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IT Project Budget Management and Planning

IT Project Budget Management and Planning

IT projects can be difficult and time-consuming, but with the right planning and budgeting, you can make them much less so. This guide will help you get started on your successful IT projects, from setting up your system to forecasting how much money you’ll need to spend each month, to designing a secure and efficient online presence.

IT Project Budget Management and Planning

Every project boils down to money. If you had a bigger budget, you could probably get more people to do your project more quickly and deliver more. That’s why no project plan is complete until you come up with a budget. But no matter whether your project is big or small, and no matter how many resources and activities are in it, the process for figuring out the bottom line is always the same.

It is important to come up with detailed estimates for all the project costs. Once this is compiled, you add up the cost estimates into a budget plan. It is now possible to track the project according to that budget while the work is ongoing.

Often, when you come into a project, there is already an expectation of how much it will cost or how much time it will take. When you make an estimate early in the project without knowing much about it, that estimate is called a rough order-of-magnitude estimate (or a ballpark estimate). This estimate will become more refined as time goes on and you learn more about the project. Here are some tools and techniques for estimating cost:

  • Determination of resource cost rates: People who will be working on the project all work at a specific rate. Any materials you use to build the project (e.g., wood or wiring) will be charged at a rate too. Determining resource costs means figuring out what the rate for labour and materials will be.
  • Vendor bid analysis: Sometimes you will need to work with an external contractor to get your project done. You might even have more than one contractor bid on the job. This tool is about evaluating those bids and choosing the one you will accept.
  • Reserve analysis: You need to set aside some money for cost overruns. If you know that your project has a risk of something expensive happening, it is better to have some cash available to deal with it. Reserve analysis means putting some cash away in case of overruns.
  • Cost of quality: You will need to figure the cost of all your quality-related activities into the overall budget. Since it’s cheaper to find bugs earlier in the project than later, there are always quality costs associated with everything your project produces. Cost of quality is just a way of tracking the cost of those activities. It is the amount of money it takes to do the project right.

Once you apply all the tools in this process, you will arrive at an estimate for how much your project will cost. It’s important to keep all of your supporting estimate information. That way, you know the assumptions made when you were coming up with the numbers. Now you are ready to build your budget plan.

Estimating Costs to Compare and Select Projects

During the conceptual phase when project selection occurs, economic factors are an important consideration in choosing between competing projects. To compare the simple paybacks or internal rates of return between projects, an estimate of the cost of each project is made. The estimates must be accurate enough so that the comparisons are meaningful, but the amount of time and resources used to make the estimates should be appropriate to the size and complexity of the project. The methods used to estimate the cost of the project during the selection phase are generally faster and consume fewer resources than those used to create detailed estimates in later phases. They rely more on the expert judgment of experienced managers who can make accurate estimates with less detailed information. Estimates in the earliest stages of project selection are usually based on information from previous projects that can be adjusted—scaled—to match the size and complexity of the current project or developed using standardized formulas.

Importance of Budget Planning in Project Management

Establishing Guidelines

  1. Having a budget allows you to establish the main objectives of a project. Some projects can be too all-encompassing and try to accomplish too much. Having a budget in place, however, limits the number of options available to a company or its project manager from the outset. Without these budgetary restrictions in place, a project may not be completed on time or at all if the available funding runs out. Instead, the budget allows the project manager to know how much he can spend on any given aspect of the project.

Cost Estimating

  1. Once a budget is in place, the project manager and cost estimator can then determine how much money can be spent on each component of the project. A budget allows those in charge of purchasing to determine what percentage of the available funds can be allocated to the constituent elements of the project itself. This provides the opportunity to determine whether or not the project can be completed with the available budget.

Prioritizing

  1. Another advantage to having a project budget is that it will allow you to prioritize the different parts of the project. While it may be desirable to complete the entire project at once, if the available funds indicate that enough money may not be available to complete all aspects of the project as desired, a budget will allow you to prioritize which parts of the project can be completed initially while other parts are put on hold.

Future Planning

  1. In the event that the budget shows funding to be inadequate to cover the necessary costs to complete the entire project, having a budget in place will make easier to plan for future costs. For instance, if the budget shows that only four of the five main objectives can be accomplished with the available funding, you should know how much additional money you will need to raise to complete the entire project because you know how much money should be allocated to each part.

Consequences of Improper Budgeting

All project procedures are tightly interwoven around project budgets. The amount of available or required cash, in most cases, dictates the duration and type of the used resources, operations and activities within the realm of a project. In the case of project budgets, a miscalculation, poor judgment or a lack of proper oversight might result in the collapse of the whole endeavor.

When it comes to poor estimation of project budgets the potential scenarios that might occur are many and all of them have negative consequences. First and foremost are the effects on meeting the client’s expectations. Not being able to deliver the agreed upon deliverables and quality standards of the project’s products might have a significant effect on your own credibility and future development as a professional. In addition, this might influence your organization’s reputation and have a negative impact on all the members of your team.  

In the sphere of the project the negative consequences might arise from the very beginning, but in most of the cases, these problems usually appear unforeseen and suddenly, hence the considerable impact on the project’s development. When they come to light, it can often be too late to have a fast and effective reaction and save the day by making the necessary alterations and amendments on the project’s initial budget.

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Causes of Improper Estimation

These erroneous calculations may come as a result of lack of experience or inefficiency in dealing with numbers in general and might result in insufficient resources. Another side effect might be the reduction in team members, or external contractors as the money simply won’t be there to pay them. In such situations it is very difficult to avoid the final outcomes being affected negatively.

On the other hand, during the evolution of a project, it is almost impossible to proceed without any amendments to the initial budget. The importance of budgeting in project management, lies in the ability to prevent unnecessary costs and to allocate the correct amount of the budget to each corresponding need. One of the most common problems a project manager is confronted with is poor calculation and a plethora of subsequent alterations and amendments of the project budgets, which are time and energy consuming. As the mantra goes, “Time is Money”, and nothing is more harmful to the successful development of a project than a badly configured budget.

Save energy and protect yourself from anxiety, uncertainty and negative consequences, by investing the time to plan an effective cost estimation, from the very beginning of the project. By doing so you will be going a long way to ensuring project success.

Project Cost Management Techniques

  1. When managing a project for a small business, the ability to contain costs is of the upmost importance. This can be a challenging task for even the most experienced project manager, particularly when there are a variety of expenses that are genuinely required for the venture to be executed without a hitch. There are, however, a few techniques that can be applied that will ensure that a project is complete under budget without compromising the integrity of the company and those associated with the project’s implementation.

Budgeting

  1. It is impossible to effectively manage the budget of a project without first estimating the potential costs included. These may include wages paid for manpower and supply costs. The estimate must also account for small incidental expenditures of which the manager may not initially think. Who, for example, will pay for the project team’s meals when they must work overtime to complete the project?In addition to determining a numeric value for each of these expenditures, the estimate should also include a variance in case of unexpected expenses. For example, if the project budget estimates two employees completing the assignment in 40 hours, it is best to budget for additional time in case the workers run into problems and are unable to complete the project in the allotted time.

Time Management

  1. Perhaps one of the primary causes of monetary waste on a project is poor time management. In order to successfully contain costs, a project manager must ensure that everyone on his team is working as efficiently as possible. In order to accomplish this, he must effectively delegate responsibilities to each employee. Although each person should only be given a realistic amount of work, there should not, ideally, be any overlap of their respective tasks. In addition, the project manager should actively monitor the work of his team to ensure that all work is on track for timely completion.

Utilize All Tools

  1. In addition to human resources, there are quite often various electronic resources aimed at supporting the successful and timely completion of a project. For example, Microsoft Outlook is designed to facilitate effective communication between members of a project team, allowing them to schedule meetings, set to-do lists and quickly send messages to one another. Likewise, devices such as a Blackberry afford team members the flexibility to complete aspects of their work remotely. By effectively utilizing each of these tools, a project manager can better ensure that the project is completed on-time and under budget.

HOW TO DEVELOP A PROJECT BUDGET


In the Project Management Body of Knowledge Guide® book, there are two processes to developing a project budget. The first process is Estimate Cost, which is often confused with the Determine Budget process. Both processes are normally preceded by a project management team planning process, which is executed as part of the Develop Project Management Plan. This planning process is known as the Project Cost Management or the Cost Management Plan. The Cost Management Plan outlines the processes involved in determining organizational cost categories, estimating, budgeting, and controlling cost, so that the project can be executed within the approved budget.

The Estimate Cost process is not only confused with Determine Budget but is also widely misunderstood. Many think that this process estimates the total cost of the project. But this is not correct, at least not directly. The Estimate Cost process estimates the cost for each of the work elements and records the basis of that cost. That is as far as Estimate Cost goes!

The second of the three processes in Project Cost Management is the Determine Budget process, which rolls work element cost upward, applies cost aggregation, applies project contingency, makes a cash flow estimate, and now you have a budget for the various levels of the WBS and the total project.

B. TOOLS TO HELP ANALYZE COST BUDGET PERFORMANCE 


Based on the work above, we now have a budget for:

  1. Individual Activities
  2. Work Packages
  3. Deliverables
  4. The Total Project


This level of detail allows a project manager (PM) to evaluate the budget performance of the project from the top down or from the bottom up. If a work package is running over or is in danger of overrunning the budget, the project manager can drill down until he/she finds the problem or potential problem. The drill down can be by the PM or in conjunction with the assigned team member.

EARNED VALUE METHOD 

One other very powerful tool that helps in the analysis of project budget performance is the Earned Value Method (EVM). EVM can assist you in evaluating project budget performance (what are you accomplishing for the funds you are expending) and in calculating a Cost Performance Index (CPI), which is a representation of the effectiveness of your spending. EVM can calculate a Cost Variance (CV), which is the difference between the value of the work completed and the amount of funds expended to accomplish that work. This will tell you the magnitude of the over- or under-run or if you are on budget. EVM can be applied down to the work element level if the appropriate level of detail exists.

VARIANCE ANALYSIS 

Variance analysis is another tool to help the PM understand why work elements are over- or under budget. The Cost Management Plan probably sets thresholds for overruns (say 10%), a different threshold for under runs (say 15%), to trigger your attention. Understanding why work elements are overrunning will assist the PM to develop solutions (action plans) to bring the project back within acceptable ranges. Understanding why work elements are significantly under budget assist the PM in feeding this information forward to new project budget development.

Regardless of experience, care, or execution effort, project budget variances will occur. This is just a fact of the project world. While they cannot all be eliminated, they can be reduced for future projects. Some (not many) projects will finish very close to the budget. More projects will finish within acceptable ranges (+/-10%). Others (we hope not many) will finish well outside the acceptable range (>10% over or under). Using the techniques outlined here will reduce the number of projects in this category and reduce the size of the overruns.

C. HOW TO SUCCESSFULLY MANAGE A PROJECT BUDGET

  1. Capture all of the scope (scope statement, WBS, and WBS dictionary). If you do not capture the total project scope correctly, there is little hope that the project can be executed for the budget or schedule.
  2. Insist on input from all stakeholders. Penetrate through stated needs and include implied needs.
  3. Determine the various cost categories used at the organization.
  4. Develop Project Team and Project Management Team trust.
  5. Develop a reliable, consistent, sufficiently detailed WBS and time decomposition structure. Estimate Cost and Determine Budget.
  6. Stop scope and grade creep. Eliminate gold plating. None of these adds value to the project. Your team is your first line of defense.
  7. Perform EVM, variance, and trend analysis.
  8. Continuously communicate to stakeholders on project status, project direction, and what the project will look like at completion.
  9. Use organizational process assets (OPA) to develop, analyze, and challenge.
  10. Avoid the pitfalls in Section IV (below).
  11. Take action when indicated (sooner rather than later)!

Conclusion

Scheduling your IT projects is a critical part of any business. By using a scheduling method that works for you, and setting a timetable for your projects, you can ensure that your IT projects are completed on schedule. Additionally, by following tips for scheduling your IT projects, you can best prioritize them and achieve their desired results.

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