Chapter 29. Finance

Financial management in project delivery needs to integrate with the wider financial management and accounting arrangements in the sponsoring organisation.

At portfolio level, a portfolio can cover the whole of an organisation’s capital investment and resource spend. Programme and project financial arrangements also need to be integrated with the sponsoring organisation. Even where a separate organisation (usually an arm’s length body) is created to deliver work, its accounts are normally consolidated into the sponsoring organisation’s accounts.

Financial management arrangements should be consistent with the sponsoring organisation’s processes and use their financial management and accounting systems wherever possible. Accounting data should be captured consistently across portfolios, programmes and projects so that costs, income, savings and forecasts can be compared and reported at each level.

Funding availability cannot be assumed, even where there is strong support for the work and a compelling business case, as organisations have to balance many different priorities in pursuit of their objectives.  A realistic funding plan and a commitment from the funder are needed before a business case is approved. Approval then either triggers the release of funding for part or all of the work, or provides authority for expenditure where funding is already held in organisation budgets.

Funding is allocated by financial year. Allocations cannot be moved from one financial year to the next without agreement from HM Treasury and updating the business case. Funding sources can include those from grants, estimates, tax, public dividend capital, public borrowing, external borrowing and income generation, as set out in Managing public money.

There are also strict rules on . Some government funding is also delegated on a ring-fenced basis by Parliament or HM Treasury for specific purposes., for example Official Development Assistance (see 10.8 for international).Some project delivery work involves the use of private finance, for example joint ventures with private sector partners. Where this is being considered, advice should be sought from the National Infrastructure and Service Transformation Authority. These arrangements require HM Treasury approval.

Business case approval and spending authorisation are not the same thing, but in practice are often linked:

• business case approval confirms that the business case is acceptable to the relevant investment scrutiny body and can proceed
• spending authorisation allows public money to be committed or spent

Both form part of the government control framework for programmes and projects, as set out in Managing public money. Business case approval also depends on other requirements being met, for example functional controls set out in the Department’s Memorandum of Understanding with HM Treasury.

Approval and authorisation can be for the next phase of the work or for all of it, depending on the business case and other considerations, for example for risk and future funding availability beyond the current spending cycle.

Business case approvals and spending authorities are governed by a department’s delegated authority limit (DAL). Spending proposals that exceed this limit, or that are novel, contentious or likely to set a precedent or affect future public spending are required to follow the Treasury approvals process for projects and programmes (requires log in). This process provides different levels of scrutiny depending on the scale and complexity of the programme or project concerned.

Government and Departmental Major Projects and HM Treasury approvals

Programmes and projects in the Government or Departmental Major Projects Portfolio require HM Treasury approvals preceding decision points. See the Treasury approval process for projects and programmes (requires log in) for more information.

Business cases that do not require HM Treasury’s approval may be approved within the sponsoring department using the departmental investment approvals process, in line with their delegated spending authority arrangements. Similar delegated arrangements are in place between departments and their arm’s length bodies.

Authority for spending within the delegated authority limit is held by the accounting officer, and delegated further as appropriate. Senior responsible owners should have delegated spending authority within agreed limits and are encouraged to delegate day-to-day spending authority to programme or project managers, who can delegate further if appropriate.

Delegated authority for spending can be provided to develop proposals and prepare a business case before formal approval, in line with the limits on modest or temporary expenditure set out in Managing public money. Once an investment case has been approved, the senior responsible owner or their delegate has authority for expenditure, subject to the terms of the delegation. Spending authority and other delegated authorities, for example on procurement, should be set out in a delegation letter to the senior responsible owner and in individual letters to anyone that authority is further delegated to.

Financial planning and forecasting involves dealing with uncertainty.

First, make uncertainty visible. Financial analysis and modelling should be robust and evidence-based, but where uncertainty exists, it should be stated clearly, with a range of plausible outcomes presented. Specialist advice should be sought on methodology where needed.

Second, build contingency into the business case. The financial case should include contingency to cover financial risks and liabilities. The economic case should account for uncertainty and risk in its modelling. As the work progresses and projections become more certain, assumptions should be adjusted and contingency updated.

Third, hold contingency centrally. Contingency should be held within the sponsoring organisation, not allocated as part of the budget for the work. This is because government is effectively self-insured: residual contingency in the financial case is converted into nominal prices and used to estimate the contribution to the organisation’s reserves. Arrangements for managing contingency, drawing it down and accounting for its use should be included in the governance and management framework.

Financial analysis and modelling should conform to the Government Functional Standard for Analysis, supported by the Aqua book (requires log in). The Green book (requires log in) provides specific guidance on handling uncertainty, optimism bias and risk in business cases.

In portfolios, funding is allocated in line with agreed priorities. Spend against budget should be reported and analysed regularly to identify actual and forecast underspends and overspends. Where variances occur, the portfolio director should flag these promptly and take decisions on addressing them.

In programmes and projects, the senior responsible owner is accountable for financial discipline.

Accurate planning, recording and reporting of spend matters because:

• if spend is not planned and profiled accurately across financial years, there may not be enough funding to complete the work on time
• if costs are not recorded properly, financial reports can understate spend, leading to unexpected overspends at year end
• if work and spend are delayed and the impact not flagged, funding cannot be reallocated in-year, leaving an underspend and a gap in the budget for the next year

Everyone working in government has a responsibility to protect public money. Accounting officers are responsible for managing fraud, bribery and corruption risks as part of their accountability to Parliament.

Senior responsible owners should balance preventative and detective controls to tackle and deter fraud, bribery, corruption and other malpractices. For all proposals, proportionate counter fraud measures should be built into the design as a constraint and therefore as a requirement of all viable options.

For major new areas of spend, an initial assessment of how fraud could occur and the potential impacts should be carried out in line with the Professional standards and guidance for fraud risk assessment in government.

This assessment:

• informs approval decisions
• provides an early view of the need to resource counter fraud activity
• maps counter fraud requirements through the life cycle
• identifies any vulnerabilities so that these can be addressed up front

New programmes or projects joining the Government Major Projects Portfolio (GMPP) are required to complete an initial fraud impact assessment. The senior responsible owner should complete this with support from local counter fraud teams. Mandatory assessments should be submitted to the Public Sector Fraud Authority for assurance before spending approval.

Once spending is approved, a full fraud risk assessment should be completed in line with the Professional standards and guidance for fraud risk assessment in government and monitored through the life cycle.

For further information see the Government Functional Standard for Counter Fraud.

Government major projects and initial fraud assessments

New programmes or projects joining the Government Major Projects Portfolio (GMPP) are required to complete an initial fraud impact assessment.

The financial management framework should reflect the mandate and objectives for the work, as these determine the nature of the finances involved and how to manage them.

Where a new portfolio is established or arrangements are being reshaped, the accounting officer and executive board may need to take strategic decisions on how portfolio investment is to be planned and managed before spending starts.

Programmes and projects can start to incur costs as soon as work begins, and these can accelerate quickly. Defining the financial management framework is an early priority so that costs can be budgeted for, met, reported and accounted for from the outset. An initial framework can be put in place and developed as the work expands.

The governance and management framework for finance forms part of the overall governance and management framework for the work and should be integrated with the framework in place for the organisation.

The first step is to assess likely requirements. A short-term project where costs are primarily salary costs held in existing budgets needs a different framework from multi-year work involving different funding streams or external delivery contracts.

This initial view provides a basis for defining the framework. It should cover:

• core accounting and financial reporting standards to be followed
• planning controls, for example on how costs and benefits are estimated
• approvals and authorities for expenditure
• management of contingency
• forecasting and profiling future costs, benefits and cashflow
• handling of international currency (where appropriate)
• recording actual and committed costs and benefits, and tracking them against plan
• tolerances and management of variances
• financial reporting and accounting requirements

In a portfolio, the framework sets the parameters for managing finance at portfolio level, as well as what is expected of those managing programmes and projects within the portfolio. How this works depends on whether funding is held, managed and allocated through the portfolio, or held and allocated separately.

In a programme or project, the senior responsible owner and the appropriate governance board should approve the framework. The framework should set out how the senior responsible owner will exercise financial responsibilities in line with delegated authority, and how any further delegations for day-to-day budget management will work.

Financial planning and control should use existing organisational finance and accounting platforms wherever possible (see 29.6.1.1 on consistency with organisational systems), supplemented by additional processes and specialist tools where needed.

Some organisations provide tools for managing project finances that interface with their existing accounting platforms. For smaller initiatives, spreadsheets are often used for financial data, modelling and analysis. For larger and more complex work, specialised planning and control software, incorporating financial data, can be used.

Financial management in project delivery involves a series of related activities, as shown in Figure 29.1 and considered below. These are iterative and can be applied at portfolio, programme, project and work package levels.

The approach to managing finances should be defined including any processes, methods, tools and techniques to be used. This forms part of the overall governance and management framework for the work (see Chapter 4: Governance and management). The important aspects of this activity are discussed in more detail in section 29.6.2.2. The framework should be maintained to address relevant feedback from its use.

The finance manager is responsible for setting up and overseeing the activities of the finance team,  and overseeing financial management through the life cycle.

This includes making sure that:

• the financial management framework is assessed and updated as needed.
• funding sources are identified and robust financial plans developed as part of business case planning
• annual delegations are in place and funding is allocated in line with them
• the necessary approvals and authorisations are secured before spend is committed.
• payments to suppliers are managed in line with performance and held over where necessary.
• spend and any income are monitored, reported and accounted for accurately.
• variances against budget profiles are identified and handling agreed through the appropriate governance, including the potential release of underspends and seeking drawdown of contingency where necessary.

Finance requirements form a core part of planning (see Chapter 16: Planning) and make up the basis of the financial case within the HM Treasury’s Business case guidance for projects and programmes (requires log in) The approved financial plan provides a part of the baselined plan against which delivery can be managed and tracked.

The financial plan should be derived from the schedule and determine the level of funding needed through the life cycle. It should provide a summary view for the whole life cycle, and a detailed view for the next phase.

The financial plan should include the:

• investment cost, developing and delivering the work, including business change
• operating cost, in-life operation or use
• maintenance cost, in-life maintenance or refresh
• disposal cost, end of life decommissioning and disposal

It should also provide information on:

• what each phase and component of the work costs, and who is accountable
• what financial benefits (for example, revenue, income or savings) are to be realised, when, and who is accountable for realising them
• financial commitments made, for example contractual costs or scheduled grant payments
• cash flow or in-year spend profile, as required by the relevant organisation
• financial authorisations needed and given

The financial plan should be set out in financial years on a whole life basis. They should identify different categories of public expenditure, for example resource (administrative or programme), capital and other categories, for example annually managed expenditure (AME). Official Development Aid (ODA) expenditure should also be identified separately and is subject to a specific governance regime, overseen by the Foreign, Commonwealth and Development Office.

Financial management controls should be implemented as soon possible in the first phase of the work, before any significant spend is committed. Controls can be implemented progressively if needed, but must be reflected in procurement documentation and contracts from that point onwards.

Audit activity often focuses on financial controls around investment and supplier management, and a strong, properly documented and actively-managed control framework is needed to demonstrate proper use of public funding.

Profiling expected spend across the year in line with delivery plans provides a baseline for tracking and managing performance. Profiling should take account of contractual arrangements and when material delivery milestones are expected, triggering the requirements for funding or payments to delivery partners.

Actual and committed spend should be recorded in organisational finance and accounting systems as they occur. Spend should be reviewed regularly and forecasts updated, for example as part of the organisation’s monthly financial reporting cycle, covering both annual and multi-year forecasts showing current spending review years and whole life totals.

Actual and forecast spend should be analysed against budget profiles to identify variances. Some variation against profile is usual, but persistent variances can point to delays or other performance issues, leading to underspends, or unforeseen costs or work overruns, leading to unplanned overspends.

Financial reports and spreadsheets used for tracking should show monthly, annual and whole-life cost profiles, actual and committed spend, and future forecasts, aligned to work breakdown structures. S-curve analysis is a common approach, tracking planned cost, actual cost against schedule or agreed milestones (see Figure 29.2).

Even small variances can point to trends and provide early warning that work going off track. The root causes of variances should be identified and addressed.

Financial status should be reported by the finance manager to the programme or project manager and their delegates, senior responsible owner or portfolio director, and through them to the appropriate governance board at least monthly. Formal reporting usually coincides with the sponsoring organisation’s reporting cycle but, where systems allow, should be available ‘on demand’ (see Chapter 18: Reporting).

Financial reports should show actual, committed and forecast spend against budget profiles for each expenditure category (admin, programme, capital and others). Reports should provide more detail for the current phase and show a summary view overall. Variances should be highlighted, and where known, the reasons for them explained. Figure 29.3 shows an example of a summary report.

Financial reports can also include other information, for example on funding availability or the effectiveness of financial controls. Financial risks can be flagged here in context but should also be fed into wider risk reporting.

It is important that expenditure is properly recorded and reported on as part of the preparation of annual accounts at organisational level, ensuring that costs incurred or committed are included in the appropriate accounting year.

In a programme or project, following completion of the work, financial reports covering the scope of the work are concluded and financial management arrangements brought to a close. In a portfolio, financial management arrangements normally continue unless the portfolio is fully concluded or substantially reset.

In some programmes or projects, financial data, reporting and accounting arrangements are handed over to support operations. This is common where there are ongoing contracts or follow up activities following closure, or where the work moves into a sustainment model with future development carried out as part of business-as-usual operations. Where this happens, there should be clear separation between costs within the agreed scope of the work and costs that fall to operations or arise from new development.

Accounting arrangements should be left in place for an agreed period, and at least to the end of the current financial year, so that all spend is accounted for as part of the organisation’s annual accounts and audit and follow up activities can take place.

The effectiveness of financial management should be evaluated as part of closing the work. Financial management information should be archived in accordance with the sponsoring organisation’s information and data retention policies. The financial management framework should then be closed.