What Makes Up a Budget? - Project Management

The project budget will be used throughout the remainder of the project to track project expenses and measure the money actually spent on project activities against the estimates given for those activities. The final budget figures are based on estimates provided by the project team, key stakeholders, vendors, and others after careful review of the Planning documents.

budget

An itemized list of allocated expenses needed to complete the work of the project.

Note:Depending on the structure of the organization you're working in, the project manager may write the budget or the finance manager may take on this responsibility.

Project Costs

Some of the items that go into a project budget are fairly obvious and apply to most projects you'll work on. For example, salaries, office supplies, and telephone charges will apply to almost all projects. These project costs and most others fall into one of three categories: human resource costs, administrative costs, or resource or project costs. Let's take a look at each of them below.

Human Resource Costs

These are the costs associated with the personnel on the project. They include salaries and the cost of benefits (such as vacation time and health insurance) if they apply. Salaries, or contracting fees for human resources, can be one of the project's largest expenses if you're working on a labor-intensive project. For example, information technology projects typically require folks with very specific skills. These skills come with a price, usually a high price, and you'll find a large portion of your project budget allocated to them. If you happen to be working for a nonprofit company that is using all volunteers to complete the project work, your salary expenses may be smaller, but you'll still probably have expenses for subject matter expertise, contractors, the project manager's salary, and so on.

Tip:Employee or contractor salaries and expenses are one of the biggest budget items on any project.

Administrative Costs

Administrative costs are the everyday-type costs that support the work of the project but are not necessarily directly related to a specific task on the project. Local telephone expense, copier paper, heating expenses, and support personnel are examples of administrative costs. Project teams have to work and meet somewhere, so that means that there is some sort of facilities expense in the form of either rent, lease, or mortgage payments. If the building or facility was leased or purchased specifically for the project, it would be classified as a project cost instead of an administrative cost.

Resource or Project Costs

Resource and project costs include things such as materials needed for specific tasks, equipment leases, long-distance telephone expense, travel expenses, and so on. These expenses are specific to the project. For example, if the project consists of building a new set of luxury condos in a prime downtown location, you'll need the use of a crane during the early phases of the construction to lift the steel beams and other needed items several stories in the air. Resource costs are typically the largest expense for construction projects, and estimating these costs will require research on your part. We'll discuss how to estimate project costs later in this chapter.

Examining each of these categories of project costs will help you identify your initial budget items. If you think about the human resources, the administrative support, and the project resources needed for each task, you'll have a list of budget items started in no time.

Direct Costs versus Indirect Costs

In addition to the three categories of project costs, there are also two types of costs: direct and indirect costs. Direct costs include costs such as salaries, equipment rentals, software, and training for team members. Any cost that can be directly attributed to project work is a direct cost.

direct costs

Cost specifically related to the work of the project.

Indirect costs are not specific to the project. For example, your project team probably works with other members of the organization (who are not working on the project) in the same building. The lease cost for the building is an example of an indirect cost because it is not specifically related to the project since all the company employees work there. Another example of an indirect cost is administrative staff, managers, or other functional members who will be assisting you with project activities (such as someone from the procurement department) but aren't assigned tasks themselves.

indirect costs

Costs associated with the project but not directly related to the work of the project.

You'll need to find out from the accounting or finance department how indirect costs should be accounted for in the project budget. Each organization has its own procedures for accounting for indirect costs, so you'll want to check with them before finalizing the budget.

Gather the Docs

We're not talking about a gathering of doctors here, although some budgets are so sick they need budget doctors to make them healthy, we're talking about the Planning documents you've diligently created.

The first step in creating the project budget is to gather all the Planning documents for reference. You will want to start with a review of the project goals and deliverables for obvious budget expenses. Next, take a look at the task list, the WBS, and the network diagram. Record tasks or items that will have costs associated with them on your list. Also give the project schedule, resource list, and roles and responsibilities chart a look-over for expenses you may need to account for. Don't forget to include equipment rentals, facilities, and material expenses associated with tasks and WBS elements.

Start your budget list on a piece of paper or an electronic spreadsheet, and record the items needed in one column and estimated costs in another column (if you know them at this point; otherwise leave that column blank). If you want to be really organized, you could use the project schedule and start recording initial costs right on the tasks listed on the schedule. We'll look at some sample budgets later in this chapter.

Budgeting Process

The process for creating the budget is similar to identifying the resource requirements and creating the project schedule. Review the planning documents to uncover all the materials and resources you'll need, estimate their costs, record them in the budget, and finally get approval of the budget. Here are the steps you'll follow to get your budget process rolling:

  1. Review the Planning documents.
  2. Create cost estimates and integrate them with the project schedule (we'll cover this shortly).
  3. Submit the budget for approval to the project sponsor or project committee.
  4. Notify the appropriate project team members and stakeholders when the budget is approved.
  5. Assign the code of accounts to the WBS elements if this hasn't been done previously.
  6. File the budget in the project notebook.

As the project manager, you should go into the project fully equipped to execute the project based on the resources available. In order to accomplish this you need an accurate budget to use as your guideline. Now let's take a closer look at some of things you'll want to include in the budget.

Budget Items

Regardless of the type of expense, you need to identify everything needed for the project and document its estimated cost.

You can use the same techniques for identifying budget items as you did for identifying deliverables and tasks. Interview stakeholders, ask project team members who have worked on similar projects in the past, interview vendors, or hold a meeting with key team members and stakeholders to brainstorm on the budget items. To save time, you could consider starting a list of budget items yourself before meeting with stakeholders or interviewing team members, especially if the project is small. You'll be able to identify many of the items simply by reviewing the Planning documents. Then let others look over what you've done and give you estimates for the things you've identified or add new items of their own.

Tip:Ask stakeholders or team members who have experience working on similar projects to help you create the budget for this project. Their experience will help assure that you don't miss anything important and will make the process go faster.

Here is a list of some of the common budget items to help you get started identifying them for your project. You could use this list as a checklist for future projects, adding your own commonly used items that require budget allocation and deleting the ones that don't occur on the types of projects you typically work on.

  • Project team salaries
  • Equipment and materials expense
  • Rent or lease costs for facilities
  • Marketing costs, including focus group and market research costs
  • Legal costs
  • Travel expenses
  • Advertising costs
  • Research costs
  • Feasibility study costs
  • Consulting services for subject matter expertise or as project participants
  • Telephone, fax, and long-distance charges
  • Office supplies (remember all those sticky notes we used!)
  • Internet access charges or website hosting fees
  • Software
  • Hardware
  • Training

Budget Woes

Budgets, like project schedules, can be the cause of conflict. Project schedules, particularly the resource assignments associated with the schedules, are typically the biggest source of conflict on any project, and budgets probably run a close second. Be prepared to defend the budget items to the project sponsor or senior managers. Be ready to explain why the items are needed to successfully complete the project and the impact on the project if those items are not funded. You will likely put a heavy dose of negotiation skills to use during the budget process.

Note:Senior managers who want to cut the budget are easily spotted because they're usually the second-cousin of the senior manager who wants to cut the project schedule.

For some reason, senior managers seem to think it's a politically beneficial action to cut the project budget (and/or the schedule) just so they look good in front of the big boss. They may have no other motivation than to appear as though they're saving the company money, even though it negatively impacts the project. Or they may have projects of their own competing for the same funds, and cutting your budget helps assure that their own project budgets won't get cut. While cutting the budget might make them look good to the big boss, it will definitely impact the project, which may not make you look so good at the end of it all. Your best defense against this happening is to communicate with the project sponsor and make certain they understand the importance of the items included in the budget. At that point, they'll have to go head-to-head with the other executive managers and fight to secure the funding for the project. But they can't do that if you haven't first communicated the importance of the things you'll need to successfully complete the project and why. The important thing to keep in mind in this case is for you to know the reason the items are needed and their impact on the project if they are not obtained, and you need to be able to communicate this information when senior managers start wielding their big scissors at your budget.

Tip:Never underestimate the importance of communicating with the project sponsor and stakeholders during all phases of the project.

If the project is not successful as a result of an inadequate budget from the get-go, no one is going to come out looking good. If your project budget is woefully inadequate because of cuts made before you reach the Executing phase, I recommend that you pass on the opportunity to lead the project if you can, as it's highly probable that it will end up as an unsuccessful project.

Following the Processes

Many organizations have a procurement department that will help you purchase the items needed for your project. They may also help you create the budget. Always check with the procurement department to determine whether there are procedures you should follow when preparing your budget. Also be certain to work with the procurement department when purchasing services from vendors or contractors. You may need to follow a specific process, for example the RFP process, to the letter so as not to hold up the project schedule (and ultimately cost you more money).

Your organization may have a finance manager in addition to the procurement manager, or the finance manager may act in both roles. In large organizations, the responsibility for determining project costs will likely rest with you and the finance manager. And sometimes the finance manager is the one who works up the budget and gets approval from senior management, and you're simply told what the final budget is and are expected to work with it. If this is the case, use your communication and negotiating skills to work with the finance manager and ask them if you can contribute to the budget process.


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