Keeping Your Project Within Budget
By Bruce Beer, PMP:
Note: This is Part 2 of the Keeping Your Project on Track series. Click here to read Part 1, Keeping Your Project on Time.
The first in this series of “Keeping Your Project on Track” dealt with how to keep your project on track with regard to time. Now let us turn our attention to one of the other key baselines – cost. If you have ever managed a project that has come in over budget you may already realize that this is not entirely or fully appreciated by management! So, how do we keep within budget?
Before we can hope to keep within budget, the first thing we must do is to set a realistic and comprehensive cost baseline, or budget, to keep within. Everyone knows that one of the key elements of cost is the cost of your resources. Most of us know that to determine this cost we need to identify ALL scope, create a Work Breakdown Structure once we have identified all deliverables, break deliverables down into activities, allocate a resource or skill level to that activity, then estimate a duration. At this stage we can calculate a cost for each activity by multiplying the daily rate for the resource due to perform that activity by the duration. Once this is done for every activity (strongly suggest you use a scheduling tool such as Microsoft Project or similar) we can aggregate all these costs into one overall cost for the project – a bottom-up estimate of resource costs.
What many people don’t realize is that this is NOT the budget – there are other costs involved to create the budget, and some can be significant. These include items such as:
- Project Management/PMO costs
- Subcontractor costs
- Outsourcing costs
- Cost of quality (design, measurement, hardware, software, testing, inspection, etc)
- Risk contingency
- Cost of communication (time to create, disseminate, read, respond, etc)
- Costs of hardware, software, applications, tools, etc. you require to complete the project
- Cost of facilities and utilities, etc. if they are allocated to your project
- Travel costs (transport, accommodation, living expenses, etc)
Once we have identified all estimated costs for the project based on a firm solid knowledge of scope, we need to ensure the unexpected does not come along and rock our financial boat. Two key elements that can throw our carefully created cost budget off track are additional costs due to risk and changes.
To ensure we have allowed ample funds for known risk, we should ensure good risk management practices are followed – identifying as many things that can go wrong as possible, allocating the relevant amount of contingency funding for each, then combining these into a project risk contingency fund.
Change itself is often good for a project – it can breathe new life into a project, improve functionality, and generally make the end result better. However, the downfall of many a PM is the dreaded “scope creep” or uncontrolled change. Each PM should have access to their company’s formal change management methodology, or if there is no such thing, create and distribute one to all stakeholders. Everyone should know that if they want a change they should request it in writing and give it to the PM (always the PM, never anyone else). The PM will log the request to enable them to track progress, ensure an impact analysis is completed detailing any additional scope, time, and cost required to implement the change, then give this to someone who is qualified to authorize the change (normally the customer). Providing a PM does not implement any change at all without prior authorization, their project (and probably career), are as well protected as possible.
In the final reckoning, when managers ask whether the PM has met their cost targets, the PM should add all the authorized additional cost of changes to the original budget and compare that to actual cost. Providing the PM has done a good job on risk contingency planning and rigidly enforced change management, they should be looking for promotion, pay raises, bonuses, appreciation from your management, and an enhanced reputation. Failure to identify and cost all scope to be included in the project, failure to identify and allow for risks that can try and throw you off track, and failure to manage change correctly will certainly lead to all things unwanted, like over time and over budget project delivery, and long waits in the employment agency whilst looking for your next job.
Once a PM has identified the budget correctly allowing for risk and rigidly controls changes, then regular monitoring of costs during the lifetime of the project will enable identification of problems at the earliest opportunity. So what do you do if, despite excellent planning, costs start to exceed estimate and you can see defeat staring you in the face? If this is a cost driven project where cost is the priority, the first step would probably be to remove some scope until costs come back under control. When defining scope you probably defined the “must haves”, the “wouldn’t it be nice ifs” and the “bells & whistles”, so when looking for some scope to remove, we can look first at the bells & whistles, then possibly at the wibnis. Using Earned Value Management throughout the implementation of the project would help identify cost issues as early as possible, thereby enabling you as PM to step in and start corrective action as soon as possible.
To summarize, the key to bringing projects in on budget are:
- Good scope definition to ensure everything is included during cost estimation
- Good estimation of ALL project costs, not just team resources
- Good risk identification, quantification, and contingency funding and planning
- Very tight change management throughout the project from all stakeholders (including the customer!) such that no changes are implemented unless correctly authorized
- Regular cost monitoring during the life of the project, resulting in prompt action to correct slipping costs and bring the project back on track.
