Project Budgeting
The phrase “Project Budgeting” can bring to mind a lot of negative thoughts and experiences. However, it does not have to be that way if we apply a few basic project management and leadership principles regarding clarity, contingency, and collaboration.
We all know that defining project scope and deliverables in some form is key to project initiation and one of the first steps in establishing expectations. A critical step that is often overlooked is evaluating the level of uncertainty and clarity associated with the scope, defined deliverables, and desired outcomes. At project initiation, people tend to be overly optimistic and confident. Sometimes critical questions are dismissed as overly conservative or even non-visionary.
Clarity is key, no matter the size of the project or its budget. Overlooking uncertainty can be costly in several ways. Lack of clarity can be managed through risk mitigation techniques, wider estimating ranges, and appropriate project contingency. Estimates can be thought of as goalposts, with their width dependent on the level of clarity related to factors such as the detail of deliverables, the degree of new technology or business process change involved, and the experience of the team.
One budgeting practice that is frequently overlooked is the use of comparable projects as an input to cost and schedule estimates. Research has shown that estimates based on similar completed projects are often more accurate than relying solely on detailed bottom-up estimates. While bottom-up estimating is valuable, it can be influenced by optimism bias, strategic bias, and the natural tendency to focus on individual tasks while overlooking broader project realities. Comparable projects provide an external reality check and help organizations calibrate estimates based on actual past performance. The strongest budgeting approaches typically combine both perspectives: insights from comparable projects and detailed input from the team performing the work.
Creating a budget contingency is too often thought of as creating slack or hiding money, when it is really a risk mitigation strategy. The contingency budgeting process we have found most effective separates contingency funds from the baseline project budget and establishes a release process requiring approval from the primary sponsor, finance representation, and the Project Manager (or Program Manager/Director).
Collaboration in building budgets is achieved by soliciting input from the people doing the work as well as key stakeholders. Whether a project budget is built top down from the stakeholders or bottom up with the project team, both groups should be involved in the process. While this adds time and often creates healthy debate during project startup, it has been our experience that the investment is well worth it. This level of collaboration creates a stronger foundation for alignment, accountability, and project success.
One final element that is critical for the entire team to acknowledge is that projects involve a continual balancing act of deliverables, schedule, budget, quality expectations, and risk management. We often talk about them as an equation:
Deliverables = Schedule + Budget + Quality + Risk
There are three important concepts within this equation.
- When any one of these elements is impacted or changed, the other elements must be adjusted.
- Balance does NOT mean equal weight, as the relative importance of these elements varies during a project as well as from project to project.
- Managing this equation is the primary responsibility of the project manager.
