Definition

Finance includes all activities required for estimating, planning, gaining, spending and controlling financial resources, both the inflow and outflow to the project. Finance therefore includes the cost management (outflow often related to a budget) as well as the financing (inflow external to the organisation) and/or funding (inflow from within the organisation) required for successful management 
of the project.

Purpose

The purpose of this competence element is to enable the individual to ensure that enough financial resources are provided to the project at any time, that the financial targets of the project can be met and that the financial status is monitored, reported and properly used for adequate management of financial resources.

Description

Initially the individual has to make an estimate of the costs that are necessary to execute the project – i.e. define the budget. The individual also has to take actions related to the way the project is financed or funded. The individual therefore has to know what the planned (or expected) and actual costs of the project are and how they relate to the progress of the work done and the objectives achieved.

In addition, cost management systems have to be established within the organisation of the project. These are used to monitor the financial status and provide a forecast on financial and performance issues so the individual can make appropriate decisions.

The individual needs to know what funding is contracted and what funding is expected. In this way, the individual can use the key performance indicators to make forecasts of the future performance of the project and, if cost breaches are signalled, should report on these according to the project’s organisation and governance and suggest appropriate mitigation plans. The term ‘funding’ is used when an organisation finances the project internally. The term ‘financing’ is used when the organisation acquires funds for the project from external sources (e.g. loans, joint ventures, etc).

For every project, the proper management of cash flow in terms of expenditure and income is crucial. The cash inflows and outflows must be calculated and evaluated regularly so the appropriate actions can be taken to ensure sufficient financial resources. The setup of the financial management system has to be made in cooperation with the financial and/or treasury department and other relevant parts of the permanent organisation.

Key competence indicators

Estimate project costs

The individual estimates or, if possible, calculates the costs needed to execute the project. Direct costs, such as labour hours, materials, investments, ongoing operating costs, travel expenses, training costs and indirect costs, such as overhead fees or licences or even opportunity costs — all have to be identified and estimated. Cost estimation includes the utilisation of a cost breakdown structure (possibly derived from a WBS) or other appropriate methods, in order to categorise the estimated costs. Cost estimation is mostly done ‘top-down’, based on the experience of subject matter experts, historical data, group estimation, ‘bottom-up’ or other domain-specific techniques. Cost targets for the whole project or single cost categories might be defined ‘top-down’ or ‘bottom-up’. When doing the calculation the individual also needs to be aware of any normative cost standards which could help in doing the more accurate calculation (e.g. engineering industry cost calculation standards). Furthermore, dependent on the specifics of the industry and the nature of the goods or services sold on the market, the individual needs to be able to apply the appropriate cost calculation technique.

Measures

• Sets up cost structures and identifies cost categories
• Selects appropriate cost calculation technique (e.g. direct calculation)
• Sets the cost targets by consulting any relevant standards or internal guidelines

Establish the project budget

Establishing budgets is closely related to estimating costs. Based on the cost estimation, the individual defines the budgets on appropriate levels of the cost breakdown structure (CBS). A close link to the WBS will ensure that it is possible to identify when costs will be expended and on what. The individual gets an overview of the time-related expenditure of funds. By taking not only the outflows but also the inflows of cash into account, a cash flow can be forecast even at an early stage of the project. The costs should be connected with time, in order to check whether the costs can be secured by the funding function of the organisation and, if not, to ensure that the appropriate adjustments are made. The project budget should include contingencies that are held in reserve to fund uncertainties, risks, claims or cost overruns.

Measures

• Establishes budget plans
• Develops budget scenarios based on cost-relevant items
• Plans budget for contingencies
• Assesses the budget against the time and funding and makes possible adjustments
• Sets the final budget

Secure project funding

The individual ensures the availability of financial resources at the right time to make sure costs are covered. The individual must follow the organisational approval processes (if in place) to get the financial needs granted. Discussions around the funding may be influenced by political circumstances. In this case, the individual may need to promote the project to potential internal and external sponsors. Even though the financing part should fall under the accountability of the project sponsor, usually the project manager needs to determine the finance structure.

Measures

• Establishes funding strategies for projects
• Identifies sources of funds
• Handles the organisational approval processes
• Cooperates, keeps close contact to and can negotiate with potential sponsors in order to get funds

Develop, establish and maintain a financial management and reporting system for the project

A financial management and reporting system must be established so that an overview of the financial situation and status of the project is available at any time. The financial management system links the project cost structure, the organisational cost structure and the time schedule. It includes not only processes but also roles and responsibilities (e.g. payment authorisations). Financial reports are the visual output of the management system. The individual establishes performance management indicators to monitor the relationships between cost and progress (e.g. cost to complete and earned value). Bases for these indicators include the mapping of cost structures and project structures. In most organisations the project financial management is closely linked to organisational accounting and controlling processes. If in place, mandatory methods and instruments may have to be used, but adapted to the specific needs of the project. If not in place, a project-specific financial management system must be defined and applied.

Measures

• Defines processes and governance for financial management
• Defines financial performance indicators on the project
• Relates the project cost structure to the organisational cost structure (e.g. aggregating work packages)
• Develops appropriate reports in accordance with the project’s organisation and governance

Monitor project financials in order to identify and correct deviations from the project plan

The goal of financial controlling is to identify deviations from the plan to enable timely reactions. The individual monitors planned and actual costs, liabilities and expected costs of the project as well as the cash flow. After analysing the deviation and its possible causes, necessary actions are taken. Planned costs are derived from the latest project plan (latest approved budget updated with changes). The actual costs come from the actuals monitored by the project team. However, the real figures are often provided by the organisational accounting. They encompass expenses for all planned cost items, such as labour hours, travel costs or bills, and any other liabilities covered by the procurement agreement and not stated in the cost calculation (e.g. material transport, consultancies, etc). The liabilities are often included in cost controlling. Liabilities are expenses bound by purchase orders but not yet paid. Comparing actual costs to planned costs is especially informative when the costs are related to the project progress. The individual uses the financial performance indicators to monitor the relationships between planned cost, actual cost, actual work done and progress trends (e.g. earned value indicators, SPI, CPI, etc). Thus the individual analyses the current project performance by controlling the financial resources and manages any underspending or overspending. Finally, the individual uses the performance indicators to make forecasts of the future project performance. If cost breaches have been forecast, the individual needs to report in accordance with the project’s organisation and governance and suggest an appropriate mitigation plan.

Measures

• Establishes and evaluates cost reports
• Analyses and interprets financial situations
• Uses financial performance indicators to monitor and control the project
• Produces project performance forecasts based upon the financial indicators
• Signals cost breaches and suggests mitigation plans in accordance with the project’s organisation and governance for any cost breaches that cannot be handled by the project budget contingencies