Cost, budget and finance

0:00Sara: Welcome to Project Management Exam Prep.

0:02This episode is about cost, budget and finance.

0:06Every project management exam tests it, because money shows whether a plan is real.

0:11Leo: You will learn how the three bodies frame it, how to build a budget from the work,

0:15and how to forecast the final cost. We finish with a drill, so keep a pen ready.

0:21Sara: First, the three lenses. What does IPMA® say?

0:25Leo: IPMA®, the International Project Management Association, sets out its standard in

0:30the Individual Competence Baseline, the ICB4.

0:33Its element on finance covers money going out and money coming in.

0:37In our words, it asks you to build the budget, secure the funds,

0:41and report so that cost breaches show early.

0:45Sara: And PMI®?

0:46Leo: PMI®, the Project Management Institute, publishes the PMBOK® Guide,

0:51its guide to the project management body of knowledge.

0:53The eighth edition has a finance performance domain.

0:58The outline of PMI®'s Project Management Professional exam, the PMP®,

1:03has a task to plan and manage finance, including contingency and the financial reserves.

1:10Sara: And APM?

1:11Leo: APM, the Association for Project Management, publishes the APM Body of Knowledge.

1:18Its section on budgeting and cost control runs from cost planning to closing the

1:22accounts. The syllabus of APM's Project Management Qualification,

1:27the PMQ, has an objective with the same name.

1:31It asks for the cost types in a budget, and how to close down the finances.

1:36Sara: Where do the words differ?

1:38Leo: In three places. First, money coming in.

1:42The ICB4 says funding when it comes from inside the organisation,

1:46and financing when it comes from outside, such as a loan.

1:50PMI® and APM say funding for both.

1:54Sara: Second?

1:55Leo: The budget spread over time. PMI® calls it the cost baseline.

2:00APM calls the spending profile a cash flow forecast, its first baseline for spending.

2:07Sara: And third?

2:08Leo: Costs you have ordered but not yet paid.

2:11The ICB4 calls them liabilities. APM says commitments.

2:16Sara: What is the core, whichever exam you take?

2:20Leo: Three ideas. One: a budget is built from the work.

2:23Estimate each work package with the people who will do it, and sort the costs by

2:28type. Direct costs belong to the work, such as staff time.

2:33Indirect costs are shared, such as office overheads.

2:36Fixed costs stay the same whatever the volume, and variable costs grow with it.

2:41Then challenge them, because first estimates are usually optimistic.

2:46Sara: Two?

2:47Leo: Money has a timeline. Spread the costs over the schedule, and set them against when

2:52the funds arrive, often in steps at each gate.

2:56Sara: And three?

2:57Leo: Control means forecasting. Each month, compare the plan with the actual costs and

3:03the signed orders. Forecast the final cost, and act while there is still time.

3:08Sara: Does that change in agile work?

3:11Leo: The shape changes. A stable team costs about the same in every iteration,

3:15so most of the cost is fixed. The budget is often set for a quarter,

3:19then reviewed. When money is short, the sponsor funds fewer iterations,

3:24and the team delivers the most valuable items first.

3:28Sara: How do you get from estimates to a budget?

3:31Leo: You add up in layers. The model sheets, free in the description,

3:35have the full example. You group the work packages into control accounts.

3:40Each control account has one owner, and it is where budget, schedule and actual

3:45costs meet. Map each account to your finance team's own cost lines.

3:50Sara: Can we have numbers?

3:52Leo: Take an eight-month city project, in thousands of euros.

3:56The supplier's fixed price is four hundred and twenty.

4:00The city's own staff, training and overheads add one hundred and fifty-six.

4:03So the work costs five hundred and seventy-six.

4:08Sara: Is that the budget?

4:09Leo: Not yet. Add twenty-four of contingency for the known risks.

4:13That makes six hundred: PMI®'s cost baseline, if your organisation keeps contingency

4:18inside it. Money held above you sits outside it.

4:23Here, that is a change budget of forty, which the steering group releases for approved

4:27changes only. So the budget is six hundred and forty.

4:31Larger projects add a management reserve for risks nobody has found.

4:36Keep each layer on its own line, and name who may release it.

4:40Sara: And once the money starts to flow?

4:43Leo: Each cost passes three moments. It is committed when you sign the order,

4:48incurred when the work is done, and paid when the invoice is settled.

4:53Finance often reports only what is paid, and that lags behind your orders.

4:58Sara: So what do you report?

5:01Leo: A forecast of the final cost: spent, plus committed, plus the estimate still to

5:06come. PMI® calls it the estimate at completion.

5:10Compare it with the whole budget. Earned value gives a second forecast,

5:14from progress. It has its own episode.

5:17Sara: And the cash flow?

5:19Leo: Add the costs month by month, and set them against the funds released.

5:24Say two hundred and fifty thousand euros come at the start, and the next funds at

5:28a gate, a decision point, in month five.

5:31If the plan spends three hundred thousand by month four, you are fifty thousand

5:36short. So act early: move a payment or the work, or ask for an earlier release.

5:43PMI® calls this check funding limit reconciliation: planned spending must never run

5:49ahead of the money released.

5:51Sara: How does this change between Mid-level and Senior?

5:54Leo: First, the two levels. They are this series' own labels.

5:58Mid-level means leading moderately complex projects, the level of IPMA® Level C and

6:05PMI®'s PMP® exam. Senior means leading complex projects and people,

6:11the level of IPMA® Level B and of APM's chartered status, Chartered Project Professional.

6:18At Mid-level, you run one budget well. Take Parking Permits Online,

6:24a city project that moves resident parking permits online in eight months.

6:28The project manager, Anna, builds its budget of six hundred and forty thousand euros

6:33from the work packages. Each month, she reports spent, committed and still to come.

6:39Sara: And at Senior level?

6:41Leo: You design the financial system that others work in.

6:45Take One City Account, a thirty-month city project that brings fourteen online services

6:51under one login, led by Anna some years later.

6:56Its budget is thirteen and a half million euros.

6:59Anna sets one cost structure for every service and supplier.

7:04Funds are released at each phase gate, but the last release is decided after the

7:09city council election in month twenty. So she shows the steering board early what

7:15could wait if that money comes late.

7:18Sara: Now the drill. A city is moving resident parking permits online in eight months.

7:25At the end of month five, Finance reports three hundred thousand euros spent,

7:29out of six hundred and forty thousand, reserves included.

7:33The sponsor is pleased: less than half is gone.

7:36But orders worth two hundred and twenty thousand are signed and not yet paid.

7:41A trial data migration shows one hundred and thirty thousand of work still to come.

7:47Is the project on budget, and what do you do?

7:51Leo: Pause and write your answer. You have forty-five seconds.

8:06Sara: First, the numbers.

8:41Leo: Add all three: three hundred, two hundred and twenty, and one hundred and thirty.

8:47The forecast is six hundred and fifty thousand, ten thousand over the whole budget.

8:52A quicker check: spent and committed make five hundred and twenty.

8:56That leaves one hundred and twenty of the budget, for one hundred and thirty of

8:59work. The spent figure misled, because it left out the orders.

9:04Sara: And the actions?

9:06Leo: Check with Finance that every order is in.

9:08Look for savings, such as cleaning some data at the source.

9:12Then report now, not at go-live: the breach is beyond your authority.

9:16Give the steering group the forecast, the cause, the options and your recommendation.

9:21Sara: What lifts that to Senior?

9:23Leo: Treat it as a trend: if one estimate was low, test the others,

9:28and give a range. Weigh the trade-off: most residents renew in January,

9:33and a late go-live would cost far more than ten thousand.

9:37Propose a new reserve for the open risks.

9:40Bring the team and the supplier into the fix, without blame.

9:44Sara: How do the exams ask this?

9:47Leo: IPMA®'s written exam asks for open answers; at Level B it may be oral.

9:53IPMA®'s certification also includes an interview, where assessors ask about your

9:57own projects, so note one cost breach you reported.

10:01The PMP® exam uses scenarios, and PMI®'s outline adds questions built on a case study

10:08or a chart: practise the forecast. APM's PMQ asks for short written answers,

10:15for example how to close down the finances.

10:17Sara: Let us recap.

10:19Leo: One. Build the budget from the work, then add each reserve on its own line.

10:25Sara: Two. Know the cost types: direct or indirect, fixed or variable.

10:31Leo: Three. Set the spending against the funds, and close any gap before it opens.

10:37Sara: Four. Forecast the final cost: spent, plus committed, plus still to come.

10:43Report a breach early, with options.

10:46Leo: And five. The bodies' words differ, but the moves are the same.

10:50Sara: The model sheets and the study handout are linked in the description.

10:54Next time: resources.