Developing an Initial Budget

After you have your resource requirements and work duration estimates, you can start to develop the budget. Like the estimates for work, it is best to estimate your costs at the work-package level. By taking a bottom-up approach, you are in the best position to identify all your resource needs and develop a more realistic budget. In addition, many industries and organizations have cost estimate models that can be leveraged, too. These models are best used during initial planning activities and as a cross-reference and validation tool for your detailed planning efforts.

Unless your organization has invested in an enterprise project management application with an emphasis on project costing or you have advanced skills in project scheduling software, I recommend the use of spreadsheet software (such as Microsoft Excel) for your project budget. I favor the spreadsheet approach for three principal reasons:

• Capture all costs—The spreadsheet approach enables you to easily capture all your project costs (and not just labor costs, which is the primary cost element captured by your schedule).
• Flexible—The spreadsheet approach offers flexible options in how you set up and organize your budget. It can also be used to track your project costs during project execution.
• Easy analysis—The spreadsheet approach comes with built-in analysis and reporting capabilities that can be easily leveraged.

The two keys for setting up your project budget are to set a line item for each cost source and to use columns for each time phase (period) that will be tracked.

Finalizing a Budget

As the schedule nears completion and the actual resources have been identified, you can finalize the project budget. Besides firming up rates on resources and estimates on other cost factors, there are several objectives to accomplish in this step:

• Validate procurement tasks scheduled—Make sure that all the tasks dealing with procuring resources (labor, equipment, and materials) are accounted for in the project schedule (and WBS). Common tasks include ordering, delivery, setup, and payment.
• Reconcile task costs versus resource costs—In most cases, there will be gaps between resource assignments on the schedule, or resources will not always be scheduled at maximum capacity. Much of this depends on how efficiently resources are leveled. Nevertheless, if your resource costs are based solely on assigned tasks, your budget might not reflect the actual resource costs you will incur. For example, Joe Analyst might have only 26 estimated work hours assigned one week but is fully booked at 40 hours the following week. You can’t afford to release Joe for the small gap that exists, so the project is generally accountable for all his time both weeks. This situation also depends on the level of responsibility the project has for maximizing resource usage, the level of resource planning done in the organization, and how time is reported.A good rule of thumb is to calculate personnel costs by taking their rates multiplied by a given calendar time period. For example, if I know Joe Analyst is on my project for 12 weeks, and I know he is generally a full-time resource, I calculate a resource cost for Joe by taking Joe’s hourly rate × 40 hours × 12 weeks. This is likely to give me a truer cost estimate—at least a more conservative one.
• Finalize management reserve—Based on all known risk factors, finalize the buffer amount to be added to the project budget. The specific amount varies depending on risk level, industry practices, and management philosophy.