Is being ‘on budget’ good Really?
“Great! We delivered the project on budget!” A claim many a project manager and sponsor would like to make.
But is this great? You can deliver any project ‘on budget’ by making the budget big enough.
Any project budget is a collection of estimates and assumptions. It may be based on multiple inputs, prior experience and detailed planning and costings; but, at the end of the day, the budget is an estimate of the costs to deliver. If you change your assumptions you will change the resultant budget figure.
Coming in ‘on budget’ is great PROVIDED it is a good, realistic budget.
How you manage your cost budget is critical to your success, but is not a primary measure of your success.
The impacts of too tight cost control
Now, some organizations tend to deliberately under-estimate their costs to deliver to try to force a tight cost focus. This tends to cause one of two results
- The project team taking shortcuts to try to bring the project in on the unrealistic budget—compromising the quality and usually increasing long-term operational costs
- Cumulative requests for budget increases as the money runs out before the project is finished. This can lead to the original budget being doubled or more for the same (or less) delivered value.
(We say, “or less” value as early shortcuts taken to try to keep within the budget can destroy the available business value resulting in you ending up paying more for less.)
Known to be under-stated budgets reduce value but do not necessarily reduce the final costs.
A project manager mandated to come in ‘on or under budget’ progressively cut the scope of the project to the point where it was unable to be implemented. The project had to be extended six months at extra cost to remediate the situation.
The impacts of too loose cost control
The approved project budget, together with any contingency and reserve funding, is often seen by the project and governance teams as “the money we have to spend.” As one CFO complained to me, “We have many projects asking for more money, but none ever give unspent funds back.”
The approved budget should be realistic and seen as the maximum amount to be spent. The absolute upper limit.
When you go out to buy, say a house appliance, you may have in mind a price you’re willing to pay. It is not your goal to spend absolutely all of this money but to limit what you buy to be within this amount. If you can save, say, $50 then you will.
The same value-for-money thinking is required on projects. The budget is not ‘there to be spent’ but is the maximum cost to be incurred to deliver the available value.
This management of costs vis-à-vis value is imperative. One project was offered the opportunity to double the production capacity of its new plant for a 1% increase in the overall budget cost. Provided this additional capacity would be used, this offer is good value for money even if it did cause the project to ‘go over budget’.
'Profit and Loss' mindset
Rather than the ‘budget’ mindset that is used on projects, you should adopt a profit and loss mindset. Every dollar/euro/pound you spend more than you need to, reduces the project’s ‘profit’. The budget/cost is the ‘loss’ dimension—a dimension to be minimized but not at the expense of the profits (benefits/value). They are investment funds, invested to deliver a return (profit).
It is a balancing act between the value to be delivered and the cost to deliver it.
Even in the operational environment ‘budgets’ are often seen as ‘there to be spent’ as, “if you don’t spend your budget you won’t get it next year.” When managers go on a spending spree to spend all of their budget, they are reducing the organization’s net profit, but as they are not measured on the profit they continue to reduce it. However, in the project environment, the sponsor is (or should be) measured on delivery of the ‘profit’ (benefits and value). Hence the applicability of the ‘profit and loss’ model.
This is why ‘value optimization’ can have a massive impact on projects.
When you know your project’s desired business outcomes and the benefits and value each outcome will deliver; and then compute the cost of delivering each business outcome, you are now in a position to identify high-cost/low-value outcomes.
These high-cost/low-value outcomes can be deleted where they do not have any downstream impacts, or adjusted to reduce their cost of delivery, increase their delivered value, or both. Using this optimization technique (made possible by the TOP Value Equation™) we have reduced project costs by 40% with only minimal impacts on the total benefits available.
On taking over a $82 million budgeted project, in the first week we identified one module delivered no benefits at all. That immediately saved $12 million with no impacts on the available business value.
Best value for money
Coming in ‘on budget’ should not be your objective per se.
Delivering the optimum value for the lowest practical cost should be your objective. This is a primary measure of success.
To do this you need to stop seeing the ‘budget’ as a stand-alone item (to be spent) and see it as one side of the project ‘profit and loss’ coin. You cannot manage one without impacting the other.
The problem in most organizations is that they never tightly link the costs of delivery to the value to be delivered and, therefore, cannot optimize their projects and effectively optimize their costs vis-à-vis the value to be delivered.