Estimating Costs and Finalizing the Budget - Project Management

The question you'll hear most often from executive managers is, "How much isthis going to cost?" Now that we've learned what makes up a budget and howto derive the estimates, we're ready to answer that question. Let's look at an example project to pull all this together.

Your project involves opening a computer retail store in a new strip mall being constructed in your city. One of the deliverables involves building out the store space. This includes things like signing the lease, installing counters and shelves, installing display cases, assembling a workspace area in the backroom, and building five checkout counter lanes. The partial WBS for this onedeliverable looks something like this:


Using acombination of top-down and bottom-up techniques, your team has identified the following costs:

Table Cost estimates

The deliverables level (which is level three on the WBS) shows item numbers 20-1,20-2, and 20-3. These are bolded in the table above. Each of these items is thetotal cost of all the individual tasks below it. These costs have been rolledup, using the bottom-up estimating technique, to give a total for each level-three item. Each of the level-three estimates can be added together to come up with a total budget for this level-two element titled "Store Build-Out" for a total of $63,800. When you've established the cost of the other level-two elements, you can add all of those together for an overall project estimate.

Questions to Ask

Once you've plugged in some initial numbers and created the first draft of the budget,you'll want to sharpen up the estimates by asking some questions. You want tobe certain that you've identified all the budget items and that the estimates you've recorded are accurate. Here are some questions to help you with this task:

  1. Are the budget estimates for salaries and contractor expense realistic? How do these compare to past projects of similar scope and size?
  2. Have all materials and supplies estimates been checked by the procurement department or another subject matter expert? Letting a second pair of eyes double-check the estimates is a good idea to see if something looks out of place or to uncover estimates that seem too high or too low.
  3. Have you identified the potential risk to the project if the requested budget item is not purchased? Identifying the risk will help you justify the expense if this is an item you must have. If it's an item you can compromise on, identifying the risk is the first step in helping you examine the alternatives.
  4. Ask whether the budget item requested is absolutely necessary in order to deliver the product or service of the project. Will this item be needed in order to complete a task or deliverable that is required to consider the project a success?
  5. Are there other costs associated with the purchase of this item? For example, software programs often have ongoing maintenance expenses in order to get support for the product or upgrades. Depending on the length of the project, these may or may not be considered project expenses, but the end customer will have to pick up these costs when the project is delivered, so you'll want to tell them about them.

Finalizing the Budget

Now we're ready to finalize the budget and submit it for approval. We've established estimates and double-checked our work. Before we submit the final budget forapproval, though, there a couple of more things we should do to make sure the budget is accurate. P.S.: Taking the time to triple-check your estimates is not a bad idea.

Tip:It's verydifficult to go back to the well and ask for more money once the budget is submitted and approved. You're usually stuck with the budget that was approved, so you want to be certain that you've included everything and that the estimates are accurate.

ContingencyReserves

Way back in ancient times (as my children call it) when I was a teenager, I remember asking my dad for money to go to the movies with my friends. My dad wasn't a big movie-goer himself, so he never knew exactly how much the movie cost. I confess that I used this to my advantage and padded my request to include enough money for popcorn and soda. (Don't tell him, though; I don't think he suspects a thing!) This usually worked well. Sometimes I could save up enough change from several movie trips to buy sodas for my friends. That was a really big hit. Or I could stash some so that if Dad didn't have enough cash on hand, I could pull out my reserves and still go to the show.

Project budgets work the same way. You'll want to build contingency reserves intothe budget for unexpected items that are bound to pop up—only I recommend that you be honest about what you're doing. Movie money is one thing; a few million dollars added to the project budget for your spending pleasure can land you inthe unemployment line or maybe even in jail!

contingency reserves

Money added to the project budget to pay for unexpected events.

Back in Chapter, "Assessing Risk," we talked about contingency plans and contingency reserves. Contingency reserves give you a buffer zone to absorb unexpected costs or deal with unanticipated risks as they arise. You can't know everything,and your team can't predict everything that will occur on the project, sohaving a contingency reserve in place will help you out of those tight spots as they arise.

One method for calculating reserves is to add an additional percentage of the total budget back into the budget for contingency. This percentage is going to vary depending on the project. The risk identification and planning process can helpyou zero in on a reasonable contingency number, and the risk response plans will help justify your need for a contingency reserve. Or you could research historical project documents to see how much reserve was used on projects inthe past and then adjust it as necessary for your project. Be careful with contingency reserves, though, as they can backfire. If you consistently add too much into the budget, stakeholders will always be leery of your estimates. If you don't add enough, you're going to be stuck figuring out how to solve problems within the budget you have because you aren't likely to get more. Make certain that the contingency amount you're using is reasonable and accurate.Document how you came up with the reserve amount and be certain to control the use of these reserves. Again, ask the experts to take a look at your reserve estimate and see if it sounds reasonable based on their past experience with similar projects.

One MoreTime

Ask the key stakeholders on the project to give the budget a thorough examination.Experienced project team members are also a good source for giving the final budget a good look before submitting it for approval. Ask them to think about some of the questions we talked about in an earlier section and to identify anything that was missed or looks miscalculated.

If stakeholders question your contingency reserve, ask them to tell you why it should be adjusted. Don't let them convince you that a contingency reserve is unnecessary. All good project managers build in contingencies to the project budget; it's a common practice.

Down Memory Lane

Sometimes you'll find that funds are short and project budgets are not going to adequately cover the expenses of the project because of cuts or lack of approval for certain expenditures. If this leaves you high and dry, you'll have to go back through the Planning phase and make adjustments. Start examining some the Planning documents to find ways to either cut or reduce activities to accommodate the decreased budget. You'll also need to revisit the project Planning processes when others tell you that your estimates are off or need adjustment.Here are some of the first things you should look at to help reduce or adjust budget estimates:

  • Reduce the project scope
  • Reduce project quality standards
  • Reduce the number of team members
  • Perform tasks in-house that were originally scheduled to be completed by contractors

Planning and tracking the budget will allow you to make adjustments to the project schedule, scope, or quality as needed. Revisiting the Planning processes will happen often during the Planning phase, so don't be dismayed when you have to pull out the project schedule for the fourth or even fifth time to make adjustments. It's part of the project management process, and going back through Planning processes is to be expected.

Are You in Control?

Who has signing authority for budget item purchases? This is a question you'll want answered up front in the Planning process. Some organizations have strict controls over budget expenditures requiring management signatures, the finance officer's signature, and the project manager's signature. If this is the case,you'll need to make a note to build in the lead time needed to get all those signatures, or you could have team members sitting around twiddling their thumbs waiting for important deliveries to arrive.

The ideal situation is for the project manager to have control over the budget. This doesn't mean that you should have unlimited signing authority, but you should be able to sign for normal supplies, contractor invoices, and so on. Work with the finance manager and your project sponsor to establish some level of signing authority for yourself so that you don't have to get signatures every time you need another box of screws or need to place a support call to a software vendor.

Note:Project managers who have no control over the budget should not be held responsible for budget mishaps or for the results of budget and cost measurements taken during the Controlling phases of the project.

The organization may be set up such that finance managers have all the control overthe budget. They approve budget item purchases, sign for them, and see that payment is made. If at all possible, you should negotiate with the finance manager for some signing authority so that there isn't a delay in the deliveryof day-to-day-type needs. If the finance manager is the only one allowed to purchase and sign for items, you should not be held responsible for the condition of the budget. Also make certain that the adherence to the budget is not part of your performance evaluation for the project.

What's the Cost?

Some projects seem to have a life of their own. Information technology projects area perfect example. I can't tell you how many projects I've witnessed in this industry where the project estimate conversation goes something like this:

  • The project manager says, "Well Ms. Sponsor, I've completed the estimates. This project is going to take 18 months and one million dollars to complete."
  • To which Ms. Sponsor replies, "You're wrong. It's going to take 12 months and $350,000."
  • The End.

Can you guess what happens next? The project manager agrees to this un realistic schedule and decreased budget but, miraculously, they deliver the project ontime. So how did that happen?

The real question here is, at what cost did that happen? While the project may have been delivered on time and on budget—that isn't the end of the story. In order to accomplish this feat, the programming project team had to cut out several important steps to meet the unrealistic deadlines.

In the end,the extended support costs due to lack of design and proper planning, coupled with all the extra hours needed by the programming staff to fix the problems,cost much more than the initial project budget. If Ms. Sponsor would have takenthe time to examine the project Planning documents, the critical deliverables,and the critical tasks needed to complete the project successfully, she might have approved the original budget. Instead, the costs to fix the problems far surpassed the approved budget, making not only the sponsor look bad for sponsoring an unsuccessful project but the project manager as well.

Budget Approvals

The last step in the budget process is getting the budget approved. The project sponsor, key stakeholders,and the finance manager are the folks most likely to approve the budget, butevery organization is different. Check your organizational procedures to determine how to go about getting the approvals for the budget. Whatever the process is, you cannot proceed without approval of the budget.


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