Calculating project over and under runs with trend analysis

How a PMO can use cost trend analysis to identify budget under and overruns

Graph analysing project costsOne of the responsibilities of  project manager is to manage the project budget.  This covers, estimating the initial budget (in most cases or at least reviewing), creating a monthly budget plan, tracking progress (actual) spend and then re-forecasting budget required (known as the estimate to complete – ETC).

Unfortunately, while some project managers are very good at estimating and managing budget, others are not very good.  This is an issue as it can result in large budget under or overruns – both being bad for an organisation.

During my years of working in change management, I have seen so many status reports where the ETC is equal to the budget less actuals.  A clear indication that the project manager is not re-forecasting, they are simply making the ETC the difference between the budget and actuals.  This will usually result in an under or overrun.

Other issues occur where the initial budget is incorrect.  There are usually legitimate reasons such as the budget being created on a number of high level assumptions.  Unfortunately, not unless the budget demand substantially moves up as more analysis is completed, most project managers will want to hold on to excess budget “just in case”.  While this provides a level of security for the project manager, it presents an opportunity cost to the organisation.

Cost Trend Analysis

A simple way for a PMO to provide independent challenge to the budget is by employing cost trend analysis.  This is where the historic data (monthly actuals) are used to predict future spending trends.  While not 100% accurate, it is fair to say that the historic monthly spend will be more indicative of future spend that a plan created many months or years ago.

How this helps?

The PMO can implement a simple process to apply trend analysis to the regular reporting submissions received from the projects.  This will then allow a comparison of the ETC submitted by the project to the prediction from the trend analysis.  Where there are significant delta’s the PMO can then meet with the project manager to discus the reason for the delta.  If there is a credible reason for increase in monthly spend, such as X new resources just added, the PMO will be comfortable with the ETC.  However, if there is no credible reason, the project manager should be encouraged to return some of the excess budget.

Identifying the under utilisation of budget early will allow for the budget to be made available for other change initiatives.  Identifying overruns will allow for earlier intervention that may save the overrun.

Summary

Using cost trend analysis will ensure that a PMO provides value and moves up the maturity curve.  It will help an organisation avoid cost mistakes in under and overruns.

The next post will go into detail on how to establish an effective but simple cost trend analysis tools and process including what data should be included in the calculation.