Your IT PMO and Cost Management

Your IT PMO needs people, processes, and technology working together to deliver on the three primary goals of a PMO: enabling executives to build and manage portfolios, spotting and fixing project problems, and helping project teams to be successful.  One ingredient to this success is Project Cost Management – both at the project-level, and rolling up to the enterprise-level.

This is important for several reasons, such as:

  • Keep your project on-budget;
  • Make critical decisions about changes, contingency, and speeding up or slowing down the project;
  • Determine if there is room in the budget for other projects; and,
  • Let finance know how much will be spent and when.

There are many different costs that should be tracked on a project (with more granularity based on the type, size, and duration of your project).  They get tracked under the Cost Breakdown Structure (CBS) which represents costs with a hierarchical cost codes.  How do you create the CBS, and to what granularity?  The simple answer is to create a CBS to the level where people are accountable for costs, and where costs can be controlled (any deeper just creates noise).

The CBS has a relationship with the schedule’s Work Breakdown Structure (WBS) but should not necessarily be synonymous with it.  The CBS also aligns with the financial General Ledger (G/L) structure.  So, the relationship between the WBS, CBS, and G/L can be described as a three-dimensional model.

The CBS is something of a translation between the G/L and the WBS.  When the system supports this well, it frees each expert to view the same costs, project work, and financial transactions in their own systems and work speciality.

But, I digress a bit … Back to the main discussion about cost controls.

The types of costs you need to track include: estimates, approved budget, commitments (contracted amounts), incurred (burned hours & dollars), actuals (billed and paid), accruals (incurred less actual), holdbacks (tracking partial payments like a rule of credit), and a variety of forecasts – including the estimate-to-complete.  To get the forecasts, the CBS must be connected to the WBS to enable cost- & time-based forecasts that ebb and flow accurately and automatically as the schedule moves.

Keep in mind, this is not accounting.  The Cost Controller isn’t worried about debits and credits.  The Cost Controller is worried about how much money has been spent and how much is required to finish the project.  Typical ERP or Finance systems simply do not handle this.  They are accounting systems for bean counters.  A Project Cost Management system is accounting for project engineers.

In addition, the Project Cost Management system may include formal processes for initiating and tracking workflows for a variety of approvals, such as initial budget approval, change request consideration and approval, and approvals to use contingency budgets.

Final word on this is that in large capital construction projects you will often have a Cost Controller.  That is someone whose only job is to manage the CBS, track costs, create forecasts, analyze reports, and so on.  In IT you almost never have this type of person.  As with creating and managing the schedule, the cost control role falls to the Project Manager.  The Project Manager is wearing many hats, so the PMO must ensure that the cost control processes and systems are very easy to learn, use, and understand.

What’s the PMO’s role in cost management?

The PMO must:

  • First, ensure that a cost control structure is in place that is easy to use and meaningful. For IT, the costs may be in simple buckets like: labour (internal, contract), infrastructure (on-premises, cloud), software (on-premises, cloud), and database (on-premises, cloud).
  • Next, determines which costs are important to capture and analyze. These are likely to be the budget, commitments, incurred, and actual.
  • Then, set up a simple forecasting method which, once configured, automatically applies the estimate-to-complete across the remaining project time.
  • Subsequently, make it easy to get or calculate these amounts on a regular cycle (e.g. weekly). For example, a PMO report should feed each Project Manager with the budget, commitment, and actual costs, and allow the PM to simply update the incurred field based on knowing the “burn” for the week (or better would be to take individual time and progress reports from each team member for the week and calculate or estimate the incurred).
  • Additionally, but perhaps most importantly, all this data should be round up in meaningful and easily understandable reports that project managers and project sponsors can interpret and use for finding & fixing problems, and making decisions.
  • Also, put in place supporting capabilities that satisfy the finance team – namely automatically calculating things like the forecast and accruals.
  • Finally, teach the project managers how to use the cost management system and how to analyze supporting reports like the forecast, and variance reports.

Finally, the PMO must put in place easy to use processes and technology to support automatically doing the cost management.

Did, I say “finally”?  Well, not quite finally.  This is a good overview on the project-level.  But, the PMO must also roll project cost information up to the program-level and portfolio-level.  For example, a forecast of the IT portfolio lets the CFO understand how much cash they will need to meet obligations in coming quarters.  Similarly, it lets a VP understand the burn rate on IT projects being done for their teams.  It also lets the CIO play some “what-if”, for examples, “What will my budget spend actually be, based on current burn rate?” or “How can I maintain my budget by speeding up or slowing down some work, without cancelling any projects?”

There are supporting functions that are necessary inside the Cost Management solution.  These are:

  • Change Management – Allowing for changes to be raised by key people on the project, reviewed by others (e.g. architects, software engineers, scheduler, cost controller, project manager, project sponsor, etc. as defined in the organization), added to or revised (by people who are allowed), and approved or rejected. If a change is approved, updates must be made to the budget (perhaps using contingency funds or actually adding dollars to the budget), and the schedule.  These may be made manually or automatically.  The change request workflow should be automated, and the decisions along the way should all be stored securely and be auditable.
  • Contract Management – (the process of managing contract creation and execution) – The details of this are typically handled by the Supply Chain Management team, using their software. The details that are important to the IT PMO are primarily the contract scope, dates, and rates.   The PMO must track these and make them available to the individual PMs to ensure that the right people are on the project at the right time, at the right rates, and doing what they are supposed to be.

PMO Enabling Cost Management Requirements:

  • One project cost tool with integration to the schedule and the finance system (WBS to CBS to G/L). (Editorial note: Base on cost and complexity, this integration is often acceptable through rolled up reports that can be easily imported.)
  • Automated and configurable business processes for change management
  • Capture and reporting of key contract details (e.g. dates, scope, value, and rates)
  • Automated creation of forecasts
  • Automated reports and dashboards that roll-up cost details and forecasts to program & portfolio reports
  • Automated supporting reports for finance (e.g. accruals) and other purchasing (e.g. commitments vs. incurred vs. actuals and contract end-dates)

Benefits

Benefits from a single integrated cost management solution includes:

  • Increased visibility of costs and the forecast to complete
  • Improved allocation of budget to projects
  • Cost analysis that results in saving money on projects
  • Increased on-budget and on-scope performance
  • Improved time to ROI
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