Let’s Talk About Effective Project Budgeting

Budgeting helps you create an action plan for arriving at your project’s objectives and strategic milestones. Effective project budgeting requires you to have measurable quantities of your expected project resources and should also account for any anticipated business benefits your project will provide to the organization.   You should build your project budget at two levels: short-term and long-term.   Your project’s short-term budget must cover your operating expenses for immediate future while the long-term budget focuses on your needs for multi-year project.

Regardless of the time frame, your project budgeting activities should define what you will do with the money and account for all related income and expenditures.  The areas you should be looking at include the overall organization (such as HR, legal, compliance, accounting, and other services), your operating unit, the program budget if your project is part of a larger program and your much more specific project budget.

Project budgets should be estimated by the project team, and these efforts are typically led by the project manager.  You will be building cost estimates based on the planned project scope and your resource-loaded project schedule.  Typical project costs found n the project budget include collected individual estimates, calculated resource commitment levels, indirect costs, overhead and general and administrative costs for the project.

Simply put, the four activities of project budgeting are:

Planning  When planning your project budget, choose your goals carefully.  Be sure to consider your organization’s mission and to account for metrics as part of your budgeting process.  You should determine the reason you are creating a budget and create a budget that meets these requirements.  Effective project managers review budget options and predict results while building their budgets in an iterative and incremental way.  Be sure to ask yourself the right questions. In light of your corporate goals, what are tradeoff and cash flow issues? What about payoff time?  Choose the best budget option for your project based on the context, market realities and your organization’s short-, mid-, and long-range visions.

Coordinating and Communicating Your project budget is probably one budget of many in your organization.  It is important that budgets across the organization support one another.  Your hierarchical budgeting process should achieve balance within this budgeting framework and justify higher-tier budgets that the project sits within. This enables you, the project manager, to be realistic with your project’s tactical planning.  Your resulting project budget should facilitate executive decision-making as needed, put the actual budget results in terms that your key stakeholders understand and be synchronized across all tiers of budgeting in your organization.

Monitoring Progress Once the project work begins, the planned project budget will be compared with actual costs as work is done.  Your cost monitoring activities on your project should be frequent enough to allow you to note cost variances quickly and respond effectively and efficiently to what is happening.  During project execution, budget corrections at any tier should be both incremental and timely.  Remember, your project’s budget performance is about results.

Evaluating Performance  To improve your project budgeting process, be sure to evaluate it during and after the project is complete.  Make sure that the project or budget manager has used allocated funds for intended purposes, kept the actual expenditures in line with the plan and maintained accurate documentation of what has happened over time.  Organizations also use budget performance as an indicator of many things, such as employee motivation, a basis for compensation decisions, your career advancement potential and capability for future assignments as well as future resource allocation.

Common mistakes in project budgeting include imposing a budget on the team versus building a representative budget for the scope of work being attempted.  Another risk that can overcome you is ignoring your risk exposure during the budgeting process.   Try to avoid these mistakes if you can!

Learning Tree’s course entitled Project Budgeting and Estimating: Taking Control of Your Projects can help you learn valuable skills and techniques for skills to estimating realistic project budgets for completing your planned project scope. You will also learn how to leverage your approved baseline budget to support the organization’s strategic objectives and get the job done right.

Happy project budgeting!

Susan Weese

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