Budget along with Scope and Schedule is one of the 3 most critical areas that needs to be managed well so that project can be completed successfully. Losing sight of the Budget can lead to diminishing the value of the project. Below is my summary of my trainings and experiences. I strongly recommend all Project / Program Managers to take this training , as Cost management is a very important skill a PM can have.
Budgeting Fundamentals:
While creating a Project Budget :
- Focus on the Triple constraints (Schedule, Scope and Costs )
- Think about the Project from Start to Finish and ask following questions:
- How much money has been allocated ?
- Which expenses are mandatory ? ( These are licenses, infra bills, support and operations and bare minimum staff costs.)
- Can I create realistic estimates ?
- Has this type of project been done before and can I get historical estimates for similar project ?
- Find out what other major expenditures (Trainings, Business travel for Meetings, requirement gatherings etc..)
- Discuss contingency dollars with sponsors incase of Risks , Technical challenges etc..
- Find out if the budget being spent is providing equal or higher benefits to the business – You should get this information typically from Sponsors.
WBS and Project tools:
- Always ask for specifics on what needs to be built so that an accurate estimates could be provided.
- Create an initial budget from the WBS (Work breakdown Structure ). This should contain tasks and estimates for each tasks. Roll up all the task and estimate information and arrive at initial cost estimates.
- Compare initial budget with the Sponsor’s expectations.
- Based on sponsor evaluation and funding available refine the Project Budget and WBS to reflect the changes.
- In addition to WBS , also update the Schedule, Risk Management plan , Quality and Procurement plans to reflect the new Budget estimates.
- Best practice is to have expense listed per month and per quarter so that finance team is aware of the cost hits to the Cost centres.
- Plan for Risk mitigation costs incase unknown risks occurs.
Costing Standards:
- Understand the pricing standards used across Countries, Projects and Businesses.
- Know the Internal Costing and accounting process .
- Company process of pre-planned and last minute addition of resource (Can the PO be amended or can the additional $ be absorbed within the function)
- How the cost of Internal employees Vs cost of Contractors are tracked within the company.
- Accounting standards used by the company for common costs like Office space seat cost, telephone costs, Hardware and equipment costs etc
Enterprise environmental factors:
- Consider the other factors (Organisational, political, environmental etc.. ) that can impact the budget.
- Internal – Budget review within organisation.
- Internal – Budgeting cycles.
- External – Overall market conditions , Vendor orgs, Supplier business etc
- External – Competitors and their product release strategies
- External – Inflation and addition cost to the Contract
- External – Currency exchange rate needs to be tracked.
Capital and Operating Costs:
- Understand Organisation’s Capital and Operating costs.
- CapEX – Money that is allocated for buying things to create future benefit in an organisation (Ex: buying vehicles, office spaces, or Building software applications )
- OpEx – Expenditures needed for the day-to-day running of the business.(Ex: Salary, cost of maintenance of office spaces/ software applications, sometimes training expenses or lunch as well)
- Every Org has different standards and can consider an Item to be CapEx while for others it could be OpEx.
- Tax implications are applied on where the costs are slotted.
- Classify Cost Type (CapEx or OpEx) in WBS based on resource and effort type.
Building the Budget:
- Types of Estimating:
- ROM – Rough order of magnitude . Initial estimate based on experience and similar type of projects to assess if the project is viable or not. Comes at an accuracy of -25% to +75% range.
- Budgetary – Refinement to ROM to give stakeholders idea and help them if they should proceed with project. Variation of -15% to 25%.
- Definitive – Final and accurate estimate based on all the factors. -5% to 10%.
- Explain all the 3 types and what estimating technique you are using while publishing it to stakeholders. Most likely they will be stuck with ROM number but explain during the process along the way.
- Estimation Approach:
- Expert Judgement: Insights from experts in the area.
- Analogous estimate: Based on Analogy , similar projects done in the past etc.
- Parametric estimate: Industry specific formulas -price per/sqft during building projects.
- Bottom up estimate: Detailed cost from lowest level of WBS.
- 3 point estimate technique for bottom up – Pessimistic , mostly likely and Optimistic cost for each tasks.
- Triangular approach Formula – (Optimistic + most likely + Pessimistic)/3
- Beta distribution estimate Formula – (Optimistic + 4 X most likely + Pessimistic)/6
- Estimating Structure:
- Start with approach typical to your industry –
- Look for events in the project where financial information has been updated – after quote updates from vendors.
- Refine the estimates as and when the project progress. Use it as an opportunity to hone the budgetary skills.
- Review the actual cost after the estimates have been provided.
- Assigning Costs:
- Build a Cost Forecast.
- Ensure the cost outlays are captured in the project schedule.
- Build a cash forecast chart.
- Group similar cost types together in WBS.
- Double check all the cost for each task are captured.
- Build a Cost Forecast.
- Control the Project cost by
- Refining the spending dates. – Contractor invoicing dates, other payment dates.
- Track the actual costs on the cost outlay chart.
- Finalizing Budget:
- Bob’s Golden Rules:
- Don’t pad things – When you put extra costs , inflate costs, or otherwise try to expand your budget without a distinct, outlined rationale for inflating costs. If you wish to add contingency dollars , clearly communicate the need for contingency dollars as a separate budget item. Detail when those contingency dollars will be needed and highlight the task areas where the contingency budget can be used.
- Be prepared to have difficult conversations.
- Use different estimate techs to validate the budget.
- Confirm the cost for all the projects is baked in.
- Find data from prior/current projects to understand the cost of resources and other such details.
- Bob’s Golden Rules:
- Budget for Agile Projects:
- Don’t worry about creating a detailed budget.
- As the scope keeps changing based on the features added or deleted, plan to create a resource plan. Apply resource X hourly $$ rate.
- Make any necessary adjustments to budget after every sprint.
- Track the team’s actual production of features against the plan.
Managing the Budget:
- Budget Detail:
- Level of Detail
- Company’s culture – Financial , Research or other types
- Presence of contracts – Type of contracts, T&M, Fixed price contracts, Cost plus contracts
- Model for tracking staff time – Internal and external cost spending ..
- Track people’s hour helps understand money and time spent.
- Level of Detail
- Budget Vs Scope:
- Leveraging scope to manage Budget !!
- Increase Scope – Budget Impact ? more funding to accommodate increase in scope, can this scope be covered within my current schedule, any cost impacts that will show up later ?
- Increase Budget – To improve quality based on the current development.
- Reduce Scope – To manage cost overruns.
- Leveraging scope to manage Budget !!
- Bloated Budget:
- Scenario when actual spending is coming way OVER the forecast !
- Budget recovery:
- Unanticipated complexities that was not estimated
- Timing of payments due.
- Management changes the budget amount.
- Cost cutting options:
- Determine how much staff time and effort it’s taking to drive the changes.
- Cut contractor cost by reducing the scope .
- Track Earned Value:
- Earned value analysis – allows us to understand how much a project has “earned” based on the tasks completed.
- Planned Value (PV) = Value of work that was supposed to be completed in said duration.
- Earned Value (EV) = Actual Value of work that was completed in said duration.
- Actual Costs (AC) = Actual cost for the work that is completed.
- PMBOK – has a detailed explanation with examples on calculating earned value of the project. I recommed you read up more on this topic from the cost management section of PMBOK
Budget Management – Pro Tips:
- Resource Usage Info:
- Collecting resource data:
- Allocate resource cost to a project line item.
- Determine the timing for collection and processing resource costs.
- Consider the scheduling of vendor invoice payments.
- Do not underestimate the time it takes to collect resource cost information.
- Collecting resource data:
- Budgeting Report
- Build budget reporting habits.
- Overtime , pay raises , contract cost of living and waiting time for resources.
- Create easy to understand reports.
- Compare actual spending vs work accomplished.
- Produce detailed reports for cost sensitive areas.
- Be consistent.
- Build budget reporting habits.
- Funding limit reconciliation:
- Understand company finance process
- Ensure diligent budget work doesn’t get undermined by undue delays and administrative obstacles.
- Tips
- Understand Org’s contract management process.
- Learn how Org’s pays it’s vendors. (VMO, PO and other process)
- Consider what processes will be expected during project’s cash flow management – Quarter wise spending or yearly spending , etc ?
- Gather receipts or purchase and orders to process POs.
- Understand company finance process
- Budget Foresight tips:
- Try to think ahead to manage and control project execution.
- Not all tasks can be affected by change in staff or increasing resources.
- Use mix of 3 types of reports for forecast
- Overall planned cost report for the project
- Current spending reports
- Actual spending vs planned costs for the remainder of the project.
- Build alerts into spending reports to ensure we are aware when threshold is reached.
- Budget Issues:
- Common issues :
- Time periods on cost data. (calendar months vs accounting months – same reporting period should be ensured)
- Purchases against budget only !
- Cost codes assigned to project , make sure only your cost codes are being charged.
- Vendors cost hitting to project ?
- Labor hours to the right project ?
- Project travel to your project ?
- Overhead charge to the your project ?
- Common issues :
Conclusion:
- Project budget is a one of the most critical aspect of the project and its is intertwined with other project management processes. Applying diligence and setting foresight and alerts will not only save a lot of hassle but also ensure the project is completed in timely fashion.
- Next steps on understanding budget management in detail are…
- Expand knowledge on earned value management.
- Learn to successfully apply EVM on the projects.
- Improve the estimations – learn from PMI published data
- Review PMI’s practice standards for Work Breakdown structures.