Wednesday, April 17, 2019

The Biggest Mistake Organizations Make With Project Cost Management

The biggest mistake project managers make with project cost management
The biggest mistake organizations make with project cost management is not doing monthly forecasting and controlling.

Project cost management is nothing more than doing the following three things every month:

1) Cost Estimating
2) Cost Budgeting
3) Cost Controlling

You start your project with an approved budget. When you are lucky, you created the budget yourself based on a combination of bottom-up and top-down estimations and it got approved by the project sponsor. When you are not so lucky, you inherited a budget created by somebody else, or you just got less money than you budgeted.

The first step is taking this budget and dividing it into meaningful spending categories. The first split I always make is between internal costs and external costs. External costs are cash out, and they’re handled differently by your company than internal costs. The rest of my splits depend on project type and size, for example: project management, technology management, change management, training and travel costs. In theory this would give me a total of 10 (2 x 5) spending categories, but since travel costs are always external costs it would be effectively nine categories.

It’s important to verify that you can map your actual booked costs to these categories. This means, for internal costs, that people working on a project have different booking codes for the different categories, or you can map all the hours of one person to one category. For external costs it means that you have different booking codes for each category, or you map them manually.

Now that you have your categories, you just create a simple spreadsheet and create a simple table with a row for each category and one column for each month of the planned duration of your project. Before your project has started, you’ll fill each column with the forecasted costs per month per category. When your project has already been running for a while, you will place the actual booked costs per category for these months in the columns and the forecast values in the rest.

When you have done this, you can add the following six columns to the end of the table.

> Total Budget: Here you manually input the budget you have per category.

> Total Actuals: This is the sum of all booked costs per category.

> Total Forecast: This is the sum of all forecasted costs per category.

> Projected Costs: This is the sum of Total Actuals + Total Forecast per category.

> Budget – Actuals: This gives you the amount that you have left of your budget per category.

> Budget – Projected Costs: This gives you a good indication if your budget is enough to realize the project.

Now add one row to your table that just sums up all the rows above, so you have the information per category as well as on a project level.

This spreadsheet is all you need as a tool to start effective project cost management.

No matter your starting point and categories, from now on you have to do the following four things each and every month until the project is officially closed.

1) Get all the costs that are booked on your project from your finance team. Put these numbers in the month they are booked. Remember that these are booked later as they have occurred.

2) Add so-called accruals to your forecast. When Supplier A has worked 36 man-days on your project in April, then you need to add these as accruals to the forecast for May. When they are not booked, then you will add the accruals to the forecast from June. You do this until the final invoice is booked and the number shows up in your actual booked costs. This is an essential part of cost controlling. When you do not do this, you will always have around two months of external costs not in your overview and will be very surprised at the end of your project.

3) Update your forecast based on what you have learned this month about the project and update these numbers in the spreadsheet.

4) Review the new numbers in the last six columns and take the necessary actions based on them.

When it comes down to it, project cost management is nothing more than discipline to break down the spending categories, create an effective spreadsheet, and do the cost estimating, cost budgeting, and cost controlling steps described above every single month, and the ability of the organization to produce the input needed. The better the quality of the input, the better the quality of your cost controlling.

In a nutshell: The key to project cost management is monthly forecasting and controlling.

When you need some guidance on how to define and measure project success, just download the Project Success Model by clicking on the image.

The Project Success Model

Posted on Wednesday, April 17, 2019 by Henrico Dolfing