Tracking Financial Obligations

In addition to collecting information on the status of tasks from your team members , you will also have a responsibility to collect information on the financial aspect of your project. You will need, and generally be required, to meet with your project sponsor to report the status of the cost of the project. When variances exist, you ll likely have to document these variances in a Cost Variance Report. This report explains the variance, the cause of the variance, and the impact on the project s success. You will have to be able to report on a regular schedule the following items:

• The amount of finances spent on the project to date

• Any cost variances

• Actual costs versus the budgeted costs

• Value of work performed

• Cost variances and offset

• Suggestions, when necessary, to reduce the cost of resources

Controlling Finances

Your organization probably already has set processes for how requests for payments, purchase orders, and payment on invoices are handled. If you are not familiar with the internal flow of paperwork, the approval of funds dispersed, or the procedure to supply purchase orders versus payment on invoices, speak with your project sponsor or company comptroller, who ll be happy to give you an education on the process.

In addition to just knowing where to route papers and whom to call when invoices are due, you ll need a formal approach to tracking and analyzing the actual costs. You can use a number of ways to create a system of collecting this information, though Microsoft Excel and Microsoft Project are two of the best tools available to project managers. In addition, you ll need organization and a regular schedule to update the expenses on your project.

Here are some terms you ll need to be familiar with to track and compute your project s finances:

• Budget at Completion (BAC) The amount of money budgeted for your project prior to the start of the project implementation phase. This is the expected cost of the project.

• Actual Costs (AC) The amount of money actually incurred by the project to date.

• Cost Variance (CV) The difference in the amount of budgeted expense and the actual expense. A negative variance means that more money was spent on the service or goods than what was budgeted for it.

• Earned Value (EV) The value of the work performed. Earned value is a dollar amount assigned to the value or worth of the work performed by the project team or vendors . The percentage of the work completed allows the project manager to compute the amount of the Earned Value for the work unit. Earned value can be calculated a few different ways, but the most accessible formula is simply EV=% of work complete BAC. For example, if the project s BAC is $200,000 and the work is 10 percent complete, the EV is $20,000. More on Earned Value in a moment.

• Qualitative value A successful project will produce attributes that are not easily tracked, such as improved customer service, improved quality, and better process to complete tasks within the organization. You ll need metrics in place to measure these nondescript terms.

Tracking Actual Costs

Tracking the actual cost of the project is done by collecting the amount charged on invoices from vendors and consultants, and the dollar amount assigned to the team members hours or the tasks they are completing. The ongoing sum of this collection is the actual cost of the project. This includes rework due to lack of quality, waste from materials, and purchased time from consultants , subject matter experts, or vendors.

The invoices you receive from vendors will be, obviously, a result of the goods or services rendered. The deliverables (service or goods) stem from a commitment document ”which is a generic way of referring to a contract, a purchase order, or letter of intent. This leads to the committed cost. A committed cost is the amount of money approved and assigned to a portion, or the entirety, of a project. On a regular schedule, you apply the committed cost to the actual cost. As Figure 8-4 demonstrates , the process of applying the committed cost to the actual cost should result in a balance based on the original budget creation.

Figure 8-4: The committed cost and actual cost should balance.

The comparison of the actual cost and the committed cost should reflect on the cumulative budget cost for the entire project. If there are inconsistencies, a line item comparison of the goods and services delivered against the cumulative budget may be required. Discrepancies between actual goods and the committed cost may arise from flux in hardware prices, additional services or features added, or an error on behalf of the vendor (at least you can call it an error). Refer to your contract for details on price overruns.

The key to controlling the finances within your project is to safeguard your budget and react to cost variances as soon as they appear. This requires a routine to confirm the cost of goods or services delivered and the cumulative budgeted costs. You can automate this procedure within Microsoft Excel and Microsoft Project.

When cost variances happen, and sooner or later they will, you will need a plan to analyze the costs and see what offsets may be made to control the total actual costs for the project. In other words, spending $5,000 for a consultant s time that was not planned for will leave your budget $5,000 in the red. ( In the red means a negative balance. In the black means a positive balance.) You will either have to find a solution of how costs may be reduced or approach management for additional funding.

Your first approach is to examine the budget to see how the extra expense can be reduced. You can reduce expenses by

• Using less expensive resources

• Assigning additional resources to a task to complete it sooner and reduce its overall labor costs.

• Arranging the PND so tasks are SS rather than FS

• Reducing the cost value allotted to the management reserve

Determining Earned Value

Earned Value is an excellent system to test, in an ongoing process, if the work completed on a project is in alignment with the budgeted costs for a project. Earned Value is a measure for project performance. This approach to financial management is ideal for hourly workers such as consultants, application developers, and resources that have a fixed hourly rate.

Earned value project management evolved from the early 1900s from the factory floors. Industrial engineers created a formula to predict the value of a factory. Their formula has three variables : earned standards (what the factory actually produced), the accumulative costs incurred, and the original budgeted costs. To use the formula, the engineers took the earned standards number and compared it to the actual costs amount. Then they compared the earned standards with their planned goals for the factory output.

The comparison of values allowed the engineers to predict the profitability for a company based on the output and costs of the workers and machines within the factories. Based on these figures, changes could be made to streamline production, address actual costs, or determine a plan of action for a less-than -profitable output.

To apply this formula to today s world, a project manager needs to first have completed all of the planning stages. Specifically, the project manager must have the WBS completed with accurate predictions of the amount of time required for each of the work packages. While some of the time required may be little more than estimates, there must be a serious attack on calculating time for each work unit, as addressed in Chapter 5. Without an accurate account of time for each task within a project, Earned Value is not reliable because it compares the current output with the predicted output.

Earned Value Management (EVM) has a few fundamental values:

• Planned Value (PV) Planned Value is how much the project should cost to get to a specific point in the schedule. For example, if a project has a budget of $100,000 and month six represents 50 percent of the project work, the PV for month six is $50,000. Planned Value used to be known as the Budgeted Cost of Work Schedule (BCWS).

• Earned Value (EV) Earned Value is representative of the work completed to date regardless of how long it took to accomplish it. For example, if a project has a budget of $100,000 and the work completed to date represents 25 percent of the entire project work, its EV is $25,000. Earned Value used to be known as the Budgeted Cost of Work Performed (BCWP).

• Actual Costs (AC) Actual Costs is the actual amount of monies the project has required to date. For example, if a project has a budget of $100,000 and $35,000 has been spent on the project to date, the AC of the project would be $35,000.

• Cost Variance (CV) A Cost Variance occurs when the actual cost of the project work is more than the EV. For example, your EV is calculated to be $25,000, but you had to spend $35,000 to get there.

• Schedule variance (SV) A Schedule Variance occurs when the EV is less than the PV. For example, the project is supposed to be worth $75,000 in month six; however, at month six your EV is only $45,000. You ve got a whopping SV of $30,000.

To implement Earned Value Management, the project manager collects the status of the computed percentage of tasks completed. For example, as team members report their status of hours applied to their assigned duties , your project management software can report a percentage of the task completed. Each work unit that has a predicted number of hours can be assigned a dollar amount as well. For example, if Marcy the programmer needs 36 hours to reach a particular milestone, and her hourly rate is $130, the dollar amount assigned to the work is $4680.

If Marcy has completed 12 hours of the work, and is on schedule now at a third of completion, the earned value is 33.33 percent of $4680 (the total cost of the work unit), which is $1560. However, if Marcy has completed 12 hours of the work, but reports that only 20 percent of the project is completed, the earned value is now out of sync with budgeted costs. The cost of the work unit has just risen to $7800 if Marcy stays on this schedule of production.

The primary benefit of predicting Earned Value is that a project manager can predict if the project is going to be in financial trouble early on in the implementation phase, as Figure 8-5 demonstrates. Unfortunately, many IT project managers simply do not take the time necessary to predict the Earned Value of their project as they implement it. It is not a hard process and should be, quite frankly, mandatory to keep expense in alignment.

Figure 8-5: Earned Value can predict if a project will be financially strapped.

Let s take a look at the EV formula in action. This example is of a project that has a budget of $250,00. The project is 15 percent complete, but it should be 20 percent complete by this point in the calendar. In addition, the project manager has had to spend $43,000 of his budget just to get to this point in the project:

Term	Value	Definition
Budget at Completion (BAC)	$250,000	This is the expected cost of the project.
Percent complete	15 percent	The actual percentage of the work completed as reported by the project team.
Earned Value (EV)	$37,500	This is simply 15 percent of the BAC.
Planned Value (PV)	$50,000	The Planned Value is what the project work should be worth by this point in the project.
Actual Costs (AC)	$43,000	The Actual Costs reflect the amount of funds the project manager had to spend to get to this point in the project.
Cost Variance (CV)	$5,500	This is found by subtracting the AC from the EV. This project is off budget.
Schedule Variance (SV)	$12,500	This is found by subtracting the PV from the EV. This project is off schedule.

On the CD-ROM, in the CH8 folder you will find an Excel file named EVWorksheet that you can use to calculate your own earned averages for your projects. You will be working more with computing Earned Values in an upcoming exercise.

Calculating the Cost Performance Index

The Cost Performance Index (CPI) is a reflection of the amount of actual cumulative dollars spent on a project s work and how close that value is to the predicted budgeted amount.

For example, as Figure 8-6 depicts, a total network upgrade project has a budget at completion of $209,300 , and to date the project has spent $34,500 on Actual Costs. Based on the percentage of the completed project, which is 15 percent, the EV is $31,395. The Planned Value, however, is $ 36,000. The project also has a CV of $3,105.

Figure 8-6: CPI reflects how closely the project is following the budget.

To compute the CPI for this project, the Earned Value, $31,395, is divided by the Actual Costs, $34,500. This results in .91, which means the project is 9 percent off the target rate of spending for this stage in the project. The project manager can use this information to reschedule resources, adjust schedules, reassign tasks, and, if worse comes to worse , ask for additional funding.

Calculating the Scheduled Performance Index

The Scheduled Performance Index (SPI) is a formula to calculate the ratio of the actual work performed versus the work planned. The SPI is an efficiency rating of the work completed over a given amount of time. It is not a dollar amount, but rather a percentage of how closely the completed work is to the predicted work. The formula to calculate the SPI is fairly simple, as Figure 8-7 shows.

Figure 8-7: SPI is the ratio of the work planned and actual work performed.

If the result of your formula is 1, you are on schedule. If the result is less than 1, you are behind schedule. Of course, if the result is greater than 1, you are ahead of schedule. For example, if the EV is $18,887 and the PV is $20,875, the SPI is .90, which is less than one, so this project is not on schedule.

Calculating the To-Complete Performance Index

Once you ve calculated the SPI, and you realize your project may be late, your first thought is, How can we get back on schedule? Okay, that s not your first thought, but pretend it is.

To predict how much harder you and your project team will need to work to finish the project on time and on schedule, you ll need to calculate the TCPI, which stands for To-Complete Performance Index . At the end of the formula, which is shown in Figure 8-8, if the number is greater than 1, you ll have to buckle down and work harder. If the result is 1 or less, breath a sigh of relief, you can make it on your current schedule.

Figure 8-8: TCPI is a formula to predict the ability of a project to stay on track.

To put the formula in action, assume the BAC is $75,000 and the EV is $5000. The Estimated at Completion (EAC) is $75,000 and the AC is $7500. This formula would read TCPI=(75000-5000)/(75000-7500) and equate to 103.7 percent. Which means, in English, you and your team will have to work 3.7 percent harder than originally planned to finish on time and on budget; basically, you re in a little bit of trouble, but not much. You ll likely need a little bit more time, more money, or both.

From the Field

Interview with Jason Duigou

Name : Jason D. Duigou
Title and certifications: IT Administration Team Leader; Lotus Notes Principle CLP
Administration; Lotus Notes Principle CLP Development; MCSE
Years as an IT project manager: 4

Jason Duigou is a project manager for a leading Fortune 500 company. During his 12 years of experience in information technology, his previous positions included director of operations for a consulting firm; manager of information systems at a graphics company; senior systems analyst; and freelance consultant. Jason stays actively involved with local, national, and international IT groups by participating in shared learning conferences, seminars , and trade shows. Jason also volunteers his time teaching the youth and single parents in his community by demystifying technology and helping them understand how it can apply to their everyday lives.

Q: What is the most important thing a project manager can do when starting the project implementation phase?

A: Review the implementation plan with all teams , internal and external, to ensure alignment, and provide a clear understanding of the objectives, roles, and responsibilities of all resources during the project. Verify that all questions regarding the plan have been addressed before the implementation.

Q: How much supervision should a project team require from the project manager on any given project?

A: It is the project manager's responsibility to ensure that continual communication throughout the project is achieved. The project manager needs to drive the project by requiring each team's representatives to meet at regular intervals to monitor progress, timelines , costs, and dependencies. Lack of supervision by a project manager can cause the teams to jeopardize the overall success of the project.

Q: Do projects always go perfectly to plan?

A: No. There are always unknown variables that may come into play. Resources are subject to change during the project, company priorities may change, and so on. One example: a component of a project was awarded to an outside contract firm. Midway through the project, the vendor ran into financial difficulty, resulting in a loss of those resources. As a result, resources had to be reassigned to the team from other sources, causing a delay during this phase of the project.

Q: What is the most difficult part of implementing a project?

A: Aligning all the resources to achieve effective results within the time specified for the project. The project manager needs to be fully aware of the progress of each team at any given time in order to be completely effective.

Q: What processes should be in place for the team members to report their successes, or failures, on project tasks?

A: Many processes and tools may be used. It comes down to what works most effectively for the team members and their relationship to one another. A close-knit group can simply gather and give regular reports. Large, virtual teams separated by geography and radically different time zones can present communication challenges. In this case, shared electronic project management is most practical. Tools that are accessible via browser over secure connections provide the greatest flexibility, since they do not require specific software to reside on the local PC. Such tools need to have digital dashboards to quickly display and monitor the progress of all units and dependencies at any given time. Often the tools include collaborative discussion, shared information repositories, and all project details including timelines. Other enhanced features such as auto-notification and alerts based on roles and assignments are beneficial as well.

Q: Do you use a software program to track team progress?

A: For small-scale projects, I use the commercially available products such as MS Project. For larger collaborative initiatives, I use a series of customized tools that are accessible via browser over a secure extranet connection. This provides the greatest flexibility since it does not require specific software to reside on the local PC.

Q: How can a project manager successfully track the budget and expenses in a large, multiphased implementation?

A: The project manager must have the right tools for the job to provide dynamic data at any given point in time. This enables the project manager to proactively monitor the project including budget and expenses as they are reported. This offers the option to throttle resources forward or backward as necessary.

Continual communication and commitment on the part of each unit or resource is absolutely necessary in order for the data to be current and accurate. Without such tools and communication, the project manager risks being blindsided at some point during the project by resource deficiencies.

Q: What methods can a project manager use to inspire a team to perform under a tight project implementation?

A: Ongoing reward and recognition is crucial in order to motivate a team, especially when faced with common challenges such as time, resources, or money. First of all, it is important to share lessons learned from previous project implementations to help guide the team in approaching tasks in the most efficient manner to avoid common pitfalls. Next, you need to recognize or offer praise when teams exceed expectations. Speed, quality, and value should always be rewarded via peer or formal recognition methods. This can happen when a time-saving or money-saving event has occurred. It is important to highlight these events whenever possible. The project manager should not overlook recognition, whether formal or informal. Recognition drives motivation and the project, and everyone involved can reap the rewards as well.

Q: What methods do you use to resolve team disagreements once the project is in the implementation phase?

A: It is important to capture the rationale around each decision point made during a project. You need to also continually elicit feedback from each member on the team during this process and provide continual updates and communication to assure everyone is aligned and focused on the same goal. Disagreements are often caused by miscommunication or lack of input from a particular unit on the team, or even at the introduction of a new resource. At that point, you need to evaluate the feedback by placing it into the proper perspective, which is done by referring to the decision point at a high level. This enables the team to measure the input against a baseline of information. The expectation should be set that the team needs to present alternate ideas with their arguments that allow the team to focus on possible solutions instead of stalling on an unfocused debate.

Q: What is the most difficult part of implementing a long-term project?

A: A team can lack focus, motivation, and direction if active participation and communication wanes.

Q: What are the challenges of implementing a short-term project?

A: Short-term projects require a team to work effectively together in order to achieve optimum results in a short time. Well-defined project management processes along with the necessary project tools need to be readily available in order to jumpstart a project as quickly as possible.

Q: What are the advantages, or disadvantages, to contracting the project implementation out to an IT integrator?

A: If you have limited resources, contracting a project is the ideal way to achieve the desired results. There can be disadvantages if this type of relationship is new or the IT integrator or its resources are not reputable.

Q: What are some pitfalls new project managers may encounter when they start to implement a new project?

A: New project managers need to thoroughly plan and elicit input from other project managers, subject matter experts, or lessons learned documentation before diving head first into a project. Project managers need to stay actively engaged in all phases of the project and provide clear, continual communication. They must also keep their finger on the pulse of the project at all times. Without clear direction, communication, and feedback, a team can waver, resulting in an inefficient project and a frustrated project manager.

Q: Can you share an experience with a difficult project implementation and how you finished the project?

A: One particular project involved a high-impact deployment of a software package that had to be delivered to every employee in a global enterprise. The project was severely hampered when significant issues were uncovered with the software package. Steps were taken to prioritize and triage these issues with the vendor. The project was modified to allow for the extended timeline and resources as necessary. By proactively monitoring the progress of the project, we were able to identify, diagnose, and report the issues in a timely and efficient manner. Following the partnership with the vendor, the product issues were corrected, and the project was completed successfully.

Q: What advice do you have for aspiring project managers?

A: Learn from the successes and failures of other projects. Peers and mentors can provide a wealth of information, often highlighting issues not taken into consideration. Communication is the key! Begin building your project manager network. Learn all you can, and then share what you have learned with others. Your learning point may help another project manager avoid pitfalls and costly mistakes.