Common Budget Challenges

Let’s take a quick review of the common challenges that a project manager faces when figuring a project budget. By increasing awareness of these factors, you can work proactively to avoid them in your own situation.

• Based on weak foundation—The budget is built on the planning foundation created by the WBS, resource estimates, effort estimates, and the project schedule. An inadequacy in any of these elements is directly reflected in the budget.
• Missing cost categories—The budget must reflect all the costs that will be incurred or at least all the costs that the project is accountable for by the sponsoring organization. See the “Sources of Project Costs” section for the list of cost sources that should be considered.
• No profit margin—For projects that are sold to clients, do not forget to include the profit margin in your project budget and in your pricing decisions.
• Budget is preallocated—In many organizations, due to the nature of their budgeting cycles and level of project management maturity, the budgets for projects are established (from high-level estimates) before the complete work of the project is defined. In these cases, the budget is often the dominant constraint on the project; as a result, it limits the amount of work that can be completed and the resourcing options available.
• Labor costs not tracked—This is mostly an issue for internal projects because in many organizations it can be difficult for the project manager to define and track labor costs, especially for internal staff. The most common reasons for this include the following:
  • Organizational policy that project managers do not track internal labor costs.
  • Organizational policy to treat internal labor as “sunk costs.”
  • A mismatch between time reporting system and procedures and the needs of the project.
  This last reason is important to understand and might limit your cost-tracking options, or at least the level of detail information you can obtain.

The Absolute Minimum

At this point, you should have a solid understanding of the following:

• If the other planning activities have been done well, establishing a project budget is a very straightforward process.
• The project budget is vital for managing expectations, accurately measuring project performance, and managing cash flow.
• An effective project budget is time-phased, addresses the complete project life cycle, and accounts for all project costs.
• The project budget is a critical component of the project plan and integrates the project schedule, resource plan, procurement plan, and risk response plan.
• The WBS, work estimates, and project schedule provide the foundation for a solid project budget.
• Spreadsheet software is usually the best tool to use for project budgeting.

The map in Figure 9.3 summarizes the main points reviewed in this chapter.