Introduction
Having a thorough budget the project manager can make better decisions regarding the constraints (time, cost and scope) to successfully complete the project while satisfying stakeholders’ needs and understanding the implications on the PM schedule and resource allocation. For example, the project budget helps determine what the scope items should be included in the PM plan and which items should be removed from this document. Alternatively, if one of the key constraints is to complete a project before a specified date, then the project budget will help you determine the degree of schedule crashing permitted so that you can deliver the project on-time.
In this article you will learn the following:
What is a Project Budget?
A Project Budget is the total amount of monetary resources that are allocated for particular goals and objectives of the project for a specific period of time. The purpose of project budget management is to estimate and control project costs within the approved budget and to achieve the stated goals of the project.
Project budget management is a process of formally identifying, approving and paying the costs or expenses incurred on the project. Project budget management involves using purchase order forms to state each set of project expenses, such as training, consulting services, equipment and material cost, etc. Usually in the process, the project manager plays the role of “Approver” (a person who approves a budget for a project) and the finance unit (e.g. Finance Department) acts as a “Recorder” (an organizational unit that tracks and audits budgeting activities and reports to the project manager). Project budget management engages the performing organization in defining the roles and responsibilities of all parties involved in managing budget activities by undertaking the process of determining budget.
Budgeting Process
The process of determining budget for a project is an activity of aggregating the cost estimates of individual activities, or a work package, to develop the total cost estimate that allows setting a formal cost baseline. This baseline is used to state the budget. However, the budget may differ from the formal cost baseline and constitute the funds authorized to perform the project and its activities. The purpose of the process is to authorize and allocate the monetary resources necessary to complete all project activities and deliver the project on schedule. The main output of the process is a set of monetary resources requirements that serve as a foundation for estimating and controlling the budget and provide valuable data to the project resource management process.
The project budgeting process is conducted at the initial steps of project planning, and typically it is performed in parallel with the project scheduling process. The steps of the process are highly dependent upon the cost estimations, task durations and allocated resources. The process is also knows as “the project budgeting process”. The budgeting serves as a cost control mechanism that allows comparing actual project costs to the items of the authorized project budget. The process allows developing a budget considering key cost factors associated with time durations of project tasks.
When working on the project budgeting activities, the project manager should collaborate with people responsible for managing the work efforts as well as for estimating project costs (the cost estimating team). They will develop and give the cost estimates of individual activities, or work packages, so that the project manager can actually start performing budgeting activities. The project manager should use the Work Break Down Structure (WBS) of the project, the costs estimates, historical data and records, resource information, and policies in order to identify the monetary resources required for the project. This statement refers to the steps of the project budget determining process. The steps are listed below:
- Using the WBS. The project WBS provides a decomposition of the project work and shows relationships between all the project deliverables and their components. The project manager should investigate the project work decomposition to see the dependencies between the work items, as well as use WBS dictionary to get the identification of the project deliverables and the description of each WBS component that are approved to produce the deliverables. Then the project manager needs to work with the cost estimating team to receive cost estimates per work package of the WBS. The obtained information will then be used for aggregating cost estimates and setting the cost baseline.
- Reviewing Historical Data and Lessons Learned. Budgeting activities from previous projects can bring more benefits to current project than it might have been expected. As being a planner, the project manager needs to review records and historical data of the previous successful projects and look for tools, methods and techniques that have made these projects succeeding. Cost estimates, WBS examples, resource allocation, estimating methods, members of the estimating team, budget control tools, etc. obtained from successfully completed projects – all this valuable information should be collected and examined, then sorted and filtered, and finally specific solutions and ideas for managing budgeting activities should be generated, considering the critical success criteria and factors.
- Investigating Resource Information. At this step, the project manager in collaboration with the estimating team should collect and investigate information on available resources, including human resource, equipment and materials. After the investigation of the resources a description of resource availability is to be created and then used for estimating costs.
- Following Project Policies. The project manager should review existing standards and requirements stated in project policies.
The implementation of the project budget determining process requires some initial information that is called “inputs”. Such inputs will be used as a foundation for taking the listed process steps. The following budget determining inputs can be considered:
- Activity Cost Estimates provide a cost estimate for each work package (a set of individual activities) within the WBS.
- Estimates Basis shows all details on cost estimates and specifies the basic decisions regarding the inclusion or exclusion of indirect project costs.
- Scope Baseline includes the scope statement, the WBS and WBS dictionary allowing determining the project budget in accordance with the cost estimates per work package.
- Project Schedule is a component of the project management plan and it reflects planned start and finish dates for the project activities, milestones, time-frames for individual activities and work packages, and auditing calendars. The information in Project Schedule is used to develop a cost schedule that indicates when the costs are planned to be incurred.
- Procurement Contracts are used to determine the project budget considering all costs incurred and associated with products and services purchased from vendors and suppliers.
- Resource Calendars are used to investigate information on resource assignments and allocation of working time assigned to the resources.
Budgeting and Risk Management
The budgeting process will not be complete and effective if no risk assessment and assignment have been applied. Without assessing risks surrounding the project, uncertainties and threats that happen regularly during the project implementation will affect the project’s bottom line. Cost estimates should be developed with reference to conducted risk assessing activities, but identified risks should not be considered a factor influencing the sales mark-up. Risk assessing activities allow representing risks as actual costs incurred over the course of project development. Usually risk assessment cover such areas as development team experience, reliability of the technology used, time shortages, availability of project resources, etc. (You can learn more about risk identification and risk analysis by reading Project Risk Management Guidelines at this website).
Once you have identified and analyzed your risks, you can assign a scope and percentage to each identified risk. For instance, in your project you develop a software application and you have decided to build its main component in Java and some modules C. Your team of developers is mainly experienced in Java programming, so the C component of the application software may have a higher risk assignment under the “Developer Experience” risk item. The higher percent of the risk assignment should be applied only to the relevant part of your project.
Despite the kind and size of your software development project, normally the overall risk assessment can be an amount between 25 and 30 percent of the total project cost. Without considering peculiarities of your project, you cannot say for sure that this amount is either high or low. Your actual total risk percentage will depend on the experience of your team in developing the application software in Java and C. You can look into previous projects performed by your team of developers and check if they actually fell within the available budget. If so, you may consider giving a “little credit” to your team members so that they will do current project having more opportunities for success and less risks of failure. If not, your team may be justified because your current project is not started yet so you have time for training your team before presenting and approving the project budget.
Budgeting Process Output
The process results in the following:
- Cost Performance Baseline. The process allows setting the cost performance baseline that gives a formal time-phased budget for estimating, tracking and controlling the overall cost performance of the project. The cost performance baseline is an aggregation of all budgets approved by time period.
- Project Funding Requirements. The process results in identification of the requirements for the total project funds. The cost baseline and the management contingency reserve amount will be covered by the requirements.
- Project Document Updates. The process of project budgeting is a critical activity that involves updates of relevant project documents, such as Project schedule, Risk Register, project cost estimates.