Hey ho, hey ho, where did all the money go.. ?
If projects have one unpleasant side-effect, it is that they cost money. Because of this, it is an accepted practice to set up a budget for a project before we start on it. Estimates are given, numbers are shouted and before you know it, a shiny new budget exists. With all the pride of a parent, the projectmanager shows the budget to the projectboard for approval. If he's lucky, the budget gets a big cuddle. If he's not, baby-budget loses an arm and a leg.
Oddly enough, despite all the work that is put into this, most projects exceed their given budgets by miles. There are numerous reasons for this to happen. One of these reasons is very simple: Setting up and controlling a budget isn't easy. If you think it is, ask yourself this: How many times did you end up with less money at the end of the weekend than you thought you would ? The principle is very similar.
In this article, I want to have a look at projects and their financial aspects. We'll start at the basics, proceed to the pitfalls and end up at Heads Up Avenue. Trust me, this is fun. Really. Who knows, it might even help you prevent that nasty surprise at the end of the weekend.
The basics of budgets in projects
Before a budget is made available, a projectmanager is going to have to give insight in what the money's going to be used for. Most of the time, this is done based on estimates; how many hours are we going to have to spend on building application X ? What sort of hardware is going to be needed ? Will we need additional software ?
The project is scrutizined from top to bottom and every activity is given a pricetag. It's important to realise that most of these pricetags are nothing more than a rudimentary guess. For example, if our project would include hiring a consultant for 40 hours, we might think that the hourly rate for this consultant is going to be € 100,-. Our budget will then include a post for € 4.000,-, based on that specific hourly rate. But what if the consultant we need costs a tad more than that ? That post in our budget will also go up. Unfortunately, sometimes there is very little that you can do to prevent this; some projects require an approved budget before the projectteam can go into that first phase: Investigation. I'll admit, it's a bit of a world gone mad, but you'd be amazed at how often this happens. You can't start investigating how much it will all cost without stating how much it's going to cost.
Thankfully, most projects are preceded by a cost study before the plans and budget are approved, reducing the risks considerably.
So, let us assume that you've done this cost study. Your shiny new budget contains several posts, including: hardware, software and manpower. These are often split into subcosts: Which hardware, how many, etc. Often, it's also specified when the money's actually going to be spent. Especially with projects that span more than one year, this is important. After all, in companies budgets are a one-year cycle and the costs that are going to count next year should be put on next year's budget. Not an ideal situation ? Perhaps. But what is ?
Another part of a project's budget is how the budget will be controlled and reported upon. Should a financial report be filed every month ? Who will supply this report ? (Most financial reports are generated by the Finance department of a company; should they be the one throwing around the papers ?). Especially when working with suppliers, this may be difficult, as it may take a while to gather all the data and bills required to make such a report.
It takes some doing, but then the budget is finally finished. Success! Hurrah!
Or not.. ?
At the end of the weekend
Somehow, I always seem to end up with less money at the end of a weekend than I had imagined at the start. Reliable sources tell me that this is a common issue, so I don't worry too much. When it comes to projects, however, this is something you should worry about. Having the projectequivalent of an all night binge in the cocktailbar is not something you want to experience; save that for your time off.
So how is it possible that a project's budget is so often exceeded ? Again, this can have many reasons. However, one of those reasons may be a lack of proper budget management.
A lot of budgets lack areas of attention. If you'd look at the true costs of a project compared to the budget it was given, you might notice one of the following problems:
Internal and hidden costs
Just because you don't have to pay extreme fees to get them to work on your projects, internal company employees cost money too. Most of the time, these costs won't show up in a project's budget because no bill is presented for them. Nevertheless, if they spend hours on your project, the costs for those hours can/will/should be attributed to your project.
Or what to think of costs such as electricity ? I'm not talking about the costs for the fluorescent lighting in the office, but the electricity bills for those fifty brand new servers your technical experts just put in place.
Admittedly, these costs may be very hard to pinpoint and specify, but a valid attempt should be done nevertheless.
Risks
Every projects has risks. Live with it. If you neglect them, they will sneak up and bite you in the behind. And when they do, they often cost money. So do yourself a favour and spend time on a risk analysis. Include measures of mitigation and their costs, so when it's time to break out the big guns and shoot down that problem, you won't have a seizure when the bill for the bullets comes in.
Critical Path (CP)
A little while ago, I wrote an article on the Critical Path of a project. In this article, we succesfully planned Project Breakfast, showing how important it is to keep an eye on the CP of a project to avoid extreme transgressions in planning. The same principle applies to the project's costs: If you bought a lot of servers that are to be installed in your new infrastructure, you might, for example, store these servers in a secure warehouse. The costs for this were present in the budget, so no surprise there. But what if the new datacenter isn't ready in time ? Apart from the consequences in planning, you'll also need to pay rent longer for the storage of the servers. An eventuality such as this should be present in your risk analysis, as should be everything else related to the project's CP.
Bad estimates
What to do about bad estimates ? Quite frankly, the only way to prevent those from having a big impact on your project is to have every estimate checked and second-opinioned as well as possible. If your company has done a similar project before, dig out the budget, planning and reports for that projects and use that as input. If this kind of project is completely new.. well. Just make sure you doublecheck every guess and estimate and pray for the best. Make sure your risk analysis report states that the team's unfamiliarity with projects of this nature may produce inaccurate estimates and use buffertime as an extra mitigation measure.
Tips and tricks
Of course, all this doesn't have to happen to you. But if it does, don't be disappointed. Learn from it and move on. Nevertheless, there are a few tips and tricks that I have found useful:
Risk budget
Again, risks exist. Be prepared. Make sure your risk analysis is as complete as possible and guard it constantly. Include the costs for mitigation measures in your budget. Also, reserve a percentage of the total budget for unforeseen events. Unless you can read the future in tealeaves, there is no way you can predict everything that might happen. Having a little stash of money handy for those unpleasant surprises may very well be the best thing you ever did. A percentage between 7-10% is often a good place to start.
Previous projects
If you have the luxury of having access to reports and documents from previous projects, study them well. What went wrong ? Which oversights were made ? Now check that against your budget and planning; have you made the mistakes ?
Get your hands on as many documents as you can, for both succesful and unsuccesful projects. Succesful projects may reveal something about what made them succesful; unsuccesful projects will most definitely show what went wrong.
Basic knowledge of financial management
Bestow upon thyself a basic knowledge of finance management. I'm not telling you to become a full-fledged accountant, but having a good understanding of financial reports and the way money is handled within your organisation may be crucial for success. I realise that gaining this knowledge doesn't appeal to many people. It most certainly didn't to me, but I found it very handy when confronted with bills, credits, debits and all those bits of paper with lots of numbers on them. Personally, I recommend 'Financial Management For Dummies'; though it hasn't stopped me from being surprised at the end of the weekend, it did teach me how to make sure the same didn't happen at work.
Software and tools
Microsoft Excel can be a very powerful tool to create budgets, predict trends and generate simple reports quickly. Learn how to use it and you'll be grateful you did. Naturally, Microsoft Project (and co.) include many handy tools and buttons for creating financial reports and predict where you might be stepping over that thin little red line.
Cost study
Having to approve a budget for a project that would start with investigating its own costs is madness, so make sure you don't wander into that trap. A simple and short cost study may seem like an investment, but it will pay off. You might learn, for example, that the benefit of the project is never going to exceed its costs and it should be dropped on the spot.
Cost studies don't have to take ages, but they should give an answer to the most fundamental question: What is this project going to cost us ? What are the financial benefits if the project's result is, for example, a product to be sold ? In other words: Where's the money ?
Concluding
Budget management is not an easy matter, which is the reason why it goes so horribly wrong from time to time. There are, however, many things a projectmanager can do to improve budgetcontrol and accuracy, thereby preventing a waste of money.
Be prepared, be thorough and keep a close eye on those numbers before they do the Dance Of Doom and leave you singing 'Hey ho, hey ho, where did all the money go.... ?'