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Making a Real Project Budget You Can Manage Against

It happens time and time again.  Sales works out the estimate and end sale with the customer and then hands the whole package off to someone who ultimately hands it to the assigned project manager.  Often that agreed to price isn’t truly an adequate project budget to get done what needs to get done.  And that’s not really known until the project manager and team can get their hands on the statement of work and associated information and work through the high-level tasks necessary to get the job done.  Only after that assessment is done, and after the project tasks are loaded into the proper project management software tool, can a more accurate assessment of the real “project budget” – as opposed to “sale price” be documented.

Remember the purpose of the project budget: to estimate at a reasonable level of what the project will actually cost the company. The project manager who does not sit down and do their own project budget assessment based on the materials and load this information that they are handed into their chosen project management software package, will often find themselves continually having to explain variances to senior management and the customer throughout the engagement.

The project manager and team should always develop their own project budget aside from the estimate passed on through Sales, for several reasons:

Future variances in the project budget must be explained. The project manager will be responsible for explaining future project expense and cost variances. That’s not possible if the project team is working with an imposed budget. The imposed budget is not based on work planned out in the initial project schedule laid out by the project manager and reviewed by the team and customer.  An estimate based on this planning effort is the budget that the project manager can defend,explain and manage in detail as the work is progressively performed throughout the life of the project.

The project manager has the right expertise to estimate.  The project manager and team are in the best position to know what the project should cost. The budget they develop is a financially stated goal, and it should serve a purpose on two levels: (1) to give the team a means for measuring success during the project and (2) to serve as a way to measure the project manager’s performance.

The project manager knows exactly what went it the project budget.  The project manager and team will be able to develop the assumptions that go into the budgeted numbers. They’ve been there before and know what roadblocks and issues to expect and what risks they may need to manage.  Assumptions are part of every project and should be incorporated into the project plan using the chosen project management software tool.

This is essential if any future variance explanations are to make sense. The assumption is compared to actual, and precise differences are isolated and tracked. Comparing on this level will improve the budgeting process significantly.

Project budgets are developed, monitored, and acted upon differently from departmental or companywide budgets because:

Projects are nonrecurring.  Departmental budgets are prepared each and every year, and often are revised every six months (or even more frequently, depending on the company and the demands of senior management). Projects are finite activities; the budget time frame is not tied to the fiscal year. Thus, project budget revisions are not likely to occur except as a result of discovering a problem with a requirement or as the result of change orders necessitated by changes to the scope of the project.

There is often more immediate control over the project budget.  Departmental budgets are often affected by coordination between several departments: The accounting department allocates fixed expenses to one department, often on the basis of estimates of another department; but decisions concerning systems and personnel are restricted to top management. The project, in comparison, involves budgeting on two levels: (1) use of existing resources - personnel and assets - that are already budgeted for at the departmental level and (2) limited use of outside resources that will not be permanent. Adding a new resource in a department means adding a permanent position.  Adding a resource to a project means using a resource already available to the company.

Project budget success often is reliant on how well tasks and resources are managed.  The success of the project budget depends on how well the project manager schedules each phase and on whether or not the people on the project team complete their tasks according to that schedule. If a phase is delayed because more time and effort is needed than was originally estimated, the project budget will reflect a negative variance.

More scrutiny is likely with the project vs. department budget.  Unfavorable variances in a project budget may be noticed more than similar, or even more drastic, variances on the departmental level. The recurring departmental budget is reviewed as part of a larger company budget and forecast; variances may be overlooked, absorbed between departments, or accepted as part of doing business.  But the project manager may be held accountable at a higher level, because the project manager is responsible for attaining the cost goals of the project.

Summary / call for input

The bottom line is this...the project budget needs to be something that the project manager can defend and manage against.  It needs to be real – something he can take into the Chief Financial Officer's (CFO) office every month, if necessary, and explain why it was budgeted that way and why there were particular variances in it this month and we more or less profit was realized.  An imposed budget makes it nearly impossible for that to happen.

What about our readers...what are your tips for creating and owning the project budget?

Comments (1) -

By Ed Williams at 4/24/2016 4:27:04 PM

While I agree with what you have written, I would add a few basic questions:

1) How accurate and precise are the estimates made by sales? if the accuracy is poor, or they don't track that, then that is the root problem, and it must be fixed before anything else will help very much.  These must be measured, not estimated.  In my experience the biggest red flag at this stage is when a high precision is claimed.  For example I have just seen a ROM at +- 3.7%; they clearly don't even know what ROM stands for!

2) Does your organization budget based on the measured accuracy and precision, or does it implicitly assume both are 100% when setting the budget?  Of course measurement takes data systematically captured over time, and too many organizations don't bother.

3) Does Sales have any responsibility for the quality of the estimate, ie for the actual cost assuming the project is well executed? If not then Sales will always have an incentive to under-estimate to get the sale.

If the answer to #1 is 'good' then how are they doing it?  In my experience the only way to produce a good quality estimate early in the process is to understand how the process actually works.  In practice, the way to make this happen, is to help Sales develop the estimating process (or do it for them) so the estimate does provide what you need.

If on the other hand the answers to 1 through 3 are unfavorable, then the root problem is that company management doesn't understand how projects work, or how to manage portfolios of projects, and there is little you can really do until you educate them.  The effective way to do that is to track variances against the Sales estimate, and point out that they are systematically wrong and of poor quality (which will be the case in this scenario).  That of course is easy to say but may be impossible to do if they don't want to learn.

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