THE CHALLENGE OF PROJECT BUDGETS, COSTS AND CONTROLS

THE CHALLENGE OF PROJECT BUDGETS, COSTS AND CONTROLS

It is interesting that some projects require the project manager to take responsibility for the project budget, whereas others see this as something belonging to the sponsor company leaving the project manager solely to look at delivery.

I believe this can be a mistake if the sponsor organisation is not actually used to managing project budgets. In this article, we'll give some experience and analysis. Which I hope will be useful.

SCOPE OF BUDGETS, COSTS AND CONTROLS

First, let's consider the various types of project, budget and control that we might want to consider. At its simplest it is literally identifying the anticipated costs and comparing with the actual costs of project delivery.

More sophisticated models may require cash flow analysis so that we know that the funding is available when needed. And over the projected period of time, discounted cash flow to take account of interest rates and the future value of money.

Another thing to consider is whether financial control includes the internal costs and what rates to apply to these internal costs when measuring and monitoring the value of internal resource.

Some projects only consider the capital cost whereas others also the revenue expense of running the project and potentially the return on investment looking further into the future.

I often recommend that financial control also take account of the payment mechanisms. Managing payments against invoices, milestones, delivery or other agreed criteria.

Looking at projected ROI may be important if the expected benefits fall below the cost of the project there may be a point in time in which it is wise to terminate.

EXAMPLE ACCOUTING FOR TIME

Here is a simplified , anonymised but otherwise real scenario. A series of 10 workflows where to be delivered over 10 days for £10,000. After 8 days of discussion and debate 5 workflow are drafted but none complete. Would you traffic-light this as green (still under budget), amber (well behind schedule), or red (unlikely to be achieved on-time and on-budget)

Typically the vendor-supplier only looking at spend will flag this as green whereas the sponsor-customer looking at projections might colour amber or red. Sadly poor monitoring often means the budget is run dry before anyone notices there is an issue.

EXAMPLE ACCOUTING FOR SCALE-CREEP

Here is another scenario. A series of 10 policies and procedures are to be produced, under the supervision of the compliance subject-matter expert. Quickly the 10 documents become 20 and what was anticipated as quick guides of 2 pages become lengthy manuals of 20 pages. How much deviation do you tolerate and accommodate before you halt and renegotiate.

This is where written-down requirements greatly help in the identification of scope-creep, scale-creep or change. Typically, however the changes are small and incremental like a rising tide and its only on later reflection (and perhaps review of time and costs) that the situation if recognised for what it is.

EXAMPLE ACCOUTING FOR CHANGE

Straightforward change should be easy to manage insofar as it should be obvious when the contract for a pizza becomes a request for a cake, or the budget for a flat becomes the need for a house.

Here again up-front written-down requirements greatly help in the identification of scope-creep, scale-creep or change. However whilst the deviation from pizza to cake maybe obvious, the transition from diesel car to electric car may be seen as minor for the person focussed on the car, and fundamental for the person recognising the differences in design, development, delivery and cost differences between diesel and electric vehicles.

The above covers some important aspects of managing project budgets, costs, and controls with the emphasis on the potential disconnect between a project manager's perspective and that of a project sponsor, as well as the impact of scope creep, time management, and change management are all critical points.

Below are some other scenarios…

RESOURCE AVAILABILITY AND SKILL CHALLENGE

A project plan could be threatened when a key resource is no longer available or is reassigned. Or perhaps the required skill sets for a project are underestimated, leading to increased training costs or the need to hire external consultants, which may inflate the budget.

TECHNOLOGY OR MATERIAL PRICE FLUCTUATION

In technology projects, or those that require specific materials, a sudden change in market prices could affect the overall budget. This scenario could be particularly relevant when dealing with long-term projects.

UNFORESEEN RISKS AND CONTINGENCIES

For projects that involve considerable uncertainties such as construction or research & development projects, the actual cost could far exceed the budget due to unforeseen risks materializing. The ability to manage risk and have a well-defined contingency plan can mitigate these scenarios.

RECOMMENDATIONS

TRAINING: Both project managers and sponsors should have training on project financial management, ensuring that they are prepared to oversee this critical aspect.

RISK MANAGEMENT: A rigorous risk management process can help in identifying and mitigating risks early. This process should be integrated into the project management workflow.

CHANGE CONTROL PROCESS: A clearly defined and strictly adhered-to change control process should be implemented to manage changes effectively.

SCOPE MANAGEMENT: To avoid scope creep, it is essential to have a well-defined project scope from the outset, and any change to it should be approved and controlled.

REGULAR BUDGET REVIEWS: Regular and systematic reviews of the project budget should be carried out to catch any potential overspends early and take corrective action.

CONCLUSION

Managing project budgets, costs, and controls is a complex task requiring a strong understanding of financial principles, project management skills, and keen oversight. Given the potential risks involved, project managers and sponsors should invest in appropriate training, employ robust risk and change management processes, and regularly review project financials to ensure success. The scenarios provided illustrate the necessity of these practices, and highlight the need for vigilance in project budgeting and cost control.