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»The Art of Managing Projects to Their Budgets: 5 Best Practices
By Carr Philips
In the world of project management, the overall success of the project is determined by three factors—on-time delivery, customer satisfaction and on-budget delivery. If a project goes significantly over-budget (as they often do), it will not be considered a success, even if it's delivered on time and meets end users' needs. A Government Accountability Office study found that half of the federal highway projects it examined had cost overruns of more than 25 percent.
Gartner analyzed2 tech projects implemented by healthcare delivery organizations and predicted that more than 60 percent would be at least 30 percent late or 20 percent over budget. Oxford University research3 of 1471 projects shows that Information and Communication Technology projects deviate from their initial cost estimate by more than 10% in 8 out of 10 cases. The average overrun was 27% and one in six of the projects had a cost overrun of 200 percent.
How can we better manage projects to their budgets? The article discusses the five best practices for ensuring maintaining control of your project budget and preventing cost overruns, and then highlights how technology can enable project managers and organizations to achieve this objective.
The five best practices include:
1) Start with a solid plan: The life cycle of a project begins with a project plan which defines the project goals and objectives, resources needed, timeline for tasks, key metrics and budgets. A preliminary project plan becomes the basis for a bid, so it is important to start with a solid plan that incorporates all of these elements. Most organizations use traditional project management tools and historical work breakdown data to create a schedule for the new project, as well as an internal skills database to create a resource plan. However, they don’t go into that much thoroughness when creating a project budget plan.
In order to ensure that the project is delivered within budget and on schedule, it is important to use the same amount of rigor in creating a budget as is used for creating a schedule. You first need to create a detailed cost plan for the project. This includes all the costs that the project will accrue, whether they have to do with people, equipment, suppliers or materials. Access to historical budgets and spend data not only provides a comprehensive framework for creating such a plan, but also significantly reduces planning errors that creep in due to omission of certain soft costs, use of wrong assumptions or inadequate allowances. Such errors are one of the leading causes of the projects eventually going over-budget. Since a cost plan drives baseline budgets, revenue forecasts and bids, a good cost plan, which is created with attention and use of historical information, is more likely to lead to an on-budget finish.
2) Continually forecast. Your project’s budget expresses your intentions—it is the course you have chosen and plotted to take you to your desired destination. Budget is akin to ship’s captain plotting the course, while the forecasts are like a ship’s radar. Instead of telling you where you want to go, which is what your budget does, forecasts tell you where you are going. Hence, a project that is run without frequent re-forecasting is more likely to be headed for failure. Frequent budget oversight prevents the budget from getting too far out of hand, because a 10 percent budget overrun is far easier to correct than a 50 percent overrun in the middle of the project.
In addition, re-forecasting also tells you how far were you off in the initial plan and forces you to understand why, so your future project plans are more ‘in-line’. In addition, the revised estimated costs for the remaining activities can be added to the actual cost of the completed activities to develop a new estimate of the total project cost at completion. Project-finance capability in your system that enables you to track various versions of your budget, manage plan hierarchies and forecast at any hierarchy will play a big role in helping you continuously forecast, identify variances and stay on top of any potential overruns.
3) Manage resource usage closely. The effective usage of resources in a project is often the make-or-break factor that will determine project success in terms of quality, schedule and budgets. However resource management should not be viewed in isolation, but in the context of budgets and schedules. By viewing all of them together, you can not only identify issues such as resource over-allocation, but it will also give you a window into current and future burn rate. For example, when estimated project costs are budgeted by resource activity and actual costs are tracked by resource activity, the project manager is able to more effectively understand and control costs on the project. As a result, you will always know if your current plan will deliver both – on-time and on-budget. In addition, you will be equipped to do more accurate cash flow projections for your project.
4) Track project in an integrated manner. There needs to be a transparency into and accountability to the plan, goals, budget and scope in order to achieve confidence that the information is accurate and actionable. Being able to define, capture and track the metrics surrounding each project and the entire portfolio of projects is a must have for any executive and management team. In addition, knowledge of actuals-to-date is a requirement for effective cost control of an ongoing project. Corrective actions can then be taken to reduce any negative (i.e., over budget) variance. Finally, by tracking projects in an integrated manner, you can build a repository of valuable information that can be used for budgeting and resource planning on future projects, especially if the organization performs many projects that are very similar to each other.
In order to achieve these objectives, an organization will need to put a system in place, so that it can:
• Enable collection and recording of all aspects of project data – work breakdown, schedule, budgets, resources, changes, documents etc.
• Track a project through its lifecycle
• Provide functional views into the project – i.e. from project manager, finance, procurement, resource manager and business manager’s perspective
• Provide a dashboard of key operational metrics
5) Manage change: How many times have you heard – ‘my request is easy’ or ‘this is just a small change’? Project stakeholders say these things without realizing the impact of their ‘small change’ on the project plan or budget. Scope creep is one of the leading causes of project overruns. As unplanned work finds its way into your project, billable hours mount and the project budget can get out of control. Project managers must carefully manage scope by having a consistent process to create change orders for work that isn't covered by the project's initial requirements.
To ensure consistency of change management process, a system must be deployed that tracks project issues; enables users to review the issues to create change requests and supports a well-defined approval process. The system should also calculate the impact of change on schedule and budget and incorporate that in the approval process.
Once approved, the system should create a revised version of the schedule, resource plan, budget and forecasts. Technology plays a key role in ensuring you manage your projects to budgets and schedule. Many project-based organizations have partially automated their processes and use a combination of packaged/SaaS software, spreadsheets and custom solutions, built using tools such as Microsoft SharePoint.
For example, they may have a SaaS-based time and expense system, a project management tool and perhaps a budgeting spreadsheet or Microsoft SharePoint-based resource management system. Such point solutions are not integrated with their CRM or their accounting system. As a result of such silos, it becomes nearly impossible for a stakeholder to get a complete picture of their project along costs/budget and schedule. . Such lack of visibility creates a lack of control and increases the risk of not making timeline and budgets. If you want to address visibility and control, silo-based automation is not the answer.
In order to be on top of costs and budgets for your project, you need systems that address baseline budgeting, forecasting, change management, visibility and reporting. It not only ensures you have a comprehensive visibility into the project along any dimension, but more important, it gives you the means for on-going forecasting and change control, so you can reset your budgets and timeline. But that is not enough. These capabilities should not be in a silo, but rather fully integrated with other operational processes of a project-based organization. Result is project success—you can deliver the project on time, on-budget, while ensuring your client is satisfied with the result and you meet your profitability targets.
Carr Philips is Senior Director of Solutions Marketing for the Professional Services Industry and the Engineering/Construction industry at SAP.