Blank spreadsheet, new project. Where do you start? Here are 5 options for creating your new project budget.
This is my personal choice most of the time. Work out the cost of the individual items included in your project budget and then you add them up to get the big picture. Simple. Especially when you can rely on subject matter experts to give you the figures. All you have to do is ask intelligent questions and make sure nothing is overlooked.
There’s more on how the elements of your budget fit together starting with the individual task estimates created through bottom up estimating here.
Parametric estimating is not a method that I tend to rely on, but it does work. It relies on you having sensible data to use at an overall level (although there is no reason why you couldn’t decompose your tasks and work it out at lower levels).
For example, if it takes one person three days to dig a trench and you need three trenches, that’s nine days of digging.
The risk with this very simplistic example is that maybe people need a rest day after they’ve been digging for two days. Or maybe one of the diggers doesn’t dig as fast as the others. Still, if you’ve got a reliable way of using data to extrapolate your estimates, you may as well use it to give you an overall, high level estimate while you consider other techniques to refine your approach if necessary.
I’d be interested in hearing about examples from people who have successfully used top down or parametric methods to work out their budgets to understand more about the type of projects it is useful for. Get in touch if you have anything to contribute on that topic.
Based on previous projects
This is a method I’ve also used successfully, although it does rely on:
If you can get round that and use real, validated data from previous similar projects, then I think this is a very robust approach to putting together a budget for your new project.
For example, we often repeat project implementation phases in multiple sites. The initial planning and set up at one site might take a bit longer than by the time we’ve done it 25 times in 25 locations, but essentially the steps are the same. We use the data from the first two or three installs to determine the implementation plan for the other sites. Then it’s almost a case of working through a project checklist and productionising the deployment of software on site. Of course, we always hit some kind of unique problem, but if we know there will be something at each site the overall timescales are still virtually the same. It does mean that sites that will get the software in the future are able to know with a high degree of certainty about when the project team is coming to them.
Using three point estimating
Three point estimating takes some time to do. OK, all estimating should take time to do if you are doing it properly. But three point estimating takes more than the others as you aren’t estimating once, you’re estimating three times.
First, you estimate the optimistic time for completing the task. Then you estimate the most likely result. And finally, you need a view of how long it would take if it all went a bit wrong – the pessimistic view. Then you use the formula:
Take your most likely estimate and times it by 4. Then add on the optimistic estimate and the pessimistic estimate. Divide the total by 6. That gives you a weighted estimate of how much the task will cost, weighted in favour of the most likely cost, but taking into account the fact things might go well or they might not.
A combination of approaches
I know I’ve said that bottom up is the approach I rely on the most, but really, it’s this one. I use whatever works at the time, and in reality that’s a combination of approaches based on the data I have, the expert input available at the time and my best guess.
I think that given the choice, most project managers would opt for this approach to building their budget. It’s the most flexible, and gives you the best chance of coming up with a sensible budget. Where you’ve got data for parametric estimating, you can use it. Where you know how to decompose the tasks, you can plan from the bottom up, and so on. Why limit yourself to one way when actually a combination of methods would get you a better result?
The only thing to remember is to make sure that your cost management plan includes the assumptions and parameters you are using to estimate so that if someone else needs to review your budget it’s clear to them how you came up with the costs you are using for each element.
If you had to choose your favourite budget method, what would it be? Let us know in the comments.
Last time in this series about project cost management I looked at the process for determining your budget. Today I want to cover the last process: controlling costs. The main purpose of controlling your project costs is to understand where you are creating variances (i.e. over or under spending) so you can put them right before you create a massive problem for yourself and your sponsor. It’s another way of minimising risk on your project, and it’s good housekeeping too.
So, let’s start with the process inputs.
There are four inputs to this process. None of them are things you won’t have come across before. They are:
Project management plan
You need this because it contains the cost baseline. See what makes up the cost baseline in this article. The overall project plan also includes the cost management plan, which sets out how you are going to monitor and control the budget. I hope you haven’t forgotten, but if you need a reminder it’s all there for you.
Project funding requirements
You’ll get the forecasted expenditures and any liabilities (such as loan repayments) from this.
Work performance data
This is useful to track what has been worked on so far and how much money you are burning through as a result.
Organisational process assets
Yep, these again. They crop up a lot! This time you are looking for things that can influence the Control Costs process, like:
The tools and techniques
This is where the process starts to get more tricky. There are 5 tools and techniques available to you for controlling costs, and they do take a bit more understanding than some of the tools we find in the processes. They are:
Earned value management
Not all organisations use EVM, but those that do typically find it really helpful. It’s a way of combining schedule, scope and resource information to see how the project is progressing. It gives you early notice about being behind schedule or over budget, but it is only as good as the information you put in. I’ve not known people to calculate it manually either. Life’s too short for that – the people I know who use it rely on tools to do it for them.
There are whole books written on EVM so I won’t go into it in any more detail here.
Forecasting simply means looking forward and working out how much you anticipate having spent by the time the project completes. This is likely to be different from your original budget as things change during the project life cycle. Depending on how different the forecasted estimate is from your original budget you might take a number of steps:
To-complete performance index (TCPI)
This technique lets you measure the cost performance required in order to meet your project’s goals. In other words, what run rate are you aiming for in order to complete the project with the current resources and budget? There are equations to work all this out but it’s essentially a ratio to track your performance numerically and give you early warning that you aren’t working efficiently enough to complete the work on time.
Performance reviews are a technique whereby you compare the cost performance on the project with the estimates needed to complete the work. Think of them as just another type of project audit or peer review. You can look at the project’s variances, earned value management reports and pretty much anything else to give you an assessment of how the project is performing in budgetary terms.
Project management software
This one is easier – use your project management software to calculate the EVM measurements, work out forecasts or just add up your expenses so you can track them.
This is a fancy name for keeping an eye on how much contingency money you have left. Track this element of the budget, and the management reserves, in the same way that you’d track expenditure on any other part of the budget. Equally, controlling these budget elements lets you establish if you need any more.
You can also plan to release contingency or reserve funds if the risk event they were linked to passes without incident. No need to hang on to the cash if another project could use it more effectively.
Finally, we’ve got the outputs, and again it’s quite a long list. The point of doing this process is to ensure you’ve got these 6 outputs, half of which are updating documents you already have:
Work performance information
This just means that you should share the budget tracking information and your cost control metrics with your stakeholders. If they are interested.
Again, once you’ve calculated the cost forecasts, write them up and include them in documentation to your stakeholders.
All this cost control analysis might throw up areas where you need to raise a change in order to secure additional funding, remove items from scope, carry out preventative actions or similar. Change requests are an output of this process if you need to do that.
Project management plan updates
If you do make changes to your budgets as a result of your cost control activities, remember to update the cost baseline and cost management plan in the project management plan – it’s tidy that way, and you won’t forget what’s happened.
Project documents updates
And update any other documents, like the estimates or assumptions. Complete that lessons learned document as well, while you are at it, as what you have learned managing this budget is bound to be useful knowledge for the future.
Organisational process asset updates
Again, update anything that needs updating, like financial databases.
And that’s it! Quite a long description of the cost control process, but there is a lot to do in here. Do you have any tips for managing and controlling your project budget? Let us know in the comments.
What makes up your overall project budget?
The project budget isn’t just one big lump sum of cash. It’s made up of various different components, and if you understand how it all fits together then it’s easier to manage it.
The diagram in A Guide To The Project Management Body of Knowledge (PMBOK Guide) – 5th edition, which I have adapted here, does a good job of explaining the component parts. I find it easier to read it from left to right.
You start with the activity cost estimates. These are the estimates for the money needed to deliver each individual task, and if necessary you add on contingency for those tasks at task level.
The activity cost estimates grouped together into work packages + contingency gives you the budget for each work package. If you need to add contingency at a work package level as well then add it on here. Just be aware that if you’ve got contingency at task level too then you might be padding the budget unnecessarily.
Work package cost estimates + work package level contingency gives you the total for your control accounts, if you use them. If not, it gives you the cost baseline for the project. That makes sense: it’s the cost of all the work packages added together with any contingency included too.
At this point you might add additional management reserves to deal with any problems. This is added to the cost baseline but kept separate: it’s not funds you can draw on easily and you’ll need to work out a process for getting hold of that money if you need it (normally you’ll use the change control process).
The overall cost baseline + management reserves gives you the project budget to track against.
Personally I would also track at lower levels so that you can see which elements of your project budget are going over or are under spent. Otherwise you risk spending all your funds early in the project without actually knowing if you have enough to get through all the work (but budget tracking is the subject of another article).
Do you think this is a comprehensive view of your project budget? Are there any elements that you don’t use (or use in addition to this)? Let us know in the comments.
This presentation shares 5 facts from Gerald Bradley's book about managing project benefits: Benefit Realisation Management (2nd Ed).