How can you identify budget misalignments in a software project?
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Budget misalignments in a software project can have serious consequences, such as scope creep, quality issues, missed deadlines, and unhappy stakeholders. To avoid these problems, you need to monitor and control your budget throughout the project lifecycle, and identify any deviations from the planned baseline. In this article, you will learn how to use some tools and techniques to detect and address budget misalignments in a software project.
One of the simplest ways to identify budget misalignments is to compare your initial estimate with the actual expenditure. You can use a spreadsheet, a project management software, or a dashboard to track and visualize the difference between the estimated and actual costs. If the actual cost is higher than the estimate, you may have under-budgeted, over-delivered, or encountered unexpected issues. If the actual cost is lower than the estimate, you may have over-budgeted, under-delivered, or saved some resources. Either way, you need to analyze the root causes of the variance and adjust your budget accordingly.
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Fernando Moreira
Sr. Program Director | Management Consultant
Through metrics and processes: (1) set KPIs like: Budget Variance, Planned Value, Cost Performance Index, Line Items in Budget (Expenses, FTE and FTE Costs) and Free Cash-Flow (2) have in place a robust Change Management Process (3) hold periodic Budget Review sessions with Project Sponsor Additionally, do not forget some success factors for an effective budget management: project is planned with realistic timelines, project is approved with good gross margin and risk margin to absorb deviations and the PM has full support and mandate from the executive team to stop or reprioritize new requests.
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Vianni Joseph Perianayagam
Technical Sales & Solution Delivery Leader | Product and Technology Consulting | Process Optimization | Program & Delivery Management
For internal projects that typically use "hours" as a measure of costs, I have done the following: 1) Detailed project plan tracking progress (actual hours used) against the forecast (hours forecast at that stage in the project). 2) Robust change control process to ensure any deviations are approved and incorporated into the plan and budgets 3) Proactive communication with stakeholders
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Another way to identify budget misalignments is to use earned value analysis (EVA), a method that measures the performance of your project in terms of scope, time, and cost. EVA uses three key metrics: planned value (PV), which is the budgeted cost of the work planned; actual cost (AC), which is the actual cost of the work performed; and earned value (EV), which is the budgeted cost of the work completed. By comparing these metrics, you can calculate two indicators: cost variance (CV), which is the difference between EV and AC; and cost performance index (CPI), which is the ratio of EV to AC. A negative CV or a CPI less than 1 indicates that your project is over budget, while a positive CV or a CPI greater than 1 indicates that your project is under budget.
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Dr. Sanjay Mohapatra
Techno and Strategic Consultant
The way we have reduced misalignments in the projects (talking about 200 plus projects) by aligning business goal ->project goal->team goal->individual goal (KPI). This is the Balanced Scorecard approach that has resulted in good results. These should be carried out at the planning stage and then reviewed constantly.
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Mohamed Metwaly
General Manager at Whitech | CTO at Future Growth
When developing software products, the key is to focus on the MVP (Minimum Viable Product). This involves planning features in an agile manner for faster productivity and ensuring you stay on track. Begin by creating a comprehensive roadmap, then tackle features one by one. For cost management, allocate team costs in fixed chunks, setting a predetermined number and mapping costs accordingly. Track costs per delivery, analyzing individual feature costs and overall expenditure. Address any deviations promptly to enhance future planning. To gauge readiness, launch the software with main features while considering expected revenues for ROI. This strategic approach ensures efficient development and a successful software launch.
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A third way to identify budget misalignments is to use budget at completion (BAC), which is the total budget allocated for the project. BAC can help you estimate how much your project will cost at the end, based on your current performance and progress. You can use two formulas to calculate your projected BAC: estimate at completion (EAC), which is the expected total cost of the project; and estimate to complete (ETC), which is the expected cost of the remaining work. EAC can be derived from AC and CPI, while ETC can be derived from EAC and EV. If your EAC is higher than your BAC, you are likely to exceed your budget, while if your EAC is lower than your BAC, you are likely to finish under budget.
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Guha Rajan M, PMP
Entrepreneur | Project Management | IOT, ML |Oracle EBS | DWH, BI| Cloud certified| Oracle products stack| Tech-New venture Mgt
Agree, but these are the parameters a PM need to take care at the time of execution of a software project. But,software projects can be so unique when compared with other projects - like building construction etc. Generally, customer most times expect higher scope of work with a constrained budget, and it becomes a challenge, if knowedgeable PM is not involved in sales cycle and another PM take it over at a later stage, so one needs to be cautious. Hence, prior take over or start of project a PM should analyse scope, schedule, effort as appropriate vs budget provisioned. Another point, generally its software and allied products only has different methodolgy like water fall, Agile or FP & TM. The right one need to choosen at the start.
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Srinivas Neelam
Analytics Leader | Digital Transformation | Cloud Migration | Agile | Product Management | BI and Advanced Analytics
Cost Tracking and Reporting: Implement a robust cost-tracking and reporting system. Use project management and accounting software to monitor expenses and compare them to the budget. Regular Budget Review: Conduct regular budget reviews at predetermined intervals (e.g., weekly, monthly) to assess how actual costs align with the budget. Variance Analysis: Calculate variances by comparing actual costs to the budgeted costs. Look for any discrepancies or significant deviations. Identify the root causes of these variances, such as scope changes, unexpected issues, or resource overages.
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A fourth way to identify budget misalignments is to use budget change control, which is a process that ensures that any changes to the project scope, schedule, or quality are reflected in the budget. Budget change control involves identifying, analyzing, approving, and documenting any changes that affect the project cost, and updating the budget baseline accordingly. You can use a change request form, a change log, or a change management system to facilitate budget change control. Budget change control can help you avoid budget misalignments by aligning your budget with the current project reality and stakeholder expectations.
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Meenakshi S
Domain practice lead at Cognizant
Often times change controls are seen as a wastage and a "bad mistake" during the course of a project or program.. To overcome this scenario it would be good to set aside a contingency budget in the beginning of any program, and come back to when there are newer discoveries and changes on the program scope. Also reviews and scope need to be increased in frequency in the first few iterations of the project itself to ensure that budget stays on track
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Vinay Mishra (PMP®, CSP-PO®)
🚀Want to Connect? | 2K+ Followers | Engineering | Finance | Delivery/Program/Product Management | IIM-L | Upcoming Author | Speaker |
Budget change control is also very important. In cases when the forecasted expenses are significantly higher than budgeted, it's a clear indication of a budget misalignment. To address that examine the impact of change requests on the budget. Changes in project scope or requirements can lead to cost increases. Ensure that any changes are properly documented and budgeted for. Always make sure this is approved within a proper governance framework :-)
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A fifth way to identify budget misalignments is to use budget review and audit, which are activities that verify and validate the accuracy and completeness of your budget data and reports. Budget review and audit can be performed by internal or external parties, such as the project team, the project sponsor, the project management office, or an independent auditor. Budget review and audit can help you identify budget misalignments by detecting and correcting any errors, inconsistencies, or frauds in your budget records and calculations.
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Vinay Mishra (PMP®, CSP-PO®)
🚀Want to Connect? | 2K+ Followers | Engineering | Finance | Delivery/Program/Product Management | IIM-L | Upcoming Author | Speaker |
My importance 2 cents here from review and audit perspective: - Conduct financial audits periodically to ensure that the project's financial processes are in compliance - Also, follow the best practices and see that there are no irregularities as well.
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Rajavel Subramanian
Manager - Medical Device/Pharma IT Applications Quality & Compliance Consulting
Other options are "reactive" and it is best to trap such discrepancies well in advance rather through "proactive". Having a budget review/audit from the initial stage of the project till end through staged manner will help us to identify or anticipate the discrepancy in advance and have necessary actions taken.
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Gaurav Dutta
Product Management at Walmart | HBR Advisory Council
1. Regular Cost Tracking: Continuously monitor and track project expenses against your budget plan. 2. Cost Breakdown: Break down project costs into categories such as personnel, hardware, software licenses, and third-party services. This helps pinpoint which areas are contributing to budget misalignments. 3. Change Control Process: Implement a change control process that requires approval for any changes to the project scope, which could impact the budget. This helps prevent unexpected cost increases. 4. Adapt and Adjust: If budget misalignments are detected, take proactive steps to adjust the budget or project plan as necessary. This may involve reprioritizing features, extending timelines, or securing additional funding.
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Michelle Pearton (PMP)
Project and Change Management services
Before a project is approved a business case is needed to enable budgets to be as accurate as possible. Lessons learned from other similar projects is invaluable. So often we embark on a project as if it has never been done elsewhere before and investing time upfront to understand the scope, the risks, the hidden costs, the resources required, what went well, what didn't can contribute to a much more accurate budget estimation before the project gets off the ground. Once project is initiated, budget and scope need to be tightly controlled at every stage of the projects life cycle. Scope creeps so insidiously. Managing scope and change to scope is a collaborative effort by the whole team and Project leaders, not just the PM.
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