PMBOK+PLUS Tools & Templates
to Facilitate Financial Analysis
ADVISORY ARTICLE
By Dr. Kenneth Smith, PMP
Honolulu, Hawaii
& Manila, The Philippines
The traditional financial management practice of assessing Project Cost Performance by comparing ‘Burn Rates’ vs cumulative baseline budgets is fatally flawed; resulting in erroneous assessments most of the time! This is a shocking assertion and situation — to say the least – deserving of further explanation; and even more importantly, Rectification.
The ‘root cause’ – to cite a contemporary catchphrase — is because the traditional practice is only valid for analyzing PROJECT expenditures when Projects are ‘On Schedule;’— which is not very often.
Indeed, during implementation, changes in both work accomplishment rates and related costs are frequent, and thirteen (13) possible combinations of work performance vs. the project schedule, budget and actual cost exist. Of these 13, only three are when the project is ‘On Schedule.’[1] Thus, in most situations (77%), traditional financial analysis reports ‘False Positives,’ ‘False Negatives’ or incorrect amounts!
For instance, if project work is delayed, the project will most likely not incur the costs budgeted for its accomplishment when scheduled. Cumulative costs vs. the scheduled budget would thus be reported — incorrectly — as ‘under budget.’ Moreover, even if the project did incur additional costs, until the cumulative budget was exceeded, costs would still be incorrectly reflected as ‘under,’ or ‘on’ budget.
Similarly, if project work is performed ahead of schedule, even if ‘on budget’ it would usually necessitate utilizing the budget earlier than scheduled. However, cumulatively, that would be incorrectly reflected as “over budget;” i.e. ‘A False Negative.’
Consequently any ‘corrective’ action indicated by the accounting profession’s conventional analytical protocol would only lead to counter-productive management decisions!
Obviously, a significantly different approach to financial analysis
of Project Cost performance is warranted
to determine the project’s true status.
HOW THEN SHOULD PROJECT COST PERFORMANCE BE ANALYZED?
Well, actually a procedure already exists, but – unfortunately — most financial managers, ACCOUNTANTS AND AUDITORS are oblivious to it.
In the face of numerous project cost overruns, during the early-1960’s[2] – i.e. almost 60 years ago — the US Department of Defense (DOD) created a PERT/Cost system to track project costs with a unique new variable. Instead of measuring the rate of spending against the schedule, costs were compared to how much had been planned to be spent at intermediate stages for the work completed – regardless of the schedule. This new indicator reflected the dynamic cost performance, enabling the project manager to estimate the ‘cost to complete’ much earlier than hitherto, and note the difference; rather than simply the percentage expended to date vs. the budget.
More…
To read entire article, click here
How to cite this article: Smith, K. F. (2022). MONITORING & ANALYZING PROJECT COSTS: PMBOK+PLUS Tools & Templates to Facilitate Financial Analysis, PM World Journal, Vol. XI, Issue VI, June. Available online at https://pmworldlibrary.net/wp-content/uploads/2022/05/pmwj118-Jun2022-Smith-monitoring-analyzing-project-costs-pmbokplus.pdf
About the Author
Dr. Kenneth Smith
Honolulu, Hawaii
& Manila, The Philippines
Initially a US Civil Service Management Intern, then a management analyst & systems specialist with the US Defense Department, Ken subsequently had a career as a senior foreign service officer — management & evaluation specialist, project manager, and in-house facilitator/trainer — with the US Agency for International Development (USAID). Ken assisted host country governments in many countries to plan, monitor and evaluate projects in various technical sectors; working ‘hands-on’ with their officers as well as other USAID personnel, contractors and NGOs. Intermittently, he was also a team leader &/or team member to conduct project, program & and country-level portfolio analyses and evaluations.
Concurrently, Ken had an active dual career as Air Force ready-reservist in Asia (Japan, Korea, Vietnam, Thailand, Indonesia, Philippines) as well as the Washington D.C. area; was Chairman of a Congressional Services Academy Advisory Board (SAAB); and had additional duties as an Air Force Academy Liaison Officer. He retired as a ‘bird’ colonel.
After retirement from USAID, Ken was a project management consultant for ADB, the World Bank, UNDP and USAID.
He earned his DPA (Doctor of Public Administration) from the George Mason University (GMU) in Virginia, his MS from Massachusetts Institute of Technology (MIT Systems Analysis Fellow, Center for Advanced Engineering Study), and BA & MA degrees in Government & International Relations from the University of Connecticut (UCONN). A long-time member of the Project Management Institute (PMI) and IPMA-USA, Ken is a Certified Project Management Professional (PMP®) and a member of the PMI®-Honolulu and Philippines Chapters.
Ken’s book — Project Management PRAXIS (available from Amazon) — includes many innovative project management tools & techniques; and describes a “Toolkit” of related templates available directly from him at kenfsmith@aol.com on proof of purchase of PRAXIS.
To view other works by Ken Smith, visit his author showcase in the PM World Library at https://pmworldlibrary.net/authors/dr-kenneth-smith/
[1] Highlighted in my June 2019 PMWJ article: Understanding & Applying Earned Value: A ‘Quick & Easy’ Approach for Monitoring Project Implementation, PM World Journal, Vol. VIII, Issue V. [For the reader’s convenience, those 13 conditions are outlined again in this article.]
[2] Early in 1964, pursuant to US Secretary of Defense Robert McNamara’s edict requiring PERT/CPM & PERT/Cost be utilized for planning and managing US defense contracts, the PERT Orientation & Training Center (POTC) was established to teach — and assist – US government officials and contractors in their concepts, methodology and application. Conceived as a US DOD “Interagency” service organization, the POTC was established under the direction of Guy Best within the office of Ron Fox, Secretary of the Air Force for administration and management. I had already had on-the-job training and experience in PERT/CPM with the Navy Department, and was appointed as one of several POTC itinerant civilian faculty. Before starting to deliver training and consulting assistance to others, we ourselves were all re-oriented and “baselined” with a Management Information Systems (MIS) training program. Our facilitators & mentors were several members of Ron Fox’s former consultancy firm – Management Systems Corporation (MSC) – notably Bill Mulcahy and an Australian, Peter Bowden. At the POTC I also learned about Value from Hans (Whitey) Driessnack — the ‘Father of PERT/Cost’ – when he was an Air Force Major working for Bud Buschman (sp?) in the SecDef Office. [I was concurrently an Air Force Reserve Lieutenant.] As part of my POTC program outreach, in August 1965 I authored an article: “WHAT IS THE VALUE OF VALUE?” which the Navy Department published in their Navy Management Review, NAVSO P910 Vol X No. 8, Office of Management Information. [Years later I encountered Whitey at a PMI conference in Washington. He was then a three-star Lieutenant General, and Comptroller of the Air Force; while I had attained the rank of Colonel.]
