4 Questions You Should Ask About Your Budget
From the The Money Files Blog
by Elizabeth Harrin
A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts.
Written by Elizabeth Harrin from RebelsGuideToPM.com.
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Project budgets – don’t you just love them? Your sponsor gives you a complicated project to manage with a relatively low available budget, and you’ve got to take it from there. When you start a project, here are 4 important questions to ask about your budget so that you are completely prepared for the project.
How much have I got?
This is important to know! While it’s great to think that you will have the luxury of working out the full scope, detailing the project schedule and resource plan, then costing it out and submitting that number, plus tolerance, to your project sponsor for approval, the reality is very different. By the time the business case and Project Charter have been approved, there is already a good idea of how much money is available for your project. That’s your budget, whether you like it or not.
So, it’s important to know what that figure is so that you can track expenditure towards it. If you do find then that you can’t achieve the project objectives within the amount that you have been given, that’s the time to put forward a change request to get the budget increased.
What’s my authorisation limit?
Can you sign off invoices and purchase orders? And if so, up to what value? There is normally a sliding scale of sign off authorisation limits in a company depending on the level of management. You may find that you have complete authority to sign off anything related to the project but it would be more normal to find that you have a capped ceiling on what you can authorise.
For example, you may be able to authorise expenditure up to $50k, but anything over that needs to be approved by your manager. Anything over $500k may need to be approved by a director, and anything over $1m by the board.
Establishing your authorisation limit now will save a lot of time later and avoid purchase orders being bounced around waiting for someone to approve them.
What’s acceptable tolerance?
Talk to your project sponsor about what levels of tolerance they are prepared to accept. For example, if you forecast that a particular cost will be $100 with a +/- tolerance of 10%, you can spend $90 or $110 without having to let the sponsor know about it. They may be happy with this, or say there is no tolerance, or set another percentage.
Knowing the tolerance levels gives you a little bit more flexibility with managing the numbers and ensures that you aren’t always asking them to approve a tiny bit more. You can have tolerances per budget area or for the overall project, so agree with your sponsor how they want you to manage tolerance on the project tasks.
How do I access the contingency fund?
Best find this out before you actually need to use it! Contingency funds are for unforseen problems – project disasters. They are not for planned risk responses or any other type of planned work. So if you think about when you are likely to need access to your contingency fund, it is probably going to be with relatively short notice to deal with something no one saw coming and that will have a big impact on the project.
In that sort of situation you don’t want to be spending a week finding out how much is available, how you can get approval to use it and who needs to authorise it for you. Find out all of this in advance so that the information is at your fingertips when you need it. Even if you never have to use it (and let’s hope not) at least you’ll then know what to do just in case.
Posted on: August 21, 2013 04:19 AM |
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Comments (4)
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"If you do find then that you can’t achieve the project objectives within the amount that you have been given, that’s the time to put forward a change request to get the budget increased."
Well in general, management thank you for your input, but keep the budget as is ;-)
Ha! Well, that's the difficult balance of being a PM and being able to deliver "more with less"!
Bernard Gore
Portfolio, Programme & Project Professional| NZ Police
Wellington, New Zealand
Another question I'd add - is this confirmed funding? In other words, is it really, defnitiely absolutely there for the spending and going to stay there. Or is it, all of which I've seen:
Sort of there, but still subject to some confirmation. Something the sponsor THINKS they can spend as they like, but no formal approval. A pot of money that other projects or work may also be feeding from. Subject to the whim of someone, and liable to just vanish one day. Subject to certain deliverables - so that if you don't get some requirements satisfied, it won't be released. Time-bounded, so needs re-bid if you don't spedn by end of financial year or other fixed time. Available and confirmed, but in next years budget, so can't spend any till then. Illegal - likely to get the attention of tax, money laundering regulators, or worse (and I'm not kidding - I had a sponsor in a major company try to fund a pet project with a brown bag full of notes that a client had given him).
Bernard, great addition to the list! I too have struggled with sponsors who say they are going to go ahead with the project and yet, when pressed, confess that actually the board hasn't signed off the budget yet. But I've never had anyone hand me a brown bag of notes!
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