FAQ: Estimating, Budgeting, and Controlling

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Winfred Hoover
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1 Question 1: Why do project managers need to create a budget? Answer 1: The budget is designed to tell how much the total project should cost and when these costs will occur. This information is beneficial to more than just the project team. The finance and accounting staff will need to know when to make funds available so that resources can be ordered and invoices paid. By knowing when and how much money should be spent, the project manager is able to calculate whether the cash flow is on target and also if the project is over or under budget. Knowing the status of the cash flow and budget stance allows the project manager to make in course corrections on project productivity to keep the deliverables on track. Question 2: How do you track project spending? Answer 2: If you plot the dollars spent on your project over time, an S curve should show the cumulative spending as the project progresses. In the following example, the estimated spending plan is plotted as the solid green line. The actual amount spent is plotted on the dashed red line. If the dotted line is at or below the solid line, you have spent less than planned. If the dotted line is above the solid line, you have spent more than planned. If at any time your costs rise above the solid blue line, you have exceeded the total project budget. The management cash reserve is what the sponsor will hold for emergencies. Cost = (Optimistic + 4(most likely) + pessimistic) / 6 Question 3: What information is needed to track a project's earned value? Answer 3: There are three specific data elements that are needed to calculate a project's earned value. The first data element is the planned value, which is how much work was planned to be accomplished by some point in time. This information is pulled from the work activities list and compared to the project's schedule. The second data element is how much work has actually been accomplished. This is the earned value to date. The project teams should be routinely reporting on the status of accomplished work packages based on the percent 1

2 of the task completed. The third date element is the actual costs of the project based on the funds that have been spent to date. Many projects track the funds spent on each activity. This allows the project manager to calculate how well each activity is tracking based on the project schedule. Question 4: What are the data elements used in the three-point estimation? Answer 4: The three elements needed in the formula to perform the threepoint estimation are the optimistic, pessimistic, and most likely estimates. The optimistic estimate is based on everything that is associated with the project activity lining up correctly with absolutely nothing going wrong. The pessimistic estimate assumes that everything that can go wrong will go wrong. This is also considered the worst-case scenario. The realistic estimate is generally accepted as what a reasonable person would think the project activity would entail. Question 5: How do you calculate the project costs using three-point estimation? Answer 5: You must first develop the three data points used in the formula: the optimistic, pessimistic, and most likely cost values. These values are then plugged into the formula (Meredith & Mantel, 2005). Cost = (Optimistic + 4(most likely) + pessimistic) / 6 For example, if the value for optimistic is US $600, realistic is US $700, and pessimistic is US $1,100, then the cost estimate would be the following: ( , ,100) / 6 = 750 The cost estimate for this project activity would be US $750. 2

3 Question 6: What can I do when my project is over budget? Answer 6: The most important thing the project manager should do when he or she finds that the project has gone over budget is find out the cause of the overrun. There are many reasons that a project will run over budget, including a weak project management team, a bad overall planning process, communication between project stakeholder not delivering the needed messages, excessive team focus on implementing new technology at the expense of business processes, and parent organizational management problems. Some of these issues can be influenced by the project manager. Many issues may be out of the project manager's control. The project team needs to spend some time analyzing the problem(s) and determining the root cause without assessing blame. Then, the team can develop plans to overcome the problems. Question 7: Should I be concerned when the cost of my project is under budget? Answer 7: Just like when a project is over budget, a project that is under budget has something going on that was not anticipated; therefore, not part of the project plan. There are also many root causes for why a project would cost less than planned. If the original estimate on the cost of materials did not adjust for lower cost of supplies, this could result in a cost reduction. Maybe, some piece of technology has been able to produce products faster than anticipated. These are usually bonuses for the project team. Dangers to the team might be that a project contributor is not providing deliverables that are up to standard or is cutting corners on quality. This will have an adverse effect on the acceptability of the final outcome for the project's client. A thorough review of the total project system may be warranted to find what is going on. It may boil down to a simple miscalculation. All of the factors need to be evaluated so that the project team knows what is affecting the budget at all times. If too many of the project budgets come in under estimate, senior management is going to question the project manager's capabilities to plan and may in fact cut budgets up front with the expectation that the project manager has over budgeted, which will lead to additional problems for him/her. 3

4 Question 8: Where do I start when I want to monitor my project? Answer 8: Meeting client expectations is one of the two most important aspects of the project, and delivering an equitable return on your organization's investments is the other. With these two criteria in mind, you will find that there are certain things that the client will want to know and other areas in which your organizational management team will be interested. The easiest way to know what to monitor is to ask the primary stakeholders what is important to them. Set up your monitoring program to deliver this information. Other areas that will require monitoring include new pieces of technology that are being deployed or recently hired team members who may need to be brought into the project team's culture. After you have developed your monitoring system, you will also want to observe this monitoring system to make sure that you are getting the results you need. It may be necessary to alter the monitoring process as you learn more about what is important and what is not. Question 9: How do I know if my corrective actions are effective? Answer 9: It is questionable as to why corrective actions are implemented in the first place. For example, if you were seeing a pattern of defective parts, you would track the number of defects per certain number (such as 10 defects per 100 parts). After implementing the corrective action, you would track that number. When your corrective action is effective, the defects per 100 will start to drop. Other actions can center on items like the number of correct lines of code per day, the number of parts produced per week, or the level of client satisfaction upon seeing a project prototype. All of these measures point back to the comparison of the output of activities to what was documented in the original project scope statement and to what is acceptable to the client. Question 10: Is it really important to use a project management software application? Answer 10: Depending on the scope, magnitude, and uniqueness of your project, it may be difficult at best to track all of the activities, resources, and schedules of your project. Project management software is designed to help you ensure that no project deliverables are overlooked and that the project is 4

5 completed on time and within budget. It may be possible to keep track of all the project elements for a 2-week project that involves only a few stakeholders and a small budget. When a project becomes more relevant to the longevity and prosperity to the organization, it will become imperative that some form of project asset tracking methodology is used. The project management team does need to ensure that the software application that the team chooses to use is capable of handling the project requirements and is easy enough to use that the primary focus is not on the management of the software, but the management of the project. References Meredith, J. R., & Mantel, S. J., Jr. (2005). Project management: A managerial approach (6th ed.). Hoboken, NJ: John Wiley & Sons. 5

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