Control – part 8 - Cost - Overspend
Fixed budget, costs must be cut
When there has been overspend the project manager will look at various ways to bring spending in line.
It may be that the amount of money in the pot is not enough.
Sometimes with horizon planning affording more accurate cost estimates over the immediate stage and best guesses contributing to the latter stages the overall estimate can fall below actual spend. The Project Sponsor may insist there is no more money which leads the Project Manager to consider cost cutting.
Cost cutting may be the first option any way before any justification can be put forward for the approval of extra funds.
Reduce resource
There are clear areas to examine that may cut costs and the obvious one is resource.
This would include personnel, equipment and facilities.
However, any reduction in costs in this manner could have a major affect on producing the project deliverables.
Any cost cutting consideration should thus be conducted carefully.
One reason for using temporary staff is it is easier to cut back when compared to employing a permanent work force.
Any staff reductions must be handled sensitively.
Balance of external vs internal
If personnel are cut back then you might need to consider the balance of external and internal.
Internal are usually cheaper but will be much harder to reduce.
Removal of internal resource away from the project to elsewhere in the organization merely moves the cost to another department.
Remove business resource
The use of any business resource could be reviewed.
This tends to be any resource that the project requires to function that is not naturally represented at project team meetings.
For example, project office resource or secretarial skills.
Finance department
Talk to the finance department as knowledge of accounting procedures may be able to help.
For example, if some of the spend can be capitalised it will be spread out over a greater period (but not reduced).
This may ease cash flow problems.
The accounting process should highlight any variances which could be:
- The schedule may have time variances
- Over or under expenditure
- Over or under payment
Basically, take advantage of their knowledge to try to improve the cash flow of the project.
Review all areas for ‘fat’ in the system
All areas should review their estimates of personnel, standards, equipment etc as it is not unheard of to overestimate in these areas.
Reduce the scope
If the above tactics fail to reduce costs to the necessary levels, management could impose across the board reductions that all managers must meet.
For example, 5% or 10% reductions.
Eventually, if costs cannot be reduced to the required level the only option may be to give the customer less than was requested.
This is the final option.
Here you would be suggesting reducing the scope of the project.
This would mean a reduction in the specification which may reduce the performance of the final product.
This would require detailed discussion with the customer and other stakeholders together with approval at senior level, that is the Project Board.
The problem with estimating future costs is they will naturally be less accurate.
Events may change in the future which could have a dramatic affect on costs.
This is why any assumptions and constraints must be recorded as part of the information package prior to project approval.
For long projects the Project Manager must be aware of the rise in labour costs and salary increases.
Exchange rates may be an issue as well as changes in environmental, health and safety and legal positions.
Control may mean providing remedial action until the full solution can be found and applied.