Project budget

In this post, we emphasize the importance of the project budget, review the process and key principles for developing a realistic budget, and highlight the areas where people often go astray. This leads to a budget that has credibility with your stakeholders and provides you with the foundation to effectively track project costs and manage project execution.

The project budget estimates all the costs the project will incur, and when they will be incurred. It is a key component of the overall project plan. The project budget is important for the following reasons:

·        Planning validator—Because the project schedule is a main driver for the project budget, the budget can serve as an excellent cross-reference for the validity of the schedule and vice versa. By looking at the schedule from a cost perspective, you might see resource or budget issues that were not obvious before. Inversely, the schedule input is key for validating the project budget because the budget needs to account for all the time a resource is required on the project.

·        Performance measurement—By measuring project progress against a cost baseline, you can better measure the true performance of your project along the way, and in most cases, identify issues and risks much sooner. This is the basis for an advanced project controlling technique called earned value management.

·        Managing expectations—The budget impacts stakeholder expectations in several ways. The initial budget sets the expectation on what the total project costs should be. If the budget is not developed properly, then you are bound to have an expectation issue. If the project budget is predefined and serves as a cost ceiling for the project, then it helps you to set stakeholder expectations regarding project schedule and project scope.

·        Cash flow management tool—Your schedule drives the timing of your resource needs. Especially in organizations where resources are shared across projects or centrally managed, the accuracy of the schedule is key to efficient resource management.

·        Justifying project investment—With more projects accountable to a project selection process and to financial return on investment expectations, it is increasingly important to establish the cost baseline for the project and monitor closely.

So even if you find yourself in an environment where it is not expected that you develop a project budget (instead you are asked to primarily manage schedule and scope), I strongly encourage you to do two things:

·        Do it anyway—Develop a project budget anyway. This exercise builds your project management skills, enables you to recognize project performance issues sooner, and better prepares you for senior management discussions about your project.

·        Follow the money—You should have determined this as part of project definition, but just in case you haven’t, make sure you are totally clear on who is financially sponsoring the project and who controls any financial based decisions to be made about your project. This awareness is key in your efforts to manage expectations and to understand the political aspects of your project.

·        Now let’s review the fundamental principles that guide this process:

·        Iterative process—Budget development is an iterative process just like all project planning. The various facets of project planning interrelate and have natural feedback loops. With the project budget, there are strong dependencies on organizational policies and on the schedule development process. As a result, it usually takes several cycles to fully develop the budget and to get an agreement.

·        Total lifecycle—The budget should address the total project lifecycle. This is a common oversight, especially for the operational phases of the project.

·        Time-phased—Not only do we need to budget cost totals, but we need to know when these costs will be incurred for both cash flow management and project control reasons. The goal of the project budgeting process is to establish a cost baseline.

·        Comprehensive—The budget should account for all project costs. There is a tendency to only account for obvious resources needed for the project (labor or new equipment).

·        Include a buffer—A buffer, normally referred to as management reserve, should be allocated to the project budget. The management reserve is primarily there to deal with known risks (a risk response), the estimating uncertainty factor, and the overall planning uncertainty factor (hidden work, rework, hidden costs, and change requests). In addition, if you have a long-term project or an international project, you might need a buffer for monetary factors such as inflation and exchange rates. Of course, these should be noted as risks in these situations.

·        Document assumptions—Budget assumptions are documented like all other project assumptions. Any assumption made as part of the budgeting process should be documented and clearly communicated. As with all assumptions, you can document them within the targeted deliverable (in this case the budget document spreadsheet) or add them to the designated repository for project assumptions (commonly either a separate assumptions document, the project definition document, or project plan).

Here I’ll end this post and my next post will be on creating a Project budget