003-The First 5 questions to ask whenever you start a new project (part 3/5)
Saluti! Join us for our new podcast, the Project Management Happy Hour! In our first 5 episodes, we are going to look at the first 5 questions you need to ask whenever starting a new project, whether you are:
- Kicking off a fresh new project
- Taking over an in-flight project
- Scoping out a new project opportunity
- Performing an assessment of a project that may be in trouble
- Communicating an overview of a project to team members or stakeholders
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Show Notes for this Episode
Now that we know what success is and we already understand our scope and the problem we are solving, it is time to dig deeper and ask the next obvious question:
What is the budget of this project? What do we have to spend? And HOW do we have
to spend it?
It can be a little uncomfortable from a Project Manager standpoint to talk about financials, especially if it’s a buyer-seller relationship and you’re on the vendor side. But we need to get over this and we need to learn how to have a comfortable and honest discussion about financials. We shouldn’t be afraid and we shouldn’t be ashamed of it.
Today, we’ll talk about some strategies to help you do it. We’ll also share an amazing tool that will be beneficial for you when you’re talking about financials. This tool is useful in managing potential budget issues even before they become real problems.
Asking the HOW [4:34]
We don’t just want to know the price tag and what we have to spend, we also need to find out HOW we have to spend it.
Apparently, asking the “How” is not being covered as much on PMI books, though there are a lot of How questions we need to ask especially before we start working on a project. Here are some examples:
- HOW is it budgeted?
- If you are the supplier, is it T&M with expected hours? What about travel expenses, is it a fixed fee? Where does the supplier carry the risk? And if so, how are they going to react to that?
- Is there a contingency?
- If we need more money, how do we get it? What’s the change process? How is that approved?
- What are the assumptions and constraints we had to make to get this estimated budget?
- How well we can answer this may depend upon our relationship-are we a supplier? Are we hiring suppliers? Internal fund transfers?
Constraints and Assumptions [6:02]
Constraints and Assumptions are what we base our proposals and commercials on. A lot of constraints and assumptions come down to dependencies for the client or for other departments.
One of the first things we learned was to clearly state the assumptions and dependencies for the client on a fixed fee contract. Fixed fee, if you are not familiar with the commercial term, is a contractual arrangement where a set fee is agreed for a fixed, specific scope of work, and deliverables. The challenge comes in because we have to make assumptions and operate in some constraints for that fixed, specific scope.
Your assumptions can be about money and it can also be about time. Regardless of which one it is, it’s incumbent on you to be the expert on your project. Understand those assumptions and help the organization manage their dependencies. When you make your fixed fee scope, you have to identify all the things that you are basing your assumption on and put dates on them.
You also have to communicate this to the customer. It’s good to take those dependencies – from the SOW or charter or as you identify them along the way, and document them in your RAID log or something else, communicate them and then track them. Otherwise, your budget is going to be off track.
This might sound like we’re talking about schedule or scope when the topic is supposed to be budget. In our experience, this is where your budget starts to be out of your control. It is because your assumptions and constraints are not documented and it starts to nail your budget.
Examples of Dependencies [13:58]
- Hardware or equipment delivery
- Resource availability
- Approval gates – Requirements, Design, Testing, etc.
- Access to facilities
- Change windows
- Extra-project processes that must be followed (change control, audits, etc.)
One way we can help mitigate risks is by adding contingencies when we are initially planning our projects. Contingency is a reserve, it’s additional funds you put into the budget to cover unexpected events.
A lot of people are afraid of doing this because they feel like they are “padding” the budget. You have to understand that contingency is not a bad thing nor unethical.
Simple human behavior, especially for optimistic agents of change, is to estimate the
average optimal duration of a task. With 50-80% of projects missing their constraints, you have to ask, are we that bad at delivery? Or are we bad at estimating what it will realistically take to finish a task? On most cases, we’re being too optimistic.
Now, knowing that the chances are we are going to go long, yet we didn’t add a contingency, then we are becoming irresponsible.
According to PMBOK, there are two kinds of contingency. We have the Simple Contingency Reserve. This is done at the task level and then we roll it out to the entire project. The second one is the Critical Chain. In this method, you cannot be that precise. It is harder to quantify individual task risk so you just roll it up to the project as a whole. This is important when you’re working on a fixed fee project.
If you add a contingency reserve to a task or to the project, it’s there, it’s yours. More importantly, it is not like you have an extra money to burn later on. The extra money is in the plan. Remember, don’t let anybody take it away from you.
Every Project is an Investment [25:21]
Every Project is an Investment and every investment has an expected return. Your job as a PM is to deliver that value.
Different Kinds of Value
- Direct financial return – delivering professional services to a client or reducing the run-cost of one of the internal services
- Exploiting an opportunity – developing a new product or offering
- Risk reduction – upgrading a service that is unstable or end of life
- Inferred or Soft Value – expected non-tangible or unquantified value, i.e. upgrading a video conferencing solution because the current one is not reliable for executive meetings
The value discussion should happen up front during project initiation, which can be less structured, but the core element is the same. Someone decided to invest money into your project with the expectation of some return. Again, financially speaking, a project is an investment with an expected value return.
What if you don’t know the value? [30:16]
While more mature organizations may have a well-defined business justification and funding process, some simply don’t. If you can, try to drive up to who made the funding decision and understand why and how the process works. The financial statement on the success criteria could also help. Additionally, it is the same with the problem or opportunity you’re trying to address.
Communicating Financials [31:38]
While we need to communicate the dependencies, when it comes to financials, we do need to be aware of what details we are sending and to whom. This needs to be clarified in the communication plan. It’s also important to agree on who tracks financials, how it is reported, and who it is reported to.
Therefore, using a tool like Commercial Notice can help in tracking financials because it allows you to communicate financial risks before it’s too late. It’s a risk report and a pre-emptive change alert. It has a very formal template that you can use in sending a notification to everyone important regarding financials.
- What is the Value you expect in return for this Investment and how will you recognize that value?
- How is this budgeted? How is it being estimated?
- What kind of contingency is there? If it is needed, how is it accessed, and in what circumstances?
You may be in trouble if:
- There is no written budget – you don’t know the budget!
- You don’t know how you’re tracking the budget
- There is no contingency built in. Is that really realistic?
- You don’t know the expected business value that justified this investment, or if you are going to deliver on that.
Let us know what you think about this topic. Leave us a comment and tell us how else we can improve this podcast. If you feel inclined, you may give us a rating in iTunes.