Creating a Project Budget

The actual process of developing a project budget is straightforward. The general challenges lie more with omissions and the foundation on which the budget is based. In this section, we review the details of the development budget and finalize the budget steps depicted in the general project planning process flow in Figure 9.1.

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 you need to consider. 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 role—whichever makes the most sense for your project. Costs are based on 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 whether your equipment costs need to be expensed at full cost against your project or whether your project just needs to reflect depreciation cost. Different factors can influence this decision, but the most common one is whether 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 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, cloud-based software expenses or Software as a Service (SaaS) fees, building permits, and so on.
• Training—This category includes the cost of any training your project team needs to do their work and any training your users 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.
• 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 might not be allocated to individual projects or there might be a predetermined 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 includes any costs (change management programs or initial productivity loss) that can directly attribute 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 might be accounted for in the other budget categories. The important thing here is to think about these costs upfront during planning.
• Unknown costs—This category is often covered by the management reserve and addresses common cost items like change requests, re-work, and unidentified work. If your project deals with different currencies, it can also cover inflation factors and exchange rate fluctuations. NoteMost project scheduling software programs offer a resource schedule that shows the total hours (and total costs) that each resource incurs over the desired time period. This feature can be very helpful to your budgeting process.