Stakeholders measure projects by how well they are executed within the project constraints or baselines. A baseline is an approved plan for a portion of a project (+/- changes). It is used to compare actual performance to planned performance and to determine if project performance is within acceptable guidelines. Every project has at least four project baselines. There may be others, depending on the project and definitions used.
Schedule and Budget are the focus of this paper and the terms activity and work elements are synonymous. Schedule and cost (budget) are two of the major legs of the project constraint polygon. Without the schedule and budget baselines plans, one does not know where the project stands relative to planned schedule progress or planned budget performance. The schedule and budget baselines, along with other baselines, are developed in the planning phase of the project. The project plan is approved prior to execution by the project sponsor or an appropriate senior level manager.
The project plan includes the budget and schedule. Schedule determines when work elements (activities) are to be completed, milestones achieved, and when the project should be completed. The budget determines how much each work element should cost, the cost of each level of the work breakdown schedule (WBS), and how much the total project should cost. Actual performance can be compared to these plans to determine how well the project is progressing or finished. Schedules and budgets are interlocked, and most likely an increase in one causes an increase in the other.
The project budget is a financial plan for all project expenditures (cost). Success in project budget management depends on, amongst other things, the creation of a comprehensive, consistent, and reliable project budget. Some people want to use the term “accurate” in the above definition. But, the word “accurate” has no place in the project world. Reliable and consistent are the terms that should be used. By definition, the project budget cannot be accurate as it is an estimate. Normal ranges of project budget variability depends on the project, the organization, type of business (and many other factors) but usually falls within +/- 10%.
A. How to Develop a Project Budget
In the Project Management Body of Knowledge Guide® world, there are two processes to developing a project budget. The first process is Estimate Cost, which is often confused with the Determine Budget process. Both of these processes are normally preceded by a project management team planning process, which is executed as part of the Develop Project Management Plan. This planning process is known as the Project Cost Management or the Cost Management Plan. The Cost Management Plan outlines the processes involved in determining organizational cost categories, estimating, budgeting, and controlling cost, so that the project can be executed within the approved budget.
The Estimate Cost process is not only confused with Determine Budget but is also widely misunderstood. Many think that this process estimates the total cost of the project. But this is not correct, at least not directly. The Estimate Cost process estimates the cost for each of the work elements and records the basis of that cost. That is as far as Estimate Cost goes!
The second of the three processes in Project Cost Management is the Determine Budget process, which rolls work element cost upward, applies cost aggregation, applies project contingency, makes a cash flow estimate, and now you have a budget for the various levels of the WBS and the total project.
B. Why a Project Budget is Important
Based on the work above, we now have a budget for:
- Individual Activities
- Work Packages
- The Total Project
This level of detail allows a project manager (PM) to evaluate the budget performance of the project from the top down or from the bottom up. If a work package is running over or is in danger of over running the budget, the project manager can drill down until he/she finds the problem or potential problem. The drill down can be by the PM or in conjunction with the assigned team member.
One other very powerful tool that helps in the analysis of project budget performance is the Earned Value Method (EVM). EVM can assist you in evaluating project budget performance (what are you accomplishing for the funds you are expending) and in calculating a Cost Performance Index (CPI), which is a representation of the effectiveness of your spending. EVM can calculate a Cost Variance (CV), which is the difference between the value of the work completed and the amount of funds expended to accomplish that work. This will tell you the magnitude of the over- or under-run or if you are on budget. EVM can be applied down to the work element level, if the appropriate level of detail exists.
Variance analysis is another tool to help the PM understand why work elements (or above) are over- or underbudget. The Cost Management Plan probably sets thresholds for overruns (say 10%), a different threshold for under runs (say 15%), to trigger your attention. Understanding why work elements are overrunning will assist the PM todevelop solutions (action plans) to bring the project back within acceptable ranges. Understanding why work elements are significantly under budget assist the PM in feeding this information forward to new project budget development.
Regardless of experience, care, or execution effort, project budget variances will occur. This is just a fact of the project world. While they cannot all be eliminated, they can be reduced for future projects. Some (not many) projects will finish very close to the budget. More projects will finish within acceptable ranges (+/-10%). Others (we hope not many) will finish well outside the acceptable range (>10% over or under). Using the techniques outlined here will reduce the number of projects in this category and reduce the size of the over runs.
C. Tips on How to Successfully Manage a Project Budget
- Capture all of the scope (scope statement, WBS, and WBS dictionary). If you do not capture the total project scope correctly, there is little hope that the project can be executed for the budget or schedule.
- Insist on input from all stakeholders. Penetrate through stated needs and include implied needs.
- Determine the various cost categories used at the organization.
- Develop Project Team and Project Management Team trust.
- Develop a reliable, consistent, sufficiently detailed WBS and time decomposition structure. Estimate
- Cost and Determine Budget.
- Stop scope and grade creep. Eliminate gold plating. None of these adds value to the project. Your team is your first line of defense.
- Perform EVM, variance, and trend analysis.
- Continuously communicate to stakeholders on project status, project direction, and what the project will look like at completion.
- Use organizational process assets (OPA) to develop, analyze, and challenge.
- Avoid the pitfalls in Section IV.
- Take action when indicated! Sooner rather than later.
Schedule and Cost Control