The importance of costs and financial knowledge

Cost always matters. Even on projects where the sponsor and stakeholders say 'Money is no object', which is sometimes true, there will come a time when cost does matter. Costs matter in the private sector because costs come from revenues, and if costs exceed revenues then there is no profit and the enterprise becomes insolvent. In the not-for-profit and government sectors, costs also matter, because although there is no profit, budgets are finite (because resources are finite) and if costs exceed budgets, then insolvency is also the result[1]. It is because costs always matter, in the end, that the skill of financial literacy is so important in management in any organization, commercial or non-profit. The higher in an organization, the more important financial skills become. The reader who is serious about advancing in project management, or in any managerial career, is strongly advised to take a 'Finance for non-financial managers' course if they have not already done so[2].

The bare minimun

The bare minimum that you must be able to report as a project manager is where the project actually is in terms of cost against the planned budget, today. This should be reported accurately in your regular reports to the sponsor, which will normally be weekly or fortnightly. If you are lucky you will have a project support office to work out actuals against planned as it is called but even then you must not walk away from responsibility for the accuracy of the report. You must understand it and check that it is right by your own rough calculations.

Table 7.1 is a very simple planned versus actuals report (or variance report). It shows all costs as they are at the date of the report, which is what the words 'to date' mean in the row headings. This contrasts with showing the total planned costs for both phases, that is, planned costs as at the end of each phase. Showing total planned costs would be misleading if shown here in this report instead of planned costs to date, because that would not allow us to calculate variance to date. This distinction is important, often critically important; it is a somewhat like the difference between a runner being five yards behind the leader half-way through a marathon, and being five yards behind the leader as the leader crosses the finish line.

Table 7.1. Example of a project cost report, planned versus actuals
Project PHAEDRUS report, 14 June
  Phase 1: Pilot Phase 2: Build Total
Planned cost to date 20,000 45,000 65,000
Actual cost to date 19,000 49,000 68,000
Variance to date + 1,000 - 4,000 3,000
Notes Pilot complete, with 1,000 underspent. Sub-contractor 1 month late. 4,000 additional cost to date for hiring temporary staff because of the sub-contractor delay. A new sub-contractor has started work. The 4,000 may be recoverable from the original sub-contractor, but it may be prudent to budget an additional 8,000.  


Now it is often useful to report the total budget for each phase as well as where the project is currently (or 'to date'). This can be achieved by adding extra rows to Table 7.1, as in Table 7.2.

Table 7.2. Example of a project cost report, planned versus actuals, with durations and dates
Project PHAEDRUS report, 14 June
  Phase 1: Pilot Phase 2: Build Total
Planned duration (weeks elapsed) 8 12  
Planned finish date 10 June 10 August  
Remaining work, planned (weeks) 0 7  
Remaining work, actual (weeks) 0 11  
Planned cost to date 20,000 45,000 65,000
Actual cost to date 19,000 49,000 68,000
Variance to date + 1,000 - 4,000 - 3,000
Notes Pilot complete, with 1,000 underspent. Sub-contractor 1 month late. 4,000 additional cost to date for hiring temporary staff because of the sub-contractor delay. A newsub-contractor has started work. The 4,000 may be recoverable from the original sub-contractor, but it may be prudent to budget an additional 8,000.  


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Definitive Guide to Project Management. The Fast Track to Getting the Job Done on Time and on Budget
The Definitive Guide to Project Management: The fast track to getting the job done on time and on budget (2nd Edition)
ISBN: 0273710974
EAN: 2147483647
Year: 2007
Pages: 217
Authors: Sebastian Nokes
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