I get it. Managing project budgets is daunting when you start out. Suddenly, someone is giving you thousands to track and manage. You’re approving invoices for more than the cost of your household monthly outgoings.
I was lucky in that when I was very junior in my career, my manager gave me the job of tracking the project spending on a larger project. He was the main project manager, and I was part of the project team, managing smaller initiatives, a workstream, and the budget and risk management. Probably because no one else wanted those jobs! They aren’t the most glamourous part of project management, but the experience actually served me very well for the future.
I got used to the scale of the numbers we were dealing with.
But you have to start somewhere, and like me, you need to get your hands stuck into managing budgets before you get confident with the methods used for tracking, monitoring and controlling project finances.
When you’re starting out, you might need a bit of support with the processes and techniques for budget tracking. The infographic below shares 6 places you can go for help. Of course, you can also talk to your manager or mentor as the first point of call. There are lots of places to get help if you are new to project budgeting, and plenty of people prepared to give advice! After all, the business has a vested interest in you learning more and being able to manage the money confidently!
There’s more information about where to go for help with project budgeting (including some ideas of my favourite books) in this article.
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So you’re a new member of the Project Board? And wondering how to approve funding for the project?
Come in, sit down, let me tell you what to expect!
First, you should know that every project-led organisation tends to do things in a slightly different way, and managing money is no exception. So you’ll need to find out exactly how your PMO process works for project funding. What I’ll describe here is a generic, common process. There might be unique tweaks for your environment, depending on how your PMO and exec team work together, what country you are in, whether you are a non-profit, and so on.
But broadly, this is how project funding approvals work.
Funding in principle: the business case
Projects start with a good idea, which is summarised and explained in the business case. At this point, senior decision makers will choose to accept (or reject) the project. If it goes ahead, they’ve approved the funding in principle, even though no one actually gets the money to spend at that time.
Typically, projects are prioritised by importance and need, so your project might not get started for a few more months. When the time comes for your project to start, the project moves into project initiation (kick off) and work can begin.
Budgets are typically handed out in phases. If you have a 5-year project, for example, you won’t get handed all the cash on Day 1. That’s bad business planning because there might be other things you can be doing with the Years 2-5 money right now. Plus, I expect it would give your business a massive cashflow problem to tie up money for that length of time when you aren’t forecasting to spend it for ages.
So money is dripped out, normally linked to the project stage.
When the project begins, you’re in the kick off and planning phase, so the money is allocated for the planned work happening in the current phase.
When you reach the end of this phase, you’ll move into the next phase of the project. There’s normally a Project Board meeting or other approval point, at which everyone agrees that the project is on track, going to deliver what it said it would, and it’s worth carrying on with the work.
You approve the project to continue, and that is the milestone that releases the next wave of funding for the next phase of planned work.
You’ll also be asked, in your capacity as a Project Board member, to have some degree of oversight over the change budget.
Change budgets are money set aside to pay for changes. The project budget only covers the planned work. Changes – the clue is in the name – are changes to the original scope that you didn’t know about at the time of planning the original budget. And normally changes cost more. You’re either paying to redo work, or to increase the scope and add extra stuff in.
The change budget is there to cover the cost of changes. The Project Board can sign off on a change and release the money from the change budget to pay for it.
Note: the change budget isn’t there as a lovely cushion for overspending. If the project manager asks to dip into it but there isn’t actually an associated change, then your answer should be no. It’s not there to fund general bad planning. If no one requests a change, then you can’t spend it!
The final type of budget that the Project Board will get involved with is the risk budget. Again, this is a budget only to be used for certain things, not as a slush fund to dip into whenever you feel like the project needs a bit extra to help get over a challenge.
The risk budget is to pay for risk management activities and the impact of risk. Once a risk has been identified, and the financial impacts of it are known, the project manager can ask the Project Board to approve spending. The money goes towards taking steps to mitigate or better manage the risk in some way. Or it could be used to pay for whatever is needed at the point the risk occurs.
Don’t let project managers spend it without it being attributed to a specific risk management task! And if you are feeling really strict (or if your PMO dictates) you shouldn’t use the risk budget for any risk other than the one that was specifically allocated at the time.
Personally, that final clause feels a bit draconian, but look at your local rules.
So that begs the question: if you can’t use change and risk budgets to deal with things other than changes and risks, what happens when the project goes over budget?
You decide. The Project Board either needs to decide that the project is “worth” the extra and puts extra money into the project. Or it decides the business can’t fund that. Your business is not an unlimited pot of money. Being careful with how it is managed is the only way to ensure more projects come in on budget, every time.
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Every so often I do a roundup of questions that I’ve been asked, relating to the topic of this blog – project budgeting. Let’s dive in to some more of your questions about project budgeting!
What’s the best tool for managing your project budget?
Unfortunately, there’s no simple answer to this. The answer depends on how your company expects budgeting to happen.
Many companies rely on Excel to track and report project budgeting. I have an Excel spreadsheet myself that tracks invoices and purchase orders, as well as current budget and forecast. We have a corporate template so all projects track the same thing, although because it’s Excel it is possible for project managers to amend the spreadsheet and personalise it. There is some latitude to track what’s important to this particular project. For example, sometimes I need to track spending in different currencies or with different tax rates, and not all projects at my company require that.
So – while I can’t give you a one-size-fits-all answer to this question, the answer lies in your PMO or Finance department. Talk to them about their requirements. Do they want you to enter data in your project management software (that’s the main alternative to spreadsheets) or do they have another way they want you to track your budget?
If there is no corporate standard, you have the latitude to work it out yourself. Spreadsheets are the easiest to get started with. Ask another project manager what they do, or search projectmanagement.com for templates.
How much contingency should I add?
This question comes up a lot!
And unfortunately, again there isn’t a simple answer. You might have organisational standards about how much contingency gets added to a budget. But in my experience, that isn’t the case. Project managers are largely left to their own devices and are expected to work out contingency themselves.
You should ask yourself:
The answers to these questions will help you work out whether you need to be generous with contingency or whether you can cut it back a bit.
The riskier the project, the more different it is from things your company has delivered in the past, and the level of confidence you have in the whole thing determine the contingency.
A reasonable starting point is 10% on the whole project budget. Cut it down for areas where you have confidence – like project initiation and close down, where the tasks are relatively standard and you can estimate the work more accurately. You might need to boost up contingency on project areas where you are doing unique work that hasn’t been done before and where your estimates are basically guesses.
Always make your contingency explicit in the budget and explain to your sponsor why it’s in there.
What’s a project budget summary?
It’s just the headlines of the budget. For example:
You use the budget summary in your project status reporting. It goes in the box about project budget update (or whatever your similar section on your report template is called). All it’s for is to give the project sponsor and the wider stakeholder group the short version of where the project is with its spending. They don’t care if you’ve spent £3.50 this month on stationery suppliers for team members on the road. They only want to see the big picture, and the summary statement gives them that.
If you feel that the total + current spend + narrative doesn’t give them enough information (or they are constantly asking you for more detail) then provide what’s necessary. They may want estimate to complete or some other type of information. Ultimately your project reporting should deliver what they want to know about the project, so ask them if your summary is hitting the right points and if not, switch it up.
I’ve done other Q&A articles before. If you enjoyed this one, check out the other instalments in this series.
And if you have questions for me, please drop me a message! I’d love to feature your question in an upcoming article.
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I’m often asked: “What do I need to include in a budget?”
I figured it was time to put together a list of what should be included when you are putting together your project budget. So here goes…
Record any goods you need to buy. Record what you need to hire and the duration you’ll need it for. All these things should be in your procurement plan, so use that as a reference. Make sure you’ve put everything from your procurement plan into your budget.
Consumable supplies are different to equipment because they are things that get used up. For example:
Again, check the procurement plan to make sure that you’ve included everything you said you would need to buy.
Essentially, the difference between equipment and consumables is the difference between capex and opex.
Many projects rely on external resources, either from a manufacturer/supplier e.g. to help you install and set up new equipment, or as consultancy resource to do a particular skill e.g. requirements analysis.
Look at the equipment and supplies you need, and see if any of them have the requirement to rely on their own resource – if so, you will need to budget for the people to come with the goods.
Consider what services or skills are required, and whether or not you have them in house. If not, you should budget for buying in those skills e.g. test manager, specialist developer, auditor, health and safety expert, lawyer etc.
If you have to hire people from overseas, or have contractors who will charge in a different currency, read this article on how to manage multi-currency budgets.
Companies vary in how they account for internal staff. You may be expected to cross-charge a department for using internal resource on your project. Or you might be able to use the people “for free”. Check what your internal rules are.
Budgeting for internal staff is one of the hardest things to do on a project, in my opinion. You aren’t charged for their person at their salaried rate, so you’ll need to find out the appropriate charge to budget for.
Make sure your project budget includes applicable taxes at the relevant rate. Often, suppliers provide estimates without taxes included, and if you don’t increase the quote amount by the tax amount, you’ll find your budget is wrong.
Expenses relate to the costs for the people involved. Whether you are using internal staff, external staff or a mixture of both, they will likely incur some expenses for travel and accommodation. For example, if a supplier attends a meeting at your office, they will most likely charge for their travel to that destination, and hotel accommodation if they need to stay over, and meals.
Some companies also (or instead of) charge a ‘per diem’ which is a daily fee to offset incidentals that consultants away from home incur. It may include a meal allowance, newspaper, laundry etc, but instead of invoicing you directly for all of these incidental costs, the company charges you a flat rate per person per day.
Contingency/Risk management budget
Contingency funds are there to offset risk. Contingency planning can be in the form of time or money. Time also costs money, so either way, make your contingency explicit in the budget.
As well as contingency, it’s also worth including management reserves if you can. This is a figure put aside to deal with unknowns. However, you’ll also hear people refer to management reserves as the ‘contingency budget’ because sometimes they don’t know the difference, or because in their organisation, ‘contingency’ really does mean ‘money put aside in cases of emergency and we don’t know if we’ll use it up but it’s nice to have just in case.’
If you aren’t clear on the preferred jargon of your business, ask the question. Make sure you and your finance team (and sponsor) are talking about the same thing.
Watch this video for tips on how to reduce your project budget.
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My favourite way of creating a project budget is to first ask how much money I’ve got, and then go from there :)
I know it’s not the best way – or even the most ‘project management-y’ way – but sometimes it’s worth cutting to the bottom line and using that as a starting point. What a waste of time costing out a project beautifully only to have executives tell you to try again, and make the number 50% less. Let’s just start with where we are supposed to end up!
However, that’s only one way to create a budget, and, as I say, is hardly best practice. In this short video, we’ll look at 3 more reliable ways to build out your project costs so you can establish how much your project budget will be overall.
For more background on how to create a project budget, this article will help you get your thoughts together before you dive in.
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