This posting is part one of several posts in relation to budgeting:
On the face of it budgeting seems like a straight forward process. Set out the requirements and fund what is necessary to get a job done, product delivered or service created. But budgeting can be problematic and challenging. One of the biggest risks affecting budget management is simply one of going over budget.*
When working on a project, a budget should be approached with scope and requirements clearly defined. A great example would be when booking a holiday. You decide on a set budget you want to spend. For example this may be £700. This includes everything. The flights, the hotel/accommodation, food and dining, sightseeing, travel (taxi’s etc), miscellaneous costs. With this budget in mind, you set out what will be possible for you and book your holiday accordingly. It may not be the most glamorous holiday on this budget, but that is the compromise you would have to make. (On a side note to this a general rule that complexity theory or the adventure of life can through at you. Is that with good budgeting and research you could possibly land a glamorous holiday! This is life).
Managing a project budget can take a very similar approach. Developing new software, creating a website, building a bridge, all projects such as these will require money and the money used to deliver them must be budgeted for in the project. The finance may come from a client or investor or it may come internally from the firm you are working at.
One thing that is key for successful budget management is to have clearly scoped out requirements for what is to be delivered. Clearly defining scope and requirements will help successful budget management and delivery of the project.
As a high level example, a client/customer may come to a firm and say they have £10,000 to spend on the creation of a website. The sales person hands the project to the project manger. Unhelpfully the sales person has done what sales people do and said on this budget all types of wonderful things can be delivered. The project manger looks at the budget and the requirements and is not quite so optimistic. The first thing the project manager should really do is talk to the client/customer and really get the specific requirements down in writing. Ideally the client should also give some examples of what they are looking for. With these details the project manager can set out and look at what can be delivered. (The project manager may need to have discussions with web developers, programmers, accountants, account managers and any other key personnel when working out the costing for the project). Once this has been done the project can be initiated. (Note: The project manager should have another person check the costings for quality assurance. The project manager will not always be involved in the budgeting of a project and may just work on delivery. Before a project is initiated some money may have to be spent on scoping out the requirements. Creating mock ups of the website, wireframes. technical specs etc… May have to be created before the project begins. This would be part of an initial startup budget and may mean that money is spent without a project even being launched.)
Key elements to successful budget Management:
- Build in a contingency cost. (This could be as much as 30% of the budget). A contingency budget is very important, If the project goes over budget this could save a lot of extra cost.
- Have more than 1 person looking after the budget. Even if this just means weekly or monthly reviews with at least 1 other person. Ideally several other people.
- Have more than 1 person creating the budget if possible.
- Closely monitor and track the budget.
- Have regular progress checks. Even if these are just weekly or daily meetings.
- Monitor issues and risks.
- Forecast costs. Future costs in the project must be accounted for in the budget.
Different ways a budget may be funded:
- Funded internally. A project could be funded internally by a firm / bank or government that wishes to make its own product, provide a service, etc…
- Funded externally. A client comes to a supplier or firm and asks for a product, service to be produced.
- RFP (Request for proposal) or Quote. A client may come to a supplier and ask for them to put forward a proposal / quote for a project.
- Funded by an individual. This could be a rich investor or someone who has links to rich investors.
- Fund raising campaigns. Often done by charities.
- Group funding. Such as those ran by kickstarter.
When using an Agile Project Management approach such as Scrum. Some of the pressures and difficulties of budget management can be reduced or eliminated. For a product backlog would have been created and only in the first release would a selection of the key elements or realistic elements would be delivered as opposed to delivering the whole thing! Although this may not always be the case and using Scrum may not help your budgeting at all! Also in some projects you have to deliver the whole thing. Such as a bridge!
* There are risks with coming under budget. There have been numerous stories of councils or government agencies spending all their budget when they don’t need to. In fear that if they don’t their budget will get cut. This may not relate specifically to a single project. But is an issue that can be caused by under spending and a some what controversial one.