About this lesson
Project costs and investments are the business expenses required to complete a project. Tracking the magnitude and timing of those costs are important indicators of project success.
Tracking Project Expenses
Project costs and investments are the business expenses required to complete ta project. Tracking the magnitude and timing of those costs are important indicators of project success.
When to Use Project Expense Tracking
Project requiring large expenditures, especially those being done under contract, should keep a close track on the project spending to recognize and correct problems and communicate project progress.
On the one hand, tracking project spending is just like tracking the spending for any other type of business activity. The costs are collected in the business financial system and the managers periodically analyse those costs to determine if any changes are required in spending patterns. However there are some complicating factors that arise when considering project cost tracking.
Project expenses are often difficult to track in a standard business accounting system. Most business financial accounting systems track spending based upon the business function or unit that is spending the money and the cost type (personnel, travel, maintenance, supplies, etc.) on which the money is spent. This can lead to several significant problems when attempting to track project expenses:
- Many projects are cross-functional and the spending for project activities can occur in multiple departments and locations. This makes the segregation and aggregation of project expenses very difficult.
- Many people who are working on project are multi-tasking. They may be assigned to multiple projects or they have a permanent “day job” and the project work is assigned to be done “over and above” their normal work. This makes the allocation of the time (and therefore the cost) by those individuals very difficult since they are working “everything” at the same time.
- Projects will often leverage the work or materials from other projects. Excess materials are transferred between projects or activity in one project will be used to support the activity of another project. While this is a good use of resources, it can create challenges for determining how to allocate the costs between those projects.
The solution to all of these is for each project to have a separate and unique account number in the financial system and everyone on the project team uses that number for project activities. Yet this can lead to an increase in reporting and overhead costs (bureaucracy?) that business teams and project teams try to avoid.
A second challenge when tracking project costs becomes an issue when the project relies heavily on suppliers and vendors to do the project activity. The challenge is that the project may commit to spending more money to complete its activity than the project has funds available. The financial system tracks costs; in an accrual-based system those costs will occur when an invoice is placed. Project work is inherently unpredictable and the actual effort required to complete project activities may be different than what was contracted. Changes to contracts are approved based upon an improved understanding of what is required. When that happens, the supplier’s invoice can be higher than the original contract price. The solution for this challenge is that the project team needs to track the amount of the contracts and authorized changes to ensure that the commitments do not exceed the money allocated for spending on the project. If this is not done, the project team may be in for a big surprise as the project nears completion and invoices come rolling in for authorized, but unfunded, work.
The third major challenge for project cost tracking is the use of reserves. Many projects will allocate a portion of the project funding in what are called “reserve accounts.” These are accounts that contain funds that are not allocated for a particular project task. When a risk mitigation activity or unexpected task is identified, the reserve funds are used to pay for that work. However this creates additional cost tracking effort to manage these accounts and to ensure they are not abused and just used as a fund to hide mis-management and overruns. I recommend the following steps when allocating reserve funds to project activities.
- Determine why the funds are requested. Is it to fund risk mitigation actions? Is it for effort that was not expected at the time of the project plan? Is it for new requirements? Is it to cover the effects of a poor estimate?
- If it is for new requirements, the project team should go back to the project sponsors and stakeholders and request the funding for this new requirement. If funding is not authorized, the requirement is out of scope for the project and the work should not be done.
- If the reserve funding request is for a risk mitigation activity or for an unexpected (but not out of scope) activity, the project manager should fund the required work as another project task.
- This additional task is recorded and used to improve the overall project risk management and lessons learned activities. This should lead to improved estimating of work on future projects.
Note that the reserve funds are not allocated to cover cost overruns due to bad estimates or poor performance. These are still tracked and shown as project overruns. At the end of the project, any remaining reserves are used to offset these overruns, but the overrun is not “hidden” by allocating reserves to the activity after the fact to make the task-level variance go away.
Hints and Tips
- There is a balance between too many project cost accounts adding unnecessary work and too few project cost accounts masking what is happening. This is a judgement call.
- For small projects. I generally only have one account per business department with project effort.
- On larger projects I will have one account per business department for each stage or major milestone activity.
- If the project is done under contract for a customer, I often will create a project account for each business department on each task. That is so I can explain in detail to a customer how I am spending their money and why an activity is underrun or overrun.
- I use a spreadsheet to track project commitments and spending with suppliers. Watch out for projects where the supplier management activity is happening in multiple locations. Ensure you have a listing of all project contracts.
- Many companies do not allow projects to have reserve accounts. They view that as a guaranteed waste of money because management fears that the project team will spend it if they have it. If you are managing a high risk project with no reserve account, you must build your risk response into you project estimates, which leads to very conservative estimates. This often results in even more spending than if aggressive estimates were used and the project manager had a reserve account to manage the risk and uncertainty.
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