Tuesday, June 2, 2015

We're not concerned about the budget

This is a true story. The company names have been changed.

Estimates are wrong

Acme Corporation’s salesman assured Standard Inc. that the billing and accounts receivable software, hardware, and customizations could be bought and implemented for $500 thousand dollars.

After Standard signed the contract, Acme’s project manager and team were assigned. They met with Standard to work out more details of their requirements and quickly realized that the salesman had under-estimated the costs. In order to support their business, Acme would need additional modules for inventory management, work order management, and additional details to support regulatory reporting. The price should have been $8 million!

Acme management was horrified and decided they would not show this new estimate to Standard. They decided to cut the figure to $6 million. The Marketing VP was interested in these new modules and agreed to pay thirty-five percent, bringing the number down to $4 million. When Acme presented this new budget, Standard thought the estimate was completely unreasonable, but could not agree to eliminate any customizations.

Standard and Acme worked together to create break down the work into two phases. Phase one would have half the work and a budget of $2 million, the remaining work and budget would be phase two. The contract was revised for the new scope of work and price, with additional provisions for a fixed price and for phase one to be completed within twelve months.  

Behind schedule, over budget

Phase one wasn’t even half over when it became very obvious that the project was running behind schedule and over budget. The project manager alerted the Standard sponsor and Acme’s management. The Standard sponsor told the project manager not to worry about the budget for now, but just to keep developing the customizations to make sure the project delivered on time.

For the next four months, the project manager continued to warn Acme management and the Standard sponsor that that project was continuing to run over budget and could not be completed for the expected amount. Both Acme management and the Standard sponsor assured the project manager that she should continue to do the work and bill Standard.

Standard continued to pay the monthly invoices until the end of the ninth month, which brought the billings up to the budgeted $2 million for phase one. More than three months remained in the schedule, and more than three months work remained to be done.

The invoice for the tenth month was being processed at Standard just as Standard was taken over by a new owner. The new owner refused to authorize payment for the tenth month.

Payments stop

The Standard sponsor asked Acme to continue the work, and the sponsor would convince the new owner of the value of the project and obtain approval for payment.

At Acme, it became known that Standard was not paying, and other projects began using resources from Standard’s project to do paid work. The project manager alerted Acme management and Standard that the project would run later as resources were dwindling. They encouraged the project manager to continue the project at whatever pace she could. By the end of the twelfth month, the original deadline, the estimate to complete was another five months.

Work and billings continued to the end of the fourteenth month, when the project fizzled out. Acme never got paid after month nine. Standard never installed the new product. The work completed was rolled into the existing product and sold to other customers.

Acme fired the project manager for allowing the project to run late and over budget.


Management at Acme did not accept responsibility for the problems that they created on this job. The project manager had made it clear to them that the project was behind schedule and over budget. They also knew they weren’t being paid. However, when the project ended disastrously, the project manager was fired.

The early estimates by the project manager and team came to $8 million, twenty-five per cent more than the figure used as the project budget. It was trimmed because Acme management thought the figure was too high to present to the customer. Unfortunately, unless the work is eliminated, reducing estimates of effort don’t make the effort go away. This cut in the estimates was not based on reduced work, and could not be achieved. The project running over budget was predictable.

It’s curious that Acme management did not arrange to meet with the new owner. A meeting with the person refusing to authorize payment would have allowed Acme to discuss the benefits of the project with the new owner. Alternatively, the meeting may have made it clear earlier on that there was no hope of the project being completed and paid. Instead, Acme accepted assurances from the Standard sponsor, who no longer had authority to pay.

Copyright 2015 Debbie Gallagher