The actual process of developing a project budget is straightforward. The general challenges lie more with omissions and the foundation the budget is based upon. In this section, we will review the details of the develop budget and finalize budget steps that we have depicted in our general project planning process flow (see Figure 9.1).
Figure 9.1. The budget-focused planning steps.
Sources of Project Costs
The first step in building a project budget is to identify your costs. This sounds easy enough, right? Let's review the cost sources that need to be considered. These cost sources are summarized in Figure 9.2.
- Labor costs One of the key budget cost items. Budget should reflect a line item for each person or rolewhichever makes the most sense for your project. Costs are based upon resource rates and estimated work durations. When dealing with external labor, these costs are a key component of the business relationship and normally easy to obtain. However, it can be difficult getting rates for internal resources. In most organizations, either the human resources or finance department should have standard labor rates for internal resources based on role.
- Equipment This category generally includes the tools that the project team requires to complete the work of the project. For budget purposes, the keys with the equipment category are twofold:
- Completeness Using a bottom-up estimating approach should identify all equipment needs from a task perspective. For knowledge-based projects, you need to account for software-based tools too.
- Expense versus capital You should work with accounting to determine if your equipment costs need to be expensed at full cost against your project or if your project just needs to reflect depreciation cost. Different factors can influence this decision, but the most common one is whether or not the equipment will be used by more than one project.
- Materials This category includes those items that are needed to build the product. The information is generally found in the product specifications document. In dealing with vendor relationships, you would either acquire or confirm material costs by reviewing vendor responses to the formal procurement documents.
- Licenses and Fees This category includes costs such as software licenses, building permits, and so on.
- Training This category includes the cost of any training your project team will need to do their work and any training your users may need to use the final product.
- Travel This category includes the travel and lodging costs to be charged to the project that will be incurred by any project team member while doing the work of the project.
- Operational costs This category includes the costs associated with the maintenance and support of the final product. In addition, there may be costs to dispose of whatever the project is replacing.
- Disposal costs This category includes the costs associated with the disposal or removal of whatever the project is replacing.
- Overhead costs This category includes the common overhead costs incurred by any project. Items typically included are facilities, administrative assistance, security, and technology infrastructure. Depending on the organization, these costs may not be allocated to individual projects or there may be a pre-determined percentage or amount that is used by all projects.
- Costs of "change" A focal point of project planning is to consider the "change" impact that the project will have. This category would include any costs (change management programs, initial productivity loss) that can directly attributed to the change factor. These costs should have been considered during the project selection phase as part of a cost-benefit analysis or return on investment analysis. In addition, these costs may be accounted for in the other budget categories. The important thing here is to think about these costs up-front during planning.
Figure 9.2. The budget costs to consider.
Develop Initial Budget
Once we have our resource requirements and work duration estimates, we can start to develop the budget. Like the estimates for work, it is best to estimate your costs at the work package level. By taking a bottom-up approach, you are in the best position to identify all of your resource needs and develop a more realistic budget. In addition, many industries and organizations have cost estimate models that can be leveraged, too. These models are best used during initial planning activities and as a cross-reference and validation tool for your detailing planning efforts.
Unless your organization has invested in an enterprise project management application with an emphasis on project costing or you have advanced skills in project scheduling software, I recommend the use of spreadsheet software (such as Microsoft Excel) for your project budget. I favor the spreadsheet approach for three principal reasons:
- Capture all costs The spreadsheet approach allows you to easily capture all of your project costs (and not just labor costs which is the primary cost element captured by your schedule).
- Flexible The spreadsheet approach offers flexible options in how you set up and organize your budget. It can also be used to track your project costs during project execution.
- Easy analysis The spreadsheet approach comes with built-in analysis and reporting capabilities that can be easily leveraged.
Most project scheduling software programs offer a resource schedule that will show the total hours (and total costs) that each resource incurs each over the desired time period. This feature can be very helpful to your budgeting process.
The two keys for setting up your project budget are to set a line item for each cost source and to use columns for each time phase (period) that will be tracked.
Once the schedule nears completion and the actual resources have been identified, we can finalize the project budget. Besides firming up rates on resources and estimates on other cost factors, there are several objectives to accomplish in this step.
- Validate procurement tasks scheduled Make sure that all the tasks dealing with procuring resources (labor, equipment, materials) are accounted for in the project schedule (and WBS). Common tasks include ordering, delivery, setup, and payment.
- Reconcile task costs versus resource costs In most cases, there will be gaps between resource assignments on the schedule, or resources will not always be scheduled at maximum capacity. Much of this depends on how efficiently resources are leveled. Nevertheless, if your resource costs are based solely on assigned tasks, your budget may not reflect the actual resource costs you will incur. For example, Joe Analyst may only have 26 estimated work hours assigned one week, but is fully booked at 40 hours the following week. You can't afford to release Joe for the small gap that exists, so the project is generally accountable for all of his time both weeks. This situation also depends on the level of responsibility the project has for maximizing resource usage, the level of resource planning done in the organization, and how time is reported.
A good rule of thumb is to calculate personnel costs by taking their rates multiplied by a given calendar time period. For example, if I know Joe Analyst is on my project for 12 weeks, and I know he is generally a full-time resource, I will calculate a resource cost for Joe by taking Joe's hourly rate x 40 hours x 12 weeks. This is likely to give me a truer cost estimateat least a more conservative one.
- Finalize management reserve Based upon all known risk factors, finalize the buffer amount to be added to the project budget. The specific amount will vary depending on risk level, industry practices, and management philosophy.