Archive for the ‘Cost Management’ Category
Prioritizing Discretionary Project Funding
Friday, December 31st, 2010
January is a common time of year for organizations to establish their discretionary financial plan. One of the challenges with this process is determining how much work can get “crammed” into the financial budget. The discretionary budget is never enough to fund all of the desired work. Therefore, organizations need to prioritize.
Just like your personal to-do list, you have the “strategic few” and the “trivial many.” Projects are no different. Take the time to prioritize which projects are the “strategic few” before you commit discretionary funds.
If you have carry-over projects from the previous year, reassess the business case for the project. If the project is running late and it does not support the business case, do not be afraid to abandon the work effort. If there is value, get a firm “estimate to complete” so you can determine what funding you will have available for other work. You can use either Earned Value (EV), or bottom-up estimating techniques to determine the Estimate-to-Complete (ETC).
Before you commit which projects will be performed with the funds you allocated, take the time to determine their strategic and tactical importance. You should be able to rank each initiative and have a definitive estimate (remember the level of precision on definitive estimates are -10% to + 15%). I personally prefer the old level of precision for definitive estimates of -5% to +10%. Knowing both the rank and definitive estimate will allow you to prioritize. An example is provided below:
In this example, the total funding available is $7.0 Million. Pick the order of magnitude for your business. This could be $7K for smaller businesses or $7 trillion over multiple years for larger organizations (e.g., governments). The concept applies regardless of budget size. Determining the estimate needed to complete the project and applying a management contingency will provide you a pretty good assessment of your funding requirement.
Prioritizing funds based on the leadership team’s agreed-to priorities will allow you to allocate funds to initiatives ranked as the highest priority, which protects the company’s interests in the event of funding shortfalls. Drawing a simple line where funding runs out will allow you to communicate to your leadership team what projects can and cannot be performed with the allocated funding. The leadership team can then make a decision to provide additional funding, or reprioritize work.
Are you quoting your estimates with the right amount of uncertainty?
Monday, December 14th, 2009
You have heard me reference the Project Management Institute’s (PMI) A Guide to The Project Management Body of Knowledge (PMBOK), Third Addition on previous blogs. This blog is no different. I would like to make sure for all future blogs on the subject of Cost Management that we are starting from a common foundation.
According to the Project Cost Management includes “the processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget” (p. 153). One of the challenges Program and Project Leaders have is setting proper expectations with respect to estimate accuracy. So, I would like to clarify the difference between the three (3) basic types of estimates: Order of Magnitude, Budgetary and Definitive.
* Order of Magnitude Estimate – An Order of Magnitude estimate is prepared during the Initiating stage and has an accuracy expectation of -25% and +75%. So, if you are quoting an Order of Magnitude estimate for a work effort you believe will be around $5.0 Million dollars. A representative quote might be “We believe the cost of the project will be between $3,750,000 and $8,750,000”. The lower range is calculated by taking 25% of the $5,000,000 number and subtracting. The upper range is calculated by taking 75% of the $5,000,000 number and adding. You could quote $5,000,000 minus 25% or plus 75% but, my experience with most Senior Leadership Teams is they DO NOT want to do the calculation (they would rather check your calculations – smile). It is highly recommended NOT to quote a single number otherwise, people get fixed on the single number instead of the range. * Budgetary Estimate – A Budgetary estimate is prepared during the Planning stage and has an accuracy expectation of -10% and +25%. So, if you are quoting a Budgetary estimate for a work effort that you believe will be around $5.0 Million dollars. A representative quote might be “We believe the cost of the project will be between $4,500,000 and $6,250,000”. This lower range is calculated by taking 10% of the $5,000,000 number and subtracting. The upper range is calculated by taking 25% of the $5,000,000 number and adding. Again, it is highly recommended NOT to quote a single number. * Definitive Estimate – A Definitive estimate is also prepared during the Planning stage and has an accuracy expectation of -5% and +10%. So, if you are quoting a Definitive estimate for a work effort that you believe will be around $5.0 Million dollars. A representative quote might be “We believe the cost of the project will be between $4,750,000 and $5,500,000”. This lower range is calculated by taking 5% of the $5,000,000 number and subtracting. The upper range is calculated by taking 10% of the $5,000,000 number and adding. Again, it is highly recommended NOT to quote a single number. I hope this helps. By the way (BTW), for those of you preparing for the Project Management Professional (PMP) exam, you may find this background information useful.
Ira M. Hendon, PMP® President and CEO Hendon Group, Inc.
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