Request for Capital
Converting the Estimate
- However, an estimate of the work alone is not sufficient for a capital request. To arrive at a capital request some conversion is necessary, for example, by adding prudent allowances such as overheads, a contingency allowance to cover normal project risks and management reserves to cover unknowns and possible scope changes.
- In addition, it may be necessary to convert the estimating data into a financial accounting format that satisfies the corporate or sponsor's format for purposes of comparison with other projects and consequent funding approval.
- In practice all the data for the type of "bottom up" approach just described may not be available. In this case alternative estimating approaches are adopted that provide various degrees of reliability in a "top down" fashion. For example:
- Order of Magnitude estimate - a "ball park" estimate, usually reserved for the concept phase only
- Analogous estimate - an estimate based on previous similar projects
- Parametric estimate - an estimate based on statistical relationships in historical data
- Whichever approach is adopted, hopefully the sum thus arrived at will be approved in full and proves to be satisfactory! This is the trigger to start the Execution Phase of the project
Note: Some managements will approve some lesser sum in the mistaken belief that this will help everyone to "sharpen their pencils" and "work smarter" for the benefit of the organization. This is a mistaken belief because management has failed to understand the nature of uncertainty and risk in project work. Consequently, the effect is more likely to result in "corner cutting" with an adverse effect on product quality, or reduced product scope or functionality.
This often leads to a "game" in which estimates are inflated so that management can adjust them downwards. But to be fair, management is also well aware that if money is over allocated, it will get spent anyway. The smart thing for managements to do is to set aside contingent reserve funds, varying with the riskiness of the project, and keep that money under careful control.
Ownership of Approved Capital
- If senior management approves the RFA as presented, the sum in question becomes the responsibility of the designated project sponsor. However, if the approved capital request includes allowances such as a "Management Reserve", this may or may not be passed on to the project's sponsor, depending on the policies of the organization.
- For the approved RFA, the project sponsor will, in turn, further delegate expenditure authority to the project's project manager and will likely not include any of the allowances. An exception might be the contingency allowances to cover the normal variations in work performance.
- The net sum thus arrived at constitutes the project manager's Approved Project Budget.
Note: If management does not approve the RFA, you should not consider this a project failure. Either the goals, objectives, justification and planning need rethinking to increase the value of the project's deliverables, or senior management simply has higher priorities elsewhere for the available resources and funding.