Principles of an Effective Budget

Before we get into the details of building a project budget, let’s review the fundamental principles that guide this process:

• Iterative process—Budget development is an iterative process, just like all project planning. The various facets of project planning interrelate and have natural feedback loops. With the project budget, there are strong dependencies on organizational policies and on the schedule development process. As a result, it usually takes several cycles to fully develop the budget and come to an agreement.
• Total life cycle—The budget should address the total project life cycle. This is a common oversight, especially for the operational phases of the project.
• Time-phased—Not only do we need to budget cost totals, but we need to know when these costs will be incurred for both cash flow management and project control reasons. The goal of the project budgeting process is to establish a cost baseline.
• Comprehensive—The budget should account for all project costs. There is a tendency to only account for obvious resources needed for the project (labor or new equipment). As part of our focus on making the budget (like the schedule) complete and realistic.
• Include a buffer—A buffer, normally referred to as management reserve, should be allocated to the project budget. The management reserve is primarily there to deal with known risks (a risk response), the estimating uncertainty factor, and the overall planning uncertainty factor (hidden work, rework, hidden costs, and change requests). In addition, if you have a long-term project or an international project, you might need a buffer for monetary factors such as inflation and exchange rates. Of course, these should be noted as risks in these situations.
• Document assumptions—Budget assumptions are documented like all other project assumptions. Any assumption made as part of the budgeting process should be documented and clearly communicated. As with all assumptions, you can document them within the targeted deliverable (in this case the budget document spreadsheet), or add them to the designated repository for project assumptions (commonly either a separate assumptions document, the project definition document, or project plan).