4 Common Project Budgeting Mistakes

 

This month here at ProjectManagement.com we are looking at everything to do with resolutions and plans for the coming year. Here are 4 common project budgeting mistakes – how many of these will you be avoiding during 2013?

1. Not forecasting holidays

It’s really easy to forget to schedule in holiday time. This is a great time of year to review your project schedule for the year and plan in all the bank holidays, office closures, school holidays and other times where you think staff may be less available than usual. If you work with an international team, make sure you include the international holidays as well.

Start talking to team leaders now about when their team members will be off on annual leave – this is especially important if you do not have line management responsibility for project team members and do not see their vacation request forms. Building good relationships with their line managers will hopefully mean that later in the year you don’t get any surprises when project team members forget to tell you that they’ve just had a 3-week vacation approved and are leaving on Monday!

2. Scheduling at 100% availability

Don’t schedule your project team members to be 100% available for any task. This is a recipe for disaster – no one is 100% available for your project. There will be training days, sickness absence, team meetings, phone calls about other projects, coffee breaks, time spent surfing on Facebook and a number of other reasons why an 8-hour working day does not equate to 8 hours spent on project tasks.

Schedule team members at 80% available and across a working week (or longer) this should balance out. Your estimates will be better because of it!

3. Confusing tolerance and contingency

Contingency is a provision made within the project planning stages to allow for unforeseen circumstances. It is usually built into the budget or schedule. A budget tolerance is a range within which you can spend without having to report back to your sponsor and ask for more money.*

In other words, they are not the same thing. You have to ask permission to spend the contingency funds every time you want to dip into that pot. With tolerance, provided you stay within the agreed limit, you can go over budget (or under) by that amount without having to get permission. Tolerance is simply the ability to apply your professional judgement and is usually more appropriate on large projects with budgets in the hundreds of thousands or millions – where a bit of overspend can be easily lost in the rounding.

Contingency funds are for emergencies: unforeseen things. Or they could be used to offset some of the risk of a high risk project, especially one where the cost estimates are a bit vague because it is something you haven’t done before.

4. Forgetting tax

Most of what you buy incurs tax. Most quotes you get from suppliers do not include tax. If you take what the quote says and put that in your budget, you’ll be missing a big chunk of the actual cost to you.

In the UK, VAT is currently 20%. This is an extra fifth of the cost of anything you procure. Other countries have different tax regulations and you could find yourself having to pay a local tax as well as a national tax.

On top of simply remembering to add tax to the cost of the supplies you are buying, you have to take into account these different country rules. For example, in the UK, a vendor from a European country who is invoicing in euro will probably not be registered for VAT. As a result, they won’t put VAT on the quote or the invoice. Ah ha, you may think. That means I don’t have to pay it. Unfortunately, due to the tax legislation, it is quite likely that you will have to pay it anyway. The only difference is that it is paid directly to the government and not via the supplier. It’s an expensive pain for accounting, and the best advice I can offer is to talk to your financial accountants about how to treat tax if you come across any odd situations like that. Get advice early so that you can plan for any unusual tax bills that might be coming your way.

The easiest (if not the most accurate) way to handle tax is to add it on to everything in your budget. Then if for whatever reason you don’t have to pay it, you have money left over. It’s often easier to explain that to a project sponsor than it is to explain why you have to go over budget by 20% because you forgot to factor in VAT.

Next time I’ll be looking at three more common budgeting mistakes. In the meantime, what mistakes have you seen recently and what have you done to put them right? Let us know in the comments.

*These definitions come from my book, Project Management in the Real World.

Elizabeth Harrin is Director of The Otobos Group, a project management communications consultancy. Find her on Google+ and Facebook.