Why is Budgeting Important in Project Management

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Budgeting helps to ensure that your project remains on schedule and on budget. A well-planned budget will allow you to track how much money has been spent and how much money needs to be spent over time. This gives you an accurate picture of how much money you have available for paying bills and salaries as well as how much money is left over at any given point in time so that you can make decisions about how best to spend it wisely!

Why is Budgeting Important 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.
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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)!
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Factors to Consider When Budgeting for a Project

The Past

  1. The best way to plan for the future is to look at the past. Don’t just look at last year’s budget — look at the actual expenses. Identify any shortcomings. For example, maybe you’re overestimating office supplies and underestimating utilities. Look at your overall numbers and identify any trends. If it’s something you have consistently measured inaccurately, make an adjustment. If it’s an uncontrollable trend, like a rise in the cost of your Internet access, then it should be reflected in your future budget.

Increasing Baseline

  1. Your base costs include things like rent, labor and supplies. You should expect these costs to increase slightly each year, both because of inflation and because you should expect your business to grow as you establish yourself. When making future budgets, take into consideration if you plan to give your employees raises or bonuses and how often. If you plan to give your employees a raise every six months, your expenses could drastically change.

Investment Needs

  1. As you grow, you should expect to invest in your own business. You’ll need new equipment, supplies and possibly a new location. If you work with computers, you should expect to replace them every 2-5 years, depending on what industry you’re in and how often you use them. You may also need new machinery. Think about any major purchases you may need to make in the near future and the more distant future and include these in your budget.

Review and Revist

  1. In order for a budget to be useful it has to be up to date. You should have several budgets reflecting different timeframes. At the very least, you should have a quarterly budget, a yearly budget and a 5 or 10-year budget. Revisit your yearly budget at least monthly. The more often you do it, the less time you’ll have to spend updating things each time. Revisit your longer-term budgets at least once a year. You may find that your priorities have shifted.

When in Doubt…

  1. There are a lot of things to include in a budget: office chairs, pens, travel expenses, electricity, software… the list goes on and on. If you feel overwhelmed, consider investing in some good budgeting software. Visit your local computer store and ask what they’d recommend. Or, do an Internet search and choose something you think will work. Remember, software should make this easier, not harder. If you find yourself spending hours figuring out how a program works, ditch it. Another great option is hiring a professional such as a CPA.

Conclusion

In order to be successful in project management, it’s important to have a clear idea of what you want your project to achieve. You also need to set goals and objectives, keep track of results, and use a project management system. By following these tips, you can create a successful budgeting process that will result in quality products and increased sales.

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