Including a line item in the project budget for team bonuses can be a highly effective way to keep costs under control without adding anything to the budget.
Whether an internal business project or a project undertaken for a client, the effort typically commences with a budget, a schedule, and an ultimate objective. If you’re a project manager, however, you probably already know that all three will likely change before the project ends.
Because project management is largely about managing change, it can be a tricky business. The best project managers are adept at it, but gaining and nurturing the project team’s commitment in keeping costs under control can be the manager’s ace in the hole.
One technique for stimulating the team’s interest and commitment to the project budget is to include a line item for team bonuses to be paid at project completion.
A Quick Example
One company in particular that implemented this type of program was a fast-growing multimedia software developer with a Fortune 50 clientele. It had lost control of project costs, and was experiencing cost overruns totaling $100,000 per month on about $500,000 per month revenues.
Within 6 months of implementing project bonus pools, budget performance had improved so significantly that it erased a cumulative $700,000 loss and completed the year with a $500,000 profit.
While some of the improvement in its fortunes can be attributed to other business changes, the bonus pool was a significant factor in aligning the entire company toward meeting project budgets.
Creating the Bonus Pool
In most cases, creating a bonus pool doesn’t require adding any money to the budget, because realistic project planning usually includes a contingency fund. Simply renaming “Contingency” to “Bonus Pool” underscores how the team collects it bonus – by reducing contingencies.
If your project budgeting doesn’t normally include contingency funds, consider moving a small percentage of funds out of other budget categories to go into a new bonus pool line item. In effect, you’re saying to your team, “If you can save money on these other line items, the savings are yours.”
How It Works
How the bonus pool works is simple. At the end of the project, if the pool hasn’t been completely raided to pay for overruns on other line items, whatever remains of the pool is divided among team members.
If there is money left over in other budget items (i.e. the project finishes under budget), 50% of the savings is added to the pool for distribution to the team. Though the company keeps 50% of the extra savings, it also risks paying for 100% of the ultimate overrun if the bonus pool is wiped out, so it’s a fair proposition to employees and company alike.
In the end when there is an intact pool remaining, it’s the project manager who gets to decide what percentage of the total each team member receives. When everyone contributes equally to the project’s success, the division is typically equal.
On the other hand, when some team member’s have spent full time on the project and some have only worked part time, the split may be pro rata based on the hours worked.
Occasionally, there may be one or more “heroes” on the project whose contributions clearly had a large impact on its success. In these situations, it’s completely appropriate to skew the division in favor of the most significant contributors.
As for the project manager’s own share, this has to be fixed by upper management before the project begins. It may be 5% to 25% depending on the size of the budget, the size of the team, and the length of the project. Whatever the percentage, at the end of the project, the manager collects the fixed portion and allocates the remainder to the rest of the team as appropriate.
Budget Visibility Is Key
Budget visibility is one of the critical factors in making this strategy effective because team members can’t help control project costs unless the costs are regularly and frequently reviewed. If the project schedule is over twelve months, it may be possible to get by with once-a-month budget reviews.
Most projects, however, are best served with weekly budget updates. The sooner the team sees something going off track, the sooner they can put in the fix before too much money flows over the dam.
Sometimes, though, it’s not just about saving costs. Sometimes the project scope changes and it’s necessary to confront the client with a change order, or to scale back the client’s expectations. Here the team can become motivated to provide critical input in identifying and documenting the scope creep to convince the client that a budget increase is in order, because failing to do so can result in a hit to their own pocketbooks.
This whole approach assumes, of course, that the company has no problem sharing financial data with project staff. If that is not the case, then this may not be a viable project cost management technique.
Avoid Issues by Embracing Transparency
Transparency in the final distribution is also critical. While it’s possible to pull the project manager’s fixed share out of the equation by putting it in an off-project budget item, such secrecy can undermine morale and start the rumor mill swirling.
It’s best to decide in advance what’s fair compensation for the project leader, and be willing to defend its fairness to all. If it turns out it’s lucrative for the project manager, promote that as incentive to other staff members to raise their skills so they too can become skilled project managers.
Transparency also applies to the division of the pool between project participants. The project manager needs to have sound rationale in the distribution, and would be well served to talk individually to each team member before making the final allocation. Letting each person on staff have input to the process makes the result more acceptable to all.
Also, by getting staff input the manager may discover unsung heroes (or clever hangers-on), and avoid making inappropriate rewards that might generate negative feelings.
Important Steps for Implementation
A program such as this requires a complete understanding of how it works and clear guidelines. It should be thoughtfully developed with project manager input, as well as that of the accounting department and project staff representatives, so that any potential problems related to the company’s culture or capabilities can be factored into creating a successful program.
Ultimately, all of the program guidelines must be defined in writing so there are no misunderstandings.
Give the program at least two project cycles to fine tune its adoption, and if changes are necessary, by all means, tweak it as befits your company.
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