Ok, my dearest project manager friend, let’s talk about money! Budget, as you should know, is an estimate of costs, revenues, and resources over a specified period, reflecting a reading of future financial conditions and goals. One of the most important administrative tools, a budget serves also as a (1) plan of action for achieving quantified objectives, (2) standard for measuring performance, and (3) device for coping with foreseeable adverse situations.
With a budget, the Project Manager is able to carefully look at how much money they are taking in during a given period, and figure out the best way to divide it among a variety of tasks and resources necessary to complete the project successfully.
The PMBOK 4th Edition defines the Project Cost Management as the processes involved in estimating, budgeting, and controlling costs so that the project can be completed within the approved budget. In this paper, we study how to apply these definitions in a practical way to the projects under your responsibility.
Who will pay the bill?
From IT to the construction of a new nuclear submarine, most projects have to purchase materials: routers and cables, shingles and steel, and so on. We almost always must buy some things to complete the project work. Think back to your last project; didn’t you have to buy something? A piece of software. A book. A new server or firewall hardware? Someone, you or the organisation you work for, had to cough up the cash to buy that stuff and pay all the people.
Regardless of scope or schedule, projects need funds to complete the work. Technically, even projects that use only labour have funds attached to them; someone, somewhere is paying for that labour. What happens if you don’t have the correct amount of funds to complete the project scope? Your project is doomed.
Because of these matters, the first thing that a project manager must take is to clarify which area or person will be responsible for effectively bear the costs of the work to be performed. And that should be done right after the definition of project scope. A friendly advice: never start a project without adequately answered the 3 following questions:
- which area or person will be responsible for effectively bear the costs of the project? As I said above, it’s the fundamental question that you need to clarify! Require and archive the proof of this information in a writing document, either via a printed document or even in an email. This can be very useful in the future
- What area or person will approve and release the necessary funds for the purchase of equipment and materials for the project? It is important to know who is responsible for approving the purchase orders for supplies and materials for the proper completion of the tasks planned for the project. Do not forget, also, to have an estimate of the time required for a purchase order is approved and released, so that you can provide them in a timely manner and without impact to the overall schedule.This also should include extraordinary expenses such as airline tickets, fuel costs, tolls, meals and overtime, if it will be necessary for your project.
- Which account or claim code the resources must use to state the hours worked on the project? resources that will work on the project should have a code or account to launch specify the hours worked on your project. The lack of this information may cause future upheavals and, believe me, it happens more often than you think. I’ve had cases where the lack of a claim code caused a few weeks delay in the release of a resource, and endless discussions and exchanges of emails between me and the business and financial areas of the company.
Never, ever, at any time accept vague or inconclusive answers like “you do not have to worry about that right now” or “we will decide it later” or “I’ll take care of dealing with budget issues for you.” Start a project without having all this properly understood and documented is treading a path which inevitably lead to disaster!
Clarifying the basic concepts
How do we know what a project will cost? We really don’t, until the project is complete. The truth is that we can’t know the final project cost until the project is complete because we can’t accurately predict the future.
What we can do is create an estimate. An estimate is more than pulling a random number out of the air, adding 20% for good measure, and then saying, “That’ll work.” A real estimate evolves as project details become available. This is progressive elaboration. Project estimates start out broad, and as the project deliverables come into focus we’re able to more accurately define our estimates.
Each estimate should provide an acceptable range of variance, the conditions of the estimates, and any assumptions made by the estimate provider. For example, an estimate to build a new warehouse may state that the warehouse will cost $350,000, +/- 10%, is valid for 30 days, and assumes that the warehouse will be built in the month of June.
Notice the range of variance, the assumptions, and the stated work? A good estimate clearly defines (1) what the project will accomplish, (2) the assumptions made, (3) how long the estimate is valid, and (4) how much the project will cost based on current information. A good estimate presents to the stakeholder everything relevant to the proposed work, without holding back any secrets. If there’s a disagreement in price, assumptions, or range variance, it’s better to discuss this issue now rather than four months into the project execution. So, the Project Cost Management processes which include the following fundamental concepts, according to the PMBOK 4th Edition:
- Estimate Costs: The process of developing an approximation of the monetary resources needed to complete project activities, as in the warehouse example cited above;
- Determine Budget – The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.
- Control Costs – The process of monitoring the status of the project to update the project budget and managing changes to the cost baseline.
With this concepts, we can start to develop Project Management Plan process, which produces a cost management plan that sets out the format and establishes the criteria for planning, structuring, estimating, budgeting, and controlling project costs. The cost management processes and their associated tools and techniques are usually selected during the project life cycle definition and are documented in the cost management plan. For example, the cost management plan must establish the following: (1) Level of accuracy; (2) Units of measure; (3) Rules of performance measurement; (4) Reporting formats; (5) Process descriptions. In resume, we have this scheme:
The above image was taken from the PMBOK 4th Edition.This next week I will write an article where we will study in more detail the different ways to making a budget estimative and the details of a Project Cost Managements plan.
Stay tuned and have a nice week ahead!