Thursday, November 10, 2011

Project balance sheet

If you follow this blog you've read several references to the project balance sheet. So, is this about accounting? Yes, and no: Yes, it's about a double entry tool to keep track of "mine" and "yours", but no, it's not the accountant's tool used in your father's accounting office.

Take a look at this figure:

What have we got here?

First, 'mine' and 'yours'.

On the left side of the balance sheet is the sponsor's investment in the project. Investment need not be all monetized. It's the 'your's side of the balance sheet, somewhat akin to the right side of the financial balance sheet (money owed to creditors and money invested by owners). 'Yours' simply means it's resources owned by others and provided to the project.

On the right side is the 'mine' side of the project balance sheet, akin to the left side of the financial accounting sheet (assets owned by the business). The right side is the project side, and the right side shows the estimates and evaluations of the project manager.

And, take note: the left side, the sponsor's side, is the fact-free zone: it's a top down allocation of resources to the vision. It is the ultimate utility expression of the sponsors: what's valuable, and how valuable, even if not entirely objective. And on the right side, it's all about facts (benchmarks) and estimates (benchmarks applied to project circumstances). It's bottom up.

Of course, there's the inevitable gap where utility collides with facts and fact-based estimates. The gap is the risk between expectations and capacity-capability. And how large is the gap (risk): only as large as needed to create a balance--that is, a deal with the devil--so that the project can go forward.

 In other words, the gap (risk), shown on the project side, is only as large as it needs to be to close the gap. Usually, it's a matter of negotiation, but once the PMB is set, the risk is the PM's responsibility to manage.

In other words, the PM is the ultimate risk manager.

In a real world example, I had this situation:
  • We bid a job competitively in a firm fixed price environment. 
  • We offered a price that was equal to our cost; in other words, no fee (profit).  We just wanted to keep the lights on and keep barriers to competition with our customer as high as possible. 
  • We won! 
  • And, in  the next moment, my general manager said: "Your bonus depends on making 4% net margin".  I had my gap!  (oh yes, I made the margin and the customer was satisfied)

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