Friday, November 15, 2013

Beginners Guide To Project Management
Part 19 - Keeping Costs Under Control

This is part 19 of the Beginners Guide To Project Management and it is about cost control. So you carefully planned this project's spending (please check the Beginners Guide to Project Management Part 10 - The Project Budget) but the fact is that things don't *always* go accordingly to plan. If you, the Project Manager, can immediately answer the question "In the end, how much will this project really cost?" you're on the good path of keeping costs under control. This article will cover the requirements for you to answer this and what options there are available to you.

Previously on the Beginners Guide to Project Management:

Introduction
Initiating
Planning
Executing and monitoring

Source of deviations

Money is spent as the project work progresses and you know that because you planned it. But, maybe not all that surprisingly, money is not being spent exactly according to your plan. Why is that? I'd say there are 3 large types of sources for deviations:
  • Plans include estimates: and estimates are just that, an approximation to reality due to the fact that you don't have all the knowledge on your side
  • Reality changes: you assumed that your resources would perform like the ones on your previous project, but that didn't happen. And you, like everyone else, make mistakes. Also, a supplier was late and you had to restart the procurement process incurring in unplanned costs. and this list goes on and on...
  • External influences: if you're doing a project abroad, with another currency, you won't ever get the actual costs of your project anywhere close to your budget - and the longer the project runs the worst your predictions on the currency exchange rates will get. It's like predicting the weather for your daughter's wedding due next year - it's not your fault, but you won't get it right. Maybe unless you're in Ireland...

Project performance data

How do you know how much money is being spent in your project? Well, it depends. It can be that the software you're using to help you manage the project does that for you (in which case it's called Enterprise Project Management software, or EPM for short). It can be that all the project related invoices have to be physically checked and approved by you. Whatever your particular situation is, you have to know this, how much money is being spent in your project.
That is one step in the right direction but this is not enough. You must also associate the money spent to the work done. And why is that, you might wonder. Well, suppose you have part of the project team contracted on a time & materials contract. The net result is that every week you have a fixed amount billed to your project. But. What work was done that week by these team members? If the work done was the work you planned to be done that week (or maybe even more), you're project is OK. If not, it means that this week's work will be more expensive than you planned because it already cost what you planned and it's not done yet, you still will have to pay some more money for it to be completed!

Project context

Someone just asked me yesterday what is the best way to manage a highly creative project. This is some question!
The way you collect the information you need to manage a project can change dramatically according to the type of project you're managing. Even if you work in a high tech, highly productive, state of the art projectized organization with EPM software in place where team members input the time they spend on each task, it doesn't mean that you have them do it all the time in any given project.
Suppose this ideal organization of yours is doing a campaign that consists of a series of articulated ads (on TV, radio, newspapers, magazines and web sites) such as the following ad for a bus company in Belgium.


Somehow I cannot imagine the creative team that produced this video pumping data (how much time did they work on what task) into your EPM software every single day just before 5 PM. Can you? But you can have a "Creative Assistant" that will do that for the team. Or you can track performance (and thus costs, as shown previously) the Agile way, starting with a 10 min daily standup meeting.
The point is: just because you have systems, procedures and processes in place - it doesn't mean you should use and follow them all the time. Just give it 2 min of your thoughts before, OK?

From the Rule of Three to Earned Value Management

If you're using Earned Value Management (EVM) in your project you have everything you need to answer the question "In the end, how much will this project really cost?". It's an EVM indicator called Estimate At Completion (EAC). But what if you don't?
Then you'll have to put an extra effort, get the data your need (what have you spent and how much have you done with it) and forecast/predict/estimate how much more you still need to finish the project. You can even use a simple Rule of Three for this and do as follows to forecast: You were hired to make 5 ads. You've completed 2 and spent 125.000 USD.

Assuming the ads will cost the same, then, in the end, your overall costs would be:


So it can be as simple as a Rule of Three. Now this was about your project performance. You still have to add your initial budget. What was it? Suppose you estimated that the 5 ads would cost a total of 300.000 USD. It looks like you're 12.500 USD short, doesn't it?

So what now?

The entire purpose of monitoring and controlling is to evaluate the gap between where you are and where you were supposed to be and then decide on the actions to take. So, besides documenting your project with work performance information, cost forecasts, justifications for the deviations and so on, the most important thing is to decide what are you going to do because of the deviations you found.
In this hypothetical 5 ad project, will the extra 12.500 USD be covered by the client, ie, does the contract supporting the project allow it? Does it make a difference for your organization? 12.500 USD doesn't sound a lot and is a deviation just over 4%, but is it too much or not? It can be also enough to cancel the project... And what can you do about it? Is there something you can do to make the next ads cheaper? For instance, can you make and deliver them faster? That would make them cheaper, right?
Depending on the situation at hand, some of these can make sense - or not. But still, monitoring is useful only if you act upon the gaps you find between the initial budget and the actual costs and do something about them. Even if it's just to say: I know there's a gap there but it's a small gap, I don't really care about it and I'm not doing nothing about it (because the client is paying for that difference).

Conclusion

Cost control is one of those areas in Project Management where things can be really different from project to project. Whatever the approach, keep your eyes on your goal: in the end, how much will this project really cost? If you can answer this, you will probably have all the information about costs that you need to correct the issues with your project.
And remember, the reason why you want to keep costs under control and answer the question "in the end, how much will this project really cost?" is to take action on the deviations you find between your plan and what's happening for real. And anything goes, from doing nothing to cancelling the project...


Images from http://www.insurancequotes.com/

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