Construction workers working with steel

Delivering to budget is an important skill for a Project Manager. As a result, most organisations require their Project Managers to update the projects’ forecast cost each month and compare this to the original budget. The intent of updating the forecast each month is to ensure that the organisation has the most up to date information available regarding the financial performance of the project. This allows early warning if the project is having problems, allowing the Project Manager to signal a potential budget overrun as soon as information comes to hand.

The problem in practice is that most Project Managers do not like to give bad news, so when things start going wrong they continue to report that things are doing fine.

There are two scenarios to look for:

  1. The cost to date is behind budget, but the forecast final cost is on budget; and/or
  2. The % complete on the program is running ahead of the % complete for costs.

In both these scenarios there is a good chance the project has some issues.  Why?

In scenario 1:

It is most likely there have been some problems causing the project to run late. The project is not below budget, but rather it is behind schedule, and as a result has not spent as much money as was expected.

The Project Manager is hoping they can get the project back on schedule, and hence is reporting that the forecast final cost is in line with budget. In most cases, the trends to date will continue and the project will run late.

This project is actually over-budget as it is running behind schedule.

In scenario 2:

In this case the Project Manager has taken an optimistic view of the schedule through the program. In my experience, costs are more accurate than the program as work does not get done unless people are getting paid. So, if there is a variance between the % complete on costs compared to the % complete on schedule, then there is potentially a couple of issues including:

  1. The Project Manager has not done their accruals or prepayments on materials properly; or
  2. The Project Manager has over or under estimated the program performance; or
  3. There is a temporary disconnect due to pre-construction works which have accelerated the schedule before higher spend rate on materials have started to hit the books.

The variance on % complete between costs and the program is a simple but effective check on whether there are issues with the project. In some cases, the difference is legitimate and there may not be any issues, but in many cases it highlights an issue that requires further discussion.

So in summary, if any of the below points are evident:

  1. % complete on actual costs is behind the  % complete on the program; or
  2. Each month we are seeing considerable shifts in the forecast final cost.

then there is a good opportunity for you to ask some questions about the project forecast as there may be some hidden issues on the project.