The Impact of the Project Budget

Even if you find yourself in an environment where it is not expected that you develop a project budget (instead you are asked to primarily manage schedule and scope), I strongly encourage you to do two things:

• Do it anyway Develop a project budget anyway. This exercise will build your project management skills, enable you to recognize project performance issues sooner, and better prepare you for senior management discussions about your project.
• Follow the money You should have determined this as part of project definition, but just in case you have not yet, make sure you are totally clear on who is financially sponsoring the project and who controls any financial-based decision to be made about your project. This awareness is key in your efforts to manage expectations and to understand the political aspects of your project.

The project budget estimates all of the costs the project will incur, when they will be incurred, and is a key component of the overall project plan. The project budget is important for the following reasons:

• Planning validator Since the project schedule is a main driver for the project budget, the budget can serve as an excellent cross-reference for the validity of the schedule and vice versa. By looking at the schedule from a cost perspective, you may see resource or budget issues that were not obvious before. Inversely, the schedule input is key for validating the project budget, because the budget needs to account for all the time a resource is required on the project.
• Performance measurement By measuring project progress against a cost baseline, you can better measure the true performance of your project along the way, and in most cases, identify issues and risks much sooner. This is the basis for an advanced project controlling technique called earned value management, which we will discuss in Chapter 10, "Controlling a Project."
• Managing expectations The budget impacts stakeholder expectations in several ways. The initial budget sets the expectation on what the total project costs should be. If the budget is not developed properly then you are bound to have an expectation issue. If the project budget is pre-defined and serves as a cost ceiling for the project then it helps you to set stakeholder expectations regarding project schedule and project scope.
• Cash flow management tool Your schedule drives the timing of your resource needs. Especially in organizations where resources are shared across projects or centrally managed, the accuracy of the schedule is key to efficient resource management.
• Justifying project investment With more projects accountable to a project selection process and to financial return on investment expectations, it is increasingly important to establish the cost baseline for the project and monitor closely.