The Impact of the Project Budget

Even if you find yourself in an environment where it is not expected that you develop a project budget (instead you are asked to primarily manage schedule and scope), I strongly encourage you to do two things:

• Do it anyway—Develop a project budget anyway. This exercise builds your project management skills, enables you to recognize project performance issues sooner, and better prepares you for senior management discussions about your project.
• Follow the money—You should have determined this as part of project definition, but just in case you haven’t, make sure you are totally clear on who is financially sponsoring the project and who controls any finance-based decisions to be made about your project. This awareness is key in your efforts to manage expectations and to understand the political aspects of your project.

The project budget estimates all the costs the project will incur, and when they will be incurred. It is a key component of the overall project plan. The project budget is important for the following reasons:

• Planning validator—Because the project schedule is a main driver for the project budget, the budget can serve as an excellent cross-reference for the validity of the schedule and vice versa. By looking at the schedule from a cost perspective, you might see resource or budget issues that were not obvious before. Inversely, the schedule input is key for validating the project budget because the budget needs to account for all the time a resource is required on the project.
• Performance measurement—By measuring project progress against a cost baseline, you can better measure the true performance of your project along the way, and in most cases, identify issues and risks much sooner. This is the basis for an advanced project controlling technique called earned value management “Controlling a Project.”
• Managing expectations—The budget impacts stakeholder expectations in several ways. The initial budget sets the expectation of what the total project costs should be. If the budget is not developed properly, then you are bound to have an expectation issue. If the project budget is predefined and serves as a cost ceiling for the project, then it helps you to set stakeholder expectations regarding project schedule and project scope.
• Cash flow management tool—Your schedule drives the timing of your resource needs. Especially in organizations where resources are shared across projects or centrally managed, the accuracy of the schedule is key to efficient resource management.
• Justifying project investment—With more projects accountable to a project selection process and to financial return on investment expectations, it is increasingly important to establish the cost baseline for the project and monitor closely. CautionMake sure your project budget accounts for all cost factors and for the entire life cycle of the effort.