Budget overruns are a litmus test for project success or failure
Short Link: https://kpi.com.sa/?p=2974
Budget overruns are a litmus test for project success or failure. Few companies have an unlimited budget, so the first thing project stakeholders look to in determining whether their project was a great success or a colossal failure is the bottom line. This fact fuels the pressure project leaders and their teams face with each passing day. As such, effective budget management is a primary area of focus for project managers who value their careers.
Following are five strategies for maintaining control of your project budget before it succumbs to whopping cost overruns.
Understand stakeholder’s true needs and wants
What stakeholders say they need or want in a project often isn’t as simple as it may seem upfront. This can lead to unidentified goals and expectations on both sides of the table. If a project manager, sponsors, team members and vendors don’t have a solid grasp of on stakeholders’ true desires, it’s almost impossible to identify what the requirements are for the project. Be sure to put in as much time as is required to get a deeper understanding of what stakeholders expect. Ultimately everything, including the budget, is defined by stakeholder expectations, deliverables, and other requirements. So the first step to an effectively managed project budget is to ensure project requirements are accurately identified, documented and confirmed with all stakeholders — and that these are communicated to all parties involved. This crucial step should be completed before budgets are set. Many projects have been initiated around needs but executed around wants, automatically putting projects at risk of budget overruns that leave everyone disappointed.
Budget for surprises
When it comes time to estimate costs, be realistic. Make sure to get input from all applicable stakeholders. More importantly, build in contingencies. This step is essential. You need to factor in things outside of your control, such as external environmental considerations that may impact pricing of supplies, resources, labor, financing, product/service shortages, currency exchanges and so on. Today’s price or rate may not carry through to the later stages of a project. Make sure vendors can deliver on their promises and prepare a backup plan. Getting input from other stakeholders and vetting suppliers and vendors can go a long way to setting a more realistic budget that can be met, even if there are unforeseen circumstances that impact costs. I’ve seen many project managers get caught off guard with escalating costs, suppliers that couldn’t meet quoted obligations or other issues. Plan for surprises, so you aren’t blindsided.
Develop relevant KPIs
You can’t effectively manage a project budget without establishing key performance indicators (KPIs). KPIs help you ascertain how much has been spent on a project, the extent to which the project’s actual budget differs from what was planned, and so on. Here are just a few commonly known and used project KPIs that are essential to effective project budget management:
Actual cost (AC), also known as actual cost of work performed (ACWP), shows how much money has been spent on a project to date.
Cost variance (CV) indicates whether the estimated project cost is above or below the set baseline.
Earned value (EV), aka budgeted cost of work performed (BCWP), shows the approved budget for performed project activities up to a particular time.
Planned value (PV), aka budgeted cost of work scheduled (BCWS), is the estimated cost for project activities planned/scheduled as of reporting date.
Return on investment (ROI) shows a project’s profitability and whether the benefits have exceeded the costs.
Revisit, review, re-forecast
A project left to run without budget management and re-forecasting will lead to failure. Frequent budget oversight is essential in preventing budgets from getting too far out of hand. A 10 percent budget overrun is far easier to correct than a 50 percent overrun, and if you don’t keep an eye on your budget and re-forecast, that 10 percent overrun can turn into a 50 percent overrun before you know it. Your chances of keeping a project on track with frequent budget review are far greater than if you forecast once and forget about it.
Just as a project’s budget needs to be constantly revisited to keep it on track, so too do the project’s resource usage, since the people working on a project contribute to its cost. Project managers should review the number of people currently working on a project and the project’s future resource needs on a weekly basis. Doing so will ensure that you’re fully utilizing the resources you have and that you have the right resources ready for the rest of the project. Regularly revisiting the resource forecast will help keep your project budget on track. 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 creating change orders for work that isn’t covered by the project’s initial requirements. Change orders authorize additional funding for the project to cover the cost of extra work and thus keep the project aligned with its new budget.
Keep everyone informed and accountable
An important part of staying on budget is to make sure all team members are aware of the current budget status as well. Keep the project team informed of the project budget forecast. An informed team is an empowered team that takes ownership of its projects. By keeping the team informed of the budget status, they will be more likely to watch their project charges and far less likely to charge extra “gray area” hours to your project — hours they know they worked but weren’t clear about what they were working on.
The project budget must be a living part of your projects — something you review with your team and stakeholders on a regular basis. Project managers who carefully watch budgets throughout the lives of their projects will keep stakeholders and management happy and thus experience greater project and career success.