The Project Notebook

Practical Budgeting for Project Managers – Part I

[In a recent update to an online course, Controlling Project Costs and Risks, I added a version of this material]

What is a Project Budget?
Let’s start with the PMBOK® Guide, Fourth Edition definition:

[Budgeting] is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.

Project budgets constitute the funds authorized to execute the project. Project cost performance will be measured against the authorized budget.

Unlike corporate balance sheets and income statements, project budgets are normally about expenses and not revenues. Revenues are normally considered a part of the sales process or product management process, where sales must meet revenue targets established by senior management. Senior management initiates projects to create products and services, and the project manager is often responsible at some level for the budget.

Consistent with the PMBOK® Guide, this presentation is going to exclude consideration of revenue. Those managing product development may indeed be required to look at revenue, and the budgeting principles are very much the same as for expenses. Those managing products also need to be able to trace the flow of money at times to defend their product. For example, I was once turned down funding for a product which was given to all users for free. Tracing how the money flowed, I found that more than half of the revenue of a particular high profit margin product would be cut off if the “free” product didn’t exist. Using that argument, I was successful in securing the necessary funding to improve the package for which I was responsible.

The Project Manager Role in Budgeting
Project manager involvement in the budget process often depends on company culture, process, and policy. During my career, I’ve been personally involved with budgets at different levels:

-Projects where all resources were salaried employees and their costs were not tracked at the project level.
-Projects where I was provided with a budget and had to work within its constraints.
-Projects where I created a plan, then a budget, and negotiated the final budget with senior management.
-Business units including projects with projects managed to one of the above levels.

Understanding some basics of budgeting will enable you to successfully work in any project environment.

There are many ways to approach budgets. The high level budget presented in the project charter is usually top down, based on rules of thumb or heuristics. To successfully manage project costs, the project manager will need a more detailed understanding of the project and should create a budget bottom up based on the work packages of the work breakdown structure. For larger projects or rapid application development projects, the bottom up budgets may be reviewed iteratively.

Next week: We’ll look at the budget considerations for types of costs.

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© 2010-2012 Ray W. Frohnhoefer, MBA, PMP, CCP