PM-Foundations – Is my project funded?

When I worked as a project manager on the client side of the fence, on a regular basis I would have a discussion with my project sponsor that went something like this:

Sponsor: We are going to need to slow down our spending on the project until the end of the quarter.

Project Manager: How can this be? Our budget is already approved by the Steering Committee.

Sponsor: I understand, but the company is struggling to hit it quarterly financial goals, and I have been asked to contribute to the cost saving required to achieve these goals by delaying spending on our project.

Project Manager: You realize that continuing to stop and start activities on our project has an adverse effect on the overall timeline and effort / budget? In addition, it makes it difficult to maintain continuity from a resource perspective when we continue to implement actions of this nature.

Project Sponsor: I understand, but this decision is out of my hands. Help me understand the impact on the project, and I will communicate it when I present the proposed spending delays to my manager.

This is a disheartening experience for project managers because the project team is working hard to meet deadlines, and then due to situations outside of their control, the project is delayed (or in a worst case, put on hold). Project managers that are unaware of the difference between the project budget and project funding are often shocked when this situation occurs. Many project managers believe that once their project budget is approved they are “free and clear” to spend the approved amount. The reality is that as the project progresses, events can occur at the project, portfolio or organization level that cause the project budget and funding to be reevaluated and adjusted. Examples of these events include:

  • The project is taking longer and/or costing more than originally expected
  • The project benefits are less than originally anticipated
  • Other projects are now more important than this project (shifts in emphasis at the portfolio level)
  • The organization needs to cut costs (the discussion described above)

This post describes certain aspects of the project budgeting process that help the project manager work through project funding related events.

The Project Budgeting Process

The development of a project budget represents a “build up” costs from the lowest level activities planned in the project schedule to the point that a project is fully funded within the organization’s cost budgeting processes. The diagram below provides a depiction of the cost build up process.

The following explains each of the components of the process of building up to the overall cost budget:

  • Activity Costs: Represents the cost associated with specific activities in the project schedule. For labor related activities the activity cost is derived from the activity hours times the labor rate for resources assigned to the activity. For material related activities the activity cost represents the material cost assigned to the activity (e.g., purchase of software, infrastructure).
  • Work Package Costs: Costs associated with a work package represents the roll-up of the activity costs for a specific deliverable. Generally this cost can be viewed in the project schedule in the form of a summary task for the deliverable (work package).
  • Control Account: A control account is another name for cost categories that are reported on in the project budget. Control accounts are generally either types of costs (internal labor, external labor, software, infrastructure), or costs associated with major work efforts (project phases or work streams). Control accounts are also where the breakdown between capital and expense amounts are captured. Control account amounts are reflected in the project budget summary, and are derived from the sources for labor and non-labor costs (see previous slides).
  • Project Estimate: Represents the sum of the Control Account amounts (without the project contingency, unless the contingency is included in a control account).
  • Contingency Reserve: Represents the project budget reserve required to mitigate known project risks. Generally the contingency is derived as a percent (%) of specific control accounts or work packages with the associated risk. The best practice is to report contingency as an explicit number either separated on the budget summary, or as a separate control account.
  • Cost Baseline: Represents the total project budget, including the project contingency reserve. This is the amount that the project manager reports against throughout the project life cycle.
  • Management Reserve: Represents the amount that is included in the project funding to account for unknown risks. The management reserve is reflected in capital plans and/or departmental budgets.
  • Cost Budget (Project Funding): Represents the total amount funded for the project, including management reserves. This is the amount that the departmental budget managers are reporting against throughout the financial reporting lifecycle (with input from the project manager). This is also the amount that is reduced when the organization needs to impact the amount spent on a project during a specific time period.

Capital vs. Expense Project Costs

The concept of capital vs. expense related costs is another important area that has a direct impact on project budgets and funding. Under American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1 companies are able to capitalize the costs associated with developing or purchasing software designated for internal use. Capitalization allows organizations to defer certain costs related to the software development effort to be amortized over future periods. Expense related costs must be reported in the period in which the costs are incurred. Only certain cost types may be capitalized, and only during particular stages of the internal software project. Expense related project costs are scrutinized much more frequently and closely than capital costs because they impact the current financial reporting period (vs. future periods).

As a project manager, it is important to understand the organization’s specific policies and procedures associated with SOP 98-1. These policies define how costs are categorized as capital vs. expense within the project budget. These policies also outline how the project manager must capture and report capital vs. expense project costs throughout the project life cycle.

The chart below depicts the breakdown of capital vs. expense costs within the project budget.

Project Funding

Although as the project manager, you will likely have limited responsibility for project funding, it is important to reconcile the funding model (cost budget) to the cost baseline for the project. This process starts by understanding when your project is approved by the sponsor team whether or not it is fully funded. Fully funded refers to the fact that the project is accounted for in Departmental Budgets (Expense budget) and/or Capital Plans (Capital budget).

Another important aspect of the funding model is not only comparing the total project budget to the total amount funded, but also understanding the timing of the project funding vs. the cost baseline. Differences between the cost baseline and the cost budget represent the Management Reserve or Deficit. Underfunding situations (deficit) at any point in time requires some action prior to executing on the project as planned:

  • Does the underfunding situation require specific activities to be delayed?
  • Can funds be pulled forward (spent in an earlier time period) to resolve the underfunding?

The chart above provides a depiction of the comparison of project funding (cost budget) to the cost baseline.

 

 

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About Steve Hart
Practice Manager responsible for project leadership & delivery services for the Cardinal Solutions Group in the RTP area. I am a PMP with 25 years of project management and technical leadership roles, have developed an extensive practical knowledge that spans a wide variety of industries, and project delivery approaches. As a practicing PMP, I am a member of the North Carolina PMI chapter. I am an avid sports fan, particularly the Miami RedHawks, Cleveland Indians, Cleveland Browns, and most recently the NC State Wolfpack.

5 Responses to PM-Foundations – Is my project funded?

  1. Pingback: PM-Foundations – Is my project funded? | #PMChat

  2. jfranzlien says:

    Great post, Steve. I’ve had those conversations about funding shifts with project managers and project teams. As you say, that point where the shift occurs is disheartening and often confusing for those responsible for the delivery. Also confusing for newbies who expected that initial approval meant free and clear spending to the end of the project.

  3. I’m still learning from you, but I’m trying to achieve my goals. I certainly enjoy reading everything that is written on your site.Keep the aarticles coming. I enjoyed it!

  4. Vincent says:

    Can you discuss Portfolio Budgeting Process next? I manage a portfolio with 28 projects, each project is reviewed and approved separately throughout the fiscal year. We roll up each project budget into the portfolio budget projecting quarterly forecasts throughout the life of the portfolio.
    Exec Comm sets target of 10 spend variance against baseline forecast for the year set at the start of the FY. But how do I meet that target when my forecast will change when each project is approved. I argued that this spend variance target should be pegged against the revised forecast of the previous quarter. Given it takes at least 3 months to approve and execute a contract at my organization. Thanks for the help. Appreciate your SharePoint tips and write ups. Big fan here!

    • Steve Hart says:

      Thanks for the kind comments. I need to think about your question a little bit. When managers talk about project based budgeting, they usually focus at the project and program levels. At the portfolio level there is usually more concern about ROI. I will get back with you on this one.

      Steve

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