Consultants often play a critical role in our projects. We bring in outside counsel to solve difficult problems that require specialized knowledge or benefit from an independent perspective. Consultants also come with costs that can be difficult to manage for even the most experienced project manager.

In this post we will look at budget oversight when a significant portion of the budget is to be delivered by consultants, specifically as part of a Time and Materials (e.g. hourly payment) contract. We will describe how to reveal assumptions used for estimating. We will also describe how to set expectations around work authorization, establish effective reporting structures, and generally ensure there is discipline in managing the contract.

Before we dive in, we should note that we have seen many effective consulting partnerships in our time. Consultants are not the enemy. Our goal here is to illustrate clear sightlines and open communication from which an effective partnership between client and consultant can be established. Through mutual understanding, both the client-organization and consultancy are best equipped to work together.

Understand Estimate Assumptions

A Time and Materials (T&M) contract implies that the consultant has estimated a certain number of hours sufficient to complete a task. This does not guarantee that the task will be completed or completed well. It simply indicates that hours will be set based on the statement of work you and they agreed to. If these estimates are not accurate, there is a good chance the budget will have been spent but the output will not meet expectations.

To increase the accuracy of your estimates, unpack the underlying assumptions that went into the estimate provided. A few questions worth asking:

• Were there direct parallels to comparable projects? If so, which and how many?
• How were the comparable projects different? How were those differences accounted for in the estimates?
• Which areas of the project have least clarity or greatest uncertainty?

As we have said many times in the past, culture is a critical variable in the nonprofit sector (see also: Converging Culture, Compliance & Project Activity). A highly deliberative organization (of which there are many) may require twice as much time to complete a task than a more directive organization. A consultancy’s failure to appreciate the organization’s culture can present a significant over- or under-estimate. We highly recommend an upfront conversation addressing the following questions:

• How much time is built into the estimates for deliberation?
• How have you anticipated decisions being made on the project?
• How will we engage and manage stakeholders in the estimates provided?
• How well do you know our organization? The nonprofit sector?

We find that the “culture factor” is frequently overlooked by firms that work predominately in the commercial sector. Estimates tend to fall far short of actual needs. And appreciation for consensus-based decision-making approaches can put early estimates into a tail-spin before the first milestone is achieved.

Set Expectations for Work Authorization

T&M-based projects can quickly run through hours without your knowledge if there is not rigor to oversight. Even experienced firms may move forward with work, only to later learn that they used hours on work you did not want or need. It would be prohibitive to approve every activity, but there should be some rigor as to how work will be authorized.

A few expectations we recommend setting for work authorization include:

• Work identified within the project schedule and project cost baselines does not need approval to move forward (as it was already approved as part of schedule and cost baseline approval).
• Any customization work will be approved in writing before it begins. To achieve approval a written design specification will be provided.
• Additional work equal to less than 5% (for example) of the project budget may be approved by the Project Team. Larger variances will need to route through the project governance model or with the authorization of the sponsor (see also Project Governance).
• No hours appearing on invoices that deviate from these expectations will be paid.

Setting work authorization expectations early in your partnership is critical to alleviating conflict later in the project. It also should help protect your project – and your organization – from some of the pitfalls associated with T&M contracts.

Implement Clear Reporting Structures

A key theme throughout all of our writing is the importance of communication. Setting expectations for how schedule, budget and scope will be communicated on a consistent basis is critical to project oversight. This oversight is especially important as every hour in a T&M contract comes with a cost – and any deviation from the plan needs to be quickly identified and resolved.

We recommend the following communication practices:

• Every Monday, the consultant will deliver a Weekly Status Update. The status update should report on hours used the prior week, hours anticipated in the coming weeks, and an indication of overall hours, schedule and scope status.
• Every Monday, the project team (consultant and client) will conduct a Weekly Project Team Meeting. At the meeting, the team will step through work output from last week and align work for the weeks ahead.
• Each month the consultant will submit an hourly detail along with the invoice. This detail will be used to compare against weekly status updates and to ensure that hours anticipated on the project are consistent with those invoiced.

We would also recommend that a cash flow projection be provided at the start of the project and updated on a monthly (if not weekly) basis. Projects can have a very real impact on cash-flow at an organization, no matter the size. While shifting of work within the project schedule may remain within budget parameters, it should also be recognized that when budget is spent can have broader impacts (see also: Key Inputs to Cost Management).

Close Phases at Completion

Projects are typically organized into phases. In a “waterfall” approach, there is an end-to-end sequence of activity that leads to a milestone. The milestone typically indicates the ending of a phase. Methodologies that integrate more “Agile” approaches may not have the same end-to-end sequencing, but are still typically organized into a set of activities – or sprints – that arrive at an outcome. Regardless of how the work is organized, budget should be oriented around the completion of major pieces of work.

From a budget discipline perspective, the key is to treat the completion of a milestone as though it is a gate. Once you pass through that gate – or achieve the milestone – it closes behind you. This is true of design or configuration decisions that may have been completed prior to the phase. It should also be true of budget that was allocated prior to the milestone. We recommend making clear to all involved that budget set for the closing phase is not to be repurposed forward without written authorization. This will help ensure those funds are not crept into a new phase – or repurposed to other means without approval.

Summary & Conclusion

An effective partnership is based on mutual trust and understanding. The goal of this post is to help achieve that trust and understanding early-on. By asking good questions, exposing assumptions and putting in place rules for work authorization in advance of them being needed, you are more likely to avoid surprises and therefore conflict. Consistent reporting processes further ensure shared understanding. And, closing gates behind you can ensure your budget does not escape the controls you have put in place.

Most of our projects live in a Time and Materials world. With a bit of discipline, we can make sure this is not a bad place to be.