Dealing with a cut budget

Published in Project Manager.

A reduced budget needn't prevent you from delivering your project successfully.

Not even the biggest company is immune to budget cuts and the deadening feeling that its hands have been tied by the recession – a situation that’s likely to continue for some time if the government implements major spending cuts. However, whatever your size, recession or not, one pertinent factor still remains, and that is the expectancy placed upon you to successfully deliver the project in hand. Which means doing so within the new budget.

If your budget is slashed, you immediately stop spending money and go back to the drawing board to work out what you can afford. I faced a similar situation a few years ago. The project was heading for an anticipated final spend of £16bn, but when the budget was slashed to £10bn, we were able to descope the works and scale spending back. In situations like this, it’s important that all those involved in the project understand you can only have what you can afford. Spend what you don’t have and you’ll either go bust or be forced to compromise investment elsewhere.

Understand your client’s needs

You might think you know what the client wants, but it's all too easy to misinterpret, and this can mean extra costs. A project can take years to deliver, and can be further delayed by changes in personnel and standards, not to mention bureaucracy within large organisations, which can often drive costs through the roof. Regardless of what stage your project is at, to ensure you are alert to the possibility of budget cuts, it is important to fix the basics – can you re-address how the project has been scoped? The use of subcontractors? Supplies? Interdepartmental issues?

Also, seek to avoid senior management changes within the project team, as this can cause extra delays. If management can apply a joined-up approach from the outset by collectively working out what the project is trying to achieve, it will help alleviate a lot of issues based around misunderstanding. Every project needs a good management structure and the team pulling in the right direction.

Look beyond contracts

Whilst a written contract is crucial, it can't always be relied on to avoid misunderstanding or going over budget. Some form of over-arching document embedded within the front of the contract helps enormously in maintaining its focus and interpretation. Remember, a contract sets out not just the terms of trading, but scope, specification, programme and price, all of which are subject to change if a lack of clarity emerges at any stage.

The solution lies in what's known as the scope definition documents, which set out the project in clear, unambiguous language so that it is understood in layman’s terms. Say a client provides you a contract that is no more than a page in length, detailing how they want trains from A to B at certain speeds every fifteen minutes for a pre-determined number of people. Although this is the basis of the project, you cannot always rely on this contract; it is only the tip of the iceberg. Working with the entire project team, you must produce a scope definition document that goes into far greater detail, covering every facet (including business needs, different phases of the project, and possible outcomes). This will help you gain the clarity needed to minimise the mistakes that lead to further costs you're unlikely to be able to afford later down the line.

Take an office build for example – can you do without a fifth floor? In the public sector, cost is worked out on an annual spend, so one option is to further defer works to subsequent years.

Constantly review and assess

Many industries have their own stage gate frameworks and standards (for example, RIBA for construction, GRIP for rail), but following these isn't always enough to ensure successful delivery of the project. A client has to address the fundamental question: “Do we know what we want to buy?” Too many projects start without having a 100% yes answer to this vital question. I know this by looking at the number of disputes between clients and contractors. Show me a completed project with limited, controlled change and you can guarantee the client knew from the beginning what they wanted to buy in near absolute terms and the contractor could therefore get on with delivering the project.

Even without the help of a recession, the scale of costs on any given project can become too much to bear. You must continually assess what it is you need to deliver against the budget you have available. At every step, you need to constantly test the market to gauge the current market price, which is not always the same as the right price.

In this situation, the questions you need to ask yourself are:

• What must we deliver?

• Can we deliver within the budget we have available?

• And - always remembering to measure functionality against cost - is there anything we can lose and still achieve successful delivery?

Never hesitate in challenging the design of the project. Doing so drives the maximum out of your supply chain by making it altogether a leaner and agile operation that's focussed on ensuring it can deliver what is essential. This action may have great bearing on whether you remain within budget. It’s rare for one issue to be the sole cause of budget problems, but rather the collective effect of multiple issues. Any buyer will tell you that prices frequently range from +/- 30% on quotes for the simplest items. Engineers might think a calculation or design is fairly self-explanatory, but such things are always open to misinterpretation.

This can only be avoided if everyone truly understands and fully concentrates on what the focus of the project is. Clarity remains the goal.

Be open and honest

Regular reporting to your client is vital to the project being successfully delivered. It can help you understand the scale of any pressing issues and how critical they may be. Sometimes there is a tendency to keep problems from clients because the fear is that any news that doesn’t involve telling them that everything is going fantastically well will cause them to question your ability to deliver. In reality, the client needs to know of any issues. If costs look as though they're going to rise, the priority must be to communicate this information as soon as possible. If this is delayed, you run the risk of the problem escalating, which can lead to a loss of trust in your integrity. So, if you identify a problem, make sure the client is aware, and better still, try to present them with potential solutions. They should respect your opinion and might even make moves to reduce your losses.

The four stages of budget cuts

Budget cut by up to 15% = achievable cost reductions with hopefully limited scope impacts.

Budget cut by 15-25% = scope and functionality impacts as well.

Budget cut by 25-35% = serious rescope/descoping of project needed.

Budget cut by more than 35% = costs have become too much to bear, resulting in possible shelving of projects.

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