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Has your project got a clear price tag?

A cynic is often described as ‘a person who knows the price of everything and the value of nothing’. This, however, is only half right when it comes to the leaders of today’s complex and ambitious projects and initiatives. That is because a surprising number of projects do not have a clear price tag.

Varying methods of calculation

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:

  1. How to impute the cost of those people working on a project? What is the salary cost and how is it weighted to contribute to the associated overhead contribute? How to estimate the number of days allocated by project work stream and there by to track burn-down?
  2. What is the transfer cost for internal services? Are some services provided free or at a discount?
  3. What budget are various costs going to come from? This is a particular issue for projects that are cross-functional.
  4. What is the acceptable time to results, revenue or payback? Burdening a project with the full costs may kill it dead. Expecting it to pay its way or to generate profit early, may kill it dead too. This is where using the term ‘investment’ is key – it is not just about budget or resources, but strategic investments made by the business with an expectation of future payback.
  5. When does the budget start? Does it include all the work completed before the project gets off the ground / is approved (e.g. planning and consultation).
  6. Do you budget for everything from the start or budget on a phased/tranched basis? This is important because the first phase of a project provides an insight to the requirements of successive phases, including the costs that are likely to be involved. However, if you don’t secure the resources at the start they may not be available later on.
  7. What is the scope of the project? Tying down requirements is essential, with scope creep being a key factor in budget underestimates and overruns.
  8. How to hedge your bets regarding budget and resources?  Specifically what type of contingency do you add in (to allow for unexpected cost over-runs, risks and setbacks? Is there padding of cost estimates or sand-bagging (or lowballing) of the revenue/payback forecasts?

Which comes first the budget or the project plan?

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.

Budgeting Has Multiple Objectives

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:  

  • Plan out a project and what it would take to deliver it
  • Explore different scenarios and possible outcomes (considering risks, etc.)
  • Tease out the viability of a project including the return on investment
  • Test the level of commitment to (as well as the level of confidence and ambition) for a project
  • Engage stakeholders in the process of co-creation and ownership (via strategic conversations regarding the project – the investment and return)
  • Get the project approved and secure funding
  • Provide the basis for project tracking / control, including the means by which performance will be measured
  • Set a project up for success – to deliver on a specific business result

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.

Fudging the Cost Is Easy!

Here are some reasons not to fully tie down costs and why the price tag may be left unclear:

  • The budgeting process is ‘broken’ with numbers being driven by finance/elsewhere, bottom up involvement is limited. Numbers are greeted with cynicism.
  • Figures thrown out in the early stages of a project have a nasty way of coming back to haunt a project. The point at which an estimate becomes a budget is important. 
  • The longer you wait before devising a budget the more information you are likely to have. In an organization that expects accurate budget estimates and allows little room for revision of budgets this is important.
  • If people knew the true cost for a project it might scare them. It forces a commitment or a decision to back a project. Doing this too early could stop the project getting a proper hearing.
  • Until the project scope has been clarified and basic project estimation done, it is difficult to arrive at an accurate budget figure.
  • The budget is just one side of the equation – the other is payback or return. Being accurate regarding costs is not the greatest challenge that project managers face, forecasting the results and their impact is considerably trickier.
  • Tying down costs could result in the project being charged for some inputs that are presently free. For example, the time of some people involved or some of the services provided by business units.

Factors to consider:

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 ????

80% budget

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:

  • The risks that you have analyzed and the complexity of the project and its different parts
  • The level of confidence applied to each stage of the project and the level of unknowns (confidence regarding estimate several phases or quarters out are likely to be lower)
  • The standard applied within your organization

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.

PhaseSpendTimelineConfidence level
Phase 1.25mMonths 1-695%
Phase 21.5mMonths 7-1590%
Phase 31mMonths 16-2470%

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:

  • Be clear on what you’re asking people for the perspectives on. For example, you are probably not going to revise all your numbers after every conversation, but are seeking input from a variety of perspectives into those aspects of the budget that are most important and most sensitive to risk. 
  • Present the scenarios, the options, the assumptions and the dependencies as the key variables – these are the real mechanics behind the numbers.

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