Everyday Project Management is a great book. Jeff, the author, writes about the budgets and budgeting practices in the project management activities. You really need to learn this in detail. Project Management Academy, for example, has also a nice reference in its project management course. All practices and methodologies worldwide clearly express the budgeting process as not an optional activity for the project manager, so you cannot just skip it.
In this chapter, you learn effective approaches to budgeting, how to combine top-down and bottom-up budgeting techniques, how optimism stands in the way of controlling expenses, and the importance of building in some slack.
Project Budget is an important definition in the project management
As project manager, a key responsibility of yours is to keep close reins on the budget. Your organization or whoever is funding the project enjoys hearing about cost overruns about as much as having a root canal.
Often the monetary resources allocated to a project (perhaps before you stepped aboard) have been underestimated. Why? Possibly as a result of exuberance the authorizing party or stakeholder might have had as to what can be achieved at what cost. This is not to say that project managers don’t have their own hand in underestimating costs.
The project manager, nevertheless, often is charged with determining the project budget, as opposed to being handed some figure from above. In such cases, it might be useful to estimate a bit on the high side. This is true for a variety of reasons:
- In many organizations, no matter how much money you seek, you will not obtain it all. Ask for slightly more than your best calculations indicate, thereby increasing the probability of receiving close to the amount you actually seek.
- No matter how precise your calculations, how much leeway you allow, or what kind of contingencies you have considered, chances are your estimate might still be low. The proverbial Murphy’s Law holds that if something can go wrong, it will go wrong. And Parkinson’s Law contends that work expands so as to fill the time allotted for its completion.
- In ever-changing business, social, and technological environments, no one has a lock on the future even three months out, let alone three years out. You need to establish extra margins in your budget beyond those that initially seem commensurate with the overall level of work to be performed and outcome to be achieved.
So, is it foolhardy to prepare a budget that merely reflects the best computation as to what the sum ought to be? Probably. You likely need to ask for even more, and your project management experience, if any, plays a big part in your ability to discern the realistic monetary costs in conducting the project. A skilled laborer might be able to work wonders, for example, with less than top-of-the-line equipment.
An entry-level laborer is likely to be less productive in the same situation.
Competent project managers have a better estimating project time and budget skills
Ironically, the more competent you are as a project manager and as a career professional in general, the greater the tendency for you to underestimate the time necessary for project staff members to complete a job. You tend to envision the completion of a job through the eyes of your own level of competency.
“I have found through many years of experience,” says one project manager, “that regardless of how competent the PM is or is not, there is a tendency to be overly optimistic on the estimated length of time need to complete a project.
So, the smart thing to do is budget 15% to 20% more, because unforeseen issues arise.” Even if you discount for newly hired and inexperienced staff, you will likely regard jobs in the way that you might have tackled them when you were newly hired. Thus, you underestimate the time required to complete the job with the staff you have.
The preceding phenomenon has a corollary in professional sports, particularly in NBA basketball. Many of the superstars who went on to become head coaches failed because they could not incorporate the lower competency levels of players on their current roster. Such coaches recalled their own playing days and what they achieved, and perhaps recalled super-competent teammates and competent players from other teams.
When coaching their current team, they can’t shake their preconceived notions of what a player was supposed to be able to accomplish, the rate at which a player learned, and the skill level that the player could acquire.
Among any group of team members, of course, adjustments will be needed. As project manager, you might have vaulted expectations about how your staff are able to perform and what your staff can accomplish. You might eminently be more competent than they are on particular tasks. And, the opposite could be true! Members of your team could have abilities that exceed yours, in certain areas.
Whereas you might be the type of individual who moves through tasks rather quickly, others might be slower, or more unsure, or simply more cautious. You might be curious about a wide variety of issues, whereas a project team member might be more inclined to maintain solitary focus on the task at hand. The takeaway?
Recognize that people on project teams, on a variety of fronts, rarely possess the same capabilities, work habits, or even inclinations as you or their colleagues do.
We are all imbued with our own talent and skills, as well as background, training, and education, not to mention energy level and enthusiasm. The ability to learn, to incorporate new instructions, or to adapt to changes on the fly could vary widely from team member to team member. The wise project manager recognizes this possibility, and proceeds accordingly when making schedules and when estimating the time and level of effort for tasks and activities.
Hidden Costs for the project
An experienced project manager knows that when you rely on external sources to proceed on a project, such as subcontractors, hidden costs could emerge. If the subcontractor works for a flat fee or lump sum amount, it’s easy to pinpoint that figure and plug it into the overall budget. What about your time and effort, however, or project team members’ time and effort, in carefully preparing guidelines for subcontractors, working with them to ensure smooth operation, and consuming time in extra meetings, phone calls, and e-mails?
What about the extra reporting and other administrative tasks associated with working with outside vendors? Such factors ultimately affect the budget. The cumulative impact of underestimating time can quickly put your project in jeopardy.
Even if you apply a safety margin to your estimate, the level of safety margin is applied through the eyes of your own personal competency. It’s best to have help when preparing the budget, so consider a team approach.
Crises in project, budgets, and costs
The experienced project manager expects that one or more crises will occur in the course of the project. The inexperienced project manager might be forewarned, but still is unprepared. Even experienced project managers know that sometimes you reach a point of desperation in the project—you have to have something done by a certain time and need to move heaven and earth to complete it.
You might have to pay exorbitant short-term costs to procure a vital resource, work around the clock, plead for added help, coax and persuade, or scramble like a rabbit in the brush to keep the project on time. Such encounters have a potentially dramatic effect on the budget.
Traditional Approaches to Budgeting
If you’re managing a project that remotely resembles anything else anyone has managed in your organization, you’ll want to seek any and all available insights on how to prepare a real-world budget for your project. Obviously, you don’t want to merely lift the cost figures from one project and apply it to yours. Still, some cost elements of a previous project might be akin to some elements of your project, so you’ve got a good place to start.
Many industries have codified cost elements associated with various jobs. Printers have elaborate cost estimate sheets. Their estimators can plug in the particulars of a customer’s request and quickly yield a cost estimate for the customer. With the many variables involved in estimating the cost of a printing job, however, the estimator can end up underestimating the true costs and, hence, diminish his profit.
In construction, for example, the cost estimator has comparable tools for that industry. The estimator might know the costs for each 2′ by 4′, brick, cinder block, and glass panel. By knowing the dimensions of the building, the number of floors, and the other attributes via project blueprints, to the best of his ability, the experienced estimator determines the overall cost of the construction project.
Nevertheless, you encounter stories about projects that ended up costing 50% or more of the original estimate, and about companies taking a bath on projects because the final costs were so out of whack with reality. Particularly on civil engineering projects, multimillion-dollar cost overruns make the daily news!
What’s going on here? Why would experienced organizations that have performed hundreds of jobs for clients and customers, using sophisticated cost estimating software, be off the mark so often and sometimes so wildly?
The skill of the person doing the budget estimate, the assumptions he or she relies on, and the approach he or she takes matters greatly. What’s more, unforeseen factors often arise that add to the scope of work.
Traditional Measures in project management
Let’s discuss some traditional measures for preparing a budget, followed by a look at the cost estimation traps that are best avoided.
Using this approach, a project manager surveys the authorizing party or committee, stakeholders, and certainly top and middle managers where relevant. The project manager also conducts a massive hunt for previous cost data on projects of a remotely similar nature, and then compiles the costs associated with each phase (if the project has phases), specific events or tasks, or even subtasks.
Borrowing from a bottom-up budgeting approach (see below), as a safeguard, the project manager might enroll project management staff, if they’ve been preidentified, and solicit their estimates of the time (and hence cost) for specific tasks and subtasks. The project manager would then refine his or her own estimates, which now could be somewhat higher than earlier estimates. In any case, the best estimate would be presented to the authorizing party.
Often, as emphasized earlier, the wise project manager lobbies for a somewhat larger budget than the authorizing party feels is necessary. Even if the project manager ends up yielding to the wishes of the authorizing party (which is predictable) and accepts a lower budget figure, safeguards have already been built into the top-down budgeting approach: The judgments of senior, top-level, highly experienced executives and managers likely already factor into budgetary safety margins and contingencies.
The project manager could possibly be the single project manager of many who are calling on the top manager or executive. Thus, the amount allocated for his or her budget could be in alignment and consistent with the overall needs of the department or entire organization.
A persuasive project manager might be able to lobby for a bit more in funding unless there are extraordinary circumstances.
As the name implies, this approach to budgeting takes the reverse course. After constructing the work breakdown structure (WBS), the project manager consults with project staff members (again, presumably preidentified), who offer detailed, pinpointed estimates of the budget required for every task and subtask.
The project manager would also routinely survey the staff once the project begins, to continue formulating the bottom-up budget, which is submitted to the higher-ups.
The project manager keeps an eye on cost trends—possibly on a daily basis, but more likely weekly or biweekly, and also in between one task and another. As project team members ascend the learning curve, they might attain operating efficiencies. More competent team members enable the overall project team to proceed on some aspects of the project with greater productivity and predictably lower costs.
This isn’t to say that the project won’t hit a snag or is otherwise immune to the potential cost overruns, as discussed throughout this chapter. The bottom-up budgeting approach offers great potential, along with significant risk. In their book Project Management, authors J. R. Meredith and Samuel Mantel state, “It is far more difficult to develop a complete list of tasks when constructing that list from the bottom up than from the top down.”
While a reasonably accurate compilation of costs can be achieved using this method, if the project manager does not recognize all cost elements of the project, then the cost estimate can be off by a wide margin.
In addition, if project management staff suspects that top management seeks to cut budgets, then they might resort to overstating their case. This results in the project manager presenting a sum to the higher-ups that is larger than would otherwise be derived. Almost as in a chain reaction, the project budget might then be whittled away—a circular dilemma!
Still, as more and more organizations request that their staff people engage in project management as managers or team members, it makes sense to regularly solicit input from those who are actually doing the work. Frontline workers in any industry have a first-person, hands-on connection to what is occurring—whereas those not on the front line are comparatively distant observers often relying on compiled information.
When project staff is allowed to participate in preparing a budget, if that budget is cut, at least they had some role in the process, and, according to Meredith and Mantel, they “will accept the result with a minimum of grumbling. Involvement is also a good managerial training technique, giving junior managers valuable experience in budget preparation as well as the knowledge of the operations required to generate a budget.”
Despite some wonderful potential benefits, most organizations and most projects do not rely on bottom-up budgeting. Top managers are reluctant to relinquish control of one of their chief sources of power—allocating monies—and sometimes mistrust subordinates, thinking that they might routinely overstate project needs.
Top-Down and Bottom-Up Budgeting
An effective approach combines the two budgeting techniques discussed above. Top-Down and Bottom-Up Budgeting involves gathering data and input from top executives, then soliciting input from project management team members and adjusting estimates accordingly.
Regardless of the approach, one needs to account for the disparity between actual hours on the job and actual hours worked. No project staff person working an eight-hour day offers eight hours of unwavering productivity.
Breaks, time-outs, lapses, unwarranted phone calls, web searches, and “who knows what else” happen! As such, you might seek to >apply a 10% to 15% increase in the estimates submitted by project management team members, especially in regard to the amount of time they’ll need to accomplish tasks and sub-tasks.
If a task initially was determined to cost $1,000 (the worker’s hourly rate times the number of hours), you would allocate $1,100 or $1,150 to better reflect the true costs to the organization. If you settle on the midpoint—perhaps the safest estimate—of your calculation, $1,125 dollars, you would plug that into the figures you present to top management.
During a project manager’s quest to pinpoint accurate costs, bouncing back and forth between top management and team members happens. Depending on how your organization views project management and earlier established protocols, a constant flow of budgetary checks and balances might be the norm for how your project proceeds. Thereafter, budget approvals require a series of periodic authorizations.
Systematic Budgeting Problems
In assessing the potential costs associated with a task or sub-task, some costs might not be budgeted accurately. Suppose you’re charged with managing a project to design a proprietary software system that could become a leading product for your company. Consider the following:
The Project Budgeting
- A variety of system development costs, including defining system requirements, designing the system, designing infrastructure, coding, unit testing, networking, and integrating, will be involved, as well as documentation, training materials, possibly consulting costs, possibly licenses, and fees.
- Staff costs will accrue to identify, configure, and purchase hardware; to install it; and to maintain it. Staff costs could accrue to acquiring software.
- Staff travel, transportation, hotel and meal expenses, conference room and equipment fees, and perhaps costs for snacks and other refreshments could mount up.
- Costs involved in having top management, outside vendors, clients, and customers attend briefings need to be considered.
- Costs associated with testing and refinement, operations, maintenance, debugging, beta testing, surveying, and compiling data are likely.
What’s more, little or no prior data might be available for the project manager to use in estimating the cost of multifaceted projects. Equally vexing, budgets from prior projects might confuse and complicate issues, rather than clarify and simplify them.
Estimation Sand Traps
Sometimes, to put it bluntly, estimation sucks. Stay alert to these estimation traps:
- Inexperienced estimators, especially those who don’t follow any consistent methodology in preparing estimates, overlook some cost items entirely, or tend to be too optimistic about what is needed to execute the job.
- If you are managing a project that has a direct payoff for a specific client, your organization had to bid tightly, perhaps too tightly, against considerable competition. Perhaps they low-balled to win the contract, and your quest is to proceed within these constraints, ever-seeking to trim costs each step of the way—even when there is nothing left to trim.
- Sometimes organizations intentionally bid on projects they know will be money losers, hoping to establish a relationship with the customer that will lead to more-lucrative projects. This is little solace for you if you have to grind out every ounce of productivity from an already overworked project staff, or by using plants and equipment to the max.
- Careful and comprehensive project budgets could be slashed by senior managers or executives who are operating based on some agenda unknown to you.
In The New Project Management, author J. D. Frame notes, “Political meddling in cost and schedule estimating is an everyday occurrence in some organizations.”The antidote against such meddling, says Frame, is “The establishment of objective, clearly defined procedures for project selection …” which should be set up so that no one, “no matter how powerful, can unilaterally impose their will on the selection process.”
The issues raised in this chapter point to the ever-present need for project managers to build an appropriate degree of leeway into their estimates. Rather than being dishonest or disloyal to your organization, you are instead acknowledging a ruthless axiom of project management—that you hardly ever obtain the funds you need, and even then, stuff happens!
Final points about the project budgets
- The monetary resources allocated to a project (perhaps even before you stepped aboard) frequently were underestimated.
- Often, no matter how much you seek, you can count on not obtaining it all.
- Although seldom employed together, the combined top-down and bottom-up approach to budgeting is quite effective.
- Build an appropriate degree of leeway into your estimates, or suffer!
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