Tracking Budgetary Expenses

It is very easy for expenses to spiral out of control. Imagine that you are buying a new server. You re talking with your favorite vendor and he s showing you that for a couple hundred dollars more you can have two processors instead of one. And you say, Might as well. Then the vendor shows how for a couple hundred more you can add 200GB more storage. And you say, Might as well. Then the vendor shows how for just a little more you can really up the RAM. Again you say, Might as well.

Might as well are some dangerous words when it comes to shopping, aren t they? It s so easy to tack on some bells and whistles for just a few dollars more. Before you know it, those few dollars more have stretched your budget so thin you ll either have to ask for more funds or skimp on other areas of the project. And it s just not shopping that can ruin your budget. It s also manpower, human error, lack of planning, hidden costs, and general lack of research.

Not only do you need a detailed budget prior to any purchases, but you also need a detailed method to track expenses as they are incurred. This is called working toward your BAC. By documenting each purchase as it s made, you can check the purchase price against your initial budget to confirm that what you planned for is what s actually implemented.

Runaway Projects

A runaway project, as its name implies, is a project that starts out well, gains speed, momentum, and scope, and then causes runaways with your budget, man hours, and possibly your reputation or career. The biggest element of a runaway project is the budget. Project managers often try to throw money at a problem, rather than completing root cause analysis. Too often in project management, there is an attitude of solving problems by spending more money.

Runaway projects happen for several reasons:

• Lack of planning Failure to plan for all aspects of the project. Projects fail in the beginning, not the end.

• Lack of vision Failure to create a definite purpose for the project.

• Scope creep Management and departments continue to add details and extras to an existing project scope. Recall that the project scope is all of the required work ”and only the required work.

• Lack of leadership Without leadership, the project is bound to wander aimlessly and incur additional expenses.

• Lack of a Change Control System (CCS) A CCS is a formal process to evaluate, approve, or decline proposed changes and additions to the project scope.

You can prevent runaway projects by creating a definite, nearly unmovable plan for the project s implementation, budget, and scope as depicted in Figure 4-7. Any additional attributes of the project that are not key to its success should be set aside regardless of the requestor . In all projects, however, there needs to be a process that will allow adamant changes to the project plan. Chapter 9 will discuss this change management in great detail.

Figure 4-7: Many factors can cause projects to run away from the original scope.

Here is an example of what appears to be a simple change to a project s scope: You are managing a project that will create an application with hooks into a SQL or Oracle database. The application will allow salespeople to place an order, check that order against warehouse inventory, and predict a ship date for the customer based on inventory or production.

The original plan of the application called only for tight coupling of the application and the database. ( Tight coupling means the application has to be connected to the database to run.) Now, several weeks into development, management asks that you change the application to allow loose coupling. ( Loose coupling allows the application to run without being directly connected to the database.) Can you see the problem now? Several weeks of development have been centric to tight coupling; now what appears to be a simple change does not reflect the work hours invested in the original application.

In this scenario, management is suddenly adamant about the loose coupling because it enables the salespeople to take their laptops into the field, take orders and store them locally, and then, once they are connected to the network in the office, actually synchronize the orders with the warehouse. The project manager must first meet with management and discuss the change and explain to management how the request will increase the scope of the project. When the scope of the project increases , additional funds will be required, in most instances.

Next the project manager will have to meet with the developers and discuss the new application plans with them. The developers will, no doubt, curse management, slam their keyboards a few times, drink some sugar-rich soda, and then start working the new plan into their project. Because of lack of planning, the project scope has increased, time has been wasted , dollars have been spent, and morale has suffered.

Keeping Track of Expenses

Before the project actually begins, you ll need to work within your organizational policies on how project expenses will be tracked and monitored . In some organizations, budgetary concerns are handled by management with some input from the project manager. In other organizations, the project manager is responsible for the day-to- day accounting of the project budget. There are multiple tools available to help you track the project expenses, but whichever one you use to keep track of your project expenditures, you ll need to include some basic elements:

• Work hours Time is one of the most expensive elements in any project, so you should have a plan for team members to report their hours working on a given project. If you are working with vendors or consultants who will be billing by the hour , create a method for them to report their hours as well. You may need to create a formula to reflect overtime and weekend pay if that is applicable to your organization. Functional managers of your project team members will also want some accountability of their employees time on your project.

• Procured goods Keep track of all hardware, tools, software, cables, and any other item that is purchased directly for your project. Your accounting software should have a method for entering any of these items. Also include petty cash items such as pizza, dinner, and miscellaneous items your team needs.

• Software licensing If your IT project includes software-licensing fees, be sure to document them. In some organizations, the IT department may pay for the initial licensing of the software, but as the software is released throughout the company, other departments have to pay to use the software from their budget. An IT project manager should know how these fees are handled and from whose budgets these funds will flow.

• Workstations and servers If your IT project includes workstations and servers as part of the plan, document the purchase price and installation date of the computers. Obviously, in some plans the implementation of the workstations or servers may in itself be the project. The reason to document the actual expense of the computers is so that if they are recycled into other servers or workstations for future projects, you can reflect the original paid price of the PCs and then diminish the value of the computers in the new project. You likely won t have to get into the details of single-line deductions versus dual-declining deductions for tax purposes, but your company s accounting department may query your decisions and choice to recycle hardware. Often an older workstation can be used as a terminal for Citrix or Windows Terminal Services. Rather than purchasing new PCs, you can incorporate the value of the older but usable PC.

• Actual variances Throughout your project, you may have small variances from what was estimated and the actual cost of the deliverable . For example, you may order supplies for the project at $440 and the actual invoice is $480. While it s only a $40 variance, it s still a variance that s going to add up and count against your budget at completion.

Here is an example of an Excel spreadsheet to keep track of budgetary expenses. This spreadsheet is for the first of three phases for a software upgrade. The actual Excel spreadsheet, named Budget, is available on the CD-ROM.

Each project will, of course, have different needs for computing the expenses committed to that project. This example shows work hours, hardware and software purchased, and any incidentals. The formulas reflect a running total of each week of the project and a total for the project s expense at the phase the project is currently in. You will get a chance to practice creating a budget spreadsheet in an upcoming exercise.

Phase One
Budget for phase	$160,000.00		Amount spent to date	$159,897.89
			Variance	$102.11
Work Hours	Hourly Rate	Week 1 Hours	Week 2 Hours	Week 3 Hours	Hours to Date	Cost to Date
Steve	$21.63	37.0	30.0	39.0	106.0	$2292.78
Sally	$30.53	27.0	25.0	26.0	78.0	$2381.34
Jane	$32.81	38.0	37.5	29.0	104.5	$3428.65
John	$32.31	29.0	40.0	37.0	106.0	$3424.86
Fred	$30.38	35.0	40.0	26.0	101.0	$3068.38
Totals	$147.66	166.0	172.5	157.0	495.5	$14,596.01
Purchases	Cost	Number of Units	Totals
Server 1	$7854	2	$15,708
Application	$89	950	$84,550
Licenses	$45	950	$42,750
Total			$143,008
Incidentals	Cost	Number of Units	Totals
Network card	$21	2	$42
Sound card	$45	4	$180
Mouse	$37	2	$74
Video card	$69	3	$207
RAM	$268	5	$1340
Team dinner	$150	3	$450
Total			$2293

As you can see, this project has ended phase 1 with a surplus of $102.11 ”an excellent reflection of planning and predicting by the project manager. While a surplus of this little amount is acceptable, a surplus of 10 percent or more of the predicted project phase budget is not a reason to celebrate.

Some IT project managers congratulate themselves for coming in under budget. However, there are several problems with large budget surpluses. The first problem is that it reflects poor planning on behalf of the IT project manager. An accurate plan will keep any surplus within 3 to 5 percent of the original budget, including the agreed upon range of variance for the project. The second problem with surpluses is that it creates an attitude of spending. Organizations with surpluses do not feel obligated to return the funds, but rather feel obligated to spend them to justify their original budget and to ensure that their budgets will be as fat on the next project. Poor planning is not a reason to celebrate.

From the Field

Interview with Greg Kirkland

Name: Gregory A. Kirkland
Title: Information Systems Manager
Company: Katz, Sapper & Miller, LLP
Years as an IT project manager: 10

Greg Kirkland has earned a BA in computer information science from Franklin College. He started writing COBOL financial applications out of school, then switched to PC and network support. He worked for a Fortune 200 company in that capacity for 5 years. Greg is now working in one of the largest regional CPA firms in the country as an IS manager. He oversees all technology operations, including infrastructure, O/S, support, and training.

Q: What is the best thing about IT project management?

A: I think getting my hands on the new toys is the most fun. Trying new technology and making the recommendations to deploy that new technology is very rewarding .

Q: When you begin to create a budget for an IT project, what things do you consider first?

A: I try not to focus on the cost. I work for a CPA firm, and they are going to analyze the proposed budget expenditures to the Nth degree. What I try to do is look at what the best solution to the problem is. I consider the best products and services on the market, because I truly believe that you get what you pay for, and spending a little extra up front can save you additional expenses and headaches later.

Q: How can IT project managers get their visions of superb technology in alignment with company budgets?

A: The best way that I have found to accomplish this is to develop a three-year technology plan. We may be dreaming of what we want to do technologically in the future, so I put it in the plan for next year or the year after. That gives me many more opportunities to get our top management time to warm up to the idea of spending that cash when it counts.

Q: Working as an IT professional in an accounting firm must be frustrating at times with your budget. What advice can you offer in regard to preparing budgets for IT projects?

A: When I wrote my first IT budget three years ago, it was a very frustrating experience. I now know that every partner that looks at my budget is going to scrutinize it like they would their clients ' financial statements. I'm not an accountant , but I have been trained to think like one.

I've divided my budget spreadsheet into Capital and Noncapital Expenditure sections. That tells us what our out-of-pocket expenses are this year versus what can be amortized over the life of the product, like a PC. Next, I create categories that match the General Ledger numbers for the firm's master budget, such as Hardware, Training, Maintenance, and Supplies. Know this ”software and software licenses are handled differently! Software is a capital expenditure that is expensed in the current year and software licenses are noncapital expenditures that can be amortized. Share that with your CFO, and they'll know what you are talking about.

Aligning the categories with G/L allows our managing partners to compare budget numbers to last year's actual numbers. I even do my homework to find out those totals before I propose my budget. It helps me avoid arguments where my recommendations are on target or under last year's amounts. That leaves me with only one battle to fight ”new projects where we spent more than last year.

Q: What key component does management want to see in an IT budget?

A: My management is not technically savvy. I can share with the managers RAID-5 this and SCSI that, and they would think that I'm speaking a foreign language. They need to understand the benefit of the end result, not necessarily what hardware or software product allows us to accomplish that result. I accomplish that by using lay terms and save the geek speak for when I'm back in my department. What they most appreciate is that my recommendations are well thought out, that I've considered other alternatives, and that we can get it for a fair price.

I break down the budget report format much like an invoice indicating quantity, price, annual price, description, and an explanation of that description. It goes through a first round cut, and then I add columns for Proposed Cuts, Cut Comment, and Revised Budget. (Secret: Ask for more than you want so that you at least get what you need.)

Additionally, they want to see the spreadsheet printed out in an easy-to-read format, with subtotals and totals that foot (add up) and are easy to follow. I typically improve the readability by highlighting category headings and totals in color and printing the spreadsheet on a color printer.

Q: Why do technology implementation projects always seem to cost more than expected?

A: I think failure to plan for the unexpected results in more time being spent, either internally, or with a consultant. The hardware and software costs should be predictable, so just the implementation costs are what is variable.

Q: What should project managers do when they are about to run over budget?

A: Honesty is always the best policy. Consult with your senior management to let them know what is going on. More than likely, you got their blessing before starting on the project. Help them remember the benefits of the project to get additional funds and time to complete the project successfully.

Q: In what ways can a project manager control cost?

A: Work absurd amounts of overtime by doing it yourself. OK, only slightly exaggerated. I do believe that an IS team should try to do all that it can internally (fixed cost if salaried) before outsourcing. Knowing your system and how to maintain it is very important. Don't hand over all of the control to the outside folks.

Q: How do you show return on investment for technology implementations ?

A: We're in the services business. Time is money, so they say, and it is true. Our company realizes the value in our investment in technology in that they can do more in less time. More billable hours means more money to the bottom line. Investment is definitely the key word. It isn't just an expense. We are getting the value out of our technology by improved efficiencies.

Q: How do you address risk in regard to new technology?

A: We try before we buy. We've got a test lab that we set up to simulate our production environment. Then we can test new products to see how they interact with our setup. We're definitely conservative in our approach. Our IS staff and our internal technology users group will try out the new gear before we roll it out to the rest of the firm. The tech group are the guinea pigs.

Q: What is the most expensive part of IT budgets?

A: Capital expenditures for new hardware make up the biggest line item on our budget. New servers, PCs, printers, hubs, cables, and so on, that keep our firm on the leading edge of technology cost more than all of the other categories combined.

Q: How does a project manager defend a much-needed technology implementation when management doesn't agree?

A: I've found that management won't approve a project just because IS says it is cool. A typical cost-versus-benefit analysis is normally necessary to help persuade them to see it your way. If they understand and appreciate the benefits, then finding a reasonably priced solution is your last hurdle .

Q: How do you factor variances of cost into your budget planning?

A: I was really fortunate this year in that the cost of the PCs that I put in the budget at the beginning of the year was much lower by the time I purchased them early in the fourth quarter. I look like a genius for saving so much money. I don't recommend padding your budget to get that effect, however. I get real quotes from the vendors I plan to do business with, then hope that prices are the same, if not lower, when I go to buy those items later in the year. In my experience, I've not seen any equipment get more expensive later in the year. I've got this saying, Better, faster, cheaper, and it usually works out to my favor.