My System For Tracking Project Financials

There are many, many ways to keep track of project financials. I struggled with the concept when I was starting out as a project manager in a consulting firm.

Over the years, I've got some real experience on this and I want to share my system of tracking project financials with you. I realize there is not a lot of information out there on this topic - so budding PMs should take note.

My viewpoint comes from a consulting firm's perspective but you can apply the same concepts if you're an in-house PM. And for those of you who are familiar, I'm assuming the project is a "fixed cost" project (client pays a fixed price $X no matter how many project resources there are or how long they work) rather than a "time and material" project (client pays for time where each project resource does work).

1. My Project Financials Template

The first thing you need to know in when tracking your project financials is to set up the information in a template.

Here is a screenshot of my template for tracking project financials.

my project financials template A screenshot of my project financials template

I'll walk through each section with you.

2. Allocated Resources

The first thing you notice in the template are the allocated resources. Who are the people staffed on your project and what is their seniority?

It's important to know their seniority because in a consulting firm, seniority determines your charge out rate. For example, a Business Analyst may cost $50 an hour. For one man-day (8 hours), he or she will cost 50 x 8 = $400. A project manager may cost $200 an hour. For one man-day, he will cost 200 x 8 = $1,600.

What you do is to list out the resources in columns and type in their charge out rates.

3. Determine Man-Days

Now, the next thing to do is to allocate each resource a specific number of man-days. If you have a Business Analyst doing requirements gathering that lasts for 4 weeks, then you should budget for 4 x 5 working days a week = 20 man-days. And this has a corresponding cost of 20 x 8 x $50 = $8,000 if we use a charge out rate of $50 an hour.

4. Other Expenses

Once you have your resource cost entered, you need to include other expenses - typical expenses would be accommodation, air tickets, mileage or other transport claims from your team members.

Tip: At the start of a project, it is difficult to precisely estimate "other" expenses like transport claims. My advice is to be conservative and allow a larger bucket for such claims so that you don't get a nasty surprise during the project.

5. Your Budget

Once you have included resource costs and other expenses, you have a baseline budget of the project defined. You should store a copy of this baseline snapshot somewhere safe.

In a consulting firm, the client would usually need to pay the "budgeted amount" above (to cover costs) plus a % fee, which represents the project's profit.

6. Your Actuals

Now, as your project progresses, your resources will need to "clock" time into your project. If a Business Analyst works for 5 man-days, he or she should clock 5 days into your project.

When this happens, you should be able to draw up an "Actuals" snapshot of your resource clocking.

Tip: Make sure you allocate time each week to ensure your team members clock into your project code properly. If a team member misses a clocking, it will give a skewed view of your project financials.

7. Monitoring Financials

Now, it's important to monitor your financials like a HAWK. Let's look at two situations to further understand this.

Assume that your project is budgeted to last 10 weeks. You have a PM and 2 BAs clocking to the project, 5 days a week, for 10 weeks. And let's ignore other expenses for now.

You are right smack on target with your deliverables and finish the project within that 10 weeks. In this case, the actuals incurred would be exactly equal to the project budget.

If however, in Week 8, you realize you are nowhere near delivering the project by Week 10, then you will likely need to bring in an extra resource to do a final push of the work to meet the deadline. Or you can finish the work only by say Week 11. In either case, your actuals will exceed your project budget.

Bringing in the extra resource costs money. Having your resources work for one more week in the project also costs money.

For consulting firms, this is a loss situation. Your resources' clocked hours in the project cannot be fully recovered. That's because you only budgeted for 10 weeks.

The way around this for consulting PMs is to bill the client for the extra work, especially if it can be demonstrated that work that is not in scope has been taken on by the team.

Case Study: In one of my projects for a bank in Singapore, we failed to bill the client for a set of changes that were analysed and implemented by our team.

One of the BAs went ahead to agree with the user that it would be implemented and told the vendor to implement the changes, without realizing the work done was out of our project's scope.

This resulted in a loss situation for us as we had to work extra hours to get those requirements documented - this was time that was never budgeted in the original contract with the bank.

8. Other Considerations

There are some other considerations which I've not yet mentioned.

Invoices

When I bill my client for work done, the invoice amount billed should cover the cost of my resources' time spent on the project, PLUS a services fees (which is my profit).

Time already clocked but not billed

Now any time that has already been clocked by your resources BUT has not been billed to the client is a danger to you. It means I have expended effort but not recovered the cost. And the longer this situation exists, the more dangerous it gets. The way around this is to build in frequent "payment checkpoints" so that I can get the client to pay often for the resource time I've already incurred.

Client does not pay

The other danger sign is when you have billed the client but the client has not paid - after months. It's important to track how long the client has an outstanding invoice that is not paid - so that you can recognize such danger signs.

Budgeted, actuals and variance

Most project status reports will show project financials with three columns "budgeted", "actuals" and variance. Variance is defined as "actuals" minus "budgeted". If your actuals (i.e. resource cost expended) is more than your budgeted amount up till this point of time, the variance will be negative and needs to be flagged as a BIG RED BOX on your report. You need to also define mitigation steps to get the financials back to zero or positive variance.

Cross-border projects

I hate to do cross-border projects. A cross-border project means that you, in Country A, bills your company's entity in Country B. The entity in Country B then bills the client. If you are in such a situation, you have to take note to bill the entity in Country B and not the client. You also have to take note of goods and services tax, plus other forms of taxes when dealing with the other country.

Case Study: In one of my projects, I did not track the project financials variance closely enough. Weeks went by with me not knowing whether the project was making or losing money. This was BAD!

Two months later when I had time, I sat down to check the financials properly and realized I was deep in the RED. Needless to say, I got a big shelling from the bosses. From then on, I have never let a week slip by where I don't monitor my financials.

Wrapping Up ...

I hope the above has given you a flavor of the project financials template (and approach) I use to keep my project budget on track. There is a lot to say about project financials but for a starting introduction the above content is very relevant. Try to apply these tips the next time you're budgeting and tracking financials for your project!

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