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Project costs and investments are the business expenses required to complete a project.  Tracking the magnitude and timing of those costs are important indicators of project success.

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Quick reference

Tracking Project Expenses

Project costs and investments are the business expenses required to complete ta project.  Tracking the magnitude and timing of those costs are important indicators of project success.

When to Use Project Expense Tracking

Project requiring large expenditures, especially those being done under contract, should keep a close track on the project spending to recognize and correct problems and communicate project progress.

Instructions

On the one hand, tracking project spending is just like tracking the spending for any other type of business activity.  The costs are collected in the business financial system and the managers periodically analyse those costs to determine if any changes are required in spending patterns.  However there are some complicating factors that arise when considering project cost tracking.

Project expenses are often difficult to track in a standard business accounting system.  Most business financial accounting systems track spending based upon the business function or unit that is spending the money and the cost type (personnel, travel, maintenance, supplies, etc.) on which the money is spent.  This can lead to several significant problems when attempting to track project expenses:

  • Many projects are cross-functional and the spending for project activities can occur in multiple departments and locations.  This makes the segregation and aggregation of project expenses very difficult.   
  • Many people who are working on project are multi-tasking.  They may be assigned to multiple projects or they have a permanent “day job” and the project work is assigned to be done “over and above” their normal work.  This makes the allocation of the time (and therefore the cost) by those individuals very difficult since they are working “everything” at the same time.
  • Projects will often leverage the work or materials from other projects.  Excess materials are transferred between projects or activity in one project will be used to support the activity of another project.  While this is a good use of resources, it can create challenges for determining how to allocate the costs between those projects.

The solution to all of these is for each project to have a separate and unique account number in the financial system and everyone on the project team uses that number for project activities.  Yet this can lead to an increase in reporting and overhead costs (bureaucracy?) that business teams and project teams try to avoid.

 

A second challenge when tracking project costs becomes an issue when the project relies heavily on suppliers and vendors to do the project activity.  The challenge is that the project may commit to spending more money to complete its activity than the project has funds available.  The financial system tracks costs; in an accrual-based system those costs will occur when an invoice is placed.  Project work is inherently unpredictable and the actual effort required to complete project activities may be different than what was contracted.  Changes to contracts are approved based upon an improved understanding of what is required.  When that happens, the supplier’s invoice can be higher than the original contract price.  The solution for this challenge is that the project team needs to track the amount of the contracts and authorized changes to ensure that the commitments do not exceed the money allocated for spending on the project.  If this is not done, the project team may be in for a big surprise as the project nears completion and invoices come rolling in for authorized, but unfunded, work.

The third major challenge for project cost tracking is the use of reserves.  Many projects will allocate a portion of the project funding in what are called “reserve accounts.”  These are accounts that contain funds that are not allocated for a particular project task.  When a risk mitigation activity or unexpected task is identified, the reserve funds are used to pay for that work.  However this creates additional cost tracking effort to manage these accounts and to ensure they are not abused and just used as a fund to hide mis-management and overruns.  I recommend the following steps when allocating reserve funds to project activities.

  1. Determine why the funds are requested.  Is it to fund risk mitigation actions? Is it for effort that was not expected at the time of the project plan?  Is it for new requirements? Is it to cover the effects of a poor estimate?
  2. If it is for new requirements, the project team should go back to the project sponsors and stakeholders and request the funding for this new requirement.  If funding is not authorized, the requirement is out of scope for the project and the work should not be done.
  3. If the reserve funding request is for a risk mitigation activity or for an unexpected (but not out of scope) activity, the project manager should fund the required work as another project task.
  4. This additional task is recorded and used to improve the overall project risk management and lessons learned activities.  This should lead to improved estimating of work on future projects.

Note that the reserve funds are not allocated to cover cost overruns due to bad estimates or poor performance.  These are still tracked and shown as project overruns.  At the end of the project, any remaining reserves are used to offset these overruns, but the overrun is not “hidden” by allocating reserves to the activity after the fact to make the task-level variance go away.

 

Hints and Tips

  • There is a balance between too many project cost accounts adding unnecessary work and too few project cost accounts masking what is happening.  This is a judgement call.
    • For small projects. I generally only have one account per business department with project effort.
    • On larger projects I will have one account per business department for each stage or major milestone activity.
    • If the project is done under contract for a customer, I often will create a project account for each business department on each task.  That is so I can explain in detail to a customer how I am spending their money and why an activity is underrun or overrun.  
  • I use a spreadsheet to track project commitments and spending with suppliers.  Watch out for projects where the supplier management activity is happening in multiple locations.  Ensure you have a listing of all project contracts.
  • Many companies do not allow projects to have reserve accounts.  They view that as a guaranteed waste of money because management fears that the project team will spend it if they have it.  If you are managing a high risk project with no reserve account, you must build your risk response into you project estimates, which leads to very conservative estimates.  This often results in even more spending than if aggressive estimates were used and the project manager had a reserve account to manage the risk and uncertainty.  
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  • 00:03 Hi, I'm Ray Sheen.
  • 00:04 I'd like to talk with you about some of the challenges you face when tracking
  • 00:07 project expenses, so let's take a look.
  • 00:10 I'll start with some of the difficulties associated with
  • 00:14 the project cost structure.
  • 00:16 Project costs include not only the costs of the project work, it also includes
  • 00:20 the project management cost of project planning and project tracking.
  • 00:25 These activities are often the more difficult to plan and track.
  • 00:28 Let's take a look at some of the inherent difficulties with project cost tracking.
  • 00:32 Most projects are cross-functional.
  • 00:34 There are individuals from multiple departments doing work on the project.
  • 00:38 But most project managers only get project cost reports for their own department.
  • 00:43 Unless the finance organization set up a special cost account on each department or
  • 00:47 created a cost account that is independent of departments, the project manager does
  • 00:51 not have easy insight into how much has been spent in other departments.
  • 00:56 Another complicating factor is that project team members are often
  • 00:59 multi-tasking.
  • 01:01 They're doing project work and sustaining work in the same meeting or
  • 01:04 at the same time.
  • 01:06 Ideally, these individuals should allocate the cost of their time between
  • 01:09 the activities but this is a big hassle.
  • 01:13 An additional factor is that projects often pass equipment and
  • 01:16 materials from one project to another.
  • 01:19 As this material and equipment is passed on, the financial responsibility for
  • 01:23 the material and equipment should be passed on.
  • 01:25 But again, this creates difficulties for
  • 01:27 tracking if a project just borrows something.
  • 01:30 The best method for accurately keeping track of all these costs
  • 01:33 Is to create separate cost accounts for each project and often in each department.
  • 01:38 Relying on individuals to do personal tracking and
  • 01:41 allocation is usually slow and full of errors and gaps.
  • 01:45 I wanna focus in on a specific project cost tracking issue that has
  • 01:49 often been at the root of major project overruns.
  • 01:52 This is the tracking of commitments and expenditures on purchased goods and
  • 01:56 services.
  • 01:58 First, let's review how the financial system tracks costs.
  • 02:01 When using the accrual cost accounting method, it collects and
  • 02:04 records the cost on purchased items when the invoice is received.
  • 02:09 Many projects heavily rely on outsourced goods and services.
  • 02:13 The project team will negotiate for these goods or services.
  • 02:16 The amount of the contract can be significantly more than budgeted, but
  • 02:21 this will not show up in the financial system until the invoice is received.
  • 02:25 I recommend that the project manager track the amount of negotiations, so
  • 02:29 they are certain that they have the budget to cover the costs
  • 02:32 when the supplier finally invoices the project.
  • 02:35 This can be an even bigger problem if the project is likely to require changes to
  • 02:39 the contract as the project progresses.
  • 02:41 In addition to the original contract amount,
  • 02:43 the project manager must track the value of change orders.
  • 02:47 When I have managed this type of project, I kept my own spreadsheet of the project
  • 02:51 commitments since the financial system only tracks the actual invoices.
  • 02:56 This will reduce the likelihood of an end of project surprise as invoices roll in.
  • 03:01 It doesn't mean the project won't overrun, but if there will be an overrun,
  • 03:04 the project manager will be aware of it early enough to take mitigating action and
  • 03:08 inform stake holders.
  • 03:10 The last point I wanna talk about is the management of financial reserves.
  • 03:14 Some companies do not want projects to have a financial reserve.
  • 03:18 They view it as a slush fund or wasted money.
  • 03:20 However, when project managers and project teams know there is no financial reserve,
  • 03:25 they often build a reserve into the estimates of all the tasks.
  • 03:29 When a project does have a financial reserve,
  • 03:31 I find I can usually get more realistic estimates.
  • 03:34 But of course if there is a reserve, it must be used wisely.
  • 03:39 When deciding how to use the reserve, first determine why the money is needed.
  • 03:44 Was it a bad estimate, new work, or risk mitigation?
  • 03:48 If new work, get the stakeholders to provide more funding.
  • 03:51 Otherwise the project has fallen into a scope creep trap.
  • 03:55 If risk mitigation, allocate the funds to the mitigation activity.
  • 03:59 Spending this money now will avoid the negative impact of the risk.
  • 04:03 If it is for an overrun, don't allocate the money.
  • 04:06 Keep track of the overrun to support the lessons learned activity
  • 04:09 at the end of the project.
  • 04:11 The purpose of the financial reserve is to provide needed resources for
  • 04:15 risk mitigation.
  • 04:16 Keep track of the use of the reserve in a log to help with risk management and
  • 04:20 lessons learned.
  • 04:21 Finally, at the end of the project,
  • 04:23 the remaining reserve is used to offset an overrun.
  • 04:26 By waiting until the end of the project, the poor estimates will not be massed and
  • 04:30 the estimating process can be improved on future projects.
  • 04:36 Although there's some significant challenges with tracking project spending,
  • 04:39 these costs can be tracked, and the information can be used to
  • 04:42 improve both the current project and future projects.

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