Hello, and welcome to another Parallel Project Training podcast on the APM PMQ syllabus, launching in September 2024. My name is Ruth Phillips, and I’m here with one of our senior trainers, Carmen Campos. Today, we’re going to be discussing budgeting and cost control. Welcome, Carmen.
Hello.
In this podcast, we’ll look at the APM syllabus, where the learning objective is to understand budgeting and cost control as the ability to estimate costs, develop and agree budgets, and monitor actual costs against forecast costs. There’s a lot to cover, as it takes us from the start to the end of a project. We’ll go through the different learning outcomes, and Carmen will guide us on how to manage this successfully in our projects.
The first learning outcome is to know how to create a budget and understand the different costs that will be included. So, Carmen, what is a budget, why do we need one, and how do we go about creating one? Let’s start from the beginning.
A budget is an estimate of the costs that a project is expected to incur throughout its lifecycle. Budgeting is about determining how much money the project will need. To do this, you start by estimating all the costs required to complete the full scope of the project, particularly in linear projects where this is done at the start.
To create a budget, you need a well-defined scope, an understanding of the required resources (both labour and non-labour), and the methods you’ll use to estimate costs. We have another podcast where we discuss different estimation methods. You also need to understand the various types of costs and the assumptions you’re making. Considerations such as overoptimism and bias must also be factored in to ensure that estimates are accurate and validated.
It sounds like creating a budget requires a high level of skill from the project manager, as it involves a lot of detail. You mentioned different types of costs—what are they, and how do they factor into the budget?
Some costs are fixed, meaning they will be incurred regardless of production levels, such as insurance. Other costs are variable, depending on the amount of work or product produced. For example, in a project to build a new rail line, the longer the rail line, the more materials you’ll need—these materials are a variable cost. Insurance for the workers would be a fixed cost, but materials like steel would be variable.
What about labour? Is it fixed or variable?
That’s an interesting one. Labour can be semi-variable. If you extend the rail line, you’ll need more time from workers, making it variable. However, if workers are contracted for the project, you may still need to pay them even if no work is produced, which introduces a fixed element. It also depends on the contract terms—if it’s a fixed price, it leans more towards being a fixed cost; if it’s based on time and materials, it becomes variable.
So, a project manager needs to consider fixed and variable costs, as well as whether the costs are recurring (like monthly software licences) or non-recurring (like a one-off equipment purchase). They also need to determine if costs are direct (specific to the project) or indirect (associated with the broader operation of the business).
If I’m a project manager at the start of my project, how do I capture and organise all this information for my budget?
The most commonly used tool is a cost breakdown structure (CBS), which identifies all the different cost categories associated with the work packages in the work breakdown structure (WBS). It’s crucial to have a well-defined scope because you can use the CBS to collect, record, and later monitor and control costs as part of your financial reporting.
You mentioned the importance of a well-defined scope. How does this work if we’re using an iterative project lifecycle where the scope isn’t defined upfront?
In an iterative lifecycle, you focus on the high-level functionality of the product, the duration of each sprint, and the resources allocated to that sprint. The flexibility lies in the scope, with priority given to requirements. The resources allocated determine the fixed costs for each sprint.
So, the CBS is more applicable to linear projects where costs are derived from the scope and the work required to complete that scope.
Yes, that’s correct. In linear projects, the CBS also helps assign financial codes, which are important for tracking costs. For example, different codes might be used for labour hours and materials, aligning with the organisation’s financial procedures.
After using the CBS and understanding the different costs, you’ll have an overall project cost. But that’s just the start—what’s next?
Once you’ve established the total budget, you need to spread these costs over time. This is important for cash flow forecasting, helping the organisation understand when funds will be required throughout the project lifecycle. A cumulative cost curve is a useful tool for this, providing a baseline for monitoring cash flow and ensuring that funding is available when needed.
If a project has a large budget, it’s vital to keep an eye on cash flow and not assume that the full amount will be needed all at once.
Exactly, and this is where the distinction between fixed and variable costs becomes key. Once the full estimate is in place, you’ll need to gain agreement on the budget, factoring in contingency and any additional efforts across the business. This budget needs approval from the sponsor and senior management, with agreed-upon funding releases at decision gates or per iteration in an iterative project.
So, let’s say we’ve set our budget and gained approval. What’s next?
Even with a well-set budget, ongoing monitoring is crucial. You need to regularly check costs against forecasts, using tools like earned value management (EVM) to track performance and avoid the risk of costs spiralling out of control. Effective budget monitoring also supports risk management by ensuring you can act quickly if unexpected costs arise.
It’s important to monitor both actual and accrued costs, as delays in invoicing can lead to surprises later on. Regular tracking, perhaps even weekly, helps keep everything on track and avoids the “watermelon project” scenario, where everything looks fine on the outside, but issues are brewing beneath the surface.
That covers monitoring and reporting financial performance. What about closing down the finances at the end of the project?
At the end of the project, the focus shifts to closing out finances. This involves ensuring all payments have been made, no outstanding invoices remain, and no more costs can be booked to the project. It’s important to handle any final claims or warranties before completing the final financial report, as this report officially closes the project and returns any unspent funds to the organisation.
You also need to prevent any further bookings to the project while still keeping certain financial systems open for final invoices with longer payment terms, ensuring everything is neatly wrapped up.
That was a thorough review of budgeting and cost control. We’ve covered creating a budget using a cost breakdown structure, identifying different types of costs, forecasting, and refining budgets using earned value management, and finally, closing down finances at the project’s end. It’s been a really informative discussion. Thank you very much, Carmen.
No problem. Thank you.
Fantastic. Thanks very much. Goodbye.
