“Sometimes one pays most for the things one gets for nothing.” Albert Einstein
No one wants to pay for things that do not provide a convincing and expected value. Every project must demonstrate its worth, else it could be considered of little or no value. A project manager needs a reasonable understanding of the project financial responsibility to demonstrate to the key stakeholders, particularly the sponsor, that the project is on track to deliver the desired outcome at the agreed and expected cost, time and quality. Treat it as a typical seller-buyer relationship. Essentially, you need solid understanding of project estimation and budgeting, financial performance tracking/monitoring and reporting.
Project estimate is usually prepared by the project portfolio management group, prior to formal project approval and initiation, as part of the project conceptualization and business case development. A project manager needs good understanding of project cost estimation to ensure that cost accuracy, within tolerable limits, is maintained during the project life cycle, due to changes in scope and other factors such as inflation, technology etc. Organizations establish tolerable limits using the cost contingency range (measured in percentage) at different stages of the project life cycle.
The preferred or recommended approach to building the project cost estimate, which the client can relate to, is the result based costing. Result based costing is based on the project deliverables. This approach enables the client and stakeholders to trace the cost of delivering the desired project outcome.
A professional will ensure that all costs are captured and avoid any attempt to hide cost in order to secure acceptable funding. Underestimation is a recipe for disaster, a major reason for project failure or mediocre outcome. Overestimation is neither a good thing, avoid it.
Underestimation and overestimation usually occur due to incompetency, organization attitudes or undue influence to control cost in a generic way. For example, the use of across the board cost cutting, which usually impact those who have done due diligence to present realistic cost. People tend to overestimate to catch up with the across the board cost cutting tactics. It is prudent to provide honest and valid estimate you can stand by and defend. Clients disrespect all attempts to overestimate or provide cost without clear justification.
Experienced, knowledgeable and ethical professionals know the importance of sound estimate that can be defended. For cost estimation you may use the top-down approach for a start and validate with a bottom-up approach. Otherwise, you should build the project cost using the bottom-up approach, which enables you to minimize cost contingency or changes in the future.
The key considerations for successful cost estimation include the following:
§ Requirements – the key determinant of what the project will likely cost.
§ Stakeholders/human capital – chargeable fees, resource types and rates.
§ Materials/Equipment – capital and operating assets, facilities and tools.
§ Administration – the overhead cost for managing the project and delivering the product.
Figure 17 shows a result based project cost estimation guide. The approach maps all cost to deliverables, which are combined to deliver the desired project outcome.
- Overestimation and underestimation should be avoided. Underestimation is rare, overestimation is common. The consequences of both are not desirable.
- Underestimation usually results in the delivery of poor or low quality product.
- Overestimation could be considered fraudulent. Sometimes it could be just to cover unexpected issues and risks. However, avoid situation where it could lead to project abandonment.
- Underestimation to reduce time and cost may end up costing you more money and time. Do not try to be ‘penny wise and pound foolish’.
- Do not provide estimate based on unclear needs or scope. Ask questions; do due diligence and state assumptions clearly.
- Cost may change; base it on justifiable or defendable reasons.
You might be thinking this is not real and no big deal, but a seriously business minded organization frown at careless estimates and you may loose respect over time. Even organizations which do not take their estimates seriously will do when they are dealing with limited resources and contending priorities.
Table 7 includes a reference or link to a result based cost estimation workguide template.
“Not everything that counts can be counted and not everything that can be counted counts.” Albert Einstein
A financial report should focus on what is relevant and useful for the stakeholders. Trying to report all possible financial records could overwhelm the audience and may dilute or hide vital information for decision making. The importance of relevant and valuable financial information cannot be understated. The content of a financial report, including the template, is discussed in Part 6 (Deliver Result).
Delegation of Authority (DOA) stipulates guidelines and rules to ensure quality of financial and related activities, by enforcing limited accountability at different assignment levels within the organization. This is a major requirement for auditing and responsible enforcement of financial dealings and service request approvals. It is not about whether or not you are trusted, it is about due diligence to ensure efficient and effective project cost performance tracking and prevent undue abuse of assigned roles and responsibilities.
As a project manager, you need to understand the DOA for your organization in order to effectively plan and secure approvals of key financial related activities for your project(s). You should accommodate the DOA reviews and approvals turn-around in the project plan (schedule). The DOA key elements are included in the Project Checklist section, Part 6 (Deliver Result).