How much will that project cost? That is probably one of the most difficult (and intimidating) questions faced by project managers. And, as luck would have it, it's also a must-answer question. Read on to find four (4) easy steps to simplify and standardize budget estimating.
As a start, in order to establish a realistic budget, your project must be properly defined*. Within the project environment, everything has a price. Products, materials and supplies have to be purchased, and resources have to be allocated, all at specific unit cost, and over a defined period of time. It is the cost of these items, in combination, that comprise the project budget.
When preparing a budget, every projected cost factor should be backed up by some tangible source, whether it is an actual quote, proposal, past 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). Also See: Setting IT Budget Priorities
Get to Budgeting in 4 Easy Stages
Realistic project budgets can be achieved in four (4) steps designed to ensure that your budgets are sufficiently defined and aligned to existing project needs and capabilities.
Stage 1: Set a justifiable basis for your budget projection by answering the following questions....
- What is the source of the cost projection?
- How was the projection derived?
- How was the projection validated?
- How confident are you in the accuracy of each projection?
Stage 2: Identify assumptions and constraints.
Project budgets are based on more than actual numbers. Behind every cost projection lie three factors – assumptions, constraints and risks. Assumptions are the beliefs assumed to be true for the purposes of planning. Constraints are the conditions, circumstances or events that limit “the possibilities" and are known from the outset (i.e. lack of staff). Risks are possible and probable conditions, circumstances or events that could threaten the success of a given project.
In order to prepare a realistic budget, these three factors have to be identified and defined in so far as they pertain to budgetary matters. This analysis will reveal the “wiggle room” in the budget estimate to determine the likelihood that the estimate will be realized, as well as the degree to which the estimate may be subject to change. (Also Read: Understanding Project Assumptions and Constraints)
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Stage 3: Skip the pad and plan for measureable contingencies.
Budgets are often “padded” to account for the unknown, taking verifiable cost estimates and then adding a “fudge factor” percentage, usually 10 to 20%. This can work for smaller, less complex projects, but in large, complex projects, fudge factors can be difficult to manage and justify. In order to establish a credible budget, separate budgets can be created to account for contingencies.
Depending on project needs, in addition to the primary working budget, additional budgets can be created to fund contingencies (the contingency budget), as well as requested changes (the change control budget). In this way, the project manager can manage the working budget as a distinct entity, and draw from the contingency budget for unplanned expenditures, and the change budget to pay for requested and approved changes. This will maintain the integrity of the working budget, and provide an accurate record for future projects.
Stage 4: Establish actionable tracking procedures.
Once a budget is approved, expenditures must be monitored, and for that, budgets must be tied to a schedule (how much will be spent and when?). In this way, expenditures can be tracked for expected utilization… i.e. at any given point in time have we spent more than expected, less than expected, or pretty much as expected? Variances can then be examined to determine whether they can be absorbed or whether corrective action must be taken.
Based on the needs of the project, budget status reporting should be a regularly scheduled project deliverable. Budget reporting should account for actual utilization compared to projected utilization, along with an explanation for any variances (and action plan as well). (Also Read: The Art of Project Status Reporting)
Closing Tip: Finding the Budget "Sweet Spot"
No one wants to be over budget, and while “under budget” may seem attractive, if projects are continually under budget, at some point, individual budgeting skills will be called into question. And once skills are in question, so is credibility. So the trick is to find the sweet spot – a realistic budget with appropriate contingency funding to allow for the unexpected.
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