Accurately forecasting expenses is a critical component of financial planning and analysis, allowing organizations to properly budget and allocate resources. However, bringing on consultants or other professional services can make expense forecasting more challenging due to the variability in project scope, effort required, and billing rates. While consultants provide valuable expertise, their costs can quickly spiral out of control without proactive management. 

In this comprehensive blog post, we will explore proven techniques that financial planning and analysis (FP&A) teams can use to improve expense forecasting when working with consultants. With advanced preparation, detailed assumptions, contingencies, and continuous monitoring, organizations can effectively estimate consulting spends and avoid cost overruns. Read on to learn key strategies for forecasting expenses, maintaining control over external spend, and ensuring consulting engagements deliver ROI.

Understand the Consulting Engagement

The first step towards creating accurate expense forecasts is to thoroughly understand the scope and specifications of the consulting engagement. Before projecting costs, FP&A professionals should clarify:

– Objectives – What business goals will the consultant help achieve? What are the specific deliverables?

– Timeline – Over what time period will the engagement last? Are there milestones or phase gates?

– Resources – How many consultants will be involved? What are their billing rates? How many hours/days will they work? 

– Variable costs – What expenses will consultants bill, such as travel or materials? 

– Billing structure – What purchase order terms apply? How frequently do consultants invoice?

Documenting this information in the contract and statement of work provides helpful benchmarks when later estimating costs. Also clearly convey expectations to the consultancy firm around invoicing and reporting to facilitate data collection for forecasts.

Develop Detailed Assumptions

With a foundational understanding of the engagement, finance teams can begin making itemized assumptions about the costs. Breakdown expense categories such as:

– Hours worked per consultant at their billing rates

– Consultant travel expenses

– Workshop, training, or event costs

– Software, data, or materials costs

– Administrative or office costs 

For each line item, build assumptions on volume or quantity needed and price per unit. Apply hourly billing rate assumptions by project phase, since a consultant may charge more for strategy versus execution. Calculate travel costs based on expected trips, airfare, hotel rates, car services, meals, etc. 

Wherever possible, identify a range such as 15-20 consultants onsite per week at $150-200 per hour. Ranges allow for flexibility in the forecast. Document assumptions to track over time and refine as needed. Maintain organized files of all background data used to create the assumptions.

Leverage Historical Data 

When available, use benchmarks from previous consulting engagements to inform your forecasting assumptions. Analyze spend data on prior projects of similar scope and scale. Calculate metrics like average hours billed per consultant per month. Reference recordings of actual costs versus budgets to improve estimating accuracy. 

Look for lessons learned on budget overruns to avoid repeating issues. If consultants previously went over budget due to unforeseen technical challenges, account for extra contingencies in the current forecast. Check if certain project phases tended to incur more variable costs and plan accordingly. Institutional knowledge is invaluable for building realistic forecasts.

Build in Contingency Buffers

Expense forecasting is not an exact science. External factors and unplanned events during consulting engagements can drive costs upward. To allow for uncertainties, always build contingency buffers into your forecasts:

– Schedule contingency – Account for possible timeline delays by assuming consultants may bill for longer than originally estimated. Add 10-20% to projected hours/days. 

– Cost contingency – Budget extra for unforeseen complexities that could arise requiring more consultant time. Add 5-10% to hourly billing totals.

– Growth contingency – If expanding internationally, assume higher costs for consultants’ in-country travel and logistics. 

– FX contingency – For global engagements, allow for currency fluctuations against your base currency. 

Ensure leadership understands contingencies are not guaranteed overages, but rather risk protections if reasonable scenarios occur. Statistical modeling methods like Monte Carlo simulations can help quantify appropriate contingency levels.  

Regularly Review and Adjust Forecasts

Expense forecasting should be an ongoing exercise, with assumptions and projections evaluated periodically throughout consulting engagements. Review accrued actual spend versus budget at least monthly. Before paying invoices, have project managers validate consultant hours. Assess whether targets remain feasible.

If costs are trending higher than expected, immediately begin reforecasting. Revisit assumptions to identify drivers of the overrun. Rebaseline projections as needed to get back on track. Bring upward revisions to leadership’s attention promptly to discuss potential actions if spend threatens to exceed approved budget.

Continuous monitoring and quick corrective actions help minimize forecast inaccuracies that amplify over time. Avoid the pitfall of leaving forecasts static for too long.

Automate Data Collection

Automating data collection from consultant time and expense systems greatly aids timely and accurate forecasting. With manual processes, FP&A risks missing key spend updates or receiving fragmented data that takes significant effort to clean and consolidate. 

Leverage technology like connectors between the consultancy’s invoicing platform and the company’s financial system. Set up automated data feeds of hourly utilization reporting into planning and analytics tools. Establish shared dashboards to centralize consultant project budget metrics versus actuals in one authoritative system.

Automation reduces tedious manual tasks for FP&A teams, allowing them to focus time on value-add analysis and planning. It also facilitates identifying outlier spending for investigation and strengthening future assumptions.

Improve Interdepartmental Communication 

Consulting engagements often span multiple business units and functions. Unfortunately, siloed teams and poor communication frequently undermine budget management and forecast accuracy. The project manager may instruct consultants to increase scope without informing FP&A. Or consultants may not proactively report mounting costs to finance teams.

To combat this risk, define protocols for collaboration between departments involved in the consulting engagement. Ensure alignment on scope and timelines. Create status update meetings or reports to share cross-functional project budget metrics and issues. Fostering transparency and cohesion prevents surprises that disrupt forecasts.

Conclusion

Bringing in consultants provides organizations invaluable expertise but can also create financial planning challenges. By strategically forecasting consulting expenses, finance teams can keep external spend controlled and optimize budget outcomes. 

First and foremost, thoroughly document the scope of consulting engagements and all associated assumptions.  Leverage benchmarks from historical data to improve accuracy. Build in prudent contingencies and continuously monitor actuals vs. plans. Implementing automation and enforcing interdepartmental communication are also critical for minimizing forecast risk.

While no projections are perfect, the rigorous approaches above will significantly improve expense forecasting when working with consultants. Tighter oversight of consulting costs will help ensure that FP&A accurately plans budgets and delivers business value.