Monitor and control project costs

Financial management is critical in project management as it allocates, forecasts and assigns a cost to optimise funds. The economic viability, stability and profitability of a project determine the return of investment for the organisation. The project manager is responsible for monitoring and controlling costs so the project remains within budget until completion.

Once the financial management planning phase has reached an agreement, it is time to monitor actual project expenditure against the allocated budget. Financial management processes compare the actual financial results against the budget.

The process of controlling budgets can be broken down into several steps:

• Establish the actual position
• Compare actual with budget
• Calculate variances
• Establish reasons for variances
• Take action to exert control.

Project managers use these financial management processes to manage project costs:

1. Strategic project financial management must align with company goals to accomplish long-term objectives.
2. Benefits realisation management aligns projects with organisational strategy to identify benefits and monitor progress during the project life cycle.
3. Bridge company-wide strategy formation and execution by selecting appropriate tools and methodologies for the project. Strategy execution is a critical step in project management and can mitigate costly risks later during the project life cycle.
4. Executive sponsorship can establish valuable company-wide connections, gain project support, reinforce stakeholder engagement, offer guidance, provide conflict resolution, reinforce engagement, and secure project budgets and resources.
5. Employ and retain the right personnel. People can make a significant difference to project success, and investment in staff training and development can increase their dedication to the organisation and project.
6. Adopt technology that will facilitate project management. Many mobile devices and software programs improve the opportunity for project success. Maximising technology increases the agility and effectiveness of project teams.
7. Adopt agile processes to optimise resources during project management.

Watch

Watch What is Agile? at: https://scnv.io/mORY

Financial management

The goal of the financial management process is to:

• Identify the sources for funds and alternatives
• Investigate the possibility of financial fluctuations
• Examine the economic environment
• Identify or develop financial analysis tools
• Evaluate appropriate legal entities
• Evaluate contract requirements
• Examine financial risk factors
• Define taxation and financial planning factors
• Identify variances.

Monitor and control financial management

Project cost estimation develops an approximation of funds required to complete a project. This process uses budgets and forecasts to predict an organisation's future financial position. Forecasts monitor financial outcomes against budget predictions. These aspects of financial management require regular review to monitor and control project costs. Data obtained from these reviews are used to determine if the project meets resource requirements and minimises future variances.

Activities that monitor and control financial management include:

• Accounting
• Cashflow analysis
• Financial reporting
• Financial audits
• Project Management Plan updates
• Cost-benefit analysis.

A project manager must monitor the actual expenditure of the project against the budget, and this can be done by:

• Monitoring the budget against agreements/quotes and actual costs
• Monitor the budget weekly to ensure there are no variances and action can be taken quickly
• Check invoices against the project budget
• Check invoices against agreements/quotes prior to payment.

Project Managers must know the available project funds for each stage of the process. You need to monitor purchase requestions, purchase orders, commitments (that is, purchase orders or contracts that you and the contractor or vendor agreed to), accounts payable and expenditure.

Project managers are responsible for ensuring projects remain within their budget. Identifying cost variations is a critical factor of financial management as it alerts the project manager to potential issues that could affect the project.

Variance analysis should occur at regular intervals during the project life cycle to assess the status of the project budget. It is sometimes necessary to adjust resources, staffing and other expenditures to stay within budget. Information obtained from variance analyses may even inform changes that need to occur in the project plan. Project managers also use variance analysis data to update stakeholders about the project's progress, particularly its financial status.

Cost variance—or budget variance—calculates the difference between the actual cost and the budgeted cost of the project. Project managers use this formula to assess the project's financial status, indicating whether the project is under or over budget.

Cost variance formula

CV = EV - AC

Cost variance = CV

Earned Value = EV

Actual Cost = AC

Cost variance compares your original budget against

Cost variance is reported as being either:

• Positive cost variance—The project or expenditure item is under budget
• Negative cost variance—The project or expenditure item is over budget
• Zero cost variance—The project is on budget, and expenditure is as expected.

The project manager must evaluate the variances and take appropriate action to ensure the project stays on track.

If a variance has been identified, the project manager should refer to the cost management plan, which describes the cost control procedures. For example, a variation of 10% may be acceptable. The project manager must identify and determine the different courses of action to address variations by considering the impact of cost, risks and benefits.

The analysis and decision will need to be communicated to the stakeholders. Variations and changes to manage the variation may require approval from the Project Sponsor or stakeholders.

An example of a budget breakdown is provided below:

Budget Breakdown

WBS level	Task	Labour		Physical resources		Budget	Actual	Difference
		Hr	Rate	Materials	Products
1	Project Staff Contract Project Manager Marketing officer x 4 weeks.	100 hours x $60 p/h 50 hours x $40 p/h	$6,000 2,000	$1,000	$800	$9,800	20,000	-$10,200
2	Website development External development			$0	$5,000	5,000	5,000	0
3	Marketing Decide marketing strategies Develop promotional materials Implement marketing communications	Project staff	Project staff	$1,000		$1,000	800	$200
Total						$15,800	25,800	-$10,000

Cost-benefit analysis

Cost-benefit analysis is an evidence-based method used by organisations to make decisions. This tool is valuable in evaluating and developing project management as it accurately measures project finances. The cost-benefit analysis comprises equations to calculate the cost and returns of business activities, including projects.

Learn more about cost-benefit analysis.

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Watch Calculating and Understanding Cost Variance.

Earned value management

The basic premise of earned value management (EVM) is straightforward: compare the value of work completed (the "earned value") to the original budget for that work (the "planned value"). The earned value is then compared to the actual costs incurred to complete the work (the "actual costs"). This simple calculation provides important insights into whether a project is on budget, ahead of schedule, or behind schedule.

EVM can be used to track progress in both monetary terms and physical terms. For example, if a project is planned to cost $100,000 and has an earned value of $50,000, then the project is 50% complete. If the project's actual cost is $75,000, then the project is 75% complete.

The following calculations used to measure project performance is from Stephanie Ray, Project Manager, 16 May 2022.

Earned Value Management Formulas

There are calculations that can be done quickly and easily to execute EVM. EVM formulas can be divided into two groups: performance indexes and variance analysis formulas. Here they are:

Schedule Variance (SV)

The schedule variance is a way for project managers to figure out how much ahead or behind schedule they are in the project. The formula to figure this out is as follows.

Schedule Variance (SV) = Earned value (EV) – Planned Value (PV)

Cost Variance (CV)

Cost variance is the difference between the actual cost of the project at that point it’s calculated compared against the planned budget cost for that period of time in the project plan. The formula is below.

Cost Variance (CV) = Earned value (EV) – Actual Cost (AC)

Schedule Performance Index (SPI)

The schedule performance index is a subset of EVM, which shows whether a project is ahead or behind schedule. It calculates the ratio of the performed work to the scheduled work. The formula for this is as follows.

Schedule Performance Index (SPI) = Earned value (EV) / Planned Value (PV)

Calculating the schedule performance index involves dividing the EV by the PV to measure progress achieved against where you expected to progress at a certain point. If you’ve come up with a value less than 1.0, it means that you’ve done less work than you projected for this point. While a value greater than 1.0 means you’ve completed more than was planned.

Cost Performance Index (CPI)

The cost performance index measures how efficient the costs are in the project. It’s shown in a ratio of earned value to actual costs.

Cost Performance Index (CPI) = Earned Value (EV) / Actual Cost (AC)

For this calculation, you divide EV by the AC to measure the value of work completed against its actual cost. Again, if you reach a figure less than 1.0, your costs are higher than budgeted. A number higher than 1.0 means the costs are less than budgeted.

Estimated At Completion (EAC)

Estimated at completion is the current expectation of what the total costs will be for the project when it is done.

Estimated at Completion (EAC) = Budget at completion (BAC) / Cost performance index (CPI)

With this calculation, you divide the total project budget by the CPI value you figured out above.

All projects need to be monitored and controlled. The cost control process monitors and governs costs and changes to the project budget. These processes occur throughout the project life cycle to implement appropriate corrective action. Ongoing observation and measurement—against the project plan—enable the project manager to make acceptable cost variances for the project.

The cost control procedure is used to measure the cost variance from the baseline and helps the Project Manager to take appropriate action, such as making changes to the budget or scope of work to correct the gap. Cost control is a continuous process done throughout the project lifecycle. The cost management plan details how project performance will be measured, the thresholds for deviations, actions to be taken if the threshold is breached, and the list of people and roles with executive authority to make decisions.

Below is an example of an organisation’s cost variation tolerance and actions.

Variation rate	Action
0–5%	Report variance and explanation of the cause
5–20%	Further commitment to additional costs must be approved by the project manager
20–45%	Further commitment to additional costs must be approved by the senior management team
45% plus	The project must be stopped and reconsidered

Corrective action

Corrective action may involve amendments to the Project Management Plan to achieve objectives and minimise constraints. Cost control ensures projects are delivered on time and within budget to satisfy stakeholder objectives.

Methods to monitor and implement financial objectives include:

• Cost estimate updates
• Cost baseline updates
• Performance measurements
• Forecasted completion
• Requested changes
• Recommended corrective actions
• Updates to organisational process assets
• Updates to the Project Management Plan

Reallocation of resources

The project manager may identify that more time or money has been spent on particular aspects of the project. One strategy to address this over time is to use the time allocated or saved hours from other project areas. For example, if ten hours have been allocated to rebranding but only four hours have been used, the other six hours could be borrowed for other parts of the project so that the budget does not exceed initial cost estimates.

Accurate and timely financial information is critical for project success. Relevant financial information provides a realistic overview of project performance. Financial reports document data to forecast and inform strategic goals. Project managers use financial reports to evaluate project performance and assess budget allocations. These reports also help control project costs and ensure expenditure is aligned with project objectives. Financial reports show stakeholders how the budget is formed, documented, reviewed and adjusted during the project life cycle.

Project financials are powerful tools for managing and controlling project costs. It is important to tailor the financial reporting system to meet individual client and project requirements.

Finance project management

Project financial reports are critical in project management, and specific activities must be conducted to manage project costs.

In large organisations, there are sometimes dedicated financial managers. Just as project managers monitor the project against its budget, financial managers monitor the profit margins of projects to analyse the organisation's performance.

In other organisations, there may be finance staff responsible for data entry.

In most organisations, the project manager reviews the data and discusses the finances with the relevant financial delegate in regularly scheduled meetings or as needed.

The purpose of financial management is to oversee project expenses, cash flow and reporting processes. Financial due diligence is an important aspect of finance project management that applies accounting procedures to gather and analyse data.

Comprehensive financial analysis can increase the productivity and profitability of an organisation and should be applied to every project.

Project financial analysis

Project financial analysis compares the planned time for the project against the actual time the project takes to complete. This process informs whether the project is on budget and profitable. The project financial review aims to analyse the ratio to assess project profitability. The structure of project financial analysis consists of three main steps:

1. Frame questions
   • Financial analysis goals should be clear and precise.
   • Specific purpose for data collection
   • Decision to be made
   • Problem that prompted analysis
   • Decision-making process
2. Define the scope
   • The scope needs to be specific to the project phase and the factors impacting the project: internal and external.
3. Quantify project variables
   • Project deliverables should be quantified based on revenue, cost and profit.
   • Factors to include:
   • Role rates
   • Hourly costs
   • Task estimations
   • Time

Source: https://www.forecast.app/blog/project-financial-analysis