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.
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.
And as another year draws to a close it’s time for some reflection. With all the rushing and deadlines and pressure to get tasks done, how well did you do with hitting all the best practices you know you should have?
Here are 15 things that you should have done this year related to your project budget. How many can you tick off and say with confidence that you achieved?
1. Set a baseline
The cost baseline is your marker in time for how your project financials look. It should be a snapshot of your approved budget. Use it to track your actual expenditure and then compare. Ideally, your baseline should end up a close reflection of your actual costs but if not at least it will help you identify where you hit problems.
2. Agreed contingency
Did you talk to your sponsor about the contingency levels for this project? Contingency gives you some comfort and flexibility. Although you should still make it clear and ask permission if required when you come to use it, having a pot there to deal with unforeseen issues is very helpful.
Contingency should be based on what you think you’ll need to manage the things you don’t know, based on an assessment of project risk.
3. Agreed a management reserve
Management reserves are normally calculated by the back of an envelope method but they are useful pots, especially if you are working on something which is innovative or unusual for your company. These reserves are emergency money only to be used in difficult situations, and you should get your sponsor’s permission before dipping in.
Read more about the difference between management reserves and contingency reserves.
4. Got it approved
You did get your budget approved this year, didn’t you? Good.
5. Tracked project management costs
You should be tracking all the costs on your projects and it’s useful to split out prject management costs (the overheads) from the delivery costs (see below). Project management costs cover the cost of doing the project – your time, your project team’s time, any short term, project specific things you need to get the project completed like temporary office space.
6. Tracked project delivery costs
Project delivery costs are related to what it is that your project is delivering. These could include software licences, fixtures and fittings for the new building and so on. They are what you normally think of when you work out a project budget and should be clear from your work breakdown structure.
Read more about the 5 different types of project costs.
7. Allocated some cash for rewarding the team
If your project was due to end this year did you put some money aside as part of your closing activities to celebrate? I hope so. It’s good to be able to reward the team for a job well done and it doesn’t cost much to go out for a meal to mark the end of a project.
Haven’t got any budget for this? Read more about how to motivate your team with spending anything.
8. Calculated the risk budget
Each risk should have mitigating actions. These will either make the risk less likely or less impactful should it happen (in the case of a negative risk) or more likely to happen or more impactful (in the case of a positive risk). The risk budget covers the cost of the tasks required to achieve this.
Read more about the 4 factors that make a project risky.
9. Shared it
Did you talk to your team regularly about the project budget and their performance against it? If not plan to do this as part of your team meetings next year. It’s a really good idea because it helps the team see how their work directly relates to cost and achieving the project’s goals.
10. Estimated it
How did you pull together your project estimates this year? Hopefully with input from the right people and using a selection of tools to give you the best, most accurate results. Watch this video on 4 pitfalls of project estimating and see if you can spot anything you did that you should be avoiding in 2015.
11. Agreed tolerances
Tolerances are great and one of the things I get sorted at the beginning of a project. They give you boundaries in which to work – amounts over and under the budget (and dates on the schedule) that you can come in on without needing management approval. Did you sort that out? No? Talk to your sponsor in January: it will make your life less stressful and give you clearer authority.
12. Set up change control processes
Hopefully your project change control processes are already in place but if not, you should have created a process specifically for your project and…
13. Approved changes
…made sure that any of the changes that you needed to put through on your project went through it. This should include a step to estimate the cost and make the necessary changes to your project budget to account for the addition or removal of work.
14. Reported it
Your project budget and progress against your targets should have been included in your project status reports. This is, after all, the one thing that most sponsors care about above all else. Make it easy for them by including the data on your reports along with ways to get more detail if they really want to dig into it.
Learn more about producing better project status reports.
15. Closed contracts
Did any deals with suppliers come to an end this year? You should have formally closed down the contracts. This draws a line under the work and makes closing out the project easier, as well as giving you a better position from which to handover the project deliverables to the operational team.
Learn more about the different types of project contracts.
If you didn’t manage to say ‘Yes’ to the whole list then that could be because the item wasn’t relevant to your project. Or it could be because you didn’t have time or the skills to get that task done.
If it’s a time and skill problem think about what you are going to do differently during 2015. Maybe you could ask your manager for training? Set yourself some goals now so that you can reflect on this list again in 12 months and feel confident in your ability to manage your project’s finances.
The last part of this ongoing series on project cost management looked at the estimating process. Today we’re going to look at how to determine your budget.
What’s the process for?
This process is where you establish the overall cost of the project. At the end of the process you’ll have the following outputs:
So what goes into creating a budget?
You’ll need lots of information in order to start putting together your overall project budget. There are 9 inputs to this process and they are:
Cost management plan
The cost management plan sets out how you are going to manage the project’s finances, and it helps to give you the framework for creating your budget.
This is essential for working out how much the project will cost – you can’t do the calculations unless you know what is in scope. Use the scope baseline to make sure that you don’t forget to cost any elements of the project. Your Work Breakdown Structure is a massive help here and probably the document that I would rely on the most to ensure everything is accounted for.
Activity cost estimates
These tell you how much effort and money is required for each activity, building on the detail in the scope baseline. You can already see how adding these up is going to give you the overall project budget, so it pays to do the work in earlier processes to get these as good as you can.
Basis of estimates
This just explains the assumptions around your estimates. It’s useful when it comes to the overall project budget because it helps you determine what, if any, contingency you should add. These assumptions are often circulated with the final budget because they help other people understand if things like indirect costs are included.
This is helpful if you have to account for work phases. You could, for example, create a budget for the first stage of the project and then a second budget for the next chunk of activity. These would then be added together to give you your overall budget. If your sponsor only wants to authorise the initial work you can use the schedule to establish what should be in and what should be out of that.
It can also be useful if you are expected to calculate the project’s costs in any given financial year or reporting period. Roll up the estimates into date-constrained packages to give you the total cost over a certain time.
These are only really useful if you have to include resource costs in the project budget. If you are working mainly with internal resources you’ll find that you don’t often need this data. However, if you are cross-charging a client for your time then you’ll definitely find it helpful to check who is working on what and what their daily rate is.
The risk register may include details of the cost of risk mitigation activities. Pull these out and put them in your project budget as well. Many a project comes unstuck because risks were identified but there was no money put aside to mitigate potential problems.
These are the contracts relating to what goods and services you require as part of this project. They may also relate to things that have already been purchased. These costs also need to be included in the budget and having the original documents can help because it’s useful to cross-check to see what taxes, delivery charges and other elements have been added in to the quote.
Organisational process assets.
These appear as an input to lots of processes but in this scenario we are referring to:
Tools and techniques
The tools are techniques for the Determine Budget process aren’t rocket science. In fact, the whole process is really about adding up your estimates, making sure nothing is overlooked and then presenting the total as a summary figure.
Having said that, it does help to work through the process because it is remarkably easy to overlook something and getting the budget wrong is embarrassing (trust me, I’ve been there).
The tools and techniques you can draw on to prepare your project budget are:
I cover these in more detail in this video on 5 tools for project budgeting.
The end result
The main output of this process is the cost baseline. This is the approved, time-phased budget for the project but it does not include management reserves. You use this cost baseline as a snapshot in time and compare it against actual expenditure.
What works for you when preparing your final project budget? Let us know your tips in the comments.