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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Closing out a Programme

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Introducing The Public Sector Advisory Community for Estimating

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)

How to Prepare for a Project Audit [video]

Categories: audit, video

In this video I share a few quick tips for preparing for a project audit. It shouldn't be a scary event and yet some project managers still feel daunted by the process. I get it - it's time consuming and it does feel like you are in the spotlight for a while. But the outcome is worth it, as long as the process is robust.

Posted on: December 01, 2017 10:51 AM | Permalink | Comments (10)
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