Friday, November 18, 2011

Beginners Guide To Project Management
Part 10, The Project Budget

Knowing (or predicting) how much the project will cost is critical from getting approval for the project till the very end of the project where you can extract some performance indication of how well the project manager did. In between, the project costs form a baseline, much like the project's schedule, that allows the project manager to have some control over the project: to correct course when needed and to evaluate the impact of changes as they occur. Moreover, it allows the project manager to update the initial estimates as the project evolves so the project manager can tell at any point in time what is now the estimate for the total project cost.

Previously on the “Beginners Guide to Project Management”
Introduction

Initiating

Planning


Context
But starting from the beginning, what is a project budget? A project budget is a schedule with all the planned costs of the project - human resources, contracts and materials. This means that you associate a cost, a date (or a period like a month) and either an activity, a contract or a material. And it serves as an estimate of cash needs along the project life. In practice, you can use your schedule and add the cost information to each activity listed there. Although some types of costs are pretty obvious to put in a schedule, others are not: where do you put on the schedule the rent you're paying for the office where your team is working? What about the equipment you'll have to buy, like a printer, for instance?
Isn't this a bit of an exaggeration? I mean, when you need something done in your home (like new windows) you just call a contractor, tell him what you want and he looks around, counts the windows, checks with you what type of windows you want and then he says how much it will cost you, right? Sure it's like that in simple cases, but even so in this case the contractor had to go through the basics of the process of building a budget - and this is the purpose of this article: to show you how to get a project budget.

(i) Get the schedule
I don't think there's a significant chance of doing a budget without using some software (like the contractor did in the previous example) so I'll assume you're using some kind of Project Management software where your schedule is already put in.
To build a budget you'll also need to have present in your mind the whys and whats. This is key to have you focused on the budget that best serves your project. Remember the Sidney Opera House project? If you don't, you'll probably be surprised to learn that the project itself was considered a completely failure then - there was a huge cost overrun and some of the reasons for that where a mismatch as to purpose (the whys) between the architect that designed it and the project sponsor. You can check part of that story here.

(ii) Estimate activity costs
This is the basis of building the budget, as all of the budget is support upon the estimates you come up with for each activity on your schedule. Now the question is: how do you estimate the cost of a given activity (and you'll have to do it for each activity on your schedule)? Depending on you project, you can do it combining some of the following (this is not an exhaustive list but just the most common I found in my own experience):
  • Your experience: or in a more general way, what the Project Management Book of Knowledge calls "Expert judgment". Imagine you are the contractor in the previous example. Your experience from previous similar projects (where you had to change windows in a house) tells you that each window costs a certain amount of money and you can use that figure.
  • The team's experience: if at this point you have a team assigned you could have used the team's opinion to build the schedule and so use it again now to compute how much that would cost having so many people doing it. This is the approach used in Agile and has the visible benefit of commitment of the people who are actually doing it.
  • Parametric estimation: this is commonly used in industries such as construction where it's expected to have data on average values like the cost of painting a square meter (or foot) of external walls. The idea is, having these average unit costs, compute the total multiplying it by the total area.
One good thing to record alongside with the estimates is the assumptions associated to them and possibly also the basis (your experience, your team's experience or parametric) and the range (for instance, between 1.000 and 1.100 € - or USD or whatever the currency used). Now, when you have an estimate all you have to do is to add it to your schedule. Once you do it for each activity, you can have the total cost of the project, right?

(iii) Add "hidden" costs
Not quite. What about the costs that are not related to manpower? You'll have to buy paints and brushes (or whatever you use to paint a building) if that's what you're going to do. You may have to rent some equipment that allows access to the exterior walls of the building. And even worse are the costs that are not even related to any activity in particular; such is the case where you have to rent an office for your project team. All of these have to be incorporated into your schedule somehow if you choose this approach - and I do think this is the best way to do it in most projects (the exceptions would be big projects (in duration and in cost) and in such case this guide isn't for you to apply, maybe just take a few ideas from).
Most Project Management software available has a way to specify variable and fixed costs of activities (variable or fixed as to the duration of the activity). So variable costs would be the ones related to manpower or renting a machine - the longer the activity lasts the more you pay. The fixed costs would be related to those things that you have to buy in order to do what you have to do: in the case of the constructor and the windows, each window would be a fixed cost as you would have to buy them and the cost will be the same if you exchange each window in an hour, a day or a week.
In the particular case where you have such costs as renting an office for your project team or any other kind of contract, the down side of putting them into the schedule is that you'll end up with a distorted schedule, that is, you'll end up with a schedule where there are activities that are not activities - like the monthly rent of the office. Oh yes, I didn't say it yest but you can change the schedule in this phase! The benefits from having one single document also with the information regarding costs largely compensates this in most cases. Plus, you can include these costs in an explicit way in your schedule that shows to anyone that these are costs not directly related to work.You can even change the WBS at his point to fine tune it by adding a branch titled "Fixed project costs" or whatever suits your particular case the best.

(iv) Other things that may play a part in the budget
Although there is a lot more to say about budgets (there are plenty of books about it and I'm synthesizing all that in this short article) there a couple of things that I think you should have in mind because they can have a huge impact on it: risks and context.
The risk associated with replacing your home's windows compared to the risk associated to a break through project (like the Sidney Opera House) is really small. You should somehow incorporate the risk into the budget. One bad idea is to increase your estimates (in duration and in cost) for each activity, but it's a bad idea basically because you loose any useful metrics in the process.The most common way to deal with this is either to (i) record the range of your estimates (if all goes as expected it will cost 1.000 € but if a certain risk occurs it could cost 2.500 €) or (ii) build a funds reserve. Both have benefits and cons, but I like the funds reserve better just because it's more transparent.
The other thing that can have a huge impact on the budget is what I called (lacking a better word) context. Context is the culture around your project (the culture of your project team, your key stakeholders and the organizations involved), the economic context (is everyone counting their pennies, for instance?) and the political environment (in the country and in the organizations involved). Just imagine you just started a governmental project last month in Italy. The government just changed, where does that leave your project?

Conclusion
It's a pretty good idea to start aiming at the end as far as budgets go. This article covered the very basics of project budgeting but I can tell you that, for example, if you plan to use Earned Value Management for project monitoring this article won't help you more than setting the very basics of it. But budgeting is always necessary when it comes to projects: from the very beginning when your sponsor needs to know how much the project will cost till the very end where, want it or not, your performance will be evaluated also by comparing how much the project was supposed to cost and how much was actually spent on it.
And even the contractor that goes to your home, looks around and shoots a price for replacing all your windows, does it pretty sharply.

Images from http://www.europarl.europa.eu

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