Join Chris Croft for an in-depth discussion in this video Monitoring costs, part of Project Management Simplified.
- Step 10 of the project management process is to monitor the cost of your project so far so that you can forecast what the cost is going to be when you're finished. Now this is an area known as earned value, and commonly in books this is quite horrible, there's lots of maths and things, but I've pulled it down to just six possible combination, six diagrams that show you the possibilities of what could happen with your project. And if you understand these six diagrams, you understand the finance of projects, it's not too bad. And you'll see that each of my six combinations is the cost of what you spent so far compared to the progress you've made so far.
So maybe being overspend is okay because you've done more than you planned for example. So we're going to analyze these six, and if you understand these six you understand the finance of projects. Now what I've got here is the six combinations in increasing order of accountant happiness. So on the first one they're really unhappy or way over it goes all the way down to the one where the accountants are delighted and you're well under your budget. So let's have a look this and see if the accountants are right. So I'm using the colors red, yellow and green as the way to characterize these projects.
Red means the projects is in big trouble, you're probably not going to be out to recover it. Yellow means, there's a little bit of a problem, it should be fixable. Green, means the project is doing really well. So let's have a look at situation number one which the accountants are giving red to. You meant to have spend 500, you've actually spend 720, so that's a red. But what we do is we remain calm and we have a look at the Gantt chart. So have a look at this. What do you think about this project? Do you think it's a red? Do you think it's a yellow or a green? Well, my feeling about this is that when we look at the Gantt chart we are slightly ahead, so that's good.
And that would explain perhaps some of the overspend. We've maybe done 600's worth instead of 500's worth. But unfortunately we've spent 720. So we are overspent, but it's not as bad as the accountants think. So, personally I would give this one a yellow for the spend and a green for the progress. So overall, this project will be a yellow. There is some action required. So that's situation number one. Now if you look at situation number two, we're also overspent, and we're also ahead.
But situation two is very different to number one, isn't it? Because you can see that we're not as badly overspent, it's still red to the accountant, but it's not as bad. And the progress is far better, we're massively into the green on the progress. So suppose we've done 800's worth instead of 500, and it's only cost us 650, then that's just great news. We're actually under budget and we're ahead. So this project is double green. The accountants giving it red is just incorrect.
And by the way, I'm not mocking the accountants because they're doing half of the story really well. And they've worked out somehow that we've spent 650, and that's great. My point is, the accountants should not be judging the project, you the project manager should be judging the project, because only you can pair up what's been spent with what's actually happening in terms of progress on the Gantt chart. You can't judge finance without a Gantt chart. So let's have a look at situation number three. Meant to spend 500, we've spent 550.
So the accountants are giving it yellow. They feel it's a little bit overspent. Have a look at it and see what you think of it. Well certainly the Gantt chart is telling us that we're slightly behind. We probably done let's say 450's worth instead of 500, and we've spent 550. So you can see that actually we're more overspent than we realize aren't we? We're perhaps twice as overspent as the accountants realized. So I would say, in terms of progress on the Gantt chart, it's probably a yellow. In terms of the money, I would say it's probably a red, we're over by a 100 not just 50.
But even if you say it's a yellow and a yellow, when you add those two up, the overall project is red. Yellow plus yellow equals red. And that's because you can't recover from being both behind and overspent. Because if you're going to catch up the lateness, you're going to have to throw extra people, resources, overtime at it and that's going to push your money even worse. So if you get the time back to green, the money is going to be into the red. So overall this is a project that can't be recovered and therefore it's a red project.
So that's number three. Now, what about number four? The accountants are actually giving this one green, they're happy, we're banged on spend. Almost suspiciously good. But have a look at it and see what you think about project number four. Now clearly the Gantt chart is showing us that we're a little bit behind. I'll probably would give this one yellow for progress. And that means that we haven't done all the works. Suppose we've done let's say 450's worth, but we've spent 500, that means that we're actually overspent, because we've used up our money but we haven't done the work.
So number four is yellow for progress and it's also yellow for money. We're actually behind and overspent. So number four is another red project and the accountants were giving it green because they couldn't see the Gantt chart. So that's project number four. Now you may say project number four is not going to happen, you'll never going to be exactly on spend, how can that happened? But it can easily happen if your only cost is people. If you got a team of let's say software guys working on something, they will spend exactly what you would expect each week and each month.
But if they've got behind schedule for whatever reason, you can get situation four. So situation four is actually very common and easy to happen, and it's deceptive because it's not green it's red. Onto situation number five now. The accountants they're giving it a green, they're delighted with only spent 450 instead of 500. Have a look at it and see if you are delighted with it. Now I'm hoping you've said that you're not delighted with it. I would say number five is probably a time to leave the company graph, it's a total disaster. And that's because we've only done, say 200's worth, and its cost us 450.
We're way over budget. But that overspend is being hidden by our terrible lateness. So we've only done 200's worth, it's cost us 450, but we should have done 500 by now. So on the face of it we're okay, but clearly we're not, and the Gantt chart clearly shows that. And I think this situation above all shows that you absolutely must always look at your Gantt chart when you're interpreting financial information. Situation five is double red, it's a total disaster. And the accountants were giving it green because they couldn't see the whole picture.
Finally, situation number six. The accountants are giving it green, they've only spent 410, it's marvelous. Have a look at the Gantt chart and see what color you would give to situation six. Now situation six isn't that bad, we're a little bit behind schedule, we're yellow on progress, we've done let's say 450's worth instead of 500, but the good news is that 450 worth has only cost us 410. So the good news is we are under budget. I'm only a little bit behind, so I give it green for the money, I give yellow for progress.
So overall it's yellow, which means that perhaps we do need to do something about it. And certainly if the key driver was time we would definitely need to do something about this project. If it was the Olympics we've got to catch up. But the good news is we've got some spare money available to do that catching up. So situation six is yellow it's recoverable. So those are the only six situations and if you understand those six, you understand project finance. It's not difficult. There is one little wrinkle that's worth being aware of though, which is nonlinear spend.
Sometimes you get one task that's worth a lot more money than the others. So for example, going back to situation number two, we felt we were pretty much home and dry, but what if that final little task that we haven't done was something really expensive then maybe there's a sting in the tail and we're not as well off as we thought. And similarly, situation number one could also be different to what we think, because in situation number one, the accountants were saying we're overspent. But what if that little bit of aheadness that we've done was something really expensive, buying the gold bars or something like that.
And that would mean that actually in situation number one we're not overspent. And finally going down to that terrible situation number five that we were looking at just now. Could we be saved by nonlinear spend? And actually we could be, couldn't we? It's possible, it's unlikely but possible that that first task was meant to cost 450, it was buying all of the equipment for our project maybe. And maybe all of that stuff that we haven't done yet is only another 50's worth. So we're definitely late on the time, there's no doubt about that, but maybe we're okay on the money, that's a thread that you can cling to, it's very easy to check of course because all we have to do is look at the Gantt chart and see what that first task is and hope that it's something expensive.
If it isn't, you're in trouble. So, what I recommend is assume linear spend, but then just in the back of your mind, bear in mind that sometimes spend isn't linear and you need to just keep an eye on that. So there we are, that's how to monitor the finance of your project. And what I recommend is have a look at your existing project now, have a look at the finance figures that you've got coming in, but pair them up with the Gantt chart and see what they've really mean, and never again judge projects just by the money, always look at the Gantt chart as well.
Lynda.com is a PMI Registered Education Provider. This course qualifies for professional development units (PDUs). To view the activity and PDU details for this course, click here.
The PMI Registered Education Provider logo is a registered mark of the Project Management Institute, Inc.
- Defining project scope
- Deciding how to list tasks
- Estimating costs and time
- Planning for risk
- Staying on budget