4.1.2.2T Techniques to Get a Project Back on Budget

(4.1.2.2T.P1)

Project managers need to manage schedule and costs on their project. The sponsor has agreed to pay a certain amount of money for a certain solution. If the solution ends up costing more than anticipated, the solution may or may not make as much business sense.

Managing the budget is vastly different from company to company. In many organizations, project budgets get fixed early and project managers have very little flexibility dealing with changes to these budgets. After the budget is allocated, it may take much more work to try to have it increased if the work is costing more than anticipated. However, in just as many organizations (perhaps more) the budget is meaningless to the project manager. These organizations typically use internal resources for projects and they do not have the accounting processes to manage project costs. The project managers try to manage the schedule to hit the estimated end-date, but they have no responsibility to estimate or manage project costs.

If you monitor costs regularly, you should know very quickly if you are trending over your budget. This control process is somewhat more difficult than managing the schedule, because there could be a variety of reasons why your financial information is not as good or as accurate. With scheduling, you know right away if you missed an end-date. With the budget, you may not always know.

There are a couple reasons that managing the budget is more complex.

  1. First of all, you rarely spend money at a constant rate. So, you need to understand what you expected to spend during the period, as well as what you actually spent. In most companies, financial information also comes in on a lag. For instance, you might not know the financial status of your project for the current month until well into the following month when the budget reports are released.

  2. Timing is another problem. You need to know when your company recognizes expenses in your financial systems. You might recognize an expense when you receive an invoice, or perhaps not until you pay an invoice, which may be much later.  If your company uses purchase orders, your project may actually get hit with a project charge when the purchase order is generated, even if the actual invoice is not paid for weeks later. Depending on your budget, this may cause expenses to hit early and may make it appear that you are trending over budget, when really you are not. The expenses are just hitting your budget earlier than you had planned.

  3. Another potential problem with budgets is that charges can get misallocated from one project to another. One of the first activities of a project manager when he receives the latest budget reports is to validate that the details are correct. This requires the project manager (or a designee) to review each line item. Depending on your financial controls, there are usually many opportunities for false charges to get allocated to your project. You could have great accounting software, but if someone enters an incorrect project code, you may get charged for the expenses from someone else’s project. This cleanup effort is normally not very time-consuming – if you do it every month. In most organizations, if the project manager finds a potential problem, the matter can be brought to the attention of an accounting resource for correction. The project manager needs to then ensure that the charge is appropriately credited in the next month.

Of course, there are times when your project expenses may end up on someone else’s project as well. So, if you know that you are missing some expected expenses for your project, it would be important for the accounting staff to track them down as well. If you just assume the charges will not hit your project, you may be in for a surprise later in the project when the other project manager discovers that the charges to his project are erroneous. 

After ensuring that all of the project expenses are valid, if you find your project is trending over budget, you must first validate the cause. If you can determine the cause, you will have a much better idea of what options are available to try to get back on track. There are a number of techniques you can apply to try to rein in spending to get back within your budget. 

Work Unpaid Overtime (4.1.2.2T.P2)

This option takes advantage of the situation where your employee staff does not get paid for overtime. It is usually the first place to look and a team may rally around overtime to get a project back on budget in the short term. The logic is that you can get more work done for the same cost, since you do not have to pay your internal resources for the overtime. If you are toward the end of the project, you also may be able to issue comp-time after the project is completed. However, this is usually not a good solution for very long. 

Swap Human Resources (4.1.2.2T.P3)

If you were trending over your deadline, you may want to swap resources to get your project back on schedule. Usually you want to swap inexperienced and less productive resources for ones that are more productive and more experienced. However, when you are dealing with an over-budget situation, you have a different motivation. You may need to see if there are less expensive resources that can be applied to activities instead of higher paid resources. In fact, if cost containment is more important than the deadline, you may be willing for the work to take a longer time if it ultimately can be completed successfully at a reduced cost. This technique could also be used to replace a contract resource with an employee resource, if the employee would end up costing less for your project.

Eliminate or Replace Non-Labor Costs (4.1.2.2T.P4)

It may be possible to utilize less costly materials, supplies or services than what was originally budgeted. For instance, you may ask travelers to stay at a discount hotel chain instead of more upscale accommodations. You can see if team members can utilize existing upgraded hardware instead of new machines. You can substitute less expensive computer-based training, or team mentoring, for previously scheduled formal training classes. You may have to send one person on a traveling activity, instead of two that were previously planned.

In each of these cases, you are attempting to satisfy the original need, but by using a less-costly alternative. 

Implement “Zero Tolerance” Scope Change (4.1.2.2T.P5)

This technique can be applied to help remedy a project that is either over deadline or over budget. Many projects begin to trend over their budget because they are doing more work than they originally committed to as a result of poor scope change management. If you are at risk of missing your budget, the project manager must work with the client and team members to ensure that absolutely no unplanned work is being requested or worked on – even if it is just one hour – unless formal scope change management is invoked. All other energy should go into cutting costs and completing only the core work that was agreed to, unless you get incremental funding for scope changes.

Use Budget Contingency (If you have it) (4.1.2.2T.P6)

If you are fortunate, your initial budget included a contingency to account for the uncertainty and risk associated with your estimate. For instance, it would not be unusual for a project to include a 10% contingency. The contingency is separate from the project budget. If you can complete the project within your initial budget, the contingency should all be returned to the company. If you find that your over-budget situation is caused by activities that are costing more than estimated, the contingency budget can be tapped. When you do this, make sure your sponsor and key stakeholders know so that you manage expectations about the amount of contingency funding remaining.

Improve Processes (4.1.2.2T.P7)

There may be cost overruns caused by inefficient internal processes. Get team member feedback and look for ways that are within your team’s internal control to streamline processes. If there are cost implications caused by external processes, try to negotiate changes to the processes on a going forward, or at least a temporary basis.

This is a good technique for longer projects since you have a chance to optimize your project processes, see the results and optimize some more. However, it may not make sense for smaller projects. It is hard to do much process improvement on a 30 day project. By the time you would want to make any process improvements the project would probably be over. 

Regain Commitments (4.1.2.2T.P8)

Work with team members to evaluate future work, re-validate estimates, and gain commitments to complete the remaining work within budget. (See 4.1.1.3T section on Regaining Commitments for more information.)

Re-bid or Renegotiate External Contracts (4.1.2.1T.P9)

In prior techniques you looked at opportunities to replace human resources and eliminate or swap non-labor items. However, third-party resources may not need to be swapped or replaced. It may just be possible to renegotiate the process and terms. If you have contract labor, perhaps you can negotiate a reduced fee. Perhaps your software vendor will take less money for their product. All of your external costs should be evaluated to see where savings can be achieved. In many cases, the vendor will be willing to work with you on lower prices – especially if the other option is to drop their products or services entirely. However, in some cases, the vendor may be willing to trade off one benefit for another. For instance, perhaps a contract resource will reduce his rate in exchange for additional work hours. Perhaps a vendor will take less money in exchange for getting paid earlier. The larger the value of your external contracts, the more flexibility you have to negotiate different terms. If you are over budget, especially on a large project, all of the vendors should be reviewed for potential cost savings.

Set Up More Detailed Cost Accounts (4.1.2.2T.P10)

Just as it is difficult to manage activities that have a long duration, it can also be difficult to manage the budget if the funding is all in one place. In both cases, the difficulty arises because you have a hard time understanding where you are at any given time. One technique to provide more budget control is through the use of more detailed cost accounts.

Cost accounts are ways to allocate funding for your project so that you have more precise control. Instead of having one large budget with all of your costs, you can separate your overall budget into lower level cost accounts. For example, you could set up a cost account for each phase of your project. You could also set up a cost account for each deliverable. Since these budgets are now allocated at the lower level, you are in a position to know much earlier if you have budget problems.

For instance, you could set up a cost account for the Analysis Phase of a project. When the Analysis Phase is completed you could compare your actual spending with the budget for this phase. If you are over your budget, that would give you an indication that you are trending overbudget for your entire project. If you do not have the budget broken down into these smaller cost accounts, it may not have been obvious how much you expected to spend on the Analysis Phase and how much you actually did spend.

Scope Back the Work or Ask for More Budget (4.1.2.2T.P11)

One option that is usually available for both an over-budget and over-deadline situation is to look at the work remaining and negotiate with the client to remove some of it from the project. If the remaining work is all vital to the solution, this discussion still might need to take place as a last resort. There may be options to complete this project on-budget with less that 100% functionality, and then to execute a follow-up project to complete the remaining requirements. 

The other alternative of last resort is to request additional budget and see if you can complete the original work requested if you are given more money. 

The key point is that you don’t jump to this alternative as soon as you start to trend over your budget. You should first try the other multitude of proactive options available to try to get back on budget. You should only fall back on reducing scope or asking for more money if all the other tools and techniques fail.