Project Management Foundations: Budgets. [Summary]

1. What is a project budget?

• Project budget is important to avoid bankrupting the project by ensuring spending doesn't exceed funding limits.
• Triple constraints (schedule, scope, and costs) should be the focus when creating a budget.
• An analysis of achievable goals and costs is necessary for an accurate budget.
• Consider all major expenditures such as labor, materials, financing, and travel.
• Contingency funds should be set aside for addressing risks.
• Information from the project sponsor and major stakeholders should be included in the business case.
• Building an accurate budget requires effort, but it will pay off in tracking and managing project costs.

2. Budgets with WBS and project tools

• Create an initial budget from your work breakdown structure (WBS)
• Assign costs to each task in the WBS and assign control account numbers to tie with your accounting system
• Compare your initial budget to your sponsor's cost expectation and refine your initial budget by comparing your results to cost data taken from other projects
• Evaluate your schedule, risk management plan, procurement, and quality plan deliverables to refine your project budget
• Ensure that your schedule includes activities from your WBS and shows when you will be spending funds for forecasting purposes
• Detail the costs associated with mitigating risks in your risk management plan and include them in your budget
• Consider primary and alternate vendors in your procurement plan as using an alternate vendor can change your purchase and shipping costs
• Outline the evaluation or test processes you will use to ensure the product of your project is appropriate in your quality plan and understand how they may impact your project budget
• Use a small, standard set of project management tools to make putting together a sound budget for your project much easier.

3. Discover costing standards

• Costing or pricing standards vary by country and organization, and it's important to understand them when budgeting for a project.
• Internal costing or accounting practices of an organization should be understood to guide the budgeting process.
• Companies may have different budgeting rates for pre-planned and last minute costs, and it's important to consider both when budgeting.
• Understanding how the cost of people is tracked and charged to a project is important, including standard pay rates for employees and contractors.
• Verify the preferred costing standard for items like office space or telephone charges with the accounting department to propose and manage budget alternatives.
• There may be trade-offs between cost, skill, quality, and time, and understanding costing standards can help make informed decisions.
• No two projects will cost the same, and understanding costing standards and the experience of other project managers can help achieve budgeting success.

4. Consider enterprise environmental factors

• Enterprise environmental factors can influence project budgets and should be considered when building a viable project budget.
• Internal factors such as organization culture and budgeting cycles can influence project budgets.
• External factors such as market conditions, competitors, inflation, and international considerations can impact project budgets.

5. Examining capital and operating costs

• Capital costs (CapEx) are allocated for buying assets that create future benefits, while operating costs (OpEx) are for day-to-day business expenses.
• Accounting rules for categorizing expenses can vary by organization and country, and there may be tax implications for where costs are slotted.
• It's important to speak to the finance department to determine how expenses should be categorized before starting a project.
• OpEx and CapEx should be classified via the work breakdown structure, and expense reports should be built separately.
• Understanding the differences between capital and operational costs can help project managers better manage their budget and stakeholder expectations.

6. Types of estimating

• Project managers struggle with estimating accurately.
• Estimation should be performed in stages or types.
• The three types of project estimates are the rough order of magnitude (ROM), budgetary estimate, and definitive estimate.
• ROM estimates are built at the project initiation stage and are usually based on knowledge of similar projects.
• Budgetary estimates are a refinement to the ROM estimate and assist in determining whether to proceed with the project.
• Definitive estimates provide an accurate estimate of project costs.
• Management should be informed about the use of these estimation types during the project life cycle.
• Never publish just an estimation figure; qualify the estimate with the type of estimate it represents.
• The key to good estimating is to not provide a more detailed estimate than you have data to support.

7. Estimation approaches

• To increase notoriety as a project manager, it's not recommended to ignore sound estimation techniques and get estimates wrong.
• Expert judgment is a technique where an expert is consulted for insights and similar projects are used as analogies for analogous estimating.
• Parametric estimating uses industry-specific mathematical formulas to come up with estimates.
• Bottom-up estimating is a common technique that involves taking detailed costs from the lowest level of the work breakdown structure and summarizing them at higher levels.
• Bottom-up estimating can be improved by using the three-point estimating technique, which involves getting three estimates (pessimistic, most likely, optimistic) and applying one of two formulas (triangular or beta distribution estimate) to calculate the expected activity cost.
• Using these techniques will likely cut down on complaints about project estimates.

8. Establishing an estimating structure

• Project estimates won't always be accurate, but it's important to learn how to improve them
• An estimated structure with multiple points such as rough order of magnitude, budgetary, and definitive estimates is essential
• Standard approaches typical to the industry, such as parametric estimates, can provide reference data points
• Look for events in the project where updated financial information can refine estimates
• Refine estimates throughout the project life cycle whenever more detailed cost information is obtained
• Review cost or duration actuals to see how well the project staff did with estimates
• Clearly define the project scope and when updated estimates will be provided
• Overcome the fear of inaccurate estimation by providing accurate information as promised

9. Assigning costs to resources

• A project budget needs to detail when funds will be spent, just like a salary needs a specific payment date.
• Build a cost forecast by capturing all cost outlays in the project schedule, grouping similar cost types, and double-checking all costs for each task.
• Use a cash forecast chart to show total spending at various points in time.
• Refine spending dates, anticipate milestone payments to vendors, and track actual costs on the cost forecast chart.
• Analyze variances, anticipate issues, and proactively manage the project budget by diligently tracking expenses against the cost forecast plan.

10. Finalizing and communicating your budget

• Communicating the project budget early and honestly is crucial to maintain project integrity.
• Padding the budget with extra or unrealistic costs is not helpful and should be avoided.
• Contingency dollars should be added as a separate budget item with a clear rationale and detail on when and where they may be needed.
• The allocation of contingency dollars should be based on the sponsor's main concerns (e.g. cost or time).
• Difficult conversations about the budget may be necessary, but it's important not to avoid them.
• Different estimation techniques and data from prior and current projects can be used to validate the budget.
• Confirming costs for all materials and facilities needed is important to avoid surprises.
• When finalizing the budget, be open about how the estimates were made, share where contingency dollars are needed, and negotiate in good faith.

11. Budget considerations for agile projects

• Traditional project management and agile project management have different approaches to budgeting and cost management.
• Agile project management focuses on high-level scope, translated into features that are prioritized and can change as the project progresses.
• Detailed budget and cost plans don't make sense in an agile environment where scope and costs can change frequently.
• To manage costs in an agile project, focus on creating a resource cost plan based on team size and hours worked.
• Adjust the budget after each sprint to account for changes in scope, staffing, equipment requirements, etc.
• Track team's actual production of features against their plan and adjust the budget projection as necessary.
• Don't create a more detailed budget than you have information to back it up.
• The key is to maintain control without burdening the agile team.

12. The correct level of budget detail

• To manage project budgets effectively, begin with the end in mind and focus on achieving project outcomes.
• Two major factors to consider when building and managing project budgets are determining the level of detail required and how to track personnel hours.
• The level of detail required is determined by factors such as company culture and the presence of contracts, with three primary contract types being time and materials, cost-plus, and fixed-price contracts.
• Your organization's model for tracking staff time can also impact the way costs are tracked.
• Tracking people's hours helps validate current estimates and produce more accurate estimates in the future.
• Understanding your organization's financial reporting is crucial if your project is a substantial part of some manager's budget.

13. Prioritizing budget versus scope elements

• Project plans and spending projections rarely go exactly as planned, so it's important to know how to adapt and respond to changes.
• Scope defines the activities required to achieve the business benefits of the project, and scope adjustments can be made to respond to budget status changes.
• Increasing scope to deliver more features requires examining budget impacts, funding availability, schedule constraints, and potential cost impacts.
• Increasing budget to reduce risk may involve producing additional scope items or reducing scope to avoid risk.
• Reducing scope to balance cost overruns or overall budget cuts requires comparing potential benefits to costs and making scope reduction recommendations.
• There are trade-offs in any scope change, and it's important to diligently examine alternatives and provide options with impacts to scope and budget to assist the project sponsor in making sound business decisions.

14. Recover a bloated budget

• Projects are always changing, so budgets may need to be adjusted throughout the project lifecycle.
• A bloated budget is when actual spending is way over forecast.
• Common causes for a bloated project budget include unanticipated complexities, poor financial tracking, and changes in management's budget amount.
• To achieve budget recovery, it's important to understand the cause of the bloating and challenge the fundamentals of the project.
• Cost-cutting options include taking out some project scope, reducing the number of contractors, or teaching internal employees to do the work.
• A bloated budget is potentially recoverable with good management and control.

15. Earned value budget tracking

• Earned value budget tracking, also known as earned value analysis, helps people understand how much a project has earned based on completed tasks and provides a sense of control around the financial status of the project.
• Earned value analysis looks at the project from cost, schedule, and work completed metrics and can determine progress and spending variances from the original plan.
• Earned value is based on three measures: planned value (PV), earned value (EV), and actual cost (AC).
• PV is how much is planned to spend to complete scheduled tasks at any point in time.
• EV is the cost allocated to completed tasks at any point in time.
• AC is the actual cost of completing tasks.
• An earned value graph can help analyze cost and schedule status on one graph.
• Earned value analysis can quickly and easily share budget status anytime, anywhere.

16. Collect resource usage information

• To manage project costs well, track costly items carefully and collect resource usage data regularly.
• Determine how management wants the cost of resources to be allocated, such as capturing labor intervals or allocating people's time against particular budget line items.
• Determine the timing for the collection and processing of resource costs, and consider the scheduling of vendor invoice payments.
• Allocate project administration time to collate necessary resource cost information, including coaching team members and verifying their input until you're confident they have good time recording habits.
• Collecting resource usage information on a regular basis can help control a project and proactively address project issues as changes in resource usage can be early indicators of a change in overall project status.

17. Select budget reporting options

• Sound and complete budget reporting habits are crucial to maintain an accurate status of your project budget.
• Commonly overlooked items that can add up include overtime, pay raises, contract cost of living increases, waiting time for resources, and exchange rate variances.
• Creating easy to understand reports, such as the Cash Forecast Over Time report, can form the basis for other reporting that will expand your budget status information.
• Comparing actual spending to the work accomplished can help put cost data in context.
• Producing detailed reports, such as a resource histogram, for cost-sensitive areas can help spot trends and show budget implications to management.
• Consistency is key, and having someone on the project team give a budget report on a standard day each month can help maintain accuracy and avoid cost blowouts.

18. Funding limit reconciliation

• To avoid budgeting obstacles, it's important to understand how the budget processes work within your company.
• Funding limit reconciliation is the key to ensuring diligent budget work doesn't get undermined by undue delays and administrative obstacles.
• Confirm how your organization performs contract management, who signs off on the terms and conditions of a contract, and how long it takes to get contracts signed off.
• Find out how your organization pays its vendors, what paperwork finance needs before they release payment, and what information you need to supply to set up vendors in your company's payment system.
• Consider what processes will be expected of you when managing your project's cash flow, whether payments have to be finalized by the end of the financial year, and if you can purchase products and services in advance.
• Make sure you know exactly what's needed and when by the finance department, such as receipts or purchase orders, to process invoices.
• Having detailed information about how to proceed with financial transactions can save you a lot of pain, heartache, and relationship issues with your vendors.
• By verifying payment processes, there'll be fewer surprises and obstacles in your project budgeting.

19. Apply foresight to your budget status

• Project managers need foresight to manage their budgets effectively, just like a GPS system helps drivers plan ahead.
• Assessing assumptions, team member quality, and resource usage can help with budget management.
• Some project tasks are more flexible than others when it comes to changing staff or number of staff members.
• Project managers should use a mix of project reports, status reports, and forecast reports to gain insight into their budget status.
• Alerts should be set up to warn project managers when they are nearing the end of a purchase order amount, giving them time to adjust their spending or request additional funding.

20. Address budgeting issues

• Projects face numerous risks and budget issues that could cause unexpected cost overruns.
• One common issue is checking the time periods on cost data to ensure accurate reporting and informed management decisions.
• Another issue is checking all purchases against the budget, as items may not appear in estimates but show up in invoices.
• Cost codes assigned to the project in the accounting system should also be checked to avoid costs being assigned to the wrong project or outside of the project.
• Quick checks to ensure charges are hitting the books properly include verifying vendor costs, labor hour costs, travel costs, and overhead items.
• Knowing the frequency of when these charges are allocated is also important.
• Administrative checks of the budget and spending data can prevent heartache and late nights trying to make sense of project spending information.