Realistic project budgets can be achieved in four (4) steps designed to ensure that your budgets are sufficiently defined and aligned to existing project needs and capabilities.
Stage 1: Set a justifiable basis for your budget projection by answering the following questions….
- What is the source of the cost projection?
- How was the projection derived?
- How was the projection validated?
- How confident are you in the accuracy of each projection?
Stage 2: Identify assumptions and constraints.
Project budgets are based on more than actual numbers. Behind every cost projection lie three factors – assumptions, constraints and risks. Assumptions are the beliefs assumed to be true for the purposes of planning. Constraints are the conditions, circumstances or events that limit “the possibilities” and are known from the outset (i.e. lack of staff). Risks are possible and probable conditions, circumstances or events that could threaten the success of a given project.
Stage 3: Skip the pad and plan for measurable contingencies.
Budgets are often “padded” to account for the unknown, taking verifiable cost estimates and then adding a “fudge factor” percentage, usually 10 to 20%. This can work for smaller, less complex projects, but in large, complex projects, fudge factors can be difficult to manage and justify. In order to establish a credible budget, separate budgets can be created to account for contingencies.
Stage 4: Establish actionable tracking procedures.
Once a budget is approved, expenditures must be monitored, and for that, budgets must be tied to a schedule (how much will be spent and when?). In this way, expenditures can be tracked for expected utilization… i.e. at any given point in time have we spent more than expected, less than expected, or pretty much as expected? Variances can then be examined to determine whether they can be absorbed or whether corrective action must be taken.
Closing Tip: Finding the Budget “Sweet Spot”
No one wants to be over budget, and while “under budget” may seem attractive, if projects are continually under budget, at some point, individual budgeting skills will be called into question. And once skills are in question, so is credibility. So the trick is to find the sweet spot – a realistic budget with appropriate contingency funding to allow for the unexpected.