Cost Management | By Brad Egeland | Read time minutes
The financial management aspect of project management can be challenging - there is no question about it. I just read about one government project for the state of Pennsylvania with IBM that is being cancelled after going 57% over budget on a $107 million project. That's a little extreme, but it truly is easy to let a project get out of hand if the budget is not watched carefully. And I'm not even considering the hundreds of other factors that can come into play to affect a project's financial health.
First let's talk about project success and what is generally acceptable in terms of coming in over budget. What's the threshold in your organisation? For me and the organisations I've worked with and for, a budget overrun of 10% at the end of the engagement has always been within the acceptable range. With some organisations it's been even higher, but I try never to set my bar so low that I'm striving for some level of mediocrity. So let's focus on that 10% number…does that sound about right for your organisation or PMO?
Watch it closely and keep it at 10%
I'm of the mindset that most projects can recover - if necessary - from a 10% budget overrun. It may take some creative management and some help from the executive team and possibly the customer, but it can usually be done. And if you're managing the project budget like you should be - forecasting and reforecasting every week by plugging project actuals obtained from accounting so you know where you stand every week - then ensuring that you never go beyond that 10% overrun threshold should be fairly easy to stick to…barring, of course, some unforeseen catastrophe.
So, let's assume you've been watching the project budget closely as you should be and your project is running right around 10% above the forecasted budget. You've mapped it out through the end of the project based on what you know right now and it appears that you're still likely to wrap the project up at 10% over budget. What can be done now to bring that back down closer to zero? After all, we want to do what we can to rein the budget back in - you never know when unforeseen circumstances or issues can come up close to deployment that can cause you major project financial issues. Therefore, you want to keep it as in check as possible in case you hit those issues late in the project and are left with no time to take any financial corrective action. Try to take it now. What can be done? Here is my list of 3 key things that you may be able to do mid-stream on the project to help get that project budget back in line with the original plan:
1. Look for Potential Change Orders
This is a hard one because customers don't like change orders. However, if you can see some change order opportunities, you may be able to price it so that the profit margin on that work is a little higher. Therefore, if your estimates are good on the change order work, it will up your revenue AND your profit margin and help bring the project budget back into alignment. You'll be surprised what a couple of those change orders will do to your project's financial health.
2. Offload Any Unnecessary Resources
If you have a resource still on the project who has little to no forecasted effort or tasks left on the engagement, cut them loose. They are likely still charging a few weekly hours to your project and that will kill your budget quickly.
3. Spend Less PM Time on the Project
Finally, one action that I've found to be effective is to step back as much as possible and charge less project management time to the engagement. My time is usually the most expensive time charged to the project in a professional services organisation, so decreasing my time on the project by just 4-5 hours a week for the rest of the engagement can make a big difference. If I can do it and still maintain the proper oversight of the project, that's a likely course of corrective action for me.
Recommended read: 11 Rules for Estimating Project Costs by Duncan Haughey.