How much will this project cost? This is probably one of the most difficult (and intimidating) issues faced by project managers. It is also a question of mandatory response. To begin with, in order to establish a realistic budget, your project must be properly defined. Within the project environment, everything comes at a price – equipment, products, materials and supplies have to be purchased, and resources must be allocated, all at a specific unit cost and for a set period of time.
These costs make up the project budget. When preparing a budget, any projected cost factor must be backed up by some tangible source, be it a quotation, a proposal, a previous project experience, research, or some quantifiable costing methodology. The ultimate goal is to create a verifiable cost projection that can withstand serious questioning and scrutiny (which is likely to occur if the budget is large).
Get to the Budget in 4 Easy Stages
Realistic project budgets can be achieved in four steps designed to ensure that your budgets are sufficiently defined and aligned with the project’s existing needs and capabilities.
Step 1 - Define a justifiable basis for your budget projection by answering the following questions:
Step 2 - Identify Assumptions and Constraints
Project budgets are based on more than real numbers. Behind each cost projection, there are three factors: assumptions, constraints, and risks.
In order to prepare a realistic budget, these three factors should be identified and defined as they relate to budgetary issues. This analysis will reveal the “room to maneuver” in the budget estimate to determine the probability that the estimate will be carried out, as well as the degree to which the estimate may be subject to change.
Step 3: Plan Measurable Contingencies
Budgets are often developed to account for the unknown, obtaining verifiable cost estimates and adding a correction factor percentage, typically 10-20%. This may work for smaller, less complex projects, but in large, complex projects, correction factors can be difficult to manage and justify.
To establish a reliable budget, separate budgets can be created to account for contingencies. Depending on project needs, in addition to the main work budget, additional budgets can be created to fund contingencies (contingency budget) as well as the requested changes (the change control budget).
In this way, the project manager can manage the work budget as a separate entity and extract from the contingency budget for unplanned expenses, and the change budget to pay for requested and approved changes. This will maintain the integrity of the work budget and provide an accurate record of future projects.
Step 4: Establish Actionable Tracking Procedures
When a budget is approved, expenditures must be monitored and budgets should be linked to a schedule (how much will it spend and when). In this way, expenses can be tracked for the expected use and at any given point in the project, it is known whether the projet is running below, above or at expectations. Any deviations can then be examined to determine if they can be absorbed or whether corrective actions should be taken.
Based on project needs, the budget status report should be a regularly scheduled project delivery. The budget report should account for actual usage compared to the projected use, along with an explanation for any variations (and also the action plan).
Closing Tip: Finding the "Right Point" Budget
No one wants to be above budget, and while being below budget may seem appealing, if projects are continually below budget, individual budgeting skills will, at some point, be called into question. Since the skills are in question, so is credibility. So, the trick is to find the ideal spot – a realistic budget with appropriate contingency funding to enable the unexpected.