Project Budgeting Explained

Project Budgeting Explained

Don’t let the idea of project budgeting intimidate you.

The budget for a project is simply the combined costs of the individual activities or work packages that the project
must accomplish. The budget is represented by the approved cost baseline.

Before we look at how the budget is developed, it’s important to understand why it’s important.

There are two key reasons the budget of your project is important…

First, the approved budget is what drives project funding. It will tell
stakeholders how much money is needed and when it is needed. Your ability to get people, equipment, and materials
when they are needed are dependent on the funding provided as a result of your budget.

The second reason budgeting is important for your project is because it provides the basis for project
cost control
. By measuring the project’s actual cost against the approved budget, you can determine if
the project is progressing according to the plan or if corrective action is needed. This is accomplished using a
cost baseline.

Project Manager’s Resource

Integrated Cost and Schedule Control in Project Management

Now that you know what a project cost budget is and why it is important, you need to know how to prepare a budget
for your project.

Most organizations have policies, procedures, and guidelines for handling cost budgeting. So the first step is
to make sure you are familiar with your organizations budgeting processes and tools. If this is your first time
handling project finances, find a controller in your organization that will help you understand how your project
fits into the overall financial structures of your company.

There are six pieces of information that you will need to prepare your budget…

Activity cost estimates are the individual cost estimates for each activity or work package that
your project will complete. For each activity, the cost estimate generally includes direct labor, materials, equipment,
services, facilities, and information technology.

The basis of estimates documents supporting details about the activity cost estimates. For
example, how the estimates were made, assumptions and constraints, and the confidence level of each estimate.

The scope baseline will let you know if there are any funding constraints that may be
mandated by your organization, contracts, or other groups such as government agencies.

The project schedule will be used to determine the cost budget over time. For a specified
calendar period, you can combine the activity costs that are planned for that period to determine the time-phased budget.

Resource calendars will let you know which resources are assigned to the project and when they
are assigned. Using each rates for each resource and combining with the project schedule you can then determine
resource costs over time.

Contracts for products or services will be used to determine their costs and can then be
included to the project budget.

Once you have the above information, then it is simply a matter of summing up the costs to determine the budget
for your project. It can be represented using a cost baseline as shown in the following diagram…

The cost baseline shows the total planned costs at a point in time. From the cost baseline, you can then determine
your periodic funding requirements. The funding requirements are represented using the dashed steps. Funding Point 1
(F1) requires F1$, Funding Point 2 (F2) requires F2$, and Funding Point 3 (F3) requires F3$. The total project budget
is F1$ + F2$ + F3$.

Project budgeting is important for getting your project funded as well as keeping it controlled. To
prepare your project’s budget, you simply sum up the estimated costs of the individual activities or work packages. This will
give you the information you need to create a cost baseline and determine your funding requirements.

Project Cost Management

Project cost management is one of the most important aspects of project management that you need to master. Learn about project cost estimating, budgeting and control.

Project Cost Estimating Tools and Techniques

Learn which project cost estimating tools and techniques can help you develop more accurate cost estimates for your projects.

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