Articles

Project Budgets: The What, Why, and How

In projects, the money matters. But all too often budget management falls short of accurate forecasts.  

Key Takeaways 

• Whether managed in dollars or effort, financial performance is critical to the success of the project. 
• Cost overruns can have a significant impact elsewhere in the organization. 
• Project managers must review and update financial forecasts as regularly as they review the schedule performance. 

PMI Picks offers the following insights for all project managers to consider: 

We all know the triple constraint: budget, scope and schedule. But of those, one factor tends to get managed a little less rigorously than the others, and that’s the budget. There are several reasons for that, most commonly the fact that when organizations talk about budget, they often don’t talk in terms of actual money. 

Instead, they focus on assigned resources. If a project is being delivered by internal employees, then the project manager is expected to deliver with the total amount of effort days assigned, and that’s a proxy for the real financial cost. This happens because project managers often aren’t allowed to know how much their team members are paid, and because the investment in the people is already happening—there isn’t additional expenditure being incurred.  

But that doesn’t mean that the resources are free. At the very least there are opportunity costs; by working on your project the people aren’t available elsewhere, and in the larger scheme of things, if the project weren’t being done, then the people wouldn’t be needed.  

The simple fact is, your project is still assigned a budget—a target cost, when it is approved, even if you aren’t told what that is. If you don’t meet that budget, then any number of problems can happen:  

• Your project may no longer be able to generate the expected return because the costs are too high. That may hurt the organization’s ability to achieve its goals and objectives. 
• There may be insufficient funds to complete all the projects approved for the current period and/or some of those projects may be delayed. 

• There may need to be additional funds moved from operational areas to project work. 
• Additional investments may be required in additional employees, contractors or vendors. 

 
There are also likely to be other knock-on impacts from the factors above—the potential disruption caused by cost overruns on just one project can be massive. And if you substitute people for dollars in each of those cost examples, the impact is the same.  

It is therefore essential that you accurately forecast the costs for your project on a regular basis, as frequently as you consider performance against schedule. You need to assess whether the money, effort, or combination of both that is approved for the project is still going to allow that project to complete, and if not, what the overrun will be. You also must consider the potential of underruns—spending less than approved.  

There are three key variables when it comes to finance:  

• Budget:  The total amount approved to be spent. 

• Planned:  The amount that you expect to spend based on the current plan. 
• Forecast:  The amount you are projecting to spend based on the progress made to date. 

 
During the project it is the forecast that is most critical as that reflects the most current assessment of how much money or how many effort days will be needed to complete the work. If that is higher than the budget, there is a problem and corrective action must be taken. If it is significantly lower than the budget, then there may be an opportunity to take money or people away from the project and reallocate them elsewhere—potentially helping another project that is over budget.  

As the project manager, the sooner you can identify and report variances in financial performance, the easier it will be to put the problem right—just as is the case with schedule. You know the planned cost of each task from your estimating and planning work, so reviewing and updating the forecasts should be a straightforward task that is automatically part of your regular project management activities.