Today we take a look at the future. It’s January 16, 2023. You’re a project manager and you open your inbox. A new e-mail. The controlling department wants to know what your project “X-Development for Customer-YZ” cost in 2022 and will cost in 2023. This information “is needed to check the business consultancy, which has to be prepared according to §238 Law to Maintain Accounting Records in the German Commercial Code.”
Phew. How do you calculate these values now? Of course there is a plan. The project has a duration. Let’s say 3 years. And a budget. Let’s say 5 million euros. But how can I use these fixed framework conditions to create a period-related evaluation – e.g. for a year, a month or a week – that shows both planned costs and actual costs?
This is a problem that many of our customers are familiar with. After all, project activities do not always end at the end of a year or month. In project management, however, costs are planned on the basis of work packages and activities. This is the only way to compare target and actual values later on and to determine whether the project will be completed within budget. Even in agile projects, you want to know from time to time: What will the release cost me?
Reality Check: Planning Is Not Always Everything
In classic projects, cost planning usually takes place after project goals, deadlines and resources have been defined. To calculate project costs, you need a work breakdown structure with project phases, work packages and activities. If you use a Gantt chart for representation, you can also use it to plan the duration of the stages. Costs are planned for the individual activities, which result, for example, from personnel costs and other costs (e.g. material costs, external services, etc.). To do this, the required resources must first be recorded with their individual cost rates or fixed costs. With a click, project management software usually provides you with the planned costs per work package or activity. When added up, this results in the planned total costs of the project. It is advisable for the planned project budget to include a buffer in addition to the planned costs.
If all projects ran according to plan in a linear fashion, no further evaluation would be necessary. In reality, however, the planned and actual values often show different figures. This is not surprising, because complex projects in particular depend on so many factors that precise advance planning is hardly possible. This realization has led to the fact that today people like to take an agile approach and not only orient themselves to the target dimensions of cost and time of the magic project management triangle in order to evaluate the progress of the project, but primarily to the value added. One metric for measuring value growth is earned value analysis, or EVA for short.
Cost Planning in a Hybrid Project
Let’s assume you are a contractor of a classic project and you develop agile together with a customer. Your project is therefore carried out in a hybrid manner. You plan the individual project phases linearly, but the development proceeds iteratively, incrementally in sprints. With the project management software in-STEP BLUE, you can easily plan and control time-related via WebApp and evaluate your costs for a specific period, for example 5 months. To do this, simply select the period you want to calculate and display in the top right-hand corner. With a click you get values like: Personnel costs (PF) planned, Personnel costs (PF) actual for the respective months. You can also see if the activities are already completed (status) and from when to when the activities are planned (start and end date). You can easily drag this cost tracking view to your topic bar for quick access.
Fig. 1: Cost tracking with the in-STEP BLUE WebApp based on an Oracle database.This allows you to show your client at any time which budget would have to be made available in which time period and how the planned costs relate to the costs incurred. An earned value analysis in the dashboard provides the completion value in relation to cost and time efficiency.
Cost planning in a PRINCE2 Project
Let’s assume you have successfully and profitably completed the hybrid project and are now starting a PRINCE2 project. The first of seven basic principles of PRINCE2 is: “Ongoing business justification”. To verify this, a business case is created at the beginning of a PRINCE2 project. The business case gathers the information that enables management to assess whether a project is (and will remain) desirable, feasible and achievable, and therefore worth investing in. The business case document contains the following information:
- Reasons for carrying out the project (expected benefits).
- Estimated costs and time frame
- Advantages and disadvantages (from the customer’s point of view)
- Overview of project risks
For the continuous justification of the project it is necessary to relate costs to the project duration again and again. With project management software from microTOOL, you plan your management phases and technical phases in a results-oriented manner. In order to be able to set the investments already made in relation to the expected result at certain points in time during the course of the project, simply set the period you want to look at in the top right-hand corner of your cost tracking view. The tool will then provide you with an overview of planned and actual personnel costs, planned and actual additional costs and the planned/actual difference per month. This way you can track costs and re-evaluate the profitability of the project at any time.
Fig. 2: Cost Tracking with objectiF RPM on the Basis of an MS SQL Server Database
From a business point of view, project costs are to a large extent also “value consumption”. This means that resources of the implementing company are consumed. In order for a project to have a positive balance in the accounting sense, the expenses must be less than the budget. This is not always easy to achieve given the volatility of raw material prices, personnel availability and incalculable risks. But because every project cancellation due to overestimated financing also results in economic damage – after all, costs have been incurred without performance – it is important to be able to draw up an interim balance sheet at any time. It’s good if project managers can track and evaluate costs at any time with the help of suitable project management software.
https://www.rechnungswesen-verstehen.de/lexikon/werteverzehr.php, retrieved 08/05/2022