Creating Project budget

In this post, we will review the details of the development budget and finalize budget steps that we have depicted in the general project planning process flow in the figure shown below:

 

The first step in building a project budget is to identify your costs. Let’s review the cost sources that you need to consider:

Labor costs—One of the key budget cost items. Budget should reflect a line item for each person or role—whichever makes the most sense for your project. Costs are based on resource rates and estimated work durations. When dealing with external labor, these costs are a key component of the business relationship and normally easy to obtain. However, it can be difficult getting rates for internal resources. In most organizations, either the human resources or finance department should have standard labor rates for internal resources based on role.

Equipment—This category generally includes the tools that the project team requires to complete the work of the project. For budget purposes, the keys with the equipment category are twofold:

·        Completeness—Using a bottom-up estimating approach should identify all equipment needs from a task perspective. For knowledge-based projects, you need to account for software-based tools, too.

·        Expense versus capital—You should work with accounting to determine whether your equipment costs need to be expensed at full cost against your project or whether your project just needs to reflect depreciation cost. Different factors can influence this decision, but the most common one is whether the equipment will be used by more than one project.

Materials—This category includes those items that are needed to build the product. The information is generally found in the product specifications document. In dealing with vendor relationships, you either acquire or confirm material costs by reviewing vendor responses to the formal procurement documents.

Licenses and fees—This category includes costs such as software licenses, building permits, and so on.

Training—This category includes the cost of any training your project team needs to do their work and any training your users need to use the final product.

Travel—This category includes the travel and lodging costs to be charged to the project that will be incurred by any project team member while doing the work of the project.

Operational costs—This category includes the costs associated with the maintenance and support of the final product. In addition, there might be costs to dispose of whatever the project is replacing.

Disposal costs—This category includes the costs associated with the disposal or removal of whatever the project is replacing.

Overhead costs—This category includes the common overhead costs incurred by any project. Items typically included are facilities, administrative assistance, security, and technology infrastructure. Depending on the organization, these costs might not be allocated to individual projects or there might be a predetermined percentage or amount that is used by all projects.

Costs of “change”—A focal point of project planning is to consider the “change” impact that the project will have. This category includes any costs (change management programs or initial productivity loss) that can directly attribute to the change factor. These costs should have been considered during the project selection phase as part of a cost-benefit analysis or return-on-investment analysis. In addition, these costs might be accounted for in the other budget categories. The important thing here is to think about these costs upfront during planning.

Once we have our resource requirements and work duration estimates, we can start to develop the budget. Like the estimates for work, it is best to estimate your costs at the work-package level. By taking a bottom-up approach, you are in the best position to identify all your resource needs and develop a more realistic budget. In addition, many industries and organizations have cost estimate models that can be leveraged, too. These models are best used during initial planning activities and as a cross-reference and validation tool for your detailed planning efforts.

Once can use a project management application with an emphasis on project costing or a project scheduling software or a spreadsheet software (such as Microsoft Excel) for the project budget. As the schedule nears completion and the actual resources have been identified, we can finalize the project budget. Besides firming up rates on resources and estimates on other cost factors, there are several objectives to accomplish in this step:

Validate procurement tasks scheduled—Make sure that all the tasks dealing with procuring resources (labor, equipment, and materials) are accounted for in the project schedule (and WBS). Common tasks include ordering, delivery, setup, and payment.

Reconcile task costs versus resource costs—In most cases, there will be gaps between resource assignments on the schedule, or resources will not always be scheduled at maximum capacity. Much of this depends on how efficiently resources are leveled. Nevertheless, if your resource costs are based solely on assigned tasks, your budget might not reflect the actual resource costs you will incur. For example, An Analyst might only have 26 estimated work hours assigned one week but is fully booked at 40 hours the following week. You can’t afford to release Joe for the small gap that exists, so the project is generally accountable for all his time both weeks. This situation also depends on the level of responsibility the project has for maximizing resource usage, the level of resource planning done in the organization, and how time is reported. A good rule of thumb is to calculate personnel costs by taking their rates multiplied by a given calendar time period. For example, if I know Analyst is on my project for 12 weeks, and I know he is generally a fulltime resource, I calculate a resource cost for Analyst by taking Analyst’s hourly rate × 40 hours × 12 weeks. This is likely to give me a truer cost estimate—at least a more conservative one.

Finalize management reserve—Based on all known risk factors, finalize the buffer amount to be added to the project budget. The specific amount varies depending on risk level, industry practices, and management philosophy.

Now let’s take a quick review of the common challenges that a project manager faces when figuring a project budget. By increasing awareness of these factors, you can work proactively to avoid these in your own situation.

Based on weak foundation—The budget is built on the planning foundation created by the WBS, resource estimates, effort estimates, and the project schedule. An inadequacy in any of these elements is directly reflected in the budget.

Missing cost categories—The budget needs to reflect all the costs that will be incurred or at least all the costs that the project is accountable for by the sponsoring organization. See the earlier section in this chapter for the list of cost sources that should be considered.

No profit margin—For projects that are sold to clients, do not forget to include the profit margin in your project budget and in your pricing decisions.

Budget is pre-allocated—In many organizations, due to the nature of their budgeting cycles and level of project management maturity, the budgets for projects are established (from high-level estimates) before the complete work of the project is defined. In these cases, the budget is often the dominant constraint on the project; as a result, it limits the amount of work that can be completed and the resourcing options available.

Labor costs not tracked—This is mostly an issue for internal projects because in many organizations it can be difficult for the project manager to define and track labor costs, especially for internal staff. The most common reasons for this include the following:

·        Organizational policy that project managers do not track internal labor costs.

·        Organizational policy to treat internal labor as “sunk costs.”

·        A mismatch between time reporting system and procedures and the needs of the project.

This last reason is important to understand and might limit your cost

Tracking options, or at least the level of detail information you can obtain.