Varying methodologies are being used to calculate the investment or cost of projects and initiatives. The result is that some projects that don’t have a clear or accurate price tag. They are asking for too much or too little, with a broader lack of alignment and mismatch of expectations.
It puts projects on a shaky foundation. It makes tracking spend, much less return on investment difficult.
Some challenges include:
It is hard to craft a budget without working out what is going to be done and how it is going to be done. So, the first step is to break down the project into its component parts and ultimately into tasks and work streams.
Then by estimating the cost of each task/work stream, you can arrive at an estimate of the cost of each phase, milestone, or deliverable of the project. In this way a breakdown of the costs follows a breakdown of the work. This is where a bottom up approach is important, as those who are closest to the work are best able to accurately determine how long it will take.
Project risks are a key driver of budget over-runs, so it is difficult to estimate the budget without analyzing the risks. The most important risks must be factored into the budget contingency that is set.
One of the most interesting aspects of any project budget is the assumptions, dependencies and risks involved in their creation. These should be laid out clearly.
When does an estimate become a budget? People have to be able to float around budget options and scenarios in the process of planning and dialog around a strategic initiative, or critical project. The danger in many organizations that a figure once mentioned is often set in stone.
Budgets prepared at the last minute without sufficient consultation or review represent a project risk.
In devising a project budget people are trying to achieve multiple ends:
So, from the list above there are multiple objectives to be achieved in crafting a project budget. A perfect set of numbers could be created and yet many of the above objectives not realized.
Budgeting is not a separate part of the project planning process, but integral to it – it goes hand in hand with planning the work, managing risk, engaging stakeholders, and so on.
Here are some reasons not to fully tie down costs and why the price tag may be left unclear:
We prefer to talk about investment rather than budget. That is because a budget decision is an investment decision.
Apply a sensitivity analysis, including what could be achieved with 5% more or less
Apply a ????
Timing of the project can be a key factor in budgeting and related to this the issues of resources planning/availability. For example, costs can be impacted if a project starts at a time when there are multiple other projects underway or key people are travelling or on leave.
A three-point estimate can be very helpful. That means taking the average of the worst, best and most likely estimate/scenario.
Contingency figure. Like the fish tails on you Gantt Chart, the contingency figure in your budget allows your idealized project plan to adjust to reality as it unfolds. The contingency figure that you can or should apply may be influenced by:
Leverage comparisons with similar projects (historical data) and incorporation of the lessons that have been learned (that way you won’t repeat them).
Get the input of others – from several different perspectives and in particular your experts.
Order of magnitude: It is not unusual to find that most of the budget is accounted for by a small number of categories. So, spend the most time there. What is the confidence level regarding the key spend areas – which ones may be under or over?
Bottom up and top down.
How to engage various scenarios / options regarding resource requirements? After all the budget depends on the scope of the work, the outputs and so on. With budget A you can achieve X and with budget B you can achieve Y. There is a risk that the inclusion of scenarios could complicate the decision-making process.
Chunk the budget, breaking it down into phases. If you must create a budget that spans several faces reaching out into the distant (and somewhat unknowable future), then add a lower confidence level to the budget for those chunks/phases that are further out.
|Phase 1||.25m||Months 1-6||95%|
|Phase 2||1.5m||Months 7-15||90%|
|Phase 3||1m||Months 16-24||70%|
Project budget should be a dynamic document, reviewed and updated regularly, however budgets quickly get locked in…
Rigid budgets are based on the planning fallacy… Temptation is to ask for more than is needed just in case. Meanwhile, unforseen calls on resources are frowned upon… Results in playing the game –padding of budget estimates or sand-bagging (or lowballing) of the revenue/payback forecasts?
Phasing and staging… Draw down….
Initial phase or pilot to get greater clarity re costs
Red team your project estimates to arrive a high confidence budget figure. This involves asking others to deliberately look for holes in your estimates, or build an alternative estimate.
Typically, the more people have been consulted with regarding the budget, the more robust it is likely to be. Also, the more buy-in you are likely to get. However, the process by which you engage people is important: