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Project Financial Management: Managing Project Financials

Whether you call it project financial management or project accounting, managing a project’s finances is essential to delivering a successful project. It’s more than just keeping up with costs. There’s a lot of planning, managing and tracking involved.

But what exactly is financial project management? We’ll get to that and define the various project financials before getting into the process of managing a project’s finances. Then, to help you get started, we’ll have a few free financial management templates you can download.

What Is Project Financial Management?

Project financial management is the process of controlling the financial aspect of a project, such as its cost, revenue and profit. To do this requires planning, estimating, budgeting, funding, managing project expenses and billing.

The budgeting part of project financial management is by far the most important aspect of this process. Being able to effectively manage the budget over the life cycle of the project and making sure that all the planned tasks are completed without having to overspend is critical to the successful delivery of the project.

The importance of project financial management cannot be underestimated. It will help manage the overall project better and positively impact business growth. That’s because it balances the investment in the project with the expected return on that investment.

Other benefits include helping track progress with financial metrics, identifying and prioritizing projects that have a higher return on investment and managing project scope and cost overruns. It can also be helpful with improving resource management capabilities by better allocating resources based on your business’s strategic goals.

Naturally, project management software facilitates these benefits. ProjectManager is award-winning project management software that can track costs in real time to help you with project financial management. Our real-time dashboards give project managers a high-level overview of project costs whenever they want them. Dashboards have easy-to-read graphs and charts that track five other project metrics, too. Plus, there’s no time-consuming setup required as with lightweight alternatives. Get started with ProjectManager today for free.

What Are Project Financials?

Project financials are the money related to the project you’re managing. By planning, managing and tracking project finances, project managers can help deliver a profitable project. Project financials center around controlling the following.

Project Costs

Project costs refer to the total funds that a project requires. This includes direct costs, such as fixed labor, materials and equipment, as well as indirect costs that include utilities and quality control , among other things.

Project Revenue

Project revenue is what a project is expected to earn. It’s estimated by looking at historical data, such as past performance and using that information to predict future performance. It can be represented by target revenue, which is what the project is expected to earn and actual billing, what you bill your customer. It can also include the estimate at the completion of project billing, which is actual billing and the remaining labor billing which is planned billable expenses plus flat fees for all unfinished activities.

Project Profit

Project profit is the total amount of money that the project earns after expenses. Net profit for a project is the gross profit minus operating expenses and taxes.

Project Funding Sources

Project funding sources can come from many different sources. For example, debt is when those funds are raised from lenders. Companies can also issue bonds and sell them for funding. Equity financing is when a developer raises private equity funds. They can also get loans to finance the project.

Project Cash Flows

Project cash flows refer to cash moving in and out of an organization and determine the project’s rate of return or value. This money can be used to fund the project.

How to Manage Project Financials

Whether you’re working on a large, expensive project or a smaller one, managing project finances is essential to delivering that project on time and within budget. Following these 11 steps will help you better manage your project financials.

1. Clearly Define the Scope of Your Project

Before you can zero in on the costs, you need to understand the scope of the project. That includes the project goals, deliverables, tasks, and, of course, costs. Create a scope statement to ensure that you cover all the bases, such as the project schedule, and align the project with stakeholder’s expectations.

2. Identify Project Risks

All projects are risky endeavors. Unexpected events can have a positive or negative impact on the project. Therefore, one must plan for risks by identifying what might happen and then create a plan of action if it does. It also helps to prioritize their risks, note the likelihood of them happening, and, if they do, their severity.

3. Do a Feasibility Study

A feasibility study is used to evaluate the project and determine if it’ll be successful and, therefore, worth initiating. Before you can manage finances you need to see if the project itself is worth the investment. The feasibility study will help you identify potential issues and allow for a better evaluation of the project’s viability.

4. Create a Resource Plan

If the project is feasible, then you’ll want to create a resource plan. Resources are anything you need to execute the project, from people to equipment and materials. In other words, everything that costs money in a project. Therefore, you must determine what those resources are and when they’re needed to allocate them accordingly based on your team’s capacity.

You can use our resource planning template to estimate all the resources that are needed to execute your project, their costs and the date when they’re needed, which is critical for estimating your project costs and making a budget.

5. Estimate the Cost of Project Resources

Not only must you make a resource plan, but estimate the cost of those resources. They will be the bulk of the expenses for the project. Use historical data, expert advice and anything else you can to create the most accurate estimate for the project resources as they will be a large part of the overall project budget.

6. Conduct a Cost-Benefit Analysis

Another tool to figure out if the project is worth the time and money is running a cost-benefit analysis. This tool helps to evaluate the costs of the project against the benefits, which can be financial or otherwise. This practical, data-driven approach will help make investment decisions that are more likely to get a return.

7. Estimate the Return on Investment of Your Project

Speaking of a return on investment, that’s another metric by which to measure the potential project before starting it. In other words, you’re going to evaluate the project from a solely financial perspective to see what its profitability will be.

8. Know The Break-Even Point of Your Project

The break-even point in a project is when the total cost and the total revenue are equal. This is helpful when making a financial decision about a project especially if you’re launching a new product as it predicts how many units must be sold, which helps determine if the project meets market demand.

9. Make a Project Budget

Now you’re ready to make a budget. This should be the most accurate estimate for your project’s costs. You’ve already defined the project’s scope, now you want to use a work breakdown structure to identify all deliverables and the tasks necessary to complete them. You’ll also use the research in making the resource plan, set aside a contingency fund to cover unexpected expenses and then create the budget.

10. Secure Funding

This budget will be used to help secure funding for the project. This means coming up with a proposal that outlines your objectives, methodology and the expected outcomes for the project. It should sway potential stakeholders to fund the project because it’ll give them a return on their investment.

11. Track Cost Variance as the Project Is Executed

To ensure that the stakeholders who fund the project get that return on their investment, you’ll need to track cost variance. This means, comparing the actual costs of executing the project against what you planned for in the budget. This allows project managers to see if they’re spending as planned and, if not, adjust the schedule or scope to get back on track.

More Project Financial Management Templates

Project management templates can help you manage project finances. ProjectManager’s website is an online hub for all things project management, including free project management templates for Excel and Word. We have free templates to help you with every phase of a project. Here are a few that can assist your project’s financial management.

Project Timesheet Template

This free project timesheet template allows you to keep track of the work hours your team members have spent on project tasks, their pay rate and their corresponding payment.

Project Estimate Template

Having accurate estimates is part of project financial management. Use our free project estimate template for Excel to help you create and keep to your budget. Our free template allows you to attach labor and materials costs to every task in your project.

How ProjectManager Helps Manage Project Finances

While our free templates can help you get started with your project financial management process, you’re going to need project management software to be able to track those costs as you execute the project. ProjectManager is award-winning project management software that is online so the data you get is in real time, which gives you the advantage of catching discrepancies in your actual costs compared to your planned costs quickly so you can respond quickly and get back on track. But that’s only one small part of how our tool helps you manage finances.

Monitor Labor Costs With Timesheets

Labor costs are often your most expensive. If your labor resources aren’t executing their tasks according to the project schedule, you’ll be racking up extra costs in no time. Being able to keep track of your labor costs is essential to staying on budget. Our secure timesheets streamline the payroll process but also give project managers a window into the team’s work. You can see what percentage of their tasks have been completed and if that aligns with where they should be in terms of the larger project plan.

Use Reports to Get More Detailed Information

While project managers can get a high-level overview of their project’s finances with the real-time dashboard, when they want more details they can toggle over to the reporting features. There they can easily general status reports or portfolio reports if they’re managing multiple projects. They can also general reports on timesheets to track labor costs, project variance and much more. All reports are customizable, which means they can be filtered to show only the data you want to see. Then they can be shared in various formats with stakeholders to keep them updated.

Delivering your project to a successful completion takes more than financial management. That’s why our software has risk management, task management and resource management features to ensure you have the control over your project that you need to bring it in on time and within budget.

ProjectManager is online project management software that connects teams no matter where they are, in the office, out in the field or anywhere in between. Share files, comment at the task level and more to foster better collaboration. Join teams from Avis, Nestle and Siemens who use our software to deliver successful projects. Get started with ProjectManager today for free.

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Project Financial Management: Guide To Plan, Mechanism, Challenges and Duties

Written By : Bakkah

Table of Content

What is financial project management?

Why is project financial management important, what is a financial plan in project management, mechanism of financial project management, what are the financial responsibilities of a project manager, how to manage project financials, how to improve project financial management, duties of project finance manager, challenges of project financial management, learn project management with bakkah learning:, popular articles.

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Project financial management encompasses various processes such as budgeting , resource allocation, cost control, financial reporting, risk management, and compliance. It is crucial to ensure the success and profitability of projects by effectively managing financial resources, mitigating risks, and maintaining transparency and accountability. 

Key components of project financial management include establishing clear financial objectives, developing comprehensive financial plans, monitoring budgets and expenses, optimizing resource allocation, and implementing robust risk management strategies. Project finance managers play a critical role in overseeing project finances, managing budgets, analyzing financial data, and communicating with stakeholders to ensure project success. 

However, project financial management faces challenges such as budget overruns, cash flow constraints, resource allocation issues, financial reporting complexities, regulatory compliance requirements, the accuracy of cost estimation, and external factors like economic fluctuations. Overcoming these challenges requires proactive planning, effective communication, continuous monitoring, and leveraging technology and expertise to improve financial management practices.

Financial project management refers to the systematic planning, monitoring, and controlling of financial resources within the context of a project. It involves managing various financial aspects such as budgeting, resource allocation, cost control, financial reporting, risk management, and compliance to ensure the successful completion of a project within its allocated budget and timeline. 

Financial project management aims to optimize the utilization of financial resources, mitigate financial risks, maintain financial stability, and achieve project objectives while adhering to financial regulations and standards. 

It requires effective communication, collaboration, and coordination among project stakeholders, including project managers , finance professionals, team members, investors, clients, and regulatory authorities. Overall, financial project management is crucial for ensuring the financial health and success of projects, contributing to organizational success and sustainability.

Financial reporting involves the preparation and dissemination of financial statements and performance reports to stakeholders, providing transparency and accountability regarding project finances. Risk management in project financial management entails identifying, assessing, and mitigating financial risks that may impact project objectives , such as budget overruns or revenue shortfalls.

Overall, mastering project financial management terminology is essential for project managers to effectively plan, execute, and control project finances, ensuring successful project outcomes.

Project financial management is crucial for several reasons:

1. Resource Allocation: 

Proper financial management ensures that resources, including funds, are allocated efficiently and effectively to support project activities. By understanding the financial implications of each decision, project managers can prioritize tasks and allocate resources where they are most needed, optimizing project outcomes.

2. Budget Adherence: 

Effective financial management helps maintain adherence to the project budget . By closely monitoring expenditures and controlling costs , project managers can prevent budget overruns and ensure that the project remains financially viable throughout its lifecycle.

3. Risk Management: 

Project financial management involves identifying and mitigating financial risks that could impact the project's success. By proactively managing risks such as budget uncertainties, currency fluctuations, or unexpected expenses, project managers can minimize the likelihood of financial setbacks and maintain project stability.

4. Stakeholder Confidence: 

Transparent and accurate financial reporting instills confidence in project stakeholders, including investors, clients, and team members. By providing clear insights into the project's financial health and performance, project managers can foster trust and support from stakeholders, enhancing overall project credibility.

5. Decision Making: 

Sound financial management provides the data and insights needed for informed decision-making. By analyzing financial metrics, project managers can make strategic adjustments, reallocate resources, or revise plans to ensure project success and maximize return on investment.

Overall, project financial management is essential for achieving project objectives, mitigating risks, and delivering value to stakeholders. It ensures that projects are completed on time, within budget, and to the expected quality standards, ultimately contributing to organizational success and sustainability.

A financial plan in project management is a comprehensive document that outlines the financial aspects of a project, including budgets, funding sources, cost estimates, and financial projections. It serves as a roadmap for managing and controlling the financial resources allocated to the project throughout its lifecycle. A financial plan typically includes the following components:

1. Budget : 

The budget section details the estimated costs associated with different project activities, resources, and deliverables. It includes both fixed costs (such as salaries and equipment purchase) and variable costs (such as materials and travel expenses). The budget serves as a baseline for financial tracking and control during project execution.

2. Funding Sources : 

This section identifies the sources of funding for the project, which could include internal funding from the organization, external grants or loans, or contributions from stakeholders or sponsors. It outlines the terms and conditions associated with each funding source and the timelines for disbursing funds.

3. Cost Estimation: 

Cost estimation involves predicting the expenses associated with various project tasks and activities. It may utilize techniques such as bottom-up estimation, analogous estimation, or parametric estimation to forecast costs accurately. Cost estimation helps in setting realistic budget targets and ensuring that adequate funds are allocated to each project phase.

4. Financial Projections: 

Financial projections provide forecasts of future project expenses, revenues, and cash flows based on assumptions and historical data. These projections help in assessing the financial viability of the project, identifying potential financial risks, and making informed decisions about resource allocation and budget adjustments.

Overall, a financial plan in project management serves as a critical tool for planning, monitoring, and controlling the financial aspects of a project. It ensures that financial resources are utilized efficiently, risks are mitigated, and project objectives are achieved within the allocated budget and timeline.

The mechanism of financial project management involves a series of interconnected processes and activities aimed at effectively managing the financial aspects of a project. Here's an overview of the key components of this mechanism:

1. Initiation and Planning:

• Identifying Financial Requirements : This step involves determining the financial resources needed to execute the project, including funding, budget allocation, and cost estimates. 
• Developing the Financial Plan : Project managers create a comprehensive financial plan that outlines budgets, funding sources, cost estimates, and financial projections to guide the project's financial management.

2. Execution :

• Budget Management : During project execution, project managers monitor actual expenses against the budget, ensuring that expenditures remain within the approved limits. They may adjust the budget as needed to accommodate changes or unforeseen circumstances.
• Cash Flow Management : Project managers oversee cash inflows and outflows to maintain liquidity and ensure that sufficient funds are available to cover project expenses at all times.
• Cost Control : Continuous monitoring and controlling of costs help prevent budget overruns and identify opportunities for cost savings or efficiency improvements.

3. Monitoring and Controlling:

• Financial Reporting : Regular financial reporting provides stakeholders with updates on the project's financial performance, including budget variance analysis, cash flow statements, and financial forecasts.
• Risk Management : Project managers identify and mitigate financial risks that could impact the project's financial health, such as cost overruns, revenue shortfalls, or changes in market conditions.
• Compliance : Ensuring compliance with financial regulations, accounting standards, and internal policies is essential to maintain financial integrity and transparency throughout the project lifecycle .

4. Closure :

Financial Evaluation : After project completion, project managers conduct a financial evaluation to assess the project's financial performance against its objectives and targets. Lessons learned from the financial management process are documented for future projects.

Throughout the project lifecycle, effective communication, collaboration, and coordination among project team members, stakeholders, and financial experts are essential to ensure the success of the financial project management mechanism. By implementing robust financial management practices, organizations can optimize resource utilization, mitigate financial risks, and achieve project goals within budget and timeline constraints.

The financial responsibilities of a project manager encompass various tasks aimed at managing and controlling the financial aspects of a project. Some of these responsibilities include:

1. Budget Management: 

Developing, monitoring, and controlling project budgets to ensure that expenditures remain within approved limits. This involves creating detailed budgets for project activities, tracking actual expenses, identifying variances, and taking corrective action as needed to keep the project financially on track.

2. Cost Estimation and Control: 

Estimating the costs associated with project tasks, resources, and deliverables accurately. Project managers must monitor costs throughout the project lifecycle , identify cost-saving opportunities, and implement strategies to control expenses and prevent budget overruns.

3. Resource Allocation: 

Allocating financial resources, including funds, personnel, equipment, and materials, effectively to support project activities. Project managers must prioritize resource allocation based on project needs, timelines , and budget constraints to optimize project outcomes.

4. Financial Planning: 

Developing comprehensive financial plans that outline budgets, funding sources, cost estimates, and financial projections to guide the project's financial management. This involves forecasting future expenses, revenues, and cash flows and developing strategies to mitigate financial risks.

5. Cash Flow Management: 

Monitoring and managing cash inflows and outflows to ensure that sufficient funds are available to cover project expenses at all times. Project managers must anticipate cash flow needs, prioritize payments, and implement measures to maintain liquidity and financial stability throughout the project.

6. Financial Reporting: 

Providing regular updates on the project's financial performance to stakeholders through financial reports, budget variance analysis, cash flow statements, and financial forecasts. Project managers must communicate financial information accurately and transparently to foster trust and accountability among stakeholders.

7. Risk Management: 

Identifying, assessing, and mitigating financial risks that could impact the project's financial health and objectives. Project managers must anticipate potential risks such as cost overruns, revenue shortfalls, or changes in market conditions and develop strategies to minimize their impact on the project.

Overall, project managers play a crucial role in ensuring the effective management and control of project finances. By fulfilling their financial responsibilities diligently, project managers can optimize resource utilization, mitigate financial risks, and achieve project goals within budget and timeline constraints.

Managing project finances effectively involves several key steps and practices to ensure that resources are allocated efficiently, costs are controlled, and financial goals are met. Here's a comprehensive guide on how to manage project financials:

1. Establish Clear Financial Objectives : 

Define clear financial objectives and goals for the project, including budget targets, cost constraints, and financial performance metrics.

2. Develop a Comprehensive Financial Plan:

Create a detailed financial plan that outlines budgets, funding sources, cost estimates, and financial projections for the project. Include contingency plans for handling unforeseen expenses or changes in financial conditions.

3. Allocate Resources Wisely: 

Allocate financial resources, including funds, personnel, equipment, and materials, based on project needs, priorities, and budget constraints. Ensure that resources are distributed effectively to support project activities and achieve desired outcomes.

4. Monitor Budgets Actively: 

Monitor project budgets regularly to track actual expenses against planned expenditures. Identify variances and deviations from the budget promptly and take corrective action as needed to prevent budget overruns.

5. Control Costs: 

Implement cost-control measures to minimize expenses and optimize resource utilization throughout the project lifecycle . This may include negotiating vendor contracts, seeking cost-saving opportunities, and optimizing project processes to reduce waste and inefficiency.

6. Manage Cash Flow: 

Monitor and manage cash flow effectively to ensure that sufficient funds are available to cover project expenses at all times. Anticipate cash flow needs, prioritize payments, and implement strategies to maintain liquidity and financial stability.

7. Conduct Financial Reporting: 

Provide regular updates on the project's financial performance to stakeholders through accurate and transparent financial reporting. Include budget variance analysis, cash flow statements, and financial forecasts to communicate financial information effectively.

8. Mitigate Financial Risks: 

Identify, assess, and mitigate financial risks that could impact the project's financial health and objectives. Develop risk management strategies to address potential risks such as cost overruns, revenue shortfalls, or changes in market conditions.

9. Monitor Regulatory Compliance: 

Ensure compliance with financial regulations, accounting standards, and internal policies throughout the project lifecycle. Stay informed about relevant regulations and requirements to avoid penalties or legal issues.

10. Review and Adjust Financial Plans: 

Regularly review and update the financial plan based on changing project needs, financial conditions, and stakeholder feedback. Adjust budgets, funding sources, and financial projections as necessary to align with project goals and objectives .

By following these steps and practices, project managers can effectively manage project finances, optimize resource utilization, control costs, and achieve project success within budget and timeline constraints.

Improving project financial management requires a combination of strategies, processes, and tools to enhance budgeting, cost control, resource allocation, and financial reporting. Here are several ways to improve project financial management:

1. Establish Clear Financial Goals and Objectives: 

Clearly define financial goals and objectives for the project, including budget targets, cost constraints, and financial performance metrics. Ensure alignment with overall project objectives and organizational priorities.

2. Implement Robust Financial Planning: 

Develop comprehensive financial plans that outline budgets, funding sources, cost estimates, and financial projections. Include contingency plans to address unforeseen expenses or changes in financial conditions.

3. Enhance Budgeting Processes:  

Improve budgeting processes by using accurate data, historical trends, and input from relevant stakeholders to develop realistic budgets. Consider factors such as inflation, market conditions, and project complexity when estimating costs.

4. Optimize Resource Allocation: 

Streamline resource allocation processes to ensure that financial resources are allocated effectively to support project activities and achieve desired outcomes. Prioritize resources based on project needs, priorities, and budget constraints.

5. Implement Cost Control Measures:

Implement cost-control measures to minimize expenses and optimize resource utilization throughout the project lifecycle. This may include negotiating vendor contracts, seeking cost-saving opportunities, and implementing efficiency improvements.

6. Enhance Financial Reporting:  

Improve financial reporting processes to provide stakeholders with accurate, timely, and transparent information about the project's financial performance. Use visualizations, dashboards, and key performance indicators (KPIs) to communicate financial information effectively.

7. Leverage Technology:  

Invest in project management software and financial tools to streamline financial management processes, automate repetitive tasks, and improve data accuracy. Use tools for budget tracking, expense management, and financial forecasting to enhance decision-making.

8. Develop Financial Expertise:  

Provide training and development opportunities for project managers and team members to enhance their financial literacy and expertise. Ensure that they understand financial concepts, tools , and best practices relevant to project management.

9. Implement Risk Management Strategies:

Develop and implement risk management strategies to identify, assess, and mitigate financial risks that could impact the project's financial health. Monitor risks regularly and adjust strategies as needed to address emerging threats.

10. Continuous Improvement : 

Foster a culture of continuous improvement by regularly evaluating and refining project financial management processes, practices, and tools. Solicit feedback from stakeholders and incorporate lessons learned from past projects to drive ongoing improvements.

By implementing these strategies and practices, organizations can improve project financial management, optimize resource utilization, control costs, and enhance overall project performance and success.

The duties of a Project Finance Manager typically encompass a range of responsibilities related to financial planning, analysis, and management within the context of project execution. Here's an outline of their key duties:

1. Financial Planning and Budgeting:

• Develop and manage project budgets, ensuring alignment with overall project objectives and organizational financial goals.
• Collaborate with project stakeholders to forecast financial requirements, including expenses, revenues, and cash flows, and incorporate them into the project financial plan.
• Monitor budget performance throughout the project lifecycle, identify variances, and implement corrective actions as necessary to ensure financial targets are met.

2. Financial Analysis and Reporting:

• Conduct financial analysis to assess the financial viability and feasibility of project proposals, including cost-benefit analysis, ROI calculations, and risk assessments.
• Prepare and present regular financial reports to project stakeholders, providing insights into budget performance, cost trends, and financial forecasts.
• Analyze financial data to identify areas for cost optimization, efficiency improvements, and risk mitigation strategies.

3. Resource Allocation and Management:

• Allocate financial resources, including funds, personnel, equipment, and materials, based on project requirements, priorities, and budget constraints.
• Monitor resource utilization and optimize resource allocation to maximize project efficiency and effectiveness.
• Coordinate with procurement and vendor management teams to negotiate contracts, manage vendor relationships, and ensure cost-effective procurement of goods and services.

4. Risk Management:

• Identify, assess, and mitigate financial risks that could impact project objectives, including budget overruns, revenue shortfalls, currency fluctuations, and regulatory changes.
• Develop risk management strategies and contingency plans to address potential financial risks, ensuring project resilience and continuity.
• Monitor risk factors and adjust risk mitigation strategies as needed to adapt to changing project conditions and external factors.

5. Compliance and Governance:

• Ensure compliance with financial regulations, accounting standards, and internal policies governing project financial management.
• Establish financial governance frameworks and controls to maintain financial integrity, transparency, and accountability throughout the project lifecycle.
• Coordinate with finance and legal teams to address any regulatory or compliance issues related to project finance.

6. Stakeholder Communication and Relationship Management:

• Communicate effectively with project stakeholders, including senior management, clients, investors, and team members, regarding project financial performance, risks, and opportunities.
• Build and maintain positive relationships with stakeholders, addressing their concerns and providing timely and accurate financial information to support decision-making.

Overall, the Project Finance Manager plays a critical role in overseeing the financial aspects of projects, ensuring financial sustainability, and contributing to project success by effectively managing resources, mitigating risks, and maximizing financial performance.

Project financial management faces several challenges that can impact the success and profitability of a project. Some of the key challenges include:

1. Budget Overruns: 

One of the most common challenges is exceeding the allocated budget due to inaccurate cost estimation, scope changes, or unforeseen expenses. Budget overruns can strain project finances and lead to delays or reduced project scope .

2. Cash Flow Constraints: 

Managing cash flow effectively is essential for ensuring that there are sufficient funds available to cover project expenses at all times. Cash flow constraints can arise due to delayed payments, unexpected expenses, or insufficient revenue generation, impacting project operations and liquidity.

Allocating financial resources, such as funds, personnel, and materials, optimally can be challenging, especially in complex projects with competing priorities. Poor resource allocation can lead to inefficiencies, delays, and increased costs.

4. Financial Reporting and Transparency: 

Maintaining accurate and transparent financial reporting throughout the project lifecycle is crucial for stakeholders' trust and confidence. Challenges may arise from inadequate financial reporting systems, errors in data collection or analysis, or lack of transparency in financial disclosures.

5. Risk Management : 

Identifying, assessing, and mitigating financial risks is essential to protect the project from potential threats that could impact its financial health and success. Challenges in risk management may arise from inadequate risk identification processes, ineffective risk mitigation strategies, or external factors beyond the project's control.

6. Regulatory Compliance:  

Ensuring compliance with financial regulations, accounting standards, and internal policies adds complexity to project financial management. Challenges may include navigating complex regulatory requirements, keeping up with changes in regulations, and addressing compliance issues that could impact project finances.

7. Cost Estimation Accuracy: 

Accurately estimating project costs is crucial for setting realistic budgets and financial projections. Challenges may arise from limited data availability, uncertainty in project scope or requirements, and reliance on historical data that may not reflect current market conditions.

8. External Factors: 

External factors such as economic downturns, inflation, currency fluctuations, or changes in market conditions can pose significant challenges to project financial management. These factors can impact project costs, revenues, and funding sources, requiring project managers to adapt their financial strategies accordingly.

Addressing these challenges requires proactive planning, effective communication, and robust financial management practices. Project managers must anticipate potential challenges, implement mitigation strategies, and continuously monitor and adjust financial plans to ensure project success. Additionally, leveraging technology and seeking expertise from financial professionals can help overcome complex financial management challenges in projects.

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Conclusion:

Project financial management is essential for ensuring the success and profitability of projects by effectively managing financial resources, mitigating risks, and maintaining transparency and accountability. 

Despite facing challenges such as budget overruns, cash flow constraints, and regulatory compliance requirements, organizations can improve financial management practices by establishing clear financial objectives, developing comprehensive financial plans, monitoring budgets and expenses, optimizing resource allocation, implementing robust risk management strategies, and leveraging technology and expertise. 

Project finance managers play a crucial role in overseeing project finances, managing budgets, analyzing financial data, and communicating with stakeholders to ensure project success. 

By addressing these challenges proactively and continuously refining financial management practices, organizations can enhance project performance, achieve financial objectives, and drive overall organizational success.

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Project Financial Management: Strategies for Project Success

Lucija Bakić

January 26, 2024

If you’re an agency professional, you know how important project financial management is. But are you fully satisfied with your current system?

In this guide, we’ll go through the essential concepts for effective agency financial management, discussing useful resources and data to drive business growth. Keep reading to learn how to optimize your day-to-day agency operations with financial planning. Key Takeaways

• Project financial management is crucial for the efficient and effective use of financial resources in a project and impacts overall agency performance.
• The project financial manager plays a key role in budgeting, progress tracking and risk management, and delivering financial reports to stakeholders.
• Utilizing specialized software for project financial management, such as all-in-one tools like Productive, enhances efficiency and provides accurate, real-time data.
• Some of the main techniques of project financial management include cost estimation, scope creep management, revenue and expense tracking, and KPI analysis.

What Is Project Financial Management?

Project financial management is the process of handling all financial aspects of a project within an agency. It includes key steps such as estimation, budgeting, risk management, and financial reporting. Another term that’s frequently used is project budgeting or project budget management .

PRODUCTIVE PROVIDES INSIGHTS INTO KEY PROJECT FINANCIALS

The managerial roles that handle financials usually depend on the agency size: a project manager usually manages it with their other responsibilities, such as timeline tracking and capacity planning. In some organizations, you might also encounter the specialized role of the project accountant , which handles tasks dedicated to finance and is in charge of the project accounting process flow . The project manager will usually work together with a finance manager to set the budget and monitor expenses. In startups or small agencies with leaner operations, this might fall to a C-level role.

The role of the Finance Manager is more number-based, but there’s a lot of crossover with Operations. That was one of the main reasons we moved to Productive: to have this one source of truth across the business.

elen Mutch , Finance Manager, Etch

Regardless of the specific position carrying out the function of a project finance manager, this process is an essential part of your project’s success. It must be carefully monitored from start to finish to ensure everything is going according to plan.  After all, the healthy functioning of a single unit or project within an agency points to the overall operational efficiency and financial health of the organization.

Project Financial Management and the Project Lifecycle

Project financial management is usually undertaken in phases that correlate with the project lifecycle.  1. Initiation phase: Before the project is agreed upon, its financial feasibility needs to be assessed with regard to agency capacity. 2. Planning phase: Financial management starts during project planning. Project expenses and budgets are allocated alongside main milestones and their timeframes. 3. Execution phase: While the project team is working on delivering tasks, the budget needs to be closely monitored for expenses and cost variance. 4. Closure phase: When the project is complete, a financial review should be conducted to gauge the return on investment (ROI) and the overall financial impact of the project.

The Importance of Project Financial Management

Financial management is a core part of effective project management. Doing it right means you’ll likely deliver your project within the timeframe and with high-quality results. Doing it wrong can set your agency’s growth back considerably — in fact, research shows that for every $1 billion spent on projects, nearly $122 million is wasted due to poor project performance, often linked to inadequate financial management (PMI). So then, what are some specific ways in which project finance management enhances business performance? The benefits are numerous, but here are some of the main things to consider:

• Informed decision-making : Financial management provides critical insights into your agency’s health. This helps shape sustainable strategies for the future and identify areas for investment and development.
• Optimized capacity planning: Having the full picture of your performance on one project means you can more easily make allocation decisions for other projects. Additionally, by tracking utilization, you can balance workloads to maximize efficiency and productivity.
•  Risk management: Even the best-planned projects can fall victim to unexpected changes. Proper management of project finances identifies and resolves potential risks early in the project lifecycle, such as cost overruns or incorrect billing.

Challenges in Project Financial Management

According to the Standish Group Chaos Report, some of the most frequent causes of project challenges are: incomplete requirements (12.3%), changing specifications or scope creep (11.8%), lack of resources (6.4%), unrealistic expectations (5.9%), and unclear objectives (5.3%). While budget overruns can occur despite all precautions, one of the main steps toward successful risk mitigation is client-agency transparency.

I think that in project management there’s a tendency to focus solely on profitability, but it’s inevitable that projects will go over budget, and that’s ok. However, it’s important to have transparency on where that stands, and Productive gives us that visibility .

Amy Nichols , Director of Operations and Productive Champion at Seven2

Learn more about how Productive helps businesses streamline operational tasks. But in order to maintain open communication, you need to have accurate and timely budget tracking.  Doing this manually can be challenging and error-prone, but the right software solutions can help you automate this process and receive reliable data in real time.  See more: Examples of Enterprise Resource Planning (ERP) Systems

Best Tools for Effective Financial Management

Traditionally, agencies have relied on manual methods, such as spreadsheets, to manage their finances. Nowadays, research shows that most organizations have moved on to more automated solutions: only 5% of agencies report being largely dependent on agencies ( Productive & SoDa ). And with good cause, as PMI research likewise reports that:

Just having spreadsheets filled with numbers is not enough; for financial information to really add value, it must be must be relevant, timely, and accurate. It must provide a true picture of performance and provide fact-based information needed to make realistic forecasts of future performance.

Source: Powerful project financials However, this doesn’t mean there isn’t still room for improvement. The same research shows that 52% of agencies depend on disparate tools with some integration, with only 14% of agencies utilizing an integrated platform that enables real-time analysis. While choosing a specialized tool for finances, such as accounting software, can certainly help you support your finance teams, an all-in-one solution can go a step further. These tools aim to integrate your processes by aligning multiple workflows and teams with comprehensive features for project management.  We’ll give you a practical example by exploring the key features of Productive, a popular integrated solution.

Productive – An All-in-One Project Financial Management Tool

Productive is an agency management software designed to support agencies of all shapes and sizes. It provides a range of features for both day-to-day tasks and broader agency initiatives, including task management, resource planning, budgeting and billing, and much more.

GET FULL CONTROL OVER YOUR BUDGETS WITH PRODUCTIVE

Some of Productive’s key project financing features include:

• Billable hours management:  Productive offers integrated Time Tracking functionalities that include various ways of creating entries — with an automated timer, through manual entry, or via automatic creation with resource bookings. Managers can easily mark time as billable or non-billable or request changes to entries.
• Budgeting : Set up your agency rate cards and build project budgets in Productive. The Budgeting capability supports budgets of all types, including a simple way to manage your retainers. You can also split up complex budgets into multiple phases to simplify your money management.
• Revenue recognition:  With Productive’s Resource Planning , you can access powerful forecasting features. After scheduling your employees, forecast revenue, profit margins, and budget burn up until the project deadline. Any changes you make are automatically applied to your data.
• Billing:  Simplify administrative tasks with Productive’s Billing feature. You can create brand-friendly invoices, attach timesheets, and send them directly from the platform. To support cash flows, you can use automated payment reminders.
• Reporting:  Productive’s Reporting provides more than 50 agency-focused templates, as well as custom fields for adding parameters outside of the scope of the platform. You can share them with stakeholders by organizing visualizations on a dashboard or scheduling reports via email.

Additional features include Project Management , Docs , Sales , Purchase Orders , and Automations . All of these capabilities combined help project managers handle the full picture of their projects while streamlining collaboration and communication across teams.

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4 Key Steps to Effective Project Budgeting

Financial project management can be complex, even when it comes to the most straightforward projects in boutique agencies. We’ll go through some essential techniques that can help you manage your finances resources with success, including tips for better cost estimation, scope creep management, revenue recognition, KPI tracking and reporting.

1. Cost Estimation

There are two most commonly used kinds of cost estimation, knows as the Rough Order of Magnitude (ROM) estimate and the Definitive Estimate.

• The ROM Estimate has an accuracy arrange between -25% to +75%, meaning that the project might end up costing 25% less or 75% more than the initial ROM estimate. As its name states, this is a rough estimate usually given to executives in order to determine whether to undertake a client engagement or not. It can be more flexible, as it doesn’t have to focus on exhaustive data to guide informed decision-making.
• The Definitive Estimate , which is formulated once the project’s scope and requirements are clearly defined, has a more precise variation range of -5% to +10%. This estimate requires a greater investment of time and effort to prepare, but its accuracy is crucial for strategic budgeting decisions. It forms the basis for allocating resources and managing potential changes effectively, offering a reliable financial framework for the project’s execution.

Historical data is an important factor in being able to achieve cost efficiency . From how long employees take to execute similar tasks, to overarching concerns such as project profitability or common expenses, software solutions like Productive can deliver these crucial insights to streamline your financial management process. Additionally, centralizing your insights on a single platform helps standardize data for more reliable comparisons. Learn more about optimizing your reporting with Productive:

2. Managing Scope Creep

One of the most common pitfalls of a carefully estimated project is scope creep. Scope creep is experienced by as many as 34% of projects globally (PMI), for reasons that can range from lack of communication with the client, unrealistic expectations set from the project planning phase, and overall a lack of documentation and transparency during the management process.

PRODUCTIVE SUPPORTS YOUR PROGRESS WITH REACTIVE RESOURCE ALLOCATION

Here are some things to consider when dealing with scope creep:

• Make sure to set your project terms in the contract clearly. For example, a common roadblock in website project management is the maintenance phase — does it include additional features, and what does the client even understand by “feature” or “bug”? These minor details can contribute significantly to project success or failure.
•  Transparency during the project management process is another essential factor. If you’re able to back up your decisions with data, you’ll find that your clients are more understanding and willing to cooperate. For example, with Productive’s Forecasting chart, you can use your resourcing to see the impact of scope changes on your profit margins , revenue, and budget burn. 
• Finally, consider turning scope creep into an opportunity. Going back to the first example with a website project, if there’s a need for it, why not offer maintenance as a retainer service? You can include various other perks such as access to specific developers on your team for any questions, and continuous upkeep for web hygiene.

3. Monitoring Revenue and Cash Flow

Effective project financial management encompasses diligent monitoring of revenue and cash flow, along with meticulous documentation of project expenses.

GET RELIABLE BILLING AND CASH FLOW MANAGEMENT WITH PRODUCTIVE

Here are some examples on how you can manage this with business budgeting tools like Productive:

• Revenue Monitoring: Productive offers both accrual-based and cash-based methods of revenue recognition. Additionally, for fixed-price revenue, you can select to recognize your revenue on a single date or spread across time. Forecasting provides accurate insights into your agency’s financial metrics over time for strategic revenue operations .
• Cash Flow Management: Cash flow — the net amount of cash being transferred into and out of the project — is fundamental for covering daily operations. A way to keep a steady flow of money is to speed up your accounts receivable as much as possible. For example, Productive provides insights into unpaid invoices and lets you set up automated reminders for clients to streamline billing.
• Documenting Project Expenses: Accurate and comprehensive recording of all project-related expenses is critical. This includes direct costs like labor and materials, as well as indirect costs such as overhead. With Productive, you can track expenses directly from a project’s budget. With the Purchase Order feature, you can also manage external costs and include them in your financial reports.

4. Tracking Key Performance Metrics

The final part of financial management is understanding essential agency metrics and how to most effectively measure them. This involves closely monitoring and analyzing key performance indicators such as:

• Gross income
• Profit margins
• Billable utilization
• Scheduling accuracy
• Estimated vs actual costs

With Productive, you can get the most out of your agency’s insights by forecasting these key metrics to make informed decisions. This strategic approach can lead to impactful changes:

We ended up terminating contracts with two of our oldest clients after only a few months of using Productive. We thought that we were at least at zero with them, or that we had some small earnings, but it turned out that we were losing money because the money they paid us did not cover salaries, fixed overhead per hour, and variable overhead per hour.

Ilija Brajković , CEO of Kontra Agency

Adapting Financial Management Practices Across Industries

Each industry and project type comes with its unique set of financial demands, risks, and compliance requirements. For instance, in construction projects, financial management must account for material costs, labor, equipment, and fluctuating market prices. In contrast, IT projects might prioritize software development costs, licensing fees, and technology upgrades. Effective financial management in these diverse settings involves not only tailoring budgeting and cost control methods but also adapting to the different timelines, resources, and KPIs inherent to each sector. Hence, a deep understanding of industry-specific dynamics is essential for guiding projects toward financial success and sustainability.

Takeaway: How to Optimize Project Financial Performance

Project financial management is an indispensable element of your agency’s success, closely linked to every phase of a project’s lifecycle. From the initial assessment and estimation to monitoring and adjusting for changes during project execution and thorough financial review upon close, each step is critical. Finding a software solution that can support your budgeting and overall agency processes is a significant benefit. While there are many different types of suitable tools, consider the advantages of an all-in-one solution for standardizing data and eliminating silos across your agency. Interested in finding out more? Consider booking a demo with Productive, the all-in-one agency management software.

What is the role of project financial management?

Project financial management plays a critical role in ensuring the efficient and effective use of financial resources throughout a project’s lifecycle. It involves planning, organizing, controlling, and monitoring financial resources to meet objectives and deliver value. Effective project financial management helps in making informed decisions, managing risks, and ensuring the project is completed within budget and on time.

What does a project financial manager do?

A project financial manager is responsible for all key budgeting initiatives. This includes formulating estimations, managing risks, tracking key performance indicators, and delivering timely financial reports to stakeholders.

What are the processes of project financial management?

Project financial management encompasses several key processes: budget planning and allocation, which involves estimating costs and setting a budget; financial tracking and risk management, which entails monitoring expenses against the budget and accounting for internal or external changes ; and financial reporting, for providing transparency and accountability across project stakeholders.

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Project Financial Analysis: Complete Guide for Professionals

Every project, regardless of its type, has only one objective: to be profitable. While it may sound simple, there are numerous factors that can affect the final financial result for a given operation - and they are all included in the project financial analysis. Here’s how to create one!

Arkadiusz Terpiłowski

Table of contents

Get proven tips on optimizing workload, project delivery, and finances - monthly.

What is project financial analysis? 

Project financial analysis is a comprehensive examination of a project's financial condition at a given moment in time. It is a key element of project management.

Importantly, it does not have to be performed only when a project is completed or while it is still in a planning phase (so-called post project financial analysis); proper financial analysis can also be used to show the status of the project while it’s still in progress. In fact, it can play a key role in optimizing the project on a regular basis. 

Why is financial analysis important for project management? 

Financial analysis for a project is a backbone of the entire operation, as it ensures that its ultimate goal - to bring profits to the company - is met. 

While this may sound quite obvious, cash flow analysis has even more benefits when we take a closer look at its details. Project financial analysis can help you: 

• determine whether you should even consider completing a given project in the first place, 
• calculate potential costs and profits of the project, 
• see whether a long-term project will be profitable in the future, 
• predict operating costs for a project, taking into account all the possible factors that may affect it, 
• evaluate the financial condition of the entire project and its parts while it is being completed, 
• monitor key financial performance indicators in the project, 
• check whether the project is staying in budget, 
• improve the financial indicators in a given project and in future operations. 

Sounds good? Great - now let’s see how to create a project financial analysis for both prospective and existing projects. 

Project financial analysis for a prospect project

Project financial analysis should start even before a project does, as it allows project managers to establish whether or not they should start working with a project at all. 

Stages of project financial analysis 

Every project life cycle starts with a financial analysis. Still, it is not a uniform process. In general, experts agree that it consists of two main parts. 

Part 1: Cost benefit analysis process

Cost benefit analysis in a project financial analysis has a very simple objective: to determine whether or not a project will be profitable for your company. As such, it is extremely helpful for project managers.

This part of the analysis focuses on calculating the key measures capable of evaluating the prospective projects using objective indicators. These indicators include: 

Return on investment 

Return on investment (or internal rate of return), also known as ROI, is a backbone of every project financial analysis. Its objective is to compare the cost of the project to the amount of money the company is expected to earn from it. In general, ROI is expressed as a percentage; the higher percentage, the better the ROI. 

Return on investment - example 

For instance, let’s assume that your company has a project. Based on the tracked hours and other costs, the project has generated $150000 in project expenses. However, when you look at the settlements, it turns out that the customer paid $200000 for the job. Therefore, the ROI equals $200000 divided by the initial investment - $150000, leaving you with 133% of ROI. 

Opportunity cost

Have you ever wondered what other projects you could have completed while you were busy with this one? Opportunity cost can help you measure the difference and see whether you made the right choice. 

To calculate the opportunity cost, check what existing and prospective endeavors you expect to have on your hands when the project in question is supposed to take place. Then, compare their costs and estimated profits to see whether there are some more valuable opportunities you may want to consider. If the project in question is the best choice for the time being, be certain to include it in your project portfolio! 

Opportunity cost - example 

For the purpose of this example, let’s imagine that the IT company received an offer of completing a project worth $200000. However, according to the resource planning process, the same team could also work on another project worth 150000$ dollars, with the cost of work being the same in both cases: $50000. Therefore, the opportunity costs are nonexistent for the former project - in fact, it is also much more profitable. Therefore, from a financial perspective, it should be the one chosen by the company. 

Profit margin

If you are working in an IT company, a maximum profit margin for a project is probably the apple of your eye. However, contrary to popular belief, profit margin is not necessarily the difference between the costs of work and technology for the project, and the amount a customer has agreed to pay for the execution of the project. 

In the IT industry, the final margin should include all the other costs of business all the projects have to cover. That includes: 

• costs and profits from people’s work,
• project overheads, such as additional equipment, subscriptions, etc.; both recurring and one-time, 
• company overheads, such as bills, rent, necessary purchases, etc., 
• costs generated by other departments supporting the project work, such as sales, marketing, administration, etc., 
• costs of internal projects and operations. 

Of course, each project should cover a proportional share of all the costs we mentioned above. We explained how to divide that sum in our article on cost allocation . 

Profit margin - example 

The company has decided to complete a Fixed Price project for 500 000 dollars. The costs of the project include: 

• the costs of work: $200 000, 
• costs of electronic devices purchased for the project: $10 000, 
• cost of other project overheads: $5000, 
• the project’s share of company-wide costs, such as support departments, rent, bills, etc.: $8000. 

Therefore, the profit margin for the project is the sum of all the costs ($223 000) divided by the income (or project's profit - $500 000) and multiplied by 100. Then, deduct the result of the calculation from 100%. In this case, the profit margin is 55,4% - and it’s pretty good! 

Net present value 

Net present value is particularly important for the companies that plan to work on a given project for quite some time, or choose to work on retainer projects. 

This indicator is commonly used in project financial analysis for such operations as it shows the difference in the current value of cash and the value that cash will have in the future. In other words, it can help you determine whether the future value and the actual profit from the project will outweigh initial investment. 

Part 2: Create a project estimate

If you have already ensured that a particular project has a good chance of being profitable, you can now delve into more details by creating a project estimate for the entire operation and all its stages. 

To successfully create an estimate for a project, you need to: 

• create a project scope that describes all the stages, tasks and necessary resources, 
• divide the project into stages and estimate the number of hours needed to complete each stage, 
• create a resource forecast for a project and estimate its cost, 
• add any company-wide costs that the project needs to cover.

An example of financial estimates in Primetric

However, that list can even be more detailed depending on your needs. We explore the topic of cost estimates further in one of our other articles.

Financial evaluation for an existing project 

Project financial analysis may come in handy also when your project is already in progress or close to completion. By then, you can also monitor the project financials in your operation using various indicators that can help you assess the condition of your project. Let’s take a look at them. 

Key measures for financial analysis for an existing project

Project profitability.

Just like in the example with profit margin above, profitability of the project depends not only on the ratio of cost of work to the planned profits, but also on the costs of other company’s endeavors a project budget has to cover. To get a bigger picture of all the finances while the project is still in progress or close to an end, you need to take into account factors such as: 

• cost of work based on the number of tracked hours ( time tracking tool can help you gather that information), 
• cost of additional purchases for the project, i.e. electronic devices, software, subscriptions, necessary travel expenses, etc., 
• project’s share of company-wide overheads, such as costs of bills, support departments, rent, etc. (learn how to calculate these costs in our article on cost allocation ), 
• any other costs that affect both the project and the company as a whole. 

Each of these factors can act as a separate financial indicator for your post project analysis, too. 

Only after deducting all these expenses from the expected or settled profits will you see exactly how much your project earned (or lost!). 

Of course, this process can be automated - for example, Primetric gathers the data in the real time to create a comprehensive profitability report whenever you need it. 

Monthly profitability report in Primetric summarizes the finances of all the project

Project profitability - example

Just like in the example with profit margin, to calculate the profitability of a project we need to have information on all the costs it needs to cover. In this case, they included: 

At the same time, the customer agreed to pay $500 000 for the projects. 

Therefore, to determine the profitability of the project, we need to deduct all the costs from the price of the project. Based on the information we have, the profitability of the project is $277 000. 

Employee profitability

As you can see from the list above, profitability includes dozens of different financial factors. Let’s focus on the most important of them - the costs of work. 

What should be included in calcuulating employee profitability?

In the service companies, people’s work is the main source of income and expenses. However, in some cases it contributes to the latter more - for example, when a person spends too much time on a mundane task, or when a senior specialist works on a simple feature that could have been produced by their junior colleague. 

Therefore, to ensure the profitability of the project as a whole, in the project financial analysis you need to check: 

• who is generating too large costs, and why (sometimes additional spendings are necessary!), 
• whether there are any delays or other problems that may have caused a sudden spike in the costs of work, 
• if there are any people who have completed their work while having some hours in their schedule left.

How to calculate employee profitability? 

Calculating the profitability of a particular employee of a given specialist is fairly simple. To do so, you need an information on: 

• person’s salary in a given period - x, 
• the number of tracked hours for a given period - y, 
• hourly wages in the projects the person tracked the time in - z. 

Then, you calculate the profitability using a formula (y*z)/x. 

Of course, project managers may also encounter some more complicated cases. If that happens, it is recommended to include the capacity in the equation to come up with a reasonable hourly rate for the specialist. 

Cost performance index 

Cost performance index is an element of project financial analysis that is capable of showing you exactly how the project is doing compared to its budget. This indicator shows whether the number of hours in the project has exceeded the expectations. Therefore, this indicator can be later used to show a fraction of the budget that is left to be used. 

Cost performance index - example

Let’s assume that half of project A is already done. It was supposed to take 1600 hours. However, completing the work up to this point took 750 hours. Therefore, we have to multiply the progress (in this case, it is 0,5, because 1 stands for a fully completed project) by 1600 estimated hours, and then divide the result by 750. In this case, the CPI is 1,07 - the project has used 7% more budget than it was supposed to. 

How can I measure all of these things? 

Naturally, calculating all of these indicators for a project financial analysis by hand is simply impossible - or at least it would take ages. To add to that, manual calculations are often prone to mistakes that may affect the decisions you make (and we bet you wouldn’t like to deal with bad decisions, would you?). 

Fortunately for project managers, such calculations do not have to be done on paper. Instead, you can use tools that combine business intelligence with project accounting to show you exactly what your budget looks like. Primetric is one of such tools! 

What can you do in Primetric? 

Primetric offers a variety of financial tools you can use to create a project financial analysis in just a few minutes. 

The tool can help you:

• gather the information on the logged time and convert them into costs using the information on wages and salaries included in the system, 
• estimate the costs of each phase of the project, 
• allocate resources that will fit in the project’s budget - a search bar will help you do that if you specify a maximum wage of a specialist you are looking for, 
• control the costs of work as the project progresses, 
• monitor the additional cost in the project, as well as company’s overheads that should be included in the profitability calculations, 
• manage settlements, 
• compare the actual costs with planned ones to ensure that your project stays in the budget. 

Project progress report in Primetric can show you exactly how your operations are going - and how much they cost.

And that’s just a fraction of the features included in Primetric! You can discover all of them right now - simply book a demo , during which our advisors will show you all the possibilities included in our software, or start a trial to see what we are capable of on your own. 

Do you want to know more about project finances? 

We have prepared numerous resources you can use to expand your knowledge. 

Visit our blog and read more about: 

• financial performance and how to measure it, 
• Jira invoices and other financial features, 
• billable and non-billable hours (and why you should use them), 
• measuring business performance , 
• forecasting revenue . 

Or, if you are already looking for a tool that can help you manage your finances, simply book a demo with Primetric experts or start a trial right away! 

Arkadiusz is Head of Growth and Co-founder at Primetric. Prior to that, Arkadiusz was at the helm of his own software development company where he oversaw operations. A great enthusiast of process improvements, his personal mission is to make software companies more profitable and efficient on their path to growth.

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Project Financial Management

• Open Access
• First Online: 15 June 2019

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• Weiwei Huang 2  

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Projects are the basic units and cells of business management at Huawei. There are different types of projects, including R&D, sales, delivery, and management transformation projects. If projects are not effectively managed, it will be impossible for a company to achieve robust operations. Huawei is working hard to shift its operating model from being function-centered to being project-centered. This is going to be a huge change. It means thousands of field teams will be mobilized. It also means that functional departments will no longer be centers of authority, but centers of expertise and resources. Huawei believes that a project-centered model will help reduce redundancy and avoid the pitfalls experienced by large companies that operate with a function-centered organizational structure. The project-centered model will also make the company more competitive and enable managers to develop rapidly.

You have full access to this open access chapter,  Download chapter PDF

To adopt a project-centered model, a company needs to establish a corporate-level project management system. Moving forward, Huawei aims to build a management system like a dragon, whose head moves flexibly to look for food or attack a target. Its bone systems are flexible and powerful to ensure that the whole body moves to support any attack the head may start. Our field project operations must be as flexible as a dragon’s head and our back-office management support systems must be like a dragon’s bone systems. This will make up the basic architecture of our future management system.

When it comes to project financial management, we first need to improve the closed-loop management of project estimation, budgeting, accounting, and final accounting. For projects that can be measured by profits and losses, we should run them as profit centers, and establish project operations management, appraisal, and Contribute and Share systems based on revenue, profits, and cash flow. For delivery projects that are run as cost centers based on budget targets, we need to integrate pre-sales and post-sales activities, align accounting with budgeting and final accounting with estimation, and perform closed-loop management of assumptions and risks. We also need to establish an incentivization system based on the completion of budget targets to inspire passion across project teams.

This chapter discusses how Huawei manages project finances. Although financial management is only a sub-system of the project management system, it penetrates deep into all kinds of business activities and runs through the entire lifecycle of a project.

1 Shifting from Being Function-Centered to Being Project-Centered

1.1 projects are the basic units and cells of business management.

Huawei is gradually changing its corporate governance model from one that is centralized to one that enables field teams to call for support. Under this new model, field teams will have both responsibility and authority while back offices provide enablement training and take responsibility for oversight. Such a model is built on an effective management platform with elements such as processes, data, information, and authority. Over the past 20-plus years, with the help of Western consultants, we have established a relatively unified platform that provides guidance and support to field offices. In the next five to ten years, we will gradually delegate decision-making authority to the field and provide the right level of support to help them exercise authority. (Ren Zhengfei: Applying the Spirit of the Tortoise to Catch up with the Dragon Spacecraft—Speech at Huawei Annual Management Conference 2013, Huawei Executive Office Speech No. [2013] 255)

Only by being project-centered can we avoid the pitfalls experienced by large companies that operate with a function-centered organizational structure. The project-centered model can also make our company more competitive. We need to quickly change our operating model from being function-centered to being project-centered. Projects are the basic units and cells of business management. If projects are not effectively managed, it will be impossible for the company to achieve robust operations. Over the next two to three years, we will change the way we operate, from being function-centered to being project-centered. This is going to be a huge change. It means thousands of field teams will be mobilized. It also means that functional departments will no longer be centers of authority, but centers of expertise and resources. In 2014, we will further delegate budgeting, accounting, and incentivization authority to project teams, so that this most basic unit of business operations can be mobilized. (Xu Zhijun: Focusing on Strategy, Streamlining Management, and Achieving Sustainable and Profitable Growth, Huawei Executive Office Speech No. [2013] 246)

Project management is the basic cell that promotes improvements to company management. We must continue to improve project management as the most important type of management at Huawei. Project management training offered by Huawei University should be systematic. Projects are basic units of operations so we must continuously improve our project management. People who truly understand project management have the potential to be top leaders. Managers who fail to manage projects effectively won’t be able to manage representative offices and regions effectively. (Ren Zhengfei: Speech at a Work Report by the Huawei University Institute of Education, Huawei Executive Office Speech No. [2013] 242)

Huawei’s management improvement has to be built on project management improvement. People in the eight critical project roles Footnote 1 should be carefully selected and developed. Mature procedures and a large high-caliber management team have to be developed. We should build a pool of managers and experts on project management through the Strategic Reserve. We need to pass advanced methods and capabilities on to representative offices through employee rotation. We should be good at identifying “golden seeds” (people with high potential) and allocate them to different places to sprout and bloom. These transformations represent opportunities for departments at all levels to create value; they are also the test beds that we can use to identify and develop managers. (Ren Zhengfei: Applying the Spirit of the Tortoise to Catch up with the Dragon Spacecraft—Speech at Huawei Annual Management Conference 2013, Huawei Executive Office Speech No. [2013] 255)

1.2 Establishing a Corporate-Level Project-Centered Management System

I think our future management system should consist of front, middle, and back ends. The front end is a project operations or action center that has clear targets. The middle end is an efficient platform from which the front end can call for support. It serves as a bridge between the front and back ends and streamlines both information and goods. It is an integrated service platform that consists of “satellites”, “aircraft carriers”, and communications systems. The back end is a decision-making and oversight center that has a clear view of front-end activities. This center is there to make sure that all front-end activities are transparent and comply with related business rules. (Ren Zhengfei: Rigorous, Well-ordered, and Simple Management Is Crucial for Huawei to Scale New Heights, Huawei Executive Office Speech No. [2014] 028)

A corporate-level project management system is needed to adopt a company-wide project-centered model. Moving forward, Huawei aims to build a management system like a dragon, whose head moves flexibly to look for food or attack a target. Its highly developed bone systems are well-coordinated to ensure that the whole body moves to support any attack the head may start. In the field, our project operations must be as flexible as a dragon’s head and our back-office management support systems must be like a dragon’s bone systems. This will make up the basic architecture of our future management system. (Guo Ping: Becoming Project-centered to Support the Company’s Sustainable and Profitable Growth—Speech at the 2014 Project Management Summit, 2014)

Huawei is changing its operating model from one that is function-centered to one that is project-centered. In the future, customer, R&D, service, and transformation projects will be the primary building blocks of the company’s operations. We will face numerous management problems. We need to ask ourselves many questions: How should we establish a three-level management system for project portfolios, programs, and projects? How should we streamline operations from end to end and make project operations a true reality by getting GTS and supply chain staff involved earlier in projects? How should we position various projects as responsibility centers and delegate authority appropriately based on their positioning? How should back-end support platforms respond to the call for resources by projects? How can we ensure effective resource allocation by combining our pull and push strategies with HQ being pulled by field offices? We need to delve deeper into these questions and explore ways to resolve them. The company’s shift to a project-centered model will help reduce redundancy and avoid the pitfalls experienced by large companies that operate with a function-centered organizational structure. Such a model will also hone our competitive edge and enable managers to develop rapidly. (Ren Zhengfei: Speech at the Awards Ceremony for Whiz Kids, Huawei Executive Office Speech No. [2014] 039)

In the future, Huawei’s model of operations should be integrated. This is known as the “Squad Leaders’ Fight”. After authority is delegated to field offices, we will make field operating teams leaner, downsize back offices, and step up efforts to build strategic mobile teams. The purpose of having smaller operating teams is not to further fine-tune the division of responsibilities. Instead, we are looking to significantly enhance their operating capabilities by equipping them with advanced tools and providing them with strong support. Of course, it is impossible to delegate authority overnight. Currently, there are still many management problems. Over the next three to five years, we will focus on streamlining LTC and achieving CIAG and Five Ones. Five years from now, we will resolutely allow field teams to gradually call for support, and resolutely remove redundant organizations at HQ. This way, our HQ will become less bureaucratic. (Ren Zhengfei: Speech at the Briefing on HR Work, Huawei Executive Office Speech No. [2014] 057)

Being project-centered is not just about running front-end business by projects. It also needs a management support system to provide full support for projects. In other words, we need to create a complete architecture to streamline both the front and back ends, involving people, processes, knowledge, strategies, and many other aspects. This is what the industry calls a corporate-level project management system. (Guo Ping: Becoming Project-centered to Support the Company’s Sustainable and Profitable Growth—Speech at the 2014 Project Management Summit, 2014)

We will stay customer-centric and gradually change our centralized resource allocation model. In the future, our resource allocation will be aligned with strategy, enabling those in field offices to call for support. Under this new resource allocation model, field teams will have both responsibility and authority while back offices provide enablement training and take responsibility for oversight. This model will combine the “pull” and “push” strategies, with the “pull” strategy playing the leading role. Field operating units make every endeavor to seize opportunities for sustainable and profitable growth. The big platform at back offices not only needs to meet the support demand of field offices; but also needs to focus on our core business, and allocate strategic resources to create more demand and opportunities for our core business. This is the architecture of our future-oriented management system, and also an important means to ensure that we are able to scale new heights. (Guo Ping: Transform Continuously and Improve Field Operating Capabilities to Ensure the Company’s Sustainable and Profitable Growth—Speech at Huawei Annual Management Conference 2013, Huawei Executive Office Speech No. [2014] 020)

Right now, our project management capabilities are still weak and there is still much waste. We need to equip our project teams with improved skills. Why was HQ so strong before? Because HQ controlled budgets: It approved its own bonuses, staffing, and job grades first. It would then send out employees with personal grades of 14 or 15 to field operating teams. Their personal grades were low and they still needed to figure out how to do their jobs. By the time they worked things out, large amounts of effort, time, and materials had already been wasted. Why couldn’t we cultivate several generals with the money wasted? This was the problem with our function-centered model. In the future, we will adopt a project-centered model. We are already piloting it now. Going forward, we will gradually give more authority to our field operating teams and will also move oversight forward to the field to ensure better delegation and exercise of authority. Radical transformation, however, could be catastrophic to the organization. It takes time to transform a company’s platform. We need to be patient and make concerted efforts to make it happen. During the process, a large number of outstanding managers will emerge. (Ren Zhengfei: Heroes Are All Around Us—Speech at the Q4 Regional Presidents’ Meeting, Huawei Executive Office Speech No. [2014] 086)

The ultimate goal of our transformation is to change from being function-centered to being project-centered. Under the project-centered model, project managers will have planning, budgeting, and cross-charging authority, and will have control over project budgets. They can purchase resources based on project needs. Processes, departments, people, and actions that don’t create value for customers are redundant. When we remove such redundancy, Huawei’s HQ will become less bloated. (Ren Zhengfei: Generals Are Born of Battle—Speech at the 2015 Project Management Summit, Huawei Executive Office Speech No. [2015] 118)

1.3 Back Offices Need to Collaborate to Provide Timely and Accurate Support for Field Operations

In the future, our organizational structure will look like a spindle – HQ departments are at the top; regions, product lines, and other execution departments in the middle; and representative offices and production lines at the bottom. Departments at HQ will be small in number and scale and will be composed of people with successful field experience. They understand the needs of field offices, have clear strategies and tactics, make correct decisions, respond quickly, and provide excellent services. Since functions will be integrated, the number of HQ departments will be reduced. The middle segment is responsible for numerous operating tasks. Since a lot of specific and specialized support needs to be provided, the middle segment has detailed division of responsibilities and a larger number of departments. Departments at the bottom are responsible for operations and execution. Functions of those departments need to be integrated, and don’t need to be aligned with those of departments in the middle. Otherwise, there will be too much coordination and internal friction, which will lead to bureaucracy in field offices. That is why we have a smaller number of departments at the bottom. (Ren Zhengfei: Speech at the UK Representative Office, Huawei Executive Office Speech No. [2007] 027)

We have made it clear that our transformation should center on the actual needs of field offices. Back offices (including field teams that are not directly involved in project operations) should promptly and accurately address the needs of field operating teams. We establish departments to fight battles and we fight battles to make profits. Back offices should be established based on the needs of field teams, and must focus on supporting field teams. We should also further integrate business functions in back offices to reduce the number of functional departments and internal coordination, and thus provide timely and accurate services to field teams. (Ren Zhengfei: Who Calls for Artillery and How Do We Provide Timely Artillery Support?—Speech at the Awards Ceremony of Sales & Services, Huawei Executive Office Speech No. [2009] 001)

Field offices must provide accurate information about their needs, and back offices must accurately understand the needs and provide support as needed. (Ren Zhengfei: Who Calls for Artillery and How Do We Provide Timely Artillery Support?—Speech at the Awards Ceremony of Sales & Services, Huawei Executive Office Speech No. [2009] 001)

Back offices will become a systematic support force and must provide timely and effective support and services. They also need to be responsible for analysis and oversight. As a back-end organization, HQ does not represent the company. It must provide support and services to field offices and avoid being bossy and arrogant. (Ren Zhengfei: Who Calls for Artillery and How Do We Provide Timely Artillery Support?—Speech at the Awards Ceremony of Sales & Services, Huawei Executive Office Speech No. [2009] 001)

We are now engaged in too much internal coordination. I think we should have fewer teams in back offices; their functions can be integrated to reduce coordination. They need to coordinate efforts to provide integrated services. You need to take time to figure out what this means. Back offices must deal with difficulties themselves and should not bother field offices with this. For example, field offices make numerous calls to resolve conflicts between two managers from back offices. Why don’t back offices integrate their functions into a unified administrative organization and deal with all difficulties internally? As company operations become more standardized and organized, we need to integrate business department functions as appropriate and reduce headcount, giving more responsibilities to employees in similar roles. This may help us work more efficiently. (Ren Zhengfei: Speech at the EMT ST Meeting, April 2010)

2 Key Activities for Project Financial Management

2.1 closed loop operations: project estimation, budgeting, accounting, and final accounting.

Perform accounting by project and customer

Projects and customers are basic units in business management. Representative offices should focus on projects and customers, and perform accounting by project and customer. Like a cell in an organism, a project is the most important building block of an organization. Without project accounting, it won’t be possible for account departments and representative offices to effectively manage their business operations. Once we are clear about projects and customers, we will have a clear picture of our account departments. This will help us better measure what our representative offices and regions have done in the past. (Ren Zhengfei: Integrating Project Estimation, Budgeting, Accounting, and Final Accounting to Support Project Operations—Speech at a Briefing on the IFS Project, Huawei Executive Office Speech No. [2010] 007)

Project cost accounting is the basis for effective management in departments at all levels. (Ren Zhengfei: Staying Customer-centric, Inspiring Dedication, and Persevering Are Key to Our Success—Speech at the 2010 Huawei Market Conference, Huawei Executive Office Speech No. [2010] 002)

The company is now focused on developing profit-centric organizations. HQ must provide services to profit centers. In the future, profit centers will view project profits as a key factor in their decisions. Project managers must be project-centric and ensure profits. (Ren Zhengfei: Remarks at a Meeting with Senior Managers at a Project Management Summit, Huawei Executive Office Speech No. [2009] 007)

Project estimation, budgeting, accounting, and final accounting are key activities in project operations management. Project estimation is the process of planning project profits; budgeting and accounting involve managing revenue increases and cost savings; and final accounting is the process of passing on the experience and lessons learned in a project. The purpose of integrating these four activities is to serve account departments and project teams, and support business management at the project level. (Ren Zhengfei: Integrating Project Estimation, Budgeting, Accounting, and Final Accounting to Support Project Operations—Speech at a Briefing on the IFS Project, Huawei Executive Office Speech No. [2010] 007)

If we are not clear about planning, budgeting, and accounting, and what surrounds these three mechanisms, then our transformation will ultimately remain function-centered. That means we would still allocate resources and perform accounting based on functional departments. It would be impossible to streamline our management. We haven’t touched upon the major issues during our transformation. (Ren Zhengfei: Rigorous, Well-ordered, and Simple Management Is Crucial for Huawei to Scale New Heights, Huawei Executive Office Speech No. [2014] 028)

When it comes to project operations, we first need to improve our budgeting and accounting capabilities. Project budgets must be reliable, clear, and executable. Project accounting must be accurate, complete, and measurable. We need to identify those who perform well in project budgeting and accounting and make fast-track promotion available to these employees. This can motivate employees and inspire passion across the entire organization. (Ren Zhengfei Minutes of the Meeting on the Budgeting Work, Huawei Executive Office Speech No. [2014] 004)

A project will become a command center once it has a budget. Our total budget system needs to provide support for this kind of operating mechanism. We must pay special attention to the cost of resources used in a project, and make all resources and their costs transparent. This will enable project teams to select the resources they need. ( Ren Zhengfei: Minutes of a Briefing on the Progress of the Project for Changing Function-centered Operations into Project-centered Operations, EMT Meeting Minutes No. [2014] 019)

A project-centered budgeting system means that we need to manage planning, budgeting, accounting, and assessment in a closed-loop manner, linking the budgets of responsibility centers to project budgets. When preparing project budgets, we should go beyond sales projects and delivery projects, and also focus on leads and opportunities that are aligned with our customers’ investment plans. This can ensure budgets are generated based on projects (Budgets for responsibility centers = ∑ Project budgets + Expenses funded by the company). Currently, the quality of our project estimation, budgeting, accounting, and final accounting is not high. About 65% of projects see a deviation of 15 percentage points in contribution gross profit rates between budgeted amount and actual figures. About 36% of projects witness a deviation of 15% between the rolling forecasts and actual figures. The GTS and Sales & Delivery Finance Management Department must analyze the root causes behind major issues in project estimation, budgeting, accounting, and final accounting, set clear goals for improvement, and make improvements as planned. (Source: Minutes of the Work Report on the Project for Changing Function-centered Operations into Project-centered Operations, BOD Executive Committee Meeting Minutes No. [2015] 020)

Over the entire project lifecycle, the project budget must be aligned with both our customer’s and Huawei’s annual budgets. Both we and our customers manage budgets on an annual basis, so the full lifecycle budget of the project must be broken down based on the customer’s and Huawei’s annual budgets. This supports operations management in representative offices and ensures our budget is reliable. (Source: Minutes of the Meeting of the Finance Committee Office, July 2015)

Project estimation, budgeting, accounting, and final accounting are key activities in project operations management. The following rules must be followed throughout the lifecycle of a project: Project estimation helps optimize solutions, make informed sales decisions, and set initial project goals. Project budgeting must align with project estimation. Resources are allocated based on project budgets to support the attainment of project goals. Comprehensive assessment of project operations must be based on project final accounting. A resource buy & sell mechanism needs to be established to improve efficiency. (Source: Project Operations and Management Policy, Corp. Doc. No. [2013] 160)

Project estimation is the basis for contract negotiation

Project quotations should be supported by cost baselines and should be used as budgets for project delivery throughout the project management process. Project managers should take care of both project delivery and project financial targets. The purpose of sales and delivery is to collect payments. (Ren Zhengfei: Keeping Customer PO Information Transparent to Support Payment Collection, Revenue Recognition, and Project Budgeting and Accounting—Speech at a Work Report by the IFS Project Team, Huawei Executive Office Speech No. [2009] 002)

The reason why we put project estimation and contract negotiation in the same COE is that contract negotiation is based on project estimation. We can’t negotiate with customers before getting project estimation straight. We could select some outstanding employees in India and build a global COE for bidding, project estimation, and contract negotiation in order to integrate these activities. (Ren Zhengfei: Keeping Customer PO Information Transparent to Support Payment Collection, Revenue Recognition, and Project Budgeting and Accounting—Speech at a Work Report by the IFS Project Team, Huawei Executive Office Speech No. [2009] 002)

Project estimation must be performed by project operations managers. All managers are estimation managers. They should have a clear idea about estimation. If they do not have accurate profit estimations for this year, how can they make money? At the representative office level, representative office general managers and account department directors are estimation managers. Business financial controllers (BFCs) of account departments do the specific work. (Ren Zhengfei: Integrating Project Estimation, Budgeting, Accounting, and Final Accounting to Support Project Operations—Speech at a Briefing on the IFS Project, Huawei Executive Office Speech No. [2010] 007)

We do not know that much about estimation. What is the coefficient for the contract under this contract scenario? What is the standard coefficient? How many estimation models do we have? We do not know the answers. Instead, we just make guesses and give approximate numbers. If the CFO gets a number approximately the same as ours through actuarial work, we cannot just leave it alone. We need to analyze why there is a difference. We also need to assign people to check, as this can help us determine what the average number is and which one is more accurate. The purpose here is not to argue about who is right or wrong, but to figure out how to be more accurate. We need to strike a balance in our work. When our schedule is not that busy, we need to plan and check our contract scenarios efficiently and quickly. To thrive, our Latin America Region first needs to make profits. Even in strategic opportunities, we also need to turn a modest profit. The region is facing numerous issues, such as foreign exchange controls. Since you cannot grow your business right now, you should instead focus on seeking more profits. (Ren Zhengfei: Speech at a Briefing of the Northern Latin America Region and Colombia Representative Office, Huawei Executive Office Speech No. [2014] 051)

Resources incur costs – Those who call for resources should bear the costs

Field offices know best about what’s going on in the field and can best assess project workload. While ensuring respect for the company’s general principles and objectives, we need to allow autonomy in basic operating units, giving them the authority to decide on tactics and operations, staffing, and resource allocation. HR departments are mainly responsible for resource quality, while project managers determine resource allocation. There should be no bureaucratic restrictions or rigid execution. HR departments should not create barriers when project managers ask for resources. Field teams know the field and projects best, so we must give project managers more flexibility in resource allocation. (Source: Remarks by Ren Zhengfei and Sun Yafang at a Briefing on Improving R&D Organization Operations, 2001)

How do we coordinate resources? The key is to make it clear that resources incur costs and profit centers must bear the expenses and costs incurred for their own development. Only in this way can we say: the more opportunities, the better. When we find ourselves short of resources, it means we have too many profitable opportunities. We have people flying to different parts of the world all the time to provide services, and profit centers should bear the expenses incurred for this. What does calling for resources mean? It is actually about allocating the expenses incurred to profit centers. But I think there is still a problem. How can we ensure all expenses incurred by services for a project are allocated specifically to that project? We do not have a reasonable formula. This puts us at a disadvantage in terms of human resource management. Chen Yongzheng, a former Microsoft executive, said he did not have money and he couldn’t understand why Huawei spent extravagantly. He also said that he needed to ask for money from project teams in representative offices. He would say to project teams, “I have provided you with services, so you have to pay me.” At Microsoft, profit centers have the budget. In contrast, Huawei’s HQ has a lot of money and has a large number of people, resulting in bloated functional departments. That’s the problem with our accounting system. (Ren Zhengfei: Speech at a Meeting with the IFS Project Team and Staff from Finance, Huawei Executive Office Speech No. [2009] 004)

Representative offices need to ensure that their demand for goods is accurate. If goods are returned due to mistakes in your plan, the losses incurred will be deducted from your compensation packages. This is the only way for us to make sure that everyone at representative offices takes the accuracy of their goods demands seriously and prevent overstock. If we have too much overstock, costs and expenses will run out of control. Management savings of the company are directly reflected in our compensation packages. (Ren Zhengfei: Comments to Staff of the Brazil Representative Office and Brazil Supply Center, Huawei Executive Office Speech No. [2014] 050)

We need to gradually reduce how much secondary sorting we do in warehouses. Warehouse expenses and inventory costs must be allocated to beneficiary departments. But how can we truly reduce our secondary sorting? We need to make sure whoever benefits pays. First, all expenses, such as warehouse rent and labor expenses, should be allocated to those who benefit from them. Otherwise, we will still manufacture products blindly. Second, in the future, most expenses incurred during inventory, return, and scrapping, if not all expenses, should also be allocated to beneficiary departments. Third, supply center warehousing costs should also be allocated to beneficiary departments. If money is saved through direct shipment, rather than using supply center warehouses, we can take a portion from the saved money to reward the department involved. (Ren Zhengfei: Doing It Right the First Time—Speech at the Global Warehouse Meeting, Huawei Executive Office Speech No. [2014] 060)

What is the relationship between the financial budget and the headcount budget for delivery resources? Project teams must make plans and prepare budgets for their headcount. We have set clear rules for budget changes, which can flexibly adapt to business changes as needed. The company has formulated strict regulations on headcount control. Because of this, it is difficult for representative offices and resource pools to increase headcount to meet growing business needs. This is a systematic issue. We need to reveal the issue through this pilot project. We don’t yet have a mechanism for adjusting project headcount, nor do we have trust-based headcount forecasting and approval. We need to work hard to resolve these issues. What resources do projects need? How do resource departments provide resources? We need to study our resource demand and supply mechanism and strike a balance in this regard. On one hand, we need to emphasize that project teams must develop accurate project resource plans. On the other hand, we must also make it clear that departments that supply resources must take primary responsibility for managing their entire resource plan and coordinating resources. If a project resource plan needs revision, the project team needs to apply for more resources or release resources in advance. The needed lead time can vary by resource level. If a project team fails to apply for more resources or release resources in advance, departments that supply resources can refer to the quotation approach adopted by the Translation Services Center and refund approach used in procurement. In this way, our project teams and departments that supply resources jointly bear costs. (Source: Minutes of the Meeting of the Finance Committee Office, July 2015)

Managing project profits and losses, cash flow, and working capital efficiency based on baselines

When assessing the value of a project, we need to assess the project’s profits and losses, cash flow, and working capital efficiency, and manage them against baselines. We will continue to improve end-to-end transaction quality and manage it as a top priority of the company. During project execution, we need to closely follow the project plan, stay on budget, and effectively manage project costs, profits, and cash flow to ensure delivery quality. (Source: 2010 Key Work Requirements, EMT Resolution No. [2010] 007)

Each country office in the Northern Latin America Region needs to establish its own baseline. You can establish a baseline by analyzing data from the past three years and make improvements against the baseline. For example, you can compare data of this year with that of last year. You don’t have to seek a unified baseline, as each country is very different. You should not aim for the best, optimal, or most scientific baseline. Instead, you should use a balanced scoreboard. If you find there are no improvements over the previous year in a given area, you should focus on improving this area next year. This can help improve your management over the long term. Under the Contribute and Share system, both improvements and waste are directly linked to your personal interests. In this way, our expense management will become more scientific. (Ren Zhengfei: Speech at a Briefing of the Northern Latin America Region and Colombia Representative Office, Huawei Executive Office Speech No. [2014] 051)

We need to keep optimizing baseline management for representative offices. Each country office should set its own baseline as appropriate. We will explore ways to further optimize baseline management with the help of IT systems and AI technology, which will make this work simpler. Though we do not have clear baselines now, I believe we will develop more scientific baselines. (Ren Zhengfei: Speech at a Briefing on Improvements and Future Planning for Carrier and Enterprise Regional Organization Transformation, Huawei Executive Office Speech No. [2017] 030)

2.2 Building an Awareness of Project Operations and a Project Operations Management Mechanism

(1) Projects are the basic units and cells of business management at Huawei. If projects are not effectively managed, it will be impossible for the company to achieve robust operations. (2) Project management teams are operating units. C&Q management should cover managers in both permanent and temporary project teams. We should select managers from amongst outstanding project management teams. (3) The annual budget needs to be prepared based on projects or opportunities. Resource allocation should also be based on projects. Project management teams need to buy resources from supporting departments according to their business plans and granted budgets. Supporting departments need to be responsible for resource efficiency. (4) Project management teams are the basic units that manage company operations. Representative offices, account departments, and product lines comprehensively manage project operations from three dimensions: product, customer, and region. The aim is to ensure balanced business development across the company. (5) Employee responsibilities in terms of project operations management must be clearly defined. Only when responsibilities are assigned to individuals and only when managers are appraised based on the results they deliver, can our employees truly assume responsibilities, help streamline management, and ultimately improve efficiency. (Ren Zhengfei: Speech at a Briefing on the IFS-PFM Project, Huawei Executive Office Speech No. [2013] 074)

We need to change our project operations from relying on individual capabilities to relying on organizational capabilities. (Ren Zhengfei: Speech at a Briefing on the IFS-PFM Project, Huawei Executive Office Speech No. [2013] 074)

We attach great importance to field experience, which means experience in project operations management. Projects here include sales, delivery, and R&D projects. When selecting and deploying managers, we pay special attention to field and project experience. (Ren Zhengfei: Speech at a Briefing on the IFS-PFM Project, Huawei Executive Office Speech No. [2013] 074)

We should always select managers from outstanding project management teams. Project results should be linked to the removal of underperforming managers. We should let the top-performing 30% of project teams take over the bottom 30%. This move will help us constantly improve project operations management. Through this mechanism, we have improved the expertise of our managers, especially those at the junior and middle levels. (Ren Zhengfei: Speech at a Briefing on the IFS-PFM Project, Huawei Executive Office Speech No. [2013] 074)

Huawei’s project operations are essentially about defining small operating units. Large companies need to be as dynamic and agile as small companies, but can our systems provide strong support in this regard? Large companies are afraid of rigidity, whereas small companies fear losing control. (Ren Zhengfei: Rigorous, Well-ordered, and Simple Management Is Crucial for Huawei to Scale New Heights, Huawei Executive Office Speech No. [2014] 028)

Guo Ping said our growth should no longer be driven by scale, but by efficiency and profits. Project operations management is an important way to get there. It is also a basic skill required of all managers. (Ren Zhengfei: Applying the Spirit of the Tortoise to Catch up with the Dragon Spacecraft—Speech at Huawei Annual Management Conference 2013, Huawei Executive Office Speech No. [2013] 255)

People in the eight critical roles of a project need to share the responsibility for high-quality project operations. The specifics of these responsibilities vary from role to role. In a project-centered operations pilot project, the Germany Representative Office can explore multiple approaches and ensure that all critical roles in the project assume common but differentiated responsibilities. For example, the PFC takes special responsibility for the accuracy of project budgets, forecasts, and accounting, and will be disciplined if any financial problems occur. If inaccurate financial data is produced during actual operations, the PFC needs to identify the root cause of the inaccuracy. This is also an opportunity for PFCs to get involved in business and continuously improve their project accounting skills. (Source: Minutes of the Meeting of the Finance Committee Office, July 2015)

Why do our projects fail to generate profits? The real reason is that our project managers do not conduct accounting properly in the first place. When you have too many resources, you get sloppy. Our project managers are focusing on delivering to customers, but they forget that they have another objective – to earn a profit. We stay customer-centric, but we also have to make profits. Our management at the moment is not effective: Project managers don’t understand finances, and project CFOs don’t understand business. So at one point we required some of our top project CFOs to serve as project managers in small projects, and some of our big project managers to be project CFOs on small projects. Project CFOs must understand the businesses they serve. On weekends, you can climb towers, or install a base station in a local city suburb. If you don’t know how to configure it, you can still screw in the nuts and bolts. That way you’ll at least know a little more than others, and you might be promoted faster. Project managers should also learn about finances: For this section of cable, how many man-hours are needed? What is the budget? Go through the calculations. I have approved fast-track promotions for 300 or 400 people in our latest round and some of them are jumping three grades. ( Ren Zhengfei: Generals Are Born of Battle—Speech at the 2015 Project Management Summit, Huawei Executive Office Speech No. [2015] 118)

2.3 Integrating Pre-sales and Post-sales Activities

We must ensure that each large project is managed from end to end. Project estimation, budgeting, accounting, and final accounting span the entire process, from project initiation to payment collection. In reality, this process, which is supposed to be integrated from end to end, has been divided into two segments – sales and delivery. Our incentivization system is also fragmented. Incentives are provided in different phases and are not streamlined. This way, we don’t know whether a project makes money or not. I think that bonuses for a sales project should be linked to project profitability. The ratio of timely incentive awards for orders needs to be adjusted based on their estimated profitability. This can drive employees to sign high-quality contracts and effectively manage contract terms. For delivery projects, any difference between project budgets and delivery costs is a key factor considered in bonus allocation. Of course, customer satisfaction is the most important factor. We must clearly understand our roles and responsibilities. (Xu Zhijun: Building Capabilities Based on Processes to Realize Sustainable and Profitable Growth and Efficient Operations, SDC Office Doc. No. [2013] 011)

Our management and operations should shift from being function-centered to being project-centered. Customer projects and product projects will be the primary building blocks of the company’s operations. Therefore, improving project operations and management capabilities will be our key means of boosting efficiency and profitability over the next couple of years. In 2015, we will continue to promote project-centered operations and begin piloting the integration of pre-sales and post-sales activities at the project level. We aim to resolve issues in three key areas: delegation of authority to project managers, project resource assurance, and budget management. These initiatives will drive the company to change gradually from a weak matrix structure characterized by “function first, project second” to a strong one characterized by “project first, function second”. Through the Strategic Reserve which is made up of elite teams, the Key Project Department, and the Project Management Resource Pool, Huawei aims to expedite the circulation of organizations, talent, technologies, management approaches, and experience during project operations. The purpose of this is to support the company’s new operating model, enabling those in field offices to call for support. Under this new model, field teams will have both responsibility and authority while back offices provide enablement training and take responsibility for oversight. (Hu Houkun: Embracing the Future and Building a Better Connected World, Huawei Executive Office Speech No. [2014] 087)

I think project operations are an end-to-end process, involving pre-sales, post-sales, and collection activities. Delivery is only one part of the process. If regional presidents and representative office general managers only pay attention to profitability and ignore contract quality, the pressure of ensuring project profitability will be all passed on to delivery personnel. This is unreasonable. (Xu Zhijun: Developing Delivery into Huawei’s Core Competencies, Huawei Executive Office Speech No. [2014] 024)

Project owners must manage project operations from end to end, that is, from pre-sales to post-sales. In particular, project owners manage and use project budgets, approve applications for risk contingency, and ensure the attainment of project goals. In pre-sales projects, project directors (PDs) arrange for the signing of high-quality contracts, make estimations, identify major risks and assumptions, and ensure estimation quality. In delivery projects, PDs or project managers (PMs) deliver high quality projects efficiently at low costs based on contracts, ensure the attainment of project goals, and take responsibility for project KPIs such as delivery progress, quality, and customer satisfaction. As core members of project operations, project CFOs and PFCs help project owners and PDs/PMs with project operations. PDs/PMs should ensure process compliance and data accuracy during project operations management. PFCs participate in key operations activities throughout the project lifecycles, give early alerts for any potential risks, and support the attainment of project goals. The key operations activities include project estimation, budgeting, accounting, and final accounting, designing an integrated project financial solution, and developing or changing project plans. Project owners, PDs, PMs, and PFCs are all responsible for project results. (Source: Project Operations and Management Policy, Corp. Doc. No. [2013] 160)

2.4 Closed-Loop Management of Project Risks and Assumptions

Project estimation is based on a project’s delivery solutions, baselines, risks, and assumptions. With quantitative analysis using the total cost model, project estimation can help make more informed sales decisions and optimize solutions, including contract terms, to deliver more competitive solutions. Approved project estimations are the initial goals of a project. Project estimations should include quantitative data, like profits, losses, and cash flow; risks and key business assumptions that have a great impact on estimations; and project sales decision making comments. (Source: Project Operations and Management Policy, Corp. Doc. No. [2013] 160)

The assumptions and risks described in project estimations reflect our expertise. We must make reasonable assumptions and avoid unrealistic risk assessments. When performing project final accounting, we should comprehensively assess the actual financial results while reviewing the risks and assumptions described in the estimation phase. If our assumptions and risk assessments deviate too much from actual results, our expertise needs to be improved. (Ren Zhengfei: Speech at a Briefing on the IFS-PFM Project, Huawei Executive Office Speech No. [2013] 074)

From an operations perspective, the IFS program has established a complete set of methodologies for project operations along the LTC process. As key activities of project operations management, our project estimation, budgeting, accounting, and final accounting are respected and implemented throughout the project lifecycle. Many key transformation points have been incorporated into our daily project management. These key points include “project estimation supporting decision making and solution optimization”, “on-budget delivery”, and “closed-loop management of risks and assumptions”. Now, 99% of project estimations have been archived. Our percentage of budgeted projects has increased from 56% to 99%. A total of 56% of projects have identified and quantified potential risks. Through our High Potential Management Elite Team, reserve pools, and PFC Resource Pool, we are transforming from “operating a single project” to “operating batches of high-quality, replicable programs.” (Meng Wanzhou: Growing amid Transformation—Thoughts at the Closing of the IFS Program, Improvement Issue No. 463, 2014)

3 Matching Project Managers and Project Management Teams’ Authority with Their Responsibilities

3.1 matching project managers’ authority with their responsibilities.

To better serve our customers, we should set up our command centers in places that are closest to customers. We should also give field staff the authority to do planning, budgeting, and accounting and make sales decisions. Back offices will decide whether we should engage in a battle whereas field offices will decide how to fight that battle. Back offices should follow the instructions of field offices, rather than the other way around. HQ should be a support, service, and oversight center rather than a center of centralized governance. (Ren Zhengfei: Speech at the UK Representative Office, Huawei Executive Office Speech No. [2007] 027)

We should delegate business decision-making authority to field project teams and budgeting authority to project managers. We need to build a project-based incentivization system, and gradually develop a resource buy & sell mechanism. If representative offices are regarded as companies, they need to pay for all services they require from HQ and regions. We can view representative offices as sales and service companies and projects as independent profit centers. Only a clearly defined resource buy & sell mechanism can truly reflect project profits and losses. All of these are part of the most basic financial tools that the company is currently promoting: project estimation, budgeting, accounting, and final accounting. With these tools, we will be able to establish more accurate and clear baselines; have a clearer picture of how to continuously increase project profitability; and make our project-based value-sharing and incentivization systems more scientific and reasonable. (Xu Zhijun: Building Capabilities Based on Processes to Realize Sustainable and Profitable Growth and Efficient Operations, SDC Office Doc. No. [2013] 011)

This is going to be a huge change. That means we need to transfer authority from functional departments to project managers. In the future, functional departments will become centers of expertise and resources. Our focus will shift from functional departments to operating teams. Thousands of operating teams, including squads and companies, will be mobilized. (Xu Zhijun: Building Capabilities Based on Processes to Realize Sustainable and Profitable Growth and Efficient Operations, SDC Office Doc. No. [2013] 011)

Why do we delegate more authority to field offices? The reason is quite simple. We aim to give more opportunities to outstanding employees who can work independently and let them leverage their potential based on existing processes and policies. We expect our leaders in field offices to be proactive and creative in our core business and work together toward the same goal. (Ren Zhengfei: Comments to Staff of the Guangzhou Representative Office, Huawei Executive Office Speech No. [2013] 057)

Project owners should be hands-on, manage operations from end to end (from pre-sales to post-sales), and ensure the attainment of project goals. Project owners should be responsive and accountable, and selected from representative offices. (Ren Zhengfei: Speech at a Briefing on the IFS-PFM Project, Huawei Executive Office Speech No. [2013] 074)

We will further delegate authority to field offices, so that they can call for support when needed. Project teams are operating units. We are now setting up a large number of subsidiary boards of directors comprised of many veteran employees to oversee project implementation. (Ren Zhengfei: Speech at a Meeting with Elite Teams at the Training Camp on July 23, 2013, Huawei Executive Office Speech No. [2013] 174)

We need to transform how we assign responsibility and delegate authority. With effective oversight and proper checks and balances in place, we must fully trust and boldly delegate authority to qualified field commanders based on their job responsibilities, match their authority with their responsibilities, and get closer to our actual business. (Hu Houkun: Correct Values and Strong Management Teams Will Lead Huawei to Long-term Success, Huawei Executive Office Speech No. [2013] 240)

We will continue to drive organizational transformation, streamline management, get closer to our actual business, and give greater autonomy to field offices. The company can grow in size, but our management must not become increasingly complex. Rigorous, well-organized, and simple management is key to scaling new heights. Our efforts will continue to focus on changing HQ from a management and control function to a service and support function. We will give more authority to field offices, to commanders who know best what is going on in the field, so that our organization will be more responsive to opportunities and challenges. In addition, we will integrate all processes at the local and project levels to improve end-to-end efficiency and make it easier for customers to do business with us. (Xu Zhijun: Focusing on Strategy, Streamlining Management, and Achieving Sustainable and Profitable Growth, Huawei Executive Office Speech No. [2013] 246)

We must gradually change our top-down, level-by-level authority delegation model that is centered on functional departments. Instead, we need to give project and program managers the requisite authority to manage project operations based on project goals and budgets. Such authority includes authority related to human resources, finances, and daily operations. In this way, we will increase people’s initiative in project and program operations management, and promote sustainable and profitable growth of the company. (Guo Ping: Transform Continuously and Improve Field Operating Capabilities to Ensure the Company’s Sustainable and Profitable Growth—Speech at Huawei Annual Management Conference 2013, Huawei Executive Office Speech No. [2014] 020)

The company will gradually implement project-centered operations. All project managers will shoulder responsibilities related to resource usage, personnel appraisal, and financial approval. This is authority mainly relating to human resources, daily operations, and finances. In the past, project managers had little authority over human resources, as performance and people management were handled by functional departments. That’s why we have added a training session on basics about people and performance management this time. (Ren Zhengfei: Speech at a Meeting with Trainees at the First Training Session for the Global Solutions Elite Team, Huawei Executive Office Speech No. [2014] 064)

The problem we face now is that collective decision making has gone too far. That’s why we have placed greater emphasis on individual accountability. We call this the commander ownership system. We need to have control over our committee system. No committees should be set up in field offices. The closer to field offices, the more emphasis we should place on commander ownership; the closer to top management, the more emphasis we should place on collective decision making. Even in a collective decision-making system, committee or team directors should still assume responsibilities. Collective decision making should not be handled in a one-size-fits-all approach, as this will lead to high costs. We need to delegate more authority to lower levels. ( Ren Zhengfei: Minutes of a Briefing on the Progress of the Project for Changing Function-centered Operations into Project-centered Operations, EMT Meeting Minutes No. [2014] 019)

3.2 Further Developing Project Management Teams and Inspiring Passion Across Field Operating Units

Sales decision-making teams (SDTs) are also project steering teams, responsible for winning contracts, ensuring contract-based delivery, and achieving project results. (Ren Zhengfei: Speech at a Briefing on the IFS-PFM Project, Huawei Executive Office Speech No. [2013] 074)

With proper checks and balances in place, we will delegate authority to field offices and increase the grades of frontline positions based on their responsibilities and contributions. This can make organizational operations more flexible and cost-effective. (Hu Houkun: Correct Values and Strong Management Teams Will Lead Huawei to Long-term Success, Huawei Executive Office Speech No. [2013] 240)

In terms of operations, we need to adopt a management system where projects are viewed as operating units. How do we define project-centered organizations? What is the role of managers in a project-centered organization? How do we delegate authority and ensure employees are properly incentivized? How do they acquire resources? How can they obtain the requisite authority based on budgets? We need to make changes and find answers to these questions. In the future, the management system should be able to cover all projects, be they R&D, delivery, transformation, or capital construction projects. A broad management system can cover the entire process from product development, to sales, supply, delivery, and finances. (Ren Zhengfei: Rigorous, Well-ordered, and Simple Management Is Crucial for Huawei to Scale New Heights, Huawei Executive Office Speech No. [2014] 028)

The fundamental reason we adopt a project-centered operating model is that we want to inspire passion across field operating units and improve operating efficiency. (Guo Ping: Becoming Project-centered to Support the Company’s Sustainable and Profitable Growth—Speech at the 2014 Project Management Summit, 2014)

4 Project Appraisals and Incentives

4.1 adopting an appraisal and incentivization mechanism based on final project results.

When it comes to authority delegation, value assessment, and incentivization for managers, we should move beyond a department-based mechanism and also establish a project-based mechanism. This will motivate all employees and experts in field offices, HQ, and functional departments to proactively participate in projects. They will work hard to make sure project teams are the most effective and agile operating units in the company that ensure project success. (Ren Zhengfei: Do Not Expand Blindly and Do Not Assume That We Are Already Strong Enough, Huawei Executive Office Speech No. [2012] 006)

We adhere to an appraisal and incentivization mechanism that is based on final project results. All appraisals and incentives must be based on results and responsibilities. Everyone involved in a project must be responsible for the results of their work. Appraisals based on processes rather than results will lead to buck-passing and fragmentation. Phase-by-phase appraisals can be implemented with the support of bonus points. The value of a bonus point must be ultimately determined by project results. (Ren Zhengfei: Speech at a Briefing on the IFS-PFM Project, Huawei Executive Office Speech No. [2013] 074)

Every department has its own unique value and role. Delivery is tasked with building deliverability into contracts; completing deliveries based on contract budgets, schedules, and quality requirements; and ensuring high levels of customer satisfaction. This is the primary value Delivery contributes. Delivery project managers may not necessarily participate in enhancing deliverability in front-end activities. Their primary value lies in supporting delivery based on contract budgets, schedules, and quality requirements, and ensuring high levels of customer satisfaction. Based on these considerations, it would be great if they could save some of their budgets. The performance appraisal of project managers at Siemens is very simple. Their budgets are always relatively accurate. Their project managers then can achieve a full appraisal score if they complete delivery according to schedules and quality requirements and come in at 5% below budget. This rule applies to both delivery and R&D projects. (Xu Zhijun: Developing Delivery into Huawei’s Core Competencies, Huawei Executive Office Speech No. [2014] 024)

Projects are the basic unit of business management. People in the eight critical roles of a project need to assume the most fundamental management responsibilities for project operations. These people must be responsible for achieving project goals and help representative offices achieve their business goals through successful project operations. (Ren Zhengfei: Speech at a Meeting with Trainees at the First Training Session for the Global Solutions Elite Team, Huawei Executive Office Speech No. [2014] 064)

First, we should allow appraisal baselines to vary for different countries and regions. Work in developed regions is a little easier overall, so we should be setting the bar higher there. For example, the baselines for Beijing, Shanghai, and Guangzhou should be higher than those for Xinjiang. Adjusting baselines will encourage dedication in hardship regions and ensure people in these regions are rewarded fairly. (Ren Zhengfei: Minutes of the Briefing on the Progress of Differentiated Appraisals for Regions, Huawei Executive Office Speech No. [2015] 050)

4.2 Exploring Project Bonuses and Implementing the Contribute and Share System

Project budgets are based on field offices. Profit centers must pay for the services they enjoy, as services come at a cost. If field offices do not choose your services, that means your services are not competitive. In terms of financial resources, human resources, compensation, and bonuses, we need to shift from our current granting system to a Contribute and Share system. Finance needs to explore ways to establish a financial management system that runs representative offices as profit centers. (Ren Zhengfei: Speech at a Meeting with Financial Managers, Huawei Executive Office Speech No. [2012] 029)

Regarding incentives based on project results, can we just keep records, rather than require all incentive changes to get approval every time? We should trust in project managers’ ability to distribute money fairly. Only by giving them this trust can the authority of project managers match their responsibilities and can they be motivated to effectively manage projects. (Ren Zhengfei: Speech at a Briefing on the IFS-PFM Project, Huawei Executive Office Speech No. [2013] 074)

We need to change our incentivization mechanism and adopt the Contribute and Share system whereby those who contribute more are rewarded more. This system will take root and bloom in a few years. (Ren Zhengfei: Speech at a Meeting with Elite Teams at the Training Camp on July 23, 2013, Huawei Executive Office Speech No. [2013] 174)

In 2012, I suggested that we implement a value-sharing mechanism for delivery projects to continuously reduce our delivery costs. What is a project value-sharing mechanism? For example, suppose the cost budget of a delivery project is US$1 million based on the capability baseline. However, the project manager motivates project team members to improve delivery efficiency and completes delivery at a cost of only US$900,000, saving US$100,000 for the company. To reward the delivery project team for its contribution, the company will take a portion of the US$100,000 that was saved to reward the delivery project team. This bonus is recognized as a cost in the books. Capability baselines will also be updated at the same time. In this way, every reward in cost saving will lead to a new delivery capability baseline. By sharing the costs saved, we can fully motivate all delivery employees to continuously improve delivery efficiency and reduce delivery costs. After repeated pushes from Dr. Howard Liang and myself, the value-sharing mechanism has been implemented for managed services projects. However, a consensus on the value-sharing mechanism for delivery projects has not been reached, mainly because the capability baseline for delivery projects has not been set and we cannot ensure accuracy or reliability of project budgets. (Xu Zhijun: Developing Delivery into Huawei’s Core Competencies, Huawei Executive Office Speech No. [2014] 024)

We should implement the Contribute and Share system and effectively manage the structure of our value distribution. We need to pay attention to each part of the organization, and allow each and every employee to benefit from the company’s growth. First, our analysis based on compensation benchmarks must be more reasonable. We need to effectively manage the ratio of how much is distributed to those pulling the cart and how much is distributed to those riding the cart. Pullers should get more than riders, and pullers should get the most when they are pulling the hardest. Second, we must not only widen the gap between the incomes of those at the top of our talent pyramid and top experts in the industry. We must also pay attention to those at the bottom of our pyramid, so we are effectively covering the entire organization. Non-monetary incentives should enable the majority of employees to see opportunities, and inspire them to work hard and strive for excellence. We must not depend solely on monetary incentives to seize strategic opportunities. More importantly, we must develop our strategic and systematic thinking. (Ren Zhengfei: Speech at the Briefing on Recent Motivation Orientations and Principles, Huawei Executive Office Speech No. [2014] 079)

The company has provided guidelines and a framework for project incentives, and regions have proactively implemented project bonuses. We have drawn two conclusions from this for future project incentives. First, project bonuses should come from project profits and should be part of a representative office’s annual bonus packages. It has been proposed that bonuses for below-budget execution (also bonuses for project operations improvements) should be included in project costs. As we have not worked out a feasible solution for this, this proposal will not be considered for the time being. Second, the company has two key requirements for delivery projects. One is that delivery must be made on time and on budget, and to a high degree of quality to ensure customer satisfaction. The other is that revenue must increase and costs cut to improve project operations. We have implemented a value-sharing mechanism based on project operations improvements in the managed services projects of GTS and some regions. We encourage field offices to experiment with bonuses for project operations improvements. Regions and representative offices can develop their own solutions, but project bonuses must come from their annual bonus packages. (Source: Minutes of the Work Report on the Project for Changing Function-centered Operations into Project-centered Operations, BOD Executive Committee Meeting Minutes No. [2015] 020)

Project goals must include budget targets – on-budget execution and budget-based improvements. Additional rewards should be given for below-budget execution (i.e., generating more revenue, cutting costs). Project bonuses can be divided into two parts. The first part can be awarded for on-budget execution. A project team will receive this part as long as they complete the project on budget. The other part should be used to drive project operations improvements based on budget targets. (Source: Minutes of the Meeting of the Finance Committee Office, July 2015)

The eight critical roles of a project include Project Manager (PM)/Project Control Manager (PCM), Technical Director (TD)/Technical Leader (TL), Project Financial Controller (PFC), Delivery Quality Assurance Engineer (DQA), Supply Chain Manager (SCM), Procurement Project Manager (PPM), Contract Manager (CM), and Project HR.

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Huang, W. (2019). Project Financial Management. In: Built on Value. Palgrave Macmillan, Singapore. https://doi.org/10.1007/978-981-13-7507-1_9

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Module Catalogue

Wm9h9-15 project financial management.

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Introductory description

This module addresses the financial management of projects. It provides a basic understanding of main financial statements, so that participants can understand and analyse financial information of a business. It also gives an introduction to management accounting concepts and techniques as an aid to effective project financial planning and control. The module introduces the financing of projects, the evaluation of capital investment projects and project risk management.

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Module aims

This module is designed to develop the knowledge and understanding in financial management of projects. To enable students to interpret financial information and apply key accounting principles and techniques to projects. To equip students with knowledge and skills required to effectively manage resources and costs associated with the projects.

Outline syllabus

This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.

Introduction to Project and Business Finance; Financial Statements; Profit vs Cash; Budgetary Control Systems; Costing Techniques to ascertain, recover and control costs; Marginal Costing and Break-even Analysis; Capital Expenditure Evaluation and Financial Evaluation of Projects; Financing and Business Structures for Large Projects.

Learning outcomes

By the end of the module, students should be able to:

• Critically assess the financial performance of a business by analysing and integrating its financial statements.
• Critically evaluate the capital investment projects including dealing with risks.
• Select and justify and apply appropriate management accounting techniques for project cost and budgetary control.
• Critically assess and defend a position around the implications of different financial and business structures for large projects.

Indicative reading list

Bamber, M., Parry S (2018) Accounting and finance for managers: a decision-making approach 2nd edition, New York: Kogan Page (ISBN: 9780749481148)

Bhimani, A. (2019) Management and Cost Accounting 7th edition Harlow, England: Pearson (ISBN: 9781292232676)

Callahan, K.R., Stetz, G.S., Brooks, L.M. (2011) Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability Hoboken, New Jersey: John Wiley and Sons Inc (ISBN: 9786613176158)

Dyson, J. R., Franklin, E. (2020) Accounting for non-accounting students 10th edition Harlow, England: Pearson (ISBN: 9781292286969)

Gatti, S. (2018) Project finance in theory and practice: designing, structuring and financing private and public projects London: Academic Press (ISBN: 9780128114025)

Subject specific skills

Project Financing, Budgeting, Cost Control, Project Evaluation, Understanding of Financial Statements, Cash Management.

Transferable skills

Financial/Numerical, Analysis, Communication, Teamwork, Presentation, Organisational, Planning, Critical Thinking, Time Management, Technology (excel).

Private study description

Guided independent study (Pre-module work materials)。

Self-study, reading and reflection.

No further costs have been identified for this module.

You do not need to pass all assessment components to pass the module.

Assessment group A

Assessment group R

Feedback on assessment

Written feedback of Post Module Assignment.

Note - some Learning Outcomes seem to be covered twice to allow recovery should first chronological be failed.

This module is Core optional for:

• Year 1 of H1SB Programme and Project Management (Full-time)

• Project Management

Project Financials: Definition, Process, Examples & Benefits

Home Blog Project Management Project Financials: Definition, Process, Examples & Benefits

The financial analysis of the life cycle of a project is called Project Financing. This involves a cost-benefit analysis to determine if the benefits of the project exceed the cost incurred to complete the project. The analysis is done by forecasting the future cash flows of the project and not the balance sheet of the sponsors.

Project financing is more complicated than other alternative sources of financing, but it helps a project sponsor take on risky projects without risking the assets owned by the sponsor and impacting the sponsor’s balance sheet. You can learn more about project financing with the easiest Project Management certifications and levelling up your knowledge.

What is Project Financial in Project Management?

Project Financing in Project Management is defined as an approach of raising long term funds for projects such as infrastructure or services, capital or financial projects. The funding can either be raised by surrendering a part of equity or by raising funds through debt. The structure of the financing is dependent on the projected cash flows of the project and is independent of the balance sheets of the performing organization.

The sponsors (or investors) of these projects are large corporations that have a high-risk tolerance. The sponsors can be either from the same industry or a government or public company.

This type of financing is used in large scale industrial or infrastructural projects wherein construction is involved. These projects require upfront capital investment, and they generate cash flow only when a phase of the project is completed. In case of a failure in complying to the loan terms, the lender can take over the project assets and operations.

The process of raising project financials through an off-balance sheet approach is called project financials. What are project financials: The amount of funds allotted for a project is called project financials. In other words, the total amount of funds you can use to successfully deliver your project is referred to as project financials.

Structure of Project Finance

In order to protect the assets of the performing organization, a Special Purpose Vehicle (or Identity) is created for overseeing the project. The funds for this project or the project financials are directed to this entity. The key features of this approach are off-balance sheet recording and non-recourse financing.

1. What are Project Financials  

The amount of funds allotted for a project is called project financials. In other words, the total amount of funds you can use to successfully deliver your project is referred to as project financials.

2. Off-balance Sheet Recording  

The debt and liability associated with these projects are not recorded on the balance sheet of the performing organization. They are recorded as a SPV subsidiary.

The provision of not mentioning debts on the balance sheets is lucrative for the performing organization as they can raise huge fundings for their projects without impacting their financials.

3. Non-recourse Financing  

This means that in case of a project failure or loan default, the sponsors will have entitlement only on the assets held by the SPV and not the performing organizations assets. Since the risk is high for sponsors, the interest rates for financing the project are comparatively high.

Key Features of Project Financing

1. Capital Intensive Projects: Project financing is ideal for projects that require high capital investment in terms of equity and debt. These types of projects are usually located in developing countries as these projects are taken up for economic development of a country.

2. Risk Management: For the performing organization this is a good financing option as they can transfer the liability and risk to the SPV, by protecting their assets and maintaining the balance sheet. For the lenders or sponsors, they enjoy high margins due to higher rates of interest for assuming the higher risk of the projects.

3. Large Number of Parties Involved: This structure allows to accommodate and involve various parties involved in these projects.

4. Loan Repayment: The excess cash flow generated by the project at the end of each phase, is used to pay off the outstanding loan. This gradual pays off of the loan amount is a relief to the lending organization as part of the debt is paid off gradually.

Main Purpose of Project Financing

In other words, why should a company opt for Project financing, when there are other traditional ways of raising funds, such as corporate finance.

In traditional or corporate finance method, the sponsors (performing organization) raise funds on the basis of their balance sheets. That means the sponsor needs to show to the lenders that they have sufficient assets, or capital to pay off the loan amount in case of default.

In project finance, the funds are not raised on the basis of balance sheet of the sponsor, but on the future cashflows of the project as the loan amount is paid off using the cash flows of the project.

Project financing greatly minimizes the risk of the sponsoring company as the assets of the company cannot be sold to pay off the loan in case of default.

The differences in between corporate finance and project finance is summarized below:

Stages of Project Financing

There are three stages of project financing:

1. Pre-Financing Stage

• Project Plan Identification: this involves identifying the strategic plan for the project and assessing whether the project is profitable or not. Keeping in mind the risk accepted by lender, this step is performed by the lender for an unbiased result.
• Risk Management:  Before the lender invests in the project, it is important to identify the associated risks and also ways to mitigate the risks, if possible.
• Project Feasibility Assessment: Since the loan payoff is dependent on the cash flow generated by the project, it is important to assess if the project can provide sufficient cash flows and is profitable in the long run.

2. Financing Stage

• Financial Arrangements: In order to raise funds for the project, the performing organization needs to acquire loan or give up equity to a financial organization that is willing to invest in the project.
• Negotiation:  This is the stage where the loan amount and rate of interest/ valuation are negotiated.
• Documentation: In this stage, the loan terms and agreements are accepted by all parties and are sealed by official documents. All the necessary documentation is completed in this stage.
• Payment: In this stage the lender transfers funds to the performing organization to begin the project operational work.

3. Post-Financing Stage

• Project Monitoring: It is important to monitor the project timely and let the stakeholders know how the project is progressing. It is the project manager’s job to ensure the project is completed on time.
• Project Closure: Once the project is delivered successfully and all the related agreements have been honored, the project is closed officially.
• Repayment: In this stage the project is officially closed, and the cash flow generated from the project is carefully evaluated as the loan is to be paid off from the excess cash flow generated.

Five Basic Steps to Finance Your Project

To adopt project finance process as a means to fund the project, the following steps should be followed:

Step 1: Identify Potential Opportunities

The first step is to identify and evaluate the potential projects that are profitable in future. Once these projects are shortlisted, the management must choose one project that the organization will go ahead with.

Step 2: Estimating Cost

In this stage, the implementation and operating costs associated with the project are projected. In this stage, the feasibility of the project is evaluated, and a decision is made based on the feasibility and returns of the project. This is the stage where potential threats are identified, and their estimated costs are also considered.

Step 3: Identify Technology

In this stage, a study is conducted to assess the kind of technology that is required to successfully deliver the project. Once the technology is identified, the next step is to estimate how much acquiring the technology will cost and how to acquire the technology.

Step 4: Identify Source of Funding

Once the cost to be incurred is estimated, the next step is to identify sources of project finance. In other words, potential lenders are identified, approached and briefed about the project and the cost associated.

Step 5: Implementation

Once a suitable lender is identified and has expressed a desire in collaborating for the project, the legal documents are signed and the funds for the project are delivered. The operational work for the project begins and strategic plans for monitoring the cost and future cash flows are implemented.

Types of Sponsors of Project Finance

There are 4 types of project finance sponsors that we usually come across. They are explained below in brief:

• Industrial Sponsors: These sponsors are directly related to the business of the performing organization. They are huge organizations in a similar industry and have the funds and risk tolerance to fund project.
• Public Sponsors:  These sponsors are government bodies and corporations. The main goal over here is public service and economic development.
• Contractual Sponsor: They help in building, developing or managing a project. They are the sponsors that get the work done in a project.
• Financial Sponsors: These sponsors are in the business of lending and are looking for high profits and substantial rate of return by accepting high risk projects.

Sources of Project Financial

Even though there are numerous sources of raising funds, they can be roughly categorized into three categories that are mentioned below:

1. Debt: Debt that is raised through Investment banks is referred as Private debt and has a cheaper capital cost. This is because debt holders are paid on a priority basis. Debt raised by the Government is referred as public debt and has a higher capital cost.

2. Equity: This source of funding involves giving up a part of ownership of the project to various sponsors in exchange of funds. One of the advantages of this source is, these funds do not need to be repaid unlike debt financing.

3. Loan: This can be categorized into secured and unsecured loan. Under secured loan, the assets of the project are held as collateral against the loan. Under unsecured loan, no assets are backing the loan amount and the loan is offered based on the credit worthiness of the project or organization.

Project Financials Examples

Liquid Gold Pvt Ltd. is an old producing company with over 30 years of experience in the industry along with some stock holdings and assets. Ajit, the CEO of the company, wants to work on a project through project financing.

Since the project he is undertaking involves a lot of risks, he decides to establish another firm for this project, Liquid Gold Oil and Energy Pvt. Ltd. This company will be completely owned by the parent company Liquid Gold Pvt. Ltd. and will manage the operational business of the new firm.

When lenders provide funding, they will fund the new form Liquid Gold Oil and Energy Pvt. Ltd. As a result of this, in case the new company defaults on their payments, Liquid Gold Oil and Energy Pvt. Ltd. will be insolvent but the parent company Liquid Gold Pvt Ltd. will not be liable to pay this debt.

How to Maximize the Impact of Project Financing?

In order to exploit the benefits of the Project Financing, there are some important points to note while implementing this approach of raising funds.

1. A Robust Project Management System

In order to avoid cost overruns, schedule delays and manage the cash cycles, the sponsor organization must have a sound project management system, along with efficient project managers. In order to be a professional project manager, you need to acquire relevant education and training in the area. To learn more about the PM certifications, refer to KnowledgeHut’s Project Management.

2. Right Project Financial Metrics

It is important to streamline and select the right financial metrics in order to monitor the cashflows of the project. A project manager should focus on key metrics that impact a project and should attempt to make decision making easy. The project financials should be carefully studied taking all the relevant information for review. It is also important to regularly conduct a financial analysis of the project to ensure the project is on track.

3. Rate of Investment (ROI)

The project managers should focus on increasing the ROI for the sponsors and creditors of the project. Since the loan is paid off using cashflows of the project, at the end of the project it is important to ensure the sponsor gets sufficient returns for taking up the project.

The two most popular certifications for project financing are the PMP certification by PMI and the PRINCE 2 Accredited training . Taking these certifications will help you ace the exam in the first go.

Benefits of Project Financials

1. Better Debt Management: With project financing, the performing or parent company can raise more funding for the project, irrespective of the financial capability of the parent company. The funding is solely dependent on the probability and cash flows of the project.

2. Better Risk Management:  The parent company’s assets are protected irrespective of the project success or failure. This enables a firm to be motivated to take up risky projects that are for the economic growth of a country or city. If multiple members are involved, the risk is shared with all the members, and this reduces each member’s exposure.

3. Allows Parent Company to Raise More Funds: Since the balance sheet of the parent company does not include the loan from project financing, the parent company can raise funds for other projects or operations using their balance sheet.

Drawbacks of Project Financing

1. Complex Documentation: Project financing involves lengthy processes and documentation that can make the process difficult to understand and prone to irregularities.

2. Expensive: The higher rates of interest on the loan amount, the due diligence and requirement of qualified professionals, makes this process more expensive than other approaches.

3. Shared Control: The lenders exercise more control on project decisions, which may be a source of conflict for the parent company and the lenders.

The project financial approach is one that can be adopted to fund long-term, large-scale projects which are repaid through the cash flows generated by the project.

This approach offers various benefits and is really useful for developing countries. It provides incentives to companies to take on risky projects that can help in the economic development of a country or society. In case you want to learn more about project financing, enrol in the KnowledgeHut's Project Management certificate course to take a leap in your career.

The off-balance financing protects the assets of the parent company and enables them to take on risky projects. This also eases the process of raising funds for small or fairly new companies, as the large loans are not provided on their creditworthiness, but on the potential of the project.

This approach is also beneficial for the lenders as they enjoy high rates of interest on these loans and since the loan is paid off through cash flows, the loan is repaid sooner than most loans.

Frequently Asked Questions

The project financing approach benefits both the project sponsor and the lenders. For the project sponsor it provides off balance sheet funding and risk diversification. The Lenders enjoy a higher interest rate for the funds lent.

Finances are the core of every project as the budget for the project decides whether the project was beneficial or not. Each project plan and approach is based on the budget of the project. As much as it is important to control the budget, it is equally important to choose the right sources of funds.

Project Finance can be used for large scale Public Infrastructure projects such as airports, roads, trains and railway tracks, metros or Energy projects like power generation, wind energy conservation, solar energy transmission etc.

It can also be used for Telecommunication infrastructure, Social Infrastructure, Construction or Manufacturing.

Kevin D.Davis

Kevin D. Davis is a seasoned and results-driven Program/Project Management Professional with a Master's Certificate in Advanced Project Management. With expertise in leading multi-million dollar projects, strategic planning, and sales operations, Kevin excels in maximizing solutions and building business cases. He possesses a deep understanding of methodologies such as PMBOK, Lean Six Sigma, and TQM to achieve business/technology alignment. With over 100 instructional training sessions and extensive experience as a PMP Exam Prep Instructor at KnowledgeHut, Kevin has a proven track record in project management training and consulting. His expertise has helped in driving successful project outcomes and fostering organizational growth.

Avail your free 1:1 mentorship session.

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Project Budget Management: A Step-by-Step Guide in 8 Easy Steps

Do you often find yourself confused about keeping your project budgets under control? Imagine being able to foresee potential budgetary obstacles and proactively address them, leading your project to completion with minimal financial hiccups. 

It’s all about project budget management. 

At the heart of every successful project lies a well-structured and diligently managed budget, and with the proper techniques, you can understand your financial resources, allocate funds strategically, and make informed decisions to prevent overspending and maximize your project’s potential.

We have prepared this comprehensive guide on project budget management, breaking it down into eight easy-to-follow steps that will transform your budgeting into a smooth, effective process.

Let’s get started!

Table of contents

What are project budget components, what are the types of project budgets, what are the key benefits of effective budget management, why is project budget management critical, what is top-down budgeting, what is bottom-up budgeting, what is zero-based budgeting, what is activity-based budgeting, what is parametric estimating, what is analogous estimating, what is three-point estimating, what is earned value management, #1 initiating the budgeting process, #2 estimating project costs, #3 creating the project budget, #4 budget approval and stakeholder communication, #5 implementing the budget, #6 monitoring and controlling project expenses, #7 risk management and budgeting, #8 project closure and budget evaluation, what tools to use for project budget management, how do you maintain a budget balance in your project, what is project budget management.

Project budget management is the art and science of planning, estimating, allocating, and controlling the financial resources required to achieve project objectives . 

It serves as a financial roadmap , guiding project managers and stakeholders through the entire project from initiation to completion. 

Let’s dive into the fundamental components of project budget management.

A project budget comprises various interconnected components forming a comprehensive financial plan. 

The first is direct costs , which are expenses directly tied to the project’s deliverables and activities. 

Direct costs can include:

• Labor: The wages or salaries of team members and workers involved in the project. This includes the cost of their time and effort dedicated to project tasks.
• Materials: These can vary depending on the nature of the project, such as construction materials, software licenses, or manufacturing components.
• Equipment: The cost of purchasing, renting, or leasing specialized equipment or machinery necessary for completing project tasks.
• Space and facilities: The expenses of renting or leasing office space, warehouse, or other facilities needed for project work.

Indirect costs are expenses that indirectly contribute to the project’s success. They support the overall project but cannot be directly attributed to specific activities. 

Indirect costs can include:

• Administrative overhead: Costs related to executive functions such as project management , office management, accounting, and general administration.
• Utilities: Expenses for electricity, water, heating, cooling, and other utilities required to operate the project workspace.
• Licenses and permits: Costs associated with obtaining licenses, permits, or certifications necessary for project compliance and operations.

In addition to being classified as direct or indirect costs, expenses can also be further categorized as fixed or variable costs:

• Fixed costs remain constant throughout the project, regardless of the project’s activity level. Examples include fixed salaries, rent, and insurance.
• Variable costs are based on the project’s activity level. For instance, materials and labor costs may vary depending on the work completed or the quantity of products produced.

Of course, unforeseen events and risks are inherent in any project. Contingency reserves set aside a portion of the budget to address unexpected challenges that may arise, acting as a buffer to mitigate potential financial impacts on the project.

Project budget management can also include management reserves , which are additional budget allocations that the project manager alone keeps to tackle unforeseen changes that might impact the project’s scope or objectives. These reserves are held separately from the project’s baseline budget and are used at the project manager’s discretion.

Handy guide: You can use our project management key elements guide to discover other fundamental aspects of the PM domain. Additionally, consider obtaining a project management certification to validate your expertise in budget management.

Understanding project budget components lays the foundation for exploring the different types of project budgets and their unique applications.

Different projects may require unique budgeting approaches based on their nature, scope, and duration. 

Here are some common types of project budgets:

Exploring the types of project budgets will pave the way to understanding the key benefits that effective budget management can bring to your project’s success.

Mastering project budget management offers a multitude of advantages for the entire project ecosystem:

• Resource allocation: It ensures that the right people, materials, and tools are available at the right time , minimizing waste and maximizing efficiency.
• Cost control: It empowers project managers to monitor expenses closely, identify cost overruns early on, and take corrective actions to prevent budget derailment.
• Decision-making: It provides valuable insights for decision-making, helping project managers prioritize tasks , choose appropriate solutions, and balance project constraints effectively.
• Stakeholder confidence: It instills stakeholder confidence, fostering trust and support for the project’s success.

Understanding the key benefits of effective budget management sheds light on the crucial importance of implementing project budget management in every project.

Project budget management is the lifeblood of successful project delivery. Without it, projects risk facing various challenges, including:

• Financial uncertainty: Inadequate budgeting can lead to financial surprises, delays, and the project being halted due to insufficient funds.
• Scope creep : Without a clear budgetary framework, projects become susceptible to scope creep, where uncontrolled changes in scope lead to increased costs.

Pro tip: Here is a guide to the top 5 causes of project creep and how to avoid them created by PMI.

• Stakeholder dissatisfaction: Poor budget management may lead to damaged stakeholder relationships and reluctance to invest in future projects.
• Project failure: Ultimately, the lack of adequate budget management can lead to project failure, tarnishing the reputation of the remote project team and organization.

Now that we have grasped the fundamentals of project budget management, let’s dive into the various standard budgeting methods and techniques used to optimize financial planning and control in projects.

What are the common budgeting methods and techniques?

When managing project budgets effectively, having the right budgeting methods and techniques in your arsenal can make all the difference. 

This section explores the most widely used and practical budgeting approaches to help you precisely plan, estimate, and control project finances. 

Let’s dive into the first one: top-down budgeting.

Top-down budgeting is a high-level budgeting approach where the overall budget is determined by top-level management or stakeholders without involving lower-level project managers or teams in decision-making. 

While this method is quicker and more straightforward, a lack of information from those in higher-level positions means that the budget can require further adjustments to ensure that the budget is aligned with project-specific needs.

Example: In a large organization, the executive team allocates a specific amount for marketing initiatives company-wide without consulting individual marketing teams on their particular needs.

In contrast to top-down budgeting, bottom-up budgeting involves collaborating with project teams and managers to create detailed budgets. 

Each team provides their estimates, which are then aggregated to form the overall project budget. 

Example: For a construction project, each department provides detailed estimates of labor, materials, and equipment costs. The project manager aggregates these estimates to create a comprehensive project budget, ensuring accuracy and input from those directly involved.

This method offers greater accuracy and buy-in from those directly involved in the project but may be time-consuming.

Zero-based budgeting requires justifying every expense from scratch, regardless of previous budgets. 

Project managers must provide a rationale for each cost element, promoting a thorough review of all expenses. 

Example: Before starting a new product development project, the project team evaluates each expense, such as research, design, and testing costs, from scratch, ensuring that every budget item is justified based on project requirements and objectives.

While this method prevents budgetary waste and ensures a well-justified budget, it can be resource-intensive and therefore unsuitable for certain projects.

Activity-based budgeting allocates resources and funds based on specific project activities or tasks. 

This method helps identify the financial impact of each activity and allows for a more focused allocation of resources where they are most needed and is particularly beneficial for projects with diverse tasks and resource requirements.

Example: A construction company uses activity-based budgeting to allocate resources separately for foundation work, structural framing, and interior finishing, taking into account the unique costs and requirements of each activity.

As we explore main project budgeting techniques further, it’s crucial to dive into the estimation process—an integral aspect of budget creation. The first method is parametric estimating .

Parametric estimating involves using historical data and statistical relationships to estimate project costs and uses predefined parameters, such as cost per unit or hour, to quickly calculate budgets. 

It is particularly helpful for projects with repetitive elements and well-established historical data.

Example: A software development team estimates the time and resources required to build a new AI-powered feature by analyzing data from similar past projects and calculating the average time it took to complete similar functionalities.

Analogous or top-down estimating relies on past projects’ data to estimate the current project’s budget. 

Project managers use similarities between previous and current projects to make educated guesses about the required resources and costs. 

While this offers quick estimates, the accuracy can vary depending on the project’s similarities.

Example: In a marketing campaign, project managers use data from past campaigns with similar target audiences and objectives to estimate the current campaign’s budget, considering lessons learned from previous projects.

Three-point estimating uses three different estimates for each task: the best-case scenario (optimistic estimate), the worst-case scenario (pessimistic estimate), and the most likely scenario (realistic estimate). 

These values are then used to calculate the expected cost, providing a more robust estimation that accounts for uncertainties and risks.

Example: In a construction project, the time required to complete a wall construction process could be estimated as follows: optimistic estimate – 4 weeks, pessimistic estimate – 8 weeks, and realistic estimate – 6 weeks.

You can combine this approach with other estimation and budgeting methods.

EVM is a powerful technique that uses project scope, schedule, and cost to assess performance. It compares the work completed to the planned value, allowing project managers to monitor cost and schedule variances and predict future performance trends.

Example: If a construction project is 50% complete according to the planned schedule and budget, but the earned value analysis shows it should have been 60% complete regarding work accomplished and budget spent, the project is behind schedule and over budget.

Now that we have explored the common budgeting methods and techniques let’s dive into a comprehensive step-by-step guide to implementing project budget management effectively in your projects.

How to implement project budget management in 8 steps?

Congratulations on reaching the heart of our guide! 

Now that we have explored the critical concepts of project budget management and common budgeting methods, it’s time to implement our knowledge. 

With these eight easy-to-follow steps, you’ll be equipped to create, track, and manage project budgets with confidence and finesse.

Let’s start with the initiation of budgeting processes.

Before diving headfirst into creating a project budget, you should create a solid foundation during the initiation phase. 

The first order of business is to gain a crystal-clear understanding of the project’s objectives and scope. 

A quick tip: You can use our guide about project charter creation to speed up the project initiation phase. 

This step is crucial as it sets the direction for budget planning and ensures that financial resources are allocated to align with the project goals .

Ask essential questions, such as:

• What specific deliverables does the project aim to achieve?
• What are the project’s overall goals, and how will success be measured?
• Are there any budget constraints or limitations that need to be considered?

A well-defined project scope will act as a compass, guiding your budget decisions and preventing scope creep, which can lead to unexpected financial challenges later in the project.

To clarify things, you may also gather historical financial data from similar past projects as a reference point for estimating costs. 

Don’t forget to consider external factors that might influence the project’s financial landscape, such as inflation rates, market trends , and regulatory changes. 

Pro tip: Budgeting is a collaborative effort that requires input from various stakeholders and experts. Assemble a competent budgeting team comprising project managers, financial analysts, subject matter experts , and key decision-makers. 

As the budgeting process is initiated, the next vital step is estimating project costs to ensure accurate financial planning and resource allocation.

Now that we have a solid foundation from the initiation phase, let’s consider estimating the project costs using the chosen budgeting approach. 

Here are the best practices to follow:

• Detailed Work Breakdown Structure: Create a comprehensive WBS for granular cost estimation.
• Involve subject matter experts: Collaborate with SMEs and team members for reliable input (decide their duties and responsibilities based on RACI ).
• Use historical data: Refer to past projects’ data to validate estimates.
• Three-point estimation: Employ optimistic, pessimistic, and realistic scenarios for robust estimates.
• Consider external factors: Evaluate inflation and market trends for accurate estimates.
• Account for contingency: Allocate a reserve for unforeseen events to maintain budget stability.
• Regular review and update: Continuously revise estimates based on project progress and changes.

Handy template: You can easily create a project structure with our WBS template .

Remember that every project comes with a level of uncertainty and risk. 

To safeguard the budget from unforeseen challenges, it’s essential to include contingency reserves. Also, consider identifying risks and uncertainties and quantifying their potential financial impact during cost estimation. 

Another handy template: You can use our risk management plan template to mitigate risks promptly.

Allocating appropriate contingency reserves demonstrates prudent financial planning and enhances the project’s ability to weather unexpected circumstances.

Congratulations! You’ve arrived at a pivotal stage: creating the project budget . 

Let’s start with the key differences between a project budget and a project estimate (they serve different purposes):

• Project budget: A detailed financial plan outlining each component’s specific costs. Guides resource allocation and expense control during project execution.
• Project estimate: Approximate costs based on available information and estimation methods. Provides a high-level view of expected costs before finalizing the budget.

Now we know the difference, let’s focus on budget creation.

To create a robust project budget, break down the costs for each project activity identified during the scope definition phase using the WBS. 

Be thorough in considering all direct and indirect costs associated with these activities. Use data from the cost estimation process, validate with subject matter experts, and evaluate historical data from past projects to enhance accuracy. 

Consider the availability of resources, such as skilled personnel, equipment, and materials, and distribute them efficiently across the project’s timeline. 

Identify resource bottlenecks or potential conflicts early on and adjust the budget allocation accordingly to ensure smooth project progress.

Important: If you are ready to create your project budget, start with our project budget spreadsheet template to avoid starting from scratch.

As you create the budget, be mindful of any limitations imposed by stakeholders, funding availability, or organizational policies. Carefully assess the impact of these constraints on the project’s scope and deliverables and make necessary adjustments to align the budget with the project’s priorities .

Practical tip: To assist you in assessing all the limitations in projects already running, consider using PPM Express as a project portfolio management tool that provides you with a “big-picture” view. 

By visualizing resource data and tracking project progress, PPM Express empowers project managers to make informed budgetary decisions, identify potential cost overruns, and optimize resource allocation for successful project delivery.

After the creation of the budget comes a new crucial phase: obtaining budget approval and communicating with stakeholders. 

First of all, before presenting the budget, tailor your communication approach to cater to the preferences and needs of your stakeholders. 

Some stakeholders may require a high-level overview, while others prefer a more detailed breakdown. Consider using visuals such as charts, graphs, and tables to make the information understandable and engaging.

When presenting the budget, provide context by highlighting the project’s objectives, scope, and anticipated outcomes. 

Pro tip: Clearly outline how the budget aligns with project objectives and supports the project’s success. If stakeholders raise concerns about specific budget items, be open to exploring alternative solutions or adjustments if warranted. 

Stakeholders may have questions, concerns, or requests for clarification regarding the budget. Be prepared to address these queries with confidence and transparency. 

Demonstrating flexibility and a willingness to collaborate fosters trust and strengthens stakeholder confidence in the budgeting process.

To secure approval, emphasize the budget’s alignment with the project goals, thoroughness of the estimation process, and steps taken to address potential risks and uncertainties. 

After the budget approval, with the financial roadmap in hand, it’s time to put your meticulously crafted project budget into action. 

Let’s explore the essential steps of implementing the budget, starting with establishing financial tracking mechanisms.

You might implement tools and systems to record and track financial transactions, expenses, and resource usage in real time. 

Platform recommendation: Consider using PPM Express as a resource management and PPM software to estimate all the aspects of implementing the project in a “one-window” view.

Having precise project budget tracking mechanisms gives project managers and stakeholders visibility into project spending, enabling proactive decision-making and timely interventions to address budgetary concerns.

Regularly compare actual expenses against the budgeted amounts for each activity or work package and analyze any variances and investigate the reasons behind them.

If deviations from the budget occur, take prompt action to understand the root causes and implement corrective measures. Communicate budgetary challenges with relevant stakeholders and collaborate on solutions to keep spending on track.

During the project, unexpected events or changes may impact the budget. As a project manager, you must be prepared to handle these deviations effectively.

• Contingency reserves: Utilize established funds for unforeseen challenges or risks within the predefined scope.
• Change control process: Follow the procedure for significant changes and seek stakeholder approval.
• Constant evaluation: Continuously assess budget project assumptions and update accordingly for changes in scope or resource needs.

With the budget in action, the focus shifts to monitoring and controlling project expenses to ensure financial adherence and optimal resource utilization .

As your project progresses, vigilant monitoring and control of project expenses become paramount to the success of your budget management efforts. 

Let’s explore the essential practices for monitoring and controlling project expenses, starting with regular budget reviews and performance analysis.

Conducting regular budget reviews is a fundamental aspect of effective budget management. 

Set a schedule for regularly reviewing the budget during the project and use this time to compare actual expenses against the budgeted amounts and analyze any variances.

Identify spending trends and patterns to gain insights into areas that may require attention.

If you identify significant variances that could jeopardize the project’s financial health, implement corrective actions promptly. 

To handle unexpected situations, consider the following steps:

• Assess the impact: Analyze the reasons behind the discrepancy and its effect on the project budget and timeline.
• Engage stakeholders: Keep stakeholders informed about the situation and involve them in decision-making to address the issue.
• Reallocate resources: Reallocate resources from lower-priority tasks to cover the additional budget expenses.
• Seek approval for changes: If the cost overrun exceeds the available contingency reserves, follow the change control process to seek approval for budget adjustments from relevant stakeholders.

As we maintain a vigilant watch over project expenses, it’s crucial to integrate risk management strategies with budgeting to safeguard against potential financial challenges.

Risks are inevitable, so anticipating and proactively managing potential budgetary risks is crucial to maintaining the financial health of your project.

To effectively conduct risk management with a comprehensive identification of potential budgetary risks, you should engage with your project team, subject matter experts, and stakeholders to brainstorm potential risks that could impact the project’s financial aspects.

Common budgetary risks include:

• Inaccurate cost estimations lead to budget deviations.
• Price fluctuations in materials or services.
• Changes in scope or requirements affecting resource allocation.
• Delays or disruptions in project execution lead to increased expenses.
• Economic or regulatory changes impacting project costs.

Once you’ve identified budgetary risks, develop strategies to mitigate their impact. Work closely with your team and stakeholders to brainstorm creative and practical approaches to manage these risks effectively.

Pro tip: You can use our risk register template to clarify, systematize, and control all the project risks.

Potential risk mitigation strategies include:

• Building contingency reserves in the budget to address unexpected events.
• Conducting thorough market research to anticipate potential price fluctuations.
• Implementing project controls to monitor expenses and prevent cost overruns.
• Establishing strong vendor relationships and negotiating favorable contracts.

Conducting risk assessment workshops and collaborating with experts to gain deeper insights into risk factors.

Integrate risk management into budget planning throughout the project lifecycle. Consider identified risks during budget creation, allocate contingency reserves, and adjust allocations accordingly. 

Practical tip: You can simplify your risk estimation process with our risk assessment template .

Revisit risk assessments during budget reviews and adapt mitigation strategies, ensuring financial resilience and proactive decision-making.

Remember, effective risk management is not about eliminating all risks but identifying, understanding, and mitigating them to ensure your project stays on track financially should issues occur.

As the project nears its closure, evaluating the budget becomes paramount, integrating risk management insights to gain valuable lessons for future financial planning and project success.

Congratulations! You’ve successfully navigated the intricacies of project budget management, and your project is nearing completion. 

However, before bidding farewell, there’s one critical step remaining: project closure and budget evaluation.

Compare the actual project budget expenses against the budgeted amounts to determine the extent of variance. Identify any areas where the budget exceeded or fell short of expectations. 

Analyze the variances between the actual expenses and the budgeted amounts for each project component. Look for trends or patterns in budget deviations to understand the root causes.

If there are significant positive variances (under-spending), investigate the reasons behind them to identify cost-saving opportunities that can be applied in future projects.

For negative variances (over-spending), explore the factors contributing to them and assess the effectiveness of your risk management and budget control strategies.

Lessons learned are invaluable for continuous improvement in project budget management. Document your budget insights, including successful budgeting practices, areas for improvement, and key takeaways from the budget evaluation process.

Reporting tip: If you’re looking for a reports template to control your budgeting performance, PPM Express has already prepared 200+ Power BI reports.

Capturing these insights systematically provides a knowledge repository that can guide future projects, enabling project managers and teams to make informed budgeting decisions and avoid common pitfalls.

After understanding the essential steps to implement project budget management, it’s time to explore the tools that enhance efficiency and effectiveness in financial planning and control.

Project budget management can be significantly streamlined and enhanced with the help of various software tools and technologies. 

These project budget tools offer features and functionalities that simplify budget planning, tracking, and reporting, making the process more efficient and transparent. 

Here are the best apps for budget tracking and managing:

• PPM platforms: Utilize PPM Express to manage budgets and resources across multiple projects and platforms, gain portfolio -level insights, and align budgets with strategic goals.
• Spreadsheet software: Use Microsoft Excel or Google Sheets for budget planning, tracking, and variance analysis. Visualize budget data through charts and graphs for stakeholder presentations with PowerPoint or Google Slides .
• Project management software: Employ Microsoft Project , Smartsheet , or Monday.com with budget management features. Set budgets, track expenses, and collaborate in real time.

Pro tip: Don’t know how to choose the right project management software? We’ll help you with our step-by-step guide about the process.

• Accounting software: Utilize QuickBooks or Xero for precise financial record-keeping, expense, and budget tracking, and reporting in complex projects.
• Expense management apps: Opt for Expensify or Zoho Expense to easily track and approve team expenses, ensuring accurate budget accounting.
• Budgeting and financial planning software: Leverage Workday Adaptive Insights or Planful for collaborative budget creation, scenario modeling, and real-time forecasting to optimize resource allocation and adapt to changes.

Pro tip: ChatGPT can also serve as a valuable tool for managing project budgets. Take a look at our comprehensive ChatGPT prompts library , which includes prompts for budget and resource management.

As we explore the project budget tools available, let’s also discover key strategies to maintain budget balance and ensure financial success throughout the project’s lifecycle.

Maintaining budget balance throughout a project’s lifecycle is essential for its success and financial health. 

These key strategies maintain budget balance in your project, empowering you to achieve your project goals while staying within financial boundaries.

• Real-time budget tracking and monitoring: Utilize budget management tools for real-time expense tracking and comparison with the original budget. Regularly review financial reports to address deviations promptly.
• Clear budgetary goals and objectives: Establish transparent budgetary goals that are aligned with project scope and objectives. Communicate these goals to team members and stakeholders to foster accountability.
• Regular budget reviews and forecasts: Conduct periodic budget reviews and forecasts to anticipate financial needs and identify potential risks. Use the data to make informed decisions on resource allocation and budget adjustments.
• Resource optimization: Efficiently allocate resources to avoid unnecessary expenses and bottlenecks and assess resource utilization to ensure a balanced project execution.
• Contingency planning : Maintain contingency reserves within the budget to handle unforeseen events and proactively assess risks and have contingency plans in place to manage budgetary challenges.
• Change control and scope management: Implement a robust change control process and manage project scope effectively. Evaluate the impact of scope changes on the budget and seek approval from stakeholders before incorporating them.

To streamline your budget management efforts and maintain budget balance effortlessly, there is no need to utilize a budgeting spreadsheet, consider using PPM Express, a powerful project portfolio management tool. 

With PPM Express, you can optimize resource allocation, monitor budget expenses, and proactively manage risks to ensure your project’s budget stays on track.

Take charge of your project’s financial success with PPM Express !

What Is Resource Allocation in Project Management?

• 1.  Project Management Basics
• 2.  Project Management Methodologies
• 3.  Project Management Life Cycle
• 4.  Best Project Management Software
• 5.  Team Collaboration Tips
• 6.  Agile Methodology Basics
• 7.  Agile Project Management Tools & Techniques
• 8.  Project Management Frameworks
• 9.  Resources
• 10.  Glossary
• Advanced Terminology
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• Project Management %09guide

Resource allocation is the process of assigning and scheduling available resources in the most effective and economical way possible. Projects will always need resources but they can often be scarce. The task, therefore, lies with the project manager to determine the proper timing and allocation of those resources within the project schedule. 

In project management, resources are often in high demand but low in availability. This reality puts project managers in a position where they must strategize the best ways to use what they have. They need to determine who does what, when, and with what tools or support. It’s a balancing act that requires keen insight into the project's needs and the capabilities of the resources at hand.

This guide will discuss the positive impacts of good resource allocation, such as enhanced team performance and better project outcomes. We’ll address potential challenges, including resource scarcity and the complexities of people management. We’ll also cover the best practices for resource assignment and provide insights on how to effectively manage and deploy resources throughout a project’s life cycle. 

Finally, we’ll show you why Wrike is the best software to help with resource allocation, including the specific features that will make your life as a project manager easier.

Most common types of resources to allocate

Resource allocation is an integral part of project management and it often revolves around four primary types of resources. These resources are essential to consider, irrespective of the industry or project scope.

This includes the project’s budget and funding. Financial resources help acquire other resources and ensure sufficient funds to cover all project aspects, from initial planning to execution and completion.

This involves tangible assets used in the project, such as equipment, materials, and workspaces. Physical resources are necessary for the project’s actual construction or development phase.

This category includes the people involved in the project, such as team members, contractors, and consultants. Human resources carry out the tasks and responsibilities outlined in the project plan.

Technological

This includes software tools for planning and monitoring, communication systems, and other technological aids that make project processes run more smoothly.

What impacts resource allocation in project management?

Resource allocation in project management is an ongoing process, not just a one-off task at the outset. It involves strategically assigning and managing various resources throughout the entire project life cycle.

Proper resource allocation leads to numerous positive outcomes. It enhances efficiency, keeps the project within budget, and ensures that every team member has clarity about their roles and responsibilities. Effective resource allocation also means making the most of what you have and avoiding wasting time and resources.

However, resource allocation isn’t without its challenges. For one, it requires continuous monitoring and adjustment. The dynamic nature of projects means that resource needs can change, sometimes unpredictably. The responsibility of resource allocation typically falls on the project manager, who must keep a vigilant eye on the project’s resource needs, adjusting and reallocating as necessary to steer the project toward its goals.

Positive impacts of resource allocation

When done right, resource management can offer a variety of positive impacts:

Properly allocated resources lead to enhanced productivity, meaning goals and milestones are achieved on time.

When resources are managed well, team members feel adequately supported and valued as they have clear guidelines and sufficient tools to execute their tasks.

Strategic resource allocation helps avoid wastage and ensures that the project stays within budget, making it financially efficient.

With a clear overview of resource distribution, team members can make quicker and more informed decisions, leading to better project outcomes.

A well-structured resource plan reduces the likelihood of errors and lowers stress levels among team members.

Difficulties in project resource allocation

While resource allocation is important to the success of any project, it’s not without its challenges. Understanding these obstacles can help you brainstorm ways to overcome them. Here are some common difficulties encountered in resource allocation:

Projects often evolve, leading to changes in scope. This can affect the original resource plan, requiring adjustments and re-evaluations to align with the new direction.

Finding the right match between the project’s needs and the skills of team members can be challenging. Ensure that the right people are working on tasks that suit their expertise.

Miscommunication can lead to resource mismanagement, affecting the project’s progress. Wrike enhances communication with real-time updates and automated notifications, ensuring all team members are on the same page. 

Tracking multiple tasks and prioritizing them according to the project’s needs can be difficult. It requires a clear understanding of the project’s objectives and the ability to adapt to changing circumstances. With Wrike’s intuitive dashboards , however, project managers can easily monitor tasks and prioritize them based on urgency and importance.

Assigning tasks based on cost, skills, and availability is complex. It involves balancing various factors to maximize resource use while managing team members. Wrike’s advanced analytics allow for a more informed task assignment process, considering cost, availability, and skill level.

Who is responsible for resource allocation during a project?

The responsibility of resource allocation typically falls on the shoulders of the project manager. They are the central figure who understands the intricacies of the project, making them best positioned to oversee the distribution and management of resources. From the initial planning stages to the final execution, the project manager must ensure that resources are utilized effectively and efficiently.

A project manager's responsibilities include identifying resource needs, aligning skills with project requirements, and adjusting resources in response to project dynamics. They are also tasked with maintaining communication with team members and stakeholders, ensuring everyone is informed about resource availability and project progress. 

5 steps to allocate resources for any project

Allocating resources effectively involves a careful balance of planning, analysis, and adaptation. Here’s a roadmap outlining five foundational steps that can guide you through the process of allocating resources for your project:

1. Assess resource needs

The first step in resource allocation is to understand the project’s objectives and needs. Ask yourself questions like: What are the main goals of the project? What tasks need to be done? Then, move on to identifying the types of resources your project requires. This varies depending on your industry and the project’s nature. Are we talking about the skills and expertise your people bring to the table? Or about the equipment or budget needed for different project aspects?

Determine the necessary resources for each task outlined in your project scope. Consider the number of team members needed, their specific skills, any special equipment required, and the budget for each task. By thoroughly assessing your resource needs, you’re setting your project up for success, avoiding last-minute chaos, and ensuring you have everything you need right from the start. 

2. Prioritize resource requirements 

With a clear picture of your project’s resource needs, the next step is prioritization . This is where you weigh the importance of each resource and determine which ones are non-negotiable and which ones you can be flexible with.

You can think of this as a hierarchy of needs for your project. At the top are the resources essential to the project’s success. These could be specialized team members whose skills are important for certain tasks or specific equipment without which the project can’t progress. These are your deal-breakers — the ones you can’t do without.

Then, consider the resources that, while important, offer some wiggle room. Maybe there’s software that would be nice to have but isn’t essential, or maybe you could manage with fewer people on specific tasks. These are your negotiable resources, where you can explore alternatives or adjustments without derailing your project. By prioritizing your resources, you create a roadmap for decision making throughout the project.  

3. Strategically allocate resources for the project

Good strategy means matching your resources smartly to your identified needs. This step requires careful consideration of availability, skills, and budget constraints to ensure a perfect fit for each aspect of your project. For instance, you should assign the most skilled team members to the most demanding tasks or ensure that essential equipment is available when needed.

It’s important to strike a balance here. Allocating too many resources to one area might cause bottlenecks elsewhere, while too few resources can lead to delays and quality issues. The goal here is to distribute your resources evenly and logically, ensuring each project phase has what it needs to succeed without overextending your available resources.

4. Monitor and adjust resources throughout the project

Allocating resources is just the beginning. The real challenge lies in continuously monitoring and adjusting these resources throughout the life of your project. Just as your project grows and changes, so too will its needs. What seemed like a perfect initial allocation might need tweaking as the project evolves. 

Regular monitoring ensures resources aren’t being overused or underused. You might find that some team members are swamped with tasks while others have plenty of capacity, or maybe certain equipment is lying idle. These imbalances can lead to budget overruns, delays, and even burnout among your team.

5. Evaluate and optimize your resource allocation process

After the curtain falls on your project, it’s time for introspection. Evaluating and optimizing your resource allocation process dissects what happened during the project, understanding what worked well and pinpointing areas for improvement.

Did you allocate too many resources to one area while neglecting another? Were there bottlenecks that could’ve been avoided with better planning? This reflective practice is not about finger-pointing or dwelling on mistakes. Instead, it’s an opportunity to learn and grow. 

At the same time, your team members may have excelled in instances where they nailed resource allocation. Recognizing these successes is just as important as identifying the missteps. Examining both the highs and lows of your project gives you invaluable insights to guide your approach in future ones.

Now, imagine having a platform like Wrike by your side throughout this process. Wrike makes the evaluation phase a breeze. With its comprehensive tracking and reporting features, Wrike can provide clear insights into how resources were used throughout your project. This data is gold when optimizing your approach for future projects.

Resource allocation examples

Whether you’re managing human resources, monitoring the budget, or ensuring the best use of technology, Wrike streamlines these processes into a cohesive, manageable workflow. For instance, you could leverage Wrike’s dashboards to track budget usage in real time or use our analytics features to forecast resource needs for upcoming phases of your project.

Let’s take a closer look with an example. Imagine you’re managing a marketing campaign . With Wrike, you can:

• Allocate human resources using a workload chart and assign tasks based on individual team members’ expertise, be that in design or copywriting.

• Monitor your campaign budget through Wrike’s advanced analytics . Adjust your spending as needed to ensure you make the most of your financial resources without going over budget

• Use time tracking features to monitor individual timesheets and track billable hours if using an external creative agency.

• View key milestones in your campaign, such as scheduled social posts and product launch dates, with Wrike’s shared calendars .

The psychological factors involved in resource allocation planning

Here are the psychological factors at play when planning resource allocation in project management:  

• Cognitive bias: As project managers, we’re not immune to biases that can skew our perception. Confirmation bias, for instance, might lead us to favor resources that align with our preconceptions, potentially overlooking better alternatives. 
• Risk perception: Different stakeholders may perceive the risks associated with resource allocation differently. Some might be risk-averse, preferring a conservative approach, while others may be more risk-tolerant. 
• Motivation and incentives: Understanding what motivates your team is essential. Are they driven by deadlines, the promise of rewards, or the satisfaction of overcoming challenges? 
• Conflict resolution: Resource allocation often involves making tough choices that not everyone will agree with. Conflict is natural, but managing it can make or break a project. 
• Communication: Clear communication is the cornerstone of effective resource allocation. Misunderstandings can lead to misallocated resources, missed deadlines, and increased project costs. 

Let’s take a deeper dive into the team dynamics involved in project management.

Team dynamics and resource allocation

The driving forces behind each team member’s work ethic can significantly impact resource utilization. Recognizing and aligning resources with individual motivations and incentives ensures each team member has a personal stake in the project. Assigning tasks that match a team member’s interests or career goals can maximize their output and satisfaction.

Efficient resource allocation also hinges on the team’s ability to communicate effectively and resolve conflicts. Open lines of communication are essential to understanding resource needs, identifying potential bottlenecks, and addressing any issues promptly. When conflicts arise, resolving them quickly and constructively is key to maintaining project momentum.

Strategies for overcoming risks and biases

The first step in overcoming biases is to acknowledge their existence. Cognitive biases like favoritism, overconfidence, or resistance to change can lead to suboptimal resource allocation decisions. Creating an environment where team members can openly discuss and challenge these biases helps make more balanced and objective decisions.

Educating team members about common biases and risk management strategies can also be highly beneficial. This could involve workshops, training sessions, or even integrating learning modules into project management tools like Wrike. By raising awareness and equipping the team with the necessary knowledge, they become more adept at identifying and managing biases and risks.

Meanwhile, risks in resource allocation can stem from various sources, including technological changes, market fluctuations, or team dynamics. Implementing a systematic approach to risk assessment helps in identifying potential pitfalls early. This could include regular risk evaluation meetings or tools like SWOT (strengths, weaknesses, opportunities, threats) analysis to evaluate different aspects of the project.

Wrike can play a pivotal role in minimizing project risks. Features like AI project risk prediction and workload charts can highlight issues such as cost overruns and burnout before they escalate.

Resource assignment best practices

Project management is a diverse field in which different projects demand unique strategies for resource allocation. As a versatile project management platform, Wrike can significantly enhance the effectiveness of the following methods:

Critical path method (CPM)

This method identifies the longest stretch of dependent activities and measures the time required to complete them. In Wrike, project managers can use the Gantt Chart view to map out these dependencies and determine the critical path visually. This helps in prioritizing tasks that directly impact the project timeline.

Earned value method (EVM)

EVM is an objective technique for assessing project performance and progress by comparing planned vs. actual earned value. Wrike’s analytics tools can be instrumental in tracking these metrics, providing real-time insights into the project’s health and progress.

Resource leveling 

This method is used to address resource overallocation. It often involves delaying tasks to balance resource demand with supply. Wrike’s workload charts enable project managers to visualize over-allocations and adjust task timelines accordingly.

Resource smoothing 

Similar to leveling, but with a focus on keeping resource usage below certain predefined limits. Wrike allows project managers to set up custom fields and reports to monitor resource utilization and ensure it stays within desired thresholds.

Program evaluation and review technique (PERT)

PERT is a statistical tool used to analyze and represent the tasks involved in completing a project. It helps in identifying the minimum time needed to complete a project. Wrike’s robust project planning and tracking functionalities offer a platform where PERT analysis can be integrated to estimate task durations more accurately.

Time purchased 

This method is pragmatic and particularly relevant when resources are outsourced or rented. Given that time-purchased resources often have direct cost implications, Wrike’s budget tracking features allow for close monitoring of expenses related to these resources. This level of financial oversight ensures that the project remains within budget.

More ways Wrike can help allocate resources in project management

As we’ve discussed, Wrike has a variety of work management features to boost resource allocation, from real-time communication to advanced analytics tools. Let’s take a look at two of the most relevant ones in closer detail.

Gantt charts

Gantt charts provide a visual timeline for the project, clearly displaying task durations, dependencies, and milestones. This visualization makes it easy to identify which resources are needed and when. Using Gantt charts, project managers can efficiently plan and allocate resources, ensuring tasks are appropriately staffed and timelines are met. This organized approach minimizes resource conflicts and optimizes the use of available assets throughout the project life cycle.

Workload charts

Workload charts in Wrike offer a powerful way to manage resource allocation in project management. Project managers can create specific views that track and display key information for each individual on their team, such as weekly hours and capacity percentage. That way, they can quickly spot potential signs of burnout and reallocate resources as needed.

To sum up, Wrike provides all the features you need to address the complexities of managing resources. Whether dealing with team dynamics, managing risks and biases, or applying best practices like critical path method or resource leveling, a robust project management platform can make a significant difference. 

Start a free trial of Wrike today to find out how it can help you transform your resource allocation.

Further reading:

• Smart Ways to Manage Your Team’s Resources with Wrike
• Introducing Workload Management in Wrike
• Managing Tasks, Projects, Issues, and Documents... How About Books?