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Saturday, June 30, 2012

Other People's Money: Managing Project Budgets Effectively

[Also available as a podcast]

Other People's Money. 

(Image source: Wikipedia)
When you mention these words, some people might think of stock markets, mutual funds, and the 1991 movie by the same name starring Danny DeVito, in which he played a ruthless corporate raider, leading hostile takeovers of other companies using everyone's money but his own. You might then think about recent history and failed banks, brokerage firms and the millions of affected people when their retirement investments shrank or fell to near zero and countless people lost their homes.

Scary, scary stuff.

Well, let's step back from the big scary picture out there. Back to the reality of your project, where you are "in charge". All of that scary stuff does not really apply to you, does it?

Well, unless you have zero control over your project (and you are just watching from the sidelines and not doing your job), it does apply to you. Unless you are Richard Branson or Bill Gates, you are probably not bankrolling this project from your own pocket.

Your entire project is funded by Other People's Money. This may be customer money, corporate internal project money, or the collected money from the bake sale last month.

The Bad News? You are the steward and caretaker of Other People's Money, entrusted to deliver the project outcomes successfully - within scope, on time, and of course - on or under budget.

The Good News? You are the steward and caretaker of Other People's Money, entrusted to deliver the project outcomes successfully - within scope, on time, and of course - on or under budget.

The Good News and the Bad News

How can this be both good and bad news? Well, if things go sour and you did not manage scope, effort and budget effectively - there will be wastage and you will likely run out of money before the project is finished. You are accountable, it will be "your fault".

The good news is that unless you are hamstrung in managing your projects by sneak-around requests to the CEO that end up blowing out scope (but with no increase in budget), you are in charge. And even in that scenario, if you manage it effectively and are able to handle the change requests for increased budget, you are still "in control".

Well at least the common perception is that you are in control - you have the authority to manage the resources and activities on your project. And often, that is all you really need - formal or informal authority discussions aside.

You might have full disclosure of the internal cost and external billing rates for every one of your team members, or you may only know the overall billing rate to the client. Or if this is an internal project, you may only know the hours budgeted and not hourly rates.

But you can still work with the information you have.

Creating the Budget: Estimating

Depending when you got involved with the project, you may have been involved with the estimating & budgeting process, or the overall budget may just be handed over to you. But if you are helping to define the project budget, read on:

There are many models for estimating in different industries, so I won't go over any detailed specifics of what the best estimate is for service X in scenario Y. These are things that will have many contributing factors based on your industry, the environment, delivery schedule and so on.

But in general - you should plan for a few surprises. Build in a "buffer" or a reserve, that can only be tapped if needed. In some industries, a 10% buffer is recommended. In a low-risk project environment, 5% may be enough. But if there is a high level of risk and uncertainty, you may want a reserve buffer as high as 30% or more of what your overall estimate is "to get the job done".

Note that the Project Manager may also build in a (much) smaller buffer for resource flexibility - perhaps earmark an additional resource that might be needed for a portion of the project, for example.

There are different methods on how you can do this. You may build it into the overall budget itself, or you can work with the client to have them secure separate funding in that amount, that can only be drawn against by formal request of the Change Control Board.

There are pros and cons to both approaches; if it is within the actual budgeted PO for you to manage, you have more flexibility in managing and juggling funds within the project, without a lot of red tape. Of course, then you have to also make sure that you track very carefully and don't "touch" those funds without joint agreement with the customer. From the customer's perspective, if all of the funds, including the buffer, are "accessible" and under the same PO, then they might realistically feel that the money will be spent - and that someone will find a reason to spend it.

If, on the other hand, it is really "emergency money" and the customer retains it in their coffers, doling out small PO's for clusters of change requests, they may feel more secure that any un-spent money can be saved for a rainy day and other projects after this one. This will add more overhead to the process, but it is an equally justifiable approach.

It is a matter of trust, on both sides as to who "holds the buffer", or at least, the potential to get at it most easily. 

You need to look at it from both levels - the PM needs a bit of flexibility in juggling hours and adapting to events without appealing to the Change Control Board, but the really big stuff should go through the CCB.

On one of my projects, I included a few extra weeks of training that were likely to be needed but might not, depending how things went - so those training days served as a small internal pool of hours that we were able to use for other things near the end of the project when it turned out the training was not needed.

Managing the Budget

Well, now you have your budget. Your overall pool of hours, resources, equipment costs, all to be managed. The budget may be based on a detailed project plan, but more likely it will be based on an RFP response which used high level estimates of what type of work needs to be done. You then need to flesh out your Project Plan - and Resource Plan - based on what actually needs to be done and when, under your ceiling of hours.

This will involve a lot of juggling on your part, working with your team leads to make sure that you have enough, but not too many resources on any particular set of tasks at any point in the project. If it sounds like a lot of work, it is - but quite essential. This is why you are the Project Manager, after all.

Of course, things are constantly changing - and the larger your project (and budget), the more things there are going on, and the greater likelihood of surprises. So you need to keep on top of the budget, the resource plan and what is coming up next. There may be delays which mean that you don't need resource X on the project until June 20 instead of May 30, so you had better make those changes quickly or you will end up burning hours while they cool their heels waiting for work to do.

You should be reviewing your budget and resource planning regularly - at least monthly, but also be aware of what is going on day-to-day in your project. Something might come up in the status meeting or be brought to your attention that requires an immediate adjustment to plan (and resources or equipment) that cannot wait for the monthly budget review. You may need to add or trim hours on an ongoing basis.

Ah, the life of the Project Manager!

Budget vs Actuals vs Forecast

On one of my projects, there were seven different resource cost and billing rates for the different types of resources utilized on the project (people, not equipment). One of the challenges I faced early on in the project was trying to get a good handle of where we actually were in terms of tracking to budget, in the midst of a lot of changes.

Of course, we had the invoice history and the details from Finance - monthly, but that was not quite enough for managing a fast-paced project. Also, with the variable billing rates of the different resources we had on-and-off-site (with different rates for on and off-site, so 14 billing rates), we had to be able to forecast in great detail, while also reconciling the actuals for auditing purposes.

Note: since that project, the company decided to go to a universal billing rate, regardless of the skill level. The only variations now are on-and-offsite rates. Almost too simple!

Previously on other projects, the PMs were tracking actual $ and forecasting hours - but this left a lot of room for error due to the multiple billing rate model. Then there were the inevitable credits issued to the customer that had to be accounted for too.

So I combined the actuals and forecasting data into one complex spreadsheet, where we reviewed the actuals and managed the forecast with the client on a monthly basis, and during the meeting we were able to immediately view the net$ impact of tweaking the different classes of resource assignments, down to the penny. As actuals came in, these replaced the forecast amounts, and we could also see the variance of the actuals vs forecast by resource and month, all in one place. We were then able to easily adjust going forward, where last month was 6 days under-spent on resource X but two days over on resource Y, and so on.

This gave the customer a great deal of confidence in the overall management of the project, and also gave them input to the resource adjustments for the upcoming months. As this was a 3-year, $5M project, having forecasting capability to that level of detail was extremely helpful, and the monthly budget meetings proved sufficient to avoid any real surprises.

And in the end - we delivered the project successfully, and under budget.

Managing Expenses: I've Got A Coupon For That!


On most projects, the expenses were relatively predictable. Airfare, Hotel, Car, Meals (no alcohol). We carpooled based on the number of resources in town at any point in time, stayed at the project hotel, and the airfares were pretty predictable. Meals were capped at $45USD per day, total.

From a budgeting/forecasting perspective, there was not a huge degree of variance.

Except for one person who I met on that project, and have worked with closely for many years since (and is also a good friend).

He was not wasteful, far from it. He does not drink (well, water and soft drinks, yes). And with a limit of $45/day, you could not really go too far astray - any excess was from your own pocket. He was also extremely generous to a fault, bringing in chocolate to the office on a regular basis.

But only when it was on sale or he had a coupon.

Yes, he was generous - but extremely frugal with his money, and especially Other People's Money. Even though we were on expenses, he took it as a personal challenge to save the project money. Not just him, but the group of us!

He scoured the papers for coupons, bought the Entertainment Coupon Book, and when he ate out, it was almost always a place he had a coupon for. And he never ate alone. He was great company to be with, but the other reason was that most of the coupons were 2-for-1. Of course, he also shared the coupons with us in case we were not dining with him that day.

He came into the office one morning beaming from ear to ear.  He had just bought a pen from CVS the day before. He had a CVS cash-back voucher, a coupon and a rebate for the pen that he could use together. Including the price of the envelope and the stamp for sending in the rebate, they were paying him $0.55 to take that $3.50 pen home. Now that is effective fiscal management!

When we had completed the main project deliverables and I returned to the head office (still doing some remote PM for the customer), we were able to keep him on-site for a good portion of the following year, based on the budgeted funds that were left over. We joked with him that his Coupon-clipping had "saved him into a year's employment". A bit of an exaggeration, but not much. He definitely contributed to the overall project ethos of "eat well but save money" that did end up saving us a lot of money for the project - and it was fun, too.

Summary

Fiscal accountability is what it is all about - being a conscientous steward of Other People's Money on your project. I am not saying there will not be some wastage, there always is some time or material that is not used quite as effectively as it could be. But if you keep in mind that the funds from your project are the result of someone else's hard-saved or hard-earned efforts, you will be able to keep the big picture in your head a bit more clearly.

It is not about spending the entire budget, reaching your corporate fiscal targets this quarter, or looking at it as a steady paycheck for a period of time. It is about doing things right - to the best of your ability, and respecting the investment they have in you - to invest their money wisely in the delivery of the project.

Good luck with your projects, manage those project budgets wisely, and when you next eat out, there might just be a coupon for that!

And as for me? I am going out to have a coffee with my wife (2-for-1 card).


Cheers!