Topic title/heading 3.4.2 Budgeting and control Definition No more than a few sentences required approximately 30 words. It should be succinct, and wherever possible, independent of the level of project/programme/portfolio at which the section is applied. Budgeting and cost management is the estimating of costs and the setting of an agreed budget, and the management of actual and forecast costs against that budget. General Generic description of the topic including universal principles independent of project/programme/portfolio levels in no more than 500 words. Any terms that tie the text to a particular level should be avoided. In some cases, especially in sections 1 and 4, this will be most, if not all of the content. A budget is a plan that outlines an organisation's financial and operational goals. It is a plan of action for achieving quantified objectives and provides a standard for measuring performance as well as being used in forecasting. When an organisation wishes to run initiatives, such as change programmes or projects, either as standalone or within a portfolio, funds will be needed and so an investment appraisal will be carried out. A primary input to this appraisal is a business case that contains an initial cost estimate. This initial estimate will be refined as the feasibility and desirability of the initiative is investigated further and a greater understanding is developed on scope, business deadlines and resources, to form a base cost estimate. To address uncertainty, including risks and possible lack of clarity on the final products of the initiative, contingency and management reserve will be factored in as additions to the base cost estimate. When the cost estimate is agreed with the sponsor, this becomes the budget for the initiative. Budgeting is concerned with: providing a forecast of expenditures (and possible revenues) enabling the monitoring of actual expenditures the possible reforecasting of expenditures. Forecast and actual expenditures are profiled on a regular time basis that typically fits with the general accounting procedures of the sponsoring organisation; e.g., on a monthly basis at month end. Where an organisation is running a portfolio or programme, consistency will be required in how budget items are described and monitored across projects. Agreed categories will be defined and these will often match the organisation s general accounting categories (e.g., CAPEX and OPEX itemised). As running initiatives generally sits outside business-as-usual for most organisations, relevant historical budgets are unlikely to exist and so the monitoring of the budget is a critical activity. Of interest are: Committed costs these reflect the placement of orders for work to be performed or goods or items to be purchased or for subcontract activity, and is the amount of funds represented by the orders Accruals work partially or fully completed for which payment is due but has not been made Actual expenditure the funds that have been consumed Forecast out-turn cost the total of actual expenditure, accruals, commitments and the estimate of the costs to complete the work to the end of the initiative. The relevance of a number of these is shown, for a single project, in figure 1, where the base cost estimate is shown profiled over time as the project budget. Although this is the basis for the reported view on project expenditure, the full sunk costs for the project is likely to include committed spend or penalties against cancelling outstanding orders. Figure 1. Page 1 of 5
Project dimensions to the topic An explanation of the application of this topic at a project level is to be included here in no more than 420 words. Anything that applies to programmes and portfolios as well as projects should be included in the general section. This section may reasonably be divided into projects that are part of a programme, and those that are independent components of a portfolio. N.B. The APM definition of a project is: A unique and transient endeavour undertaken to achieve a desired outcome. The three major components of a project budget are: the base cost estimate contingency management reserve. In essence, the base cost estimate is for the known knowns in the project. The day-to-day resourcing costs (e.g., daily staff rates and consultants per diem fees) Accommodation costs (e.g., rent) Consumables (e.g., power and IT supplies) Expenses (e.g., travel and subsistence) Capital items (e.g., purchase of items for use within the project, such as software packages, and items that may be (partial) outputs, such as a new manufacturing plant and new delivery vehicles). Other direct costs (e.g., training programmes) Indirect costs to the initiative (e.g., administrative charges and insurance). As part of planning, the base cost estimate will be profiled over time to form the performance measurement baseline (PMB). Contingency should be for the known unknowns. This is money set aside for identified risks and usually covers risk responses if one or more risks mature, while management reserve is for the unknown unknowns. This is to cover things that might surface during the initiative, such as extra activities to produce needed products that had not been identified earlier. The more uncertainty there is on the deliverable, the more management reserve is required. This uncertainty could, e.g., be due to a lack of clarity on the requirements, simply because of the novelty of what is Page 2 of 5
being attempted. Expenditure of the three components should be managed like three different bank accounts : the base cost estimate that forms the PMB is the current account for the project; contingency is a savings account for things that we know about that might happen, and management reserve is an emergency account for the unexpected. There should be strict guidelines or rules for moving monies between these accounts. In many organisations the project manager is given control of the base cost estimate budget component, while the sponsor retains control of the management reserve. Contingency should be under the control of the project manager, but may be held by the sponsor or as part of a larger organisational contingency fund. Within a programme it will be the case that both management reserve and contingency will be controlled at the programme level. During the execution of the project, the PMB provides the focus for expected costs profiled over time. This profile will be determined by: the products of the project (the product breakdown structure PBS), how they are to be built or acquired (the work breakdown structure WBS), when they are planned to be produced and the number and types of resources to be used to produce them (the organisational breakdown structure OBS and schedule) Capital expenditures and when they are expected to be an expense to the initiative Other direct costs Indirect costs to the projects. Taken together, a cost breakdown structure (CBS) can be produced, which shows costs against budget categories profiled over time. The PMB can be used as the basis for earned value management (EVM), which provides a way of monitoring expenditure against achievement and, importantly, provides an approach to forecast out-turn cost and, more questionably, project duration. As part of monitoring, the performance of the project should be reviewed at regular intervals, including a review of scope, schedule, risk and opportunity to assist with the assessment of cost performance. Identifying and taking corrective action to minimise adverse variances against budget is necessary for effective control. Any changes resulting from the reviews should be formally approved and introduced in a controlled way to the project baseline. Such reviews form part of earned value management. Programme dimensions to the topic An explanation of the application of this topic at a programme level is to be included here, where applicable. Where the general principles need to be adapted, enhanced or extended for specific programme application, where content is different or additional to that for project aspects to this topic above, it may be added below in no more than 420 words. Anything that applies to projects and portfolios as well as programmes should be included in the general section. If there are no such applicable adaptations, enhancements or extensions, please enter the following text in the space provided NO SPECIFIC ADAPTATION REQUIRED OF THE TOPIC FOR PROGRAMME MANAGEMENT. N.B. The APM definition of a programme is: A group of related projects, which may include business-as-usual activities that together, achieve a beneficial change of a strategic nature for an organisation. For a programme to spend its budget three things are needed: - approval of the programme's business case - authority to spend the budget, i.e. funds have been released (e.g. for the current financial year) - programme financial governance (includes how both programme and project budget will be controlled). Programmes frequently cut across operational structures, e.g. vertical silos so the programme manager must ensure they know which budget is funding the programme and who controls that budget. The programme may be funded from more than one budget. Programmes commonly last longer than a year so the programme's sponsor must ensure that the programme funding will be maintained between financial years, especially if from an operational budget. Page 3 of 5
Programme governance in terms of financial control will usually have follow as appropriate, corporate financial governance standards. Either the programme manager or programme management office should liaise with the finance department, or with the enterprise portfolio management office (EPMO). Within any external rules, the programme sets the budget governance for the programme as a whole and its projects, and should include: - forecasting and tracking of actuals - reporting; responsibilities, content and timetable - exception handling and escalation process at project level and programme - how financials and programme/project schedules are matched Programme financial control must ensure that value is being gained from expenditure. Both programme and project forecasts should indicate what physical progress should be made for a given investment. Earned value management is a highly valuable technique for determining whether a physical progress matches the expended investment and is recommended. Actual costs will be tracked either directly or indirectly by the programme. Frequently, programme and project managers are reliant on information from operational finance systems. This information will need to be checked (e.g. by the programme management office) to ensure that costs have been posted correctly to the programme or its projects. Where there is a programme management office, the PMO will liaise with finance, EPMO for financial control standards and communicate these to projects in the programme. The PMO will collate returns from projects and provide programme budget information to the programme manager and external stakeholders. Portfolio dimensions to the topic An explanation of the application of this topic at a portfolio level is to be included here, where applicable. Where the general principles need to be adapted, enhanced or extended for specific portfolio application, where content is different or additional to that for project and programme aspects to this topic above, it may be added below in no more than 420 words. Anything that applies to projects and programmes as well as portfolios should be included in the general section. If there are no such applicable adaptations, enhancements or extensions, please enter the following text in the space provided NO SPECIFIC ADAPTATION REQUIRED OF THE TOPIC FOR PORTFOLIO MANAGEMENT. N.B. The APM definition of a portfolio is: A grouping of an organisation s projects, programmes and related business-as-usual activities taking into account resource constraints. Portfolios can be managed at an organisational, programme or functional level. Further reading All cited references, and items for further reading should be listed together in a section headed, further reading. You may use the Harvard system of referencing. This requires the author name, title, date of publication, publisher and place of publication. Provide us with these basic details and our copy editors will be able to complete the task. APM Guidelines for Earned Value Management Brooks, Frederick P., (1995), The Mythical Man-Month, Addison Wesley Longman Inc., ISBN 978-0-201-83595-3 Page 4 of 5
The Scheduling Maturity Model (2010) APM White Paper APM Earned Value SIG The Earned Value Management Compass (2010) APM Publishing, Princes Risborough, ISBN 978-1- 903494-33-2 APM Earned Value SIG (2002) Earned Value Management: APM Guidelines, APM Publishing, Princes Risborough, ISBN 1 903494 26 5 Office for Government Commerce (OGC) Managing Successful Projects with PRINCE2 (2009), TSO, ISBN 978-0-11-331059-3 Page 5 of 5