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A question of bottleneck management, you always need to ask yourself: "where is currently the weakest link?" It is good to take a critical look at the financial processes in the company, because to use a real estate metaphor: "A building is only as strong as its foundation."
The company’s financial planning also starts with a good basis at operational level: the projects. As a CFO, if you want to be able to rely on a KPI dashboard, you need to be certain that it is based on good data and that you have the right controls in place. In this blog, I look at the ‘foundation’ in more depth: the five pillars of project control.
The five pillars of project control
Pillar 1: Estimating costs & returns
Returns and risk go together. When considering risks, we tend to think first about the project risks, like land acquisition, financing and sales risk. But good risk management (and thus return management) go further. The quality of estimating costs & returns is an example of that. In general, I can say that estimates must be transparent, appropriate, and robust for the current phase of the project.
By 'transparent' I mean that when assessing a forecast in an investment proposal, for example, the forecasting method used as a basis must be clear to the reader without any verbal explanation: are the estimates based on a standard norm, on personal experience, on expert advice, a quote, a contract? That makes a huge difference for the 'hardness' of the figures you are looking at. Which is where the word 'appropriate' comes in: is the method used to substantiate the forecast appropriate for the current phase of the project?
Smart software helps you work from rough to fine data on which to base the costs and returns. This enables you to start with a quick, rough initial estimate based on standard amounts or own estimates and provide better substantiation with quotes and contracts as more information becomes available during the project.
Finally, the forecast must be 'robust'. Does every project developer use their own Excel model? Is there a standard template, but does everyone adapt it as they see fit? How do you ensure that the whole company uses the latest version? All these issues are potential risks for the quality of the forecast. Because mistakes are easily made, and it means that the reader of the forecast first needs to understand the calculation rules. Smart software contains robust, predefined calculation models while offering sufficient flexibility to enable the multiple project variables to be included in the forecasting.
Pillar 2: Quality of the planning
Just as return and risk go together, so do time and money. Because the difference between one million euros today is huge compared with one million euros next year. A few things to consider, for example: indexation, financing, return and the 'time factor'. The further you plan into the future, the more uncertain it becomes. And a lot can happen in the meantime.
When planning money in time, it is therefore important to choose a good ‘granularity’, i.e. the right level of detail. This helps you assess the figures at the right abstraction level. In general: the further you get in the process, the more you know and so the more detail you can add. Which doesn’t mean that you must. It also means that amounts in the near future can be more accurately assessed than in the far future. This prevents false accuracy.
Pillar 3: Cost control
Future and past come together in the present. It is only meaningful to plan for the future if you also monitor whether your estimates were correct and whether you are on schedule with the execution. Cost control is fundamental for managing an ongoing project.
Every project manager should intrinsically want this to measure the success of their projects, but many companies feel it is too important to leave to individual workers. Many companies therefore choose to ask the people responsible for the project to periodically justify their projects in a standard reporting format. For example, monthly or quarterly.
A best practice which we advise is to have up-to-date insight in each project into the actuals, contractual obligations, the approved budget and the (financial) forecasting. You are then always in control of what you have (already) spent, what you have agreed to spend or whether that needs to be adjusted within the allocated budget, and whether that still reflects the total amount you expect to spend and earn. You can also facilitate this process with smart software. Via a link with the accounting system, you share finance information so that data only needs to be entered and updated in one place. The entire process is also easy to manage due to the workflow in the system and the many standard reports.
Pillar 4: Project structure
A good project structure also helps you to be consistently successful. By that, I don’t mean the legal or fiscal structures of your project. Although that is obviously important, in this context I mean a good structure of entities on which you base your financial forecasting. For example, do you choose to subdivide your plan financially by following the division of the building blocks, the different real estate assets functions or based on rent/sale? How do you actually choose which criteria on which to subdivide a project? We (too) often see that this is done based on external factors: the accounting structure is followed, the reporting format of an external regulator, etc. Our best practice is: keep it simple and consider which distinction is important to make for internal goals.
Pillar 5: Power of change
Once a project has started, change is the only constant. Plans change, designs change, contracts are negotiated, permits are applied for, etc. As a company, if you want to keep control of this, changes will need to be managed properly. Are changes relating to the forecasting or the approved budget updated in a change log? Are scenarios prepared to enable you to enter negotiations better prepared? Is the financial forecasting also adjusted if the plans change? What change requires a new approval decision, and what mandate do the workers have themselves?
The key to managing changes in the project well involves good tooling with in-built scenario options, a good process with in-built controls and the right attitude among workers. We can’t help with the latter, but we can help with the tooling and a good process!
How do you take the next step?
As an agile software company, we have learned to always implement small, clearly defined changes. That makes the change easy to implement and ensures that the result is quickly visible. You then know whether you should continue on that path or change course.