Comments (13)

9 steps for asking for a budget increase

Categories: budget, contingency

You’ve looked at the budget tracker and – to your dismay – you can’t make the figures balance. At the current run rate you will be overspent by the end of the project. You are forecasting to be over by way more than your project sponsor has agreed in terms of tolerances. There’s only one option: you need to ask for more money.

Asking for a budget increase isn’t an easy thing to do. For one, it’s embarrassing, especially if you were involved in putting the budget together in the first place. You’ve got to admit that you got it wrong. Here are nine steps to handle that difficult conversation with your project sponsor.

1. Be honest

You can’t hide at this point. Make sure that you are working from a position of clear, transparent, justifiable data.

2. Get time with your sponsor

Don’t do this over email. Even over the phone is pretty bad. If you can, get time with your sponsor to meet them face-to-face. If necessary, book it through their PA and confirm the day before. You can do this as soon as you know you are going to need the meeting, and ask to see them as soon as possible. Your budget position is only going to get worse, so you need a steer from them about the project financials as soon as you can.

Give yourself time to work out the position and prepare some alternatives but ideally you’ll want to meet them quickly.

3. Sort out your estimating

You need better estimates. Most likely your project budget is over because you:

  • Forgot to include key elements of work
  • Didn’t estimate properly and several tasks are costing more than initially expected.

Estimate, and then include proper contingency reserves if you do not have confidence in those estimates.

4. Prepare a new budget

Use your new figures to revise your budget. Go back to basics. Start from scratch and do the whole thing again. There may be some elements you feel confident enough to keep but at this point nothing should be without challenge.

Why?

Because if you are going to back to ask for more cash, make sure you only do it once. Once is excusable – kind of. Twice makes it look like you don’t have a handle on the work involved and it undermines your professional credibility.

5. Prepare your rationale

You may be more interested in securing more funding, but your project sponsor is going to want to know why you need the money. Work out your arguments in advance, and make sure they are good.

You should be able to articulate why you are overspent (remember point 1 about: be honest and if you messed up, say so). Stay factual, and avoid apportioning blame even if it is really tempting to mention that you got a bad deal from a supplier.

6. Prepare some alternatives

Could you stick with your existing budget but deliver less functionality? Or deliver the same functionality over a longer period of time, perhaps with less expensive or in-house resources? Or deliver some functionality with the extra funding but not everything?

Come up with some alternatives to the whole amount so your sponsor has options. Be aware that one option is to cancel the project completely.

7. Prepare your sponsor

Don’t let your sponsor believe you are going to meet them to tell them that all is well. Nobody likes surprises, and in my experience, project sponsors hate them more than most! Send over a briefing pack for them to review in advance of your meeting, including the alternative options if securing the full amount of additional funding isn’t an option.

8. Hold your meeting

Meet your sponsor. Clearly present the current project situation and the financial position. Clearly explain what cash is needed to keep the project moving forward and why that is required. Give a level of confidence about how comfortable you are that these figures are now accurate and what is needed to complete the project on time and to the existing scope.

Talk to them about the additional options that you have come up with and ask if they see any further alternatives that would deliver business value but keep within reasonable cost.

Ultimately, your sponsor will make a decision about what to do next. The exact answer you get will depend on the situation and how far along you are in the project but it’s likely to be something like one of these:

“Here’s the extra funding. Carry on.”

“Here’s a portion of the extra funding. Let’s work out how much we can deliver with this.”

“There is no more funding. Work out what you can deliver without more money.”

“This project is no longer viable. Please shut it down and salvage what you can.”

9. Act on your sponsor’s decision

Your sponsor has spoken. Now it’s your turn to follow through. Obviously what you do depends on what route they have chosen as the most appropriate one for your project. Whatever the way forward, you should explain the situation to the project team so they are fully aware of what is going on.

Nine steps might sound like quite a lot but it’s an involved process that you need to get right. Have I missed anything out? What are your experiences of having to ask for more money to complete your project? Let us know in the comments.

 

Elizabeth also writes the blog, A Girl’s Guide to Project Management. Find her on Twitter here.

Posted on: February 22, 2015 03:20 PM | Permalink | Comments (6)

Management reserves and contingency reserves: what’s the difference?

Categories: accounting, contingency

Picture of cashDo you have contingency on your project? In Eliyahu Goldratt’s book Critical Chain he calls it safety, but whatever name for it you use, most projects have an element of budget provision put aside in case of emergency.

Let’s start with a definition of what management reserves and contingency reserves are, taken from Michel Thiry’s book, Program Management.

Contingency reserve: “a planned amount of money or time which is added to an estimate to address a specific risk.”

Management reserve: “a planned amount of money or time which is added to an estimate to address unforeseeable situations.”

Can you see the difference?

Contingency reserves

When you work out the contingency reserve for a task or project estimate, you do so based on project risk. How do you want to respond to that risk? Most times risk responses require cash or extra time to put a plan in action. The amount of contingency allocated depends on the risk and also on the risk response.

As contingencies are linked to particular risks, if the risk passes and is not realised, the need for the contingency goes away. That means returning the cash, or taking any extra time out of the task schedule. You don’t get to keep the contingency ‘in the bank’. If you feel that you need to, it’s probably because another risk is looming on the horizon. If that is the case, you should increase the contingency related to that risk and make your plans accordingly. It is OK to change your contingency strategies as you go forward with the project – after all, as you get nearer to a particular risk event you find out more about it and have more knowledge about how you would deal with it and that is quite likely to change your response.

Management reserves

Every project could do with one of these! However, in my experience few projects have them. A management reserve is a pot of money of a size that is based on the overall uncertainty of the project. For example, if you are doing an innovative project that your company has little experience of, you would want a big pot of money (or time) as your reserve. If you are working on something relatively straightforward, perhaps something that your company has run several times before, you wouldn’t need such a large amount or in some cases any amount of management reserve at all.

Management reserves are generally calculated using that well-known finger-in-the-air method, although it would be good to think that they are scientifically worked out based on the experience of the company and historical data extrapolated from previous relevant projects both at your company and across your industry. However, it is more likely that you just guess.

Management reserves are only used in emergencies, and that is the reason (in my opinion) that many projects don’t have them. The default for projects without management reserves is to go back to the project sponsor, explain the situation and ask for more cash, or more time. If you can do that anyway, what’s the point in having a management reserve? You still have to ask permission before you dip into the reserve, so the actual process for getting your hands on the money or authority to change the delivery date is the same.

A management reserve means that at least the money is put aside for you, and you avoid the situation where the project sponsor says that there is no additional budget available for your project – in which case you’d be stuck finding a way to deliver what you needed with the available money, which would probably involve changing the timescale or compromising on quality (the classic iron triangle constraint).

You don’t give back what is left of your management reserve when the crisis has passed. The pot stays active until the end of the project, although you may find that towards the end of the project when you have more certainty about how things will unfold, you can give back some of the money or use it for something else.

Now that you know more about management and contingency reserves, do you have these on your projects?

Posted on: August 26, 2012 12:11 PM | Permalink | Comments (10)
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