Learn English through Project Management

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We have been thinking about how to give you more help in project management area. It is well known that international concepts and thoughts in this field are changing constantly. In this view, we have prepared some English articles and hope that you may learn project management knowledge, improve your English, and also understand those professional PM vocabulary.

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Learn English through Project Management

Your First Project Budget

What You Should Know

So you’ve been given a project with a budget? Or you’ve been asked to create a project budget for the first time? Here’s what you should know.

The expected total

Even if you’ve been told to create a budget from scratch, the person who asked (your project sponsor) already has an idea in mind for what the “right” number is. Save yourself some time and ask them to tell you what their expectations are for the final figure.

Now you have to work out how close you can get to that number.

Breaking down the cost elements

You need to work out how much each individual element of the project is going to cost. This is called bottom up estimating.

Take your list of items and estimate a cost for each one. Involve any subject matter experts in this and make sure that you take into account any constraints and assumptions. The aim is to get a detailed and accurate (albeit estimated) take on how much each element costs.

Add the individual estimates together, and that’s your total expected spend. Hopefully, this matches the initial expectations of your manager or project sponsor.

Review against expectations

Once you’ve done some work on the budget, you’ll have an idea of whether you can hit the target they have in mind. If it looks like you’ll need more than that, you can start to position the scope of the project in a way that helps you get closer to the number. Here are some suggestions:

• Take scope items out

• Propose a Phase 2 so that extra funding can be secured later for additional features

• Reduce the resource requirements so you use cheaper resources, and accept that this might mean the project takes longer.

Or, of course, you could build a robust defence for why your project is going to cost more than your sponsor originally expected! Use data and facts to create the justification.

Next, you should talk to your sponsor about the other budget areas that should be considered before the budget is considered final.

Add management reserves and contingency

You can find out more about management reserves and contingency in this article, including how they fit into your overall budget.

Talk to your project sponsor about making sure there is adequate contingency for the project, and management reserves as required.

Add a risk management fund

If your project is relatively large and likely to be affected by significant risk, then it’s worth building in a risk management fund.

Basically, a risk management fund helps you pay for the activities required to mitigate, transfer or otherwise deal with risks. Instead of just tracking the risks, you can actually do something useful with your pot of money to offset the impact they might have on the project.

Set tolerances

Finally, talk to your sponsor about budget tolerances. That basically means the boundaries within which you can act without going to them for further approval. On a budget of £1m, you don’t want to be asking them for sign off because you need to spend an extra £10. Set some limits with which you are both comfortable and that give you freedom of action but ensure some rigour.

Note: tolerances in this instance specifically relate to financial boundaries, but the concept of tolerance is useful for other areas of project management too, like setting boundaries for schedule and risk. Tolerances provide you with guidance around how you can act without escalating.

Finally…

With all the calculations and discussions out of the way, you should be at a point now to agree the final budget. This figure is what you will work to and track against during the life cycle of the project. It’s the figure approved for your project, and you’re responsible for using the money wisely.

Report spending to the project board or steering committee and make sure you keep your numbers up to date. If you need help with tracking spend in a way that is considered appropriate by your company, start with the PMO. They probably have software or spreadsheets you can use to store all the financial figures. If you’re lucky, it might automatically create the information required for your financial reporting too!

Want more tips on creating a budget? 

Read this next:

5 Ways to Create a Budget

Blank spreadsheet, new project. Where do you start? Here are 5 options for creating your new project budget.

Bottom up

This is my personal choice most of the time. Work out the cost of the individual items included in your project budget and then you add them up to get the big picture. Simple. Especially when you can rely on subject matter experts to give you the figures. All you have to do is ask intelligent questions and make sure nothing is overlooked.

There’s more on how the elements of your budget fit together starting with the individual task estimates created through bottom up estimating here.

Top down

Parametric estimating is not a method that I tend to rely on, but it does work. It relies on you having sensible data to use at an overall level (although there is no reason why you couldn’t decompose your tasks and work it out at lower levels).

For example, if it takes one person three days to dig a trench and you need three trenches, that’s nine days of digging.

The risk with this very simplistic example is that maybe people need a rest day after they’ve been digging for two days. Or maybe one of the diggers doesn’t dig as fast as the others. Still, if you’ve got a reliable way of using data to extrapolate your estimates, you may as well use it to give you an overall, high level estimate while you consider other techniques to refine your approach if necessary.

I’d be interested in hearing about examples from people who have successfully used top down or parametric methods to work out their budgets to understand more about the type of projects it is useful for. Get in touch if you have anything to contribute on that topic.

Based on previous projects

This is a method I’ve also used successfully, although it does rely on:

• Your previous projects having good cost management processes

• Your previous projects being updated when estimates change

• Making sure that you are using the latest estimate data and not the original budget forecast from the project initiation stage.

If you can get round that and use real, validated data from previous similar projects, then I think this is a very robust approach to putting together a budget for your new project.

For example, we often repeat project implementation phases in multiple sites. The initial planning and set up at one site might take a bit longer than by the time we’ve done it 25 times in 25 locations, but essentially the steps are the same. We use the data from the first two or three installs to determine the implementation plan for the other sites. Then it’s almost a case of working through a project checklist and productionising the deployment of software on site. Of course, we always hit some kind of unique problem, but if we know there will be something at each site the overall timescales are still virtually the same. It does mean that sites that will get the software in the future are able to know with a high degree of certainty about when the project team is coming to them.

Using three point estimating

Three point estimating takes some time to do. OK, all estimating should take time to do if you are doing it properly. But three point estimating takes more than the others as you aren’t estimating once, you’re estimating three times.

First, you estimate the optimistic time for completing the task. Then you estimate the most likely result. And finally, you need a view of how long it would take if it all went a bit wrong – the pessimistic view. Then you use the formula:

Take your most likely estimate and times it by 4. Then add on the optimistic estimate and the pessimistic estimate. Divide the total by 6. That gives you a weighted estimate of how much the task will cost, weighted in favour of the most likely cost, but taking into account the fact things might go well or they might not.

A combination of approaches

I know I’ve said that bottom up is the approach I rely on the most, but really, it’s this one. I use whatever works at the time, and in reality that’s a combination of approaches based on the data I have, the expert input available at the time and my best guess.

I think that given the choice, most project managers would opt for this approach to building their budget. It’s the most flexible, and gives you the best chance of coming up with a sensible budget. Where you’ve got data for parametric estimating, you can use it. Where you know how to decompose the tasks, you can plan from the bottom up, and so on. Why limit yourself to one way when actually a combination of methods would get you a better result?

The only thing to remember is to make sure that your cost management plan includes the assumptions and parameters you are using to estimate so that if someone else needs to review your budget it’s clear to them how you came up with the costs you are using for each element.