I could have also called this post: What money stuff do you do when?
I should start by saying that it’s difficult to give you a complete rundown of what project budgeting activity needs to happen when in the month or whenever in your project, because each company is different. So this article will cover what I think is common practice based on the project managers I work with and coach.
Project start up
At the beginning of the project, before the ‘doing’ of the work starts, you should:
Remember to write all this stuff down as part of your project initiation documentation.
During the activity part of the project where you are completing project work and achieving targets towards your deliverables you should be:
Each month on the project
Every month you should be updating your project records and doing the following:
Every couple of months on the project
Every so often – I’d do this every two months on shorter projects and every three on longer ones – review these bigger ticket items to see what your status is:
If your project falls over the year end financial accounting period you should also be preparing for anything that you might need to do in order to satisfy the internal processes around that. For example, managing accruals. If you’re lucky, someone will do this for you!
At the end of the project you should:
What else would you add to the list? Let us know in the comments.
You’ve looked at the budget tracker and – to your dismay – you can’t make the figures balance. At the current run rate you will be overspent by the end of the project. You are forecasting to be over by way more than your project sponsor has agreed in terms of tolerances. There’s only one option: you need to ask for more money.
Asking for a budget increase isn’t an easy thing to do. For one, it’s embarrassing, especially if you were involved in putting the budget together in the first place. You’ve got to admit that you got it wrong. Here are nine steps to handle that difficult conversation with your project sponsor.
1. Be honest
You can’t hide at this point. Make sure that you are working from a position of clear, transparent, justifiable data.
2. Get time with your sponsor
Don’t do this over email. Even over the phone is pretty bad. If you can, get time with your sponsor to meet them face-to-face. If necessary, book it through their PA and confirm the day before. You can do this as soon as you know you are going to need the meeting, and ask to see them as soon as possible. Your budget position is only going to get worse, so you need a steer from them about the project financials as soon as you can.
Give yourself time to work out the position and prepare some alternatives but ideally you’ll want to meet them quickly.
3. Sort out your estimating
You need better estimates. Most likely your project budget is over because you:
Estimate, and then include proper contingency reserves if you do not have confidence in those estimates.
4. Prepare a new budget
Use your new figures to revise your budget. Go back to basics. Start from scratch and do the whole thing again. There may be some elements you feel confident enough to keep but at this point nothing should be without challenge.
Because if you are going to back to ask for more cash, make sure you only do it once. Once is excusable – kind of. Twice makes it look like you don’t have a handle on the work involved and it undermines your professional credibility.
5. Prepare your rationale
You may be more interested in securing more funding, but your project sponsor is going to want to know why you need the money. Work out your arguments in advance, and make sure they are good.
You should be able to articulate why you are overspent (remember point 1 about: be honest and if you messed up, say so). Stay factual, and avoid apportioning blame even if it is really tempting to mention that you got a bad deal from a supplier.
6. Prepare some alternatives
Could you stick with your existing budget but deliver less functionality? Or deliver the same functionality over a longer period of time, perhaps with less expensive or in-house resources? Or deliver some functionality with the extra funding but not everything?
Come up with some alternatives to the whole amount so your sponsor has options. Be aware that one option is to cancel the project completely.
7. Prepare your sponsor
Don’t let your sponsor believe you are going to meet them to tell them that all is well. Nobody likes surprises, and in my experience, project sponsors hate them more than most! Send over a briefing pack for them to review in advance of your meeting, including the alternative options if securing the full amount of additional funding isn’t an option.
8. Hold your meeting
Meet your sponsor. Clearly present the current project situation and the financial position. Clearly explain what cash is needed to keep the project moving forward and why that is required. Give a level of confidence about how comfortable you are that these figures are now accurate and what is needed to complete the project on time and to the existing scope.
Talk to them about the additional options that you have come up with and ask if they see any further alternatives that would deliver business value but keep within reasonable cost.
Ultimately, your sponsor will make a decision about what to do next. The exact answer you get will depend on the situation and how far along you are in the project but it’s likely to be something like one of these:
“Here’s the extra funding. Carry on.”
“Here’s a portion of the extra funding. Let’s work out how much we can deliver with this.”
“There is no more funding. Work out what you can deliver without more money.”
“This project is no longer viable. Please shut it down and salvage what you can.”
9. Act on your sponsor’s decision
Your sponsor has spoken. Now it’s your turn to follow through. Obviously what you do depends on what route they have chosen as the most appropriate one for your project. Whatever the way forward, you should explain the situation to the project team so they are fully aware of what is going on.
Nine steps might sound like quite a lot but it’s an involved process that you need to get right. Have I missed anything out? What are your experiences of having to ask for more money to complete your project? Let us know in the comments.
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.