4.1.2.1T Manage the Budget / Techniques

Techniques to Get a Project Back on Budget (4.1.2.1T.P1)

Just as you may face scheduling difficulties, you may also find yourself trending over budget. If you monitor costs regularly, you should know very quickly if you are trending over your budget. This control process is somewhat more difficult than managing the schedule because there could be a variety of reasons why your financial information is not as timely or as accurate as your schedule information. See 4.1.2.2T for techniques to get a project back on budget.

Make Sure Team Members Understand their Budgets (4.1.2.1T.P2)

The project manager needs to make sure that team members understand if there is a cost component to their activities. This cost component could come from labor costs or non-labor costs.

Labor costs will vary depending on the number of hours worked on the activity and the cost of the resources applied. This could be as simple as understanding how many hours each person on the activity is assigned to work. If the team reports more hours than the total estimated hours, there may well be budget implications. Likewise if there are multiple people assigned and they have different hourly rates (for instance, contractors versus employees) it may well make a difference how many hours each resource requires to complete the work.

Some activities also have a non-labor component and the project manager has a similar obligation to make sure the team members understand the cost expectations. For example, a team may need to buy equipment as a part of their work. The budget for the equipment should be known to the team members, and they should work with the project manager if the actual equipment cost is materially different from the estimates.

Manage Budget within Tolerances (4.1.2.1T.P3)

When you manage the budget, you do not need to be accurate to the dollar. You also do not want make all kinds of proactive changes if your project is trending over budget by a small amount one week and are underbudget the next week. Your client does not normally expect that level of accuracy in your budget management. 

As the project manager, you should understand the tolerance level for your project. For example, let’s say you are updating your project costs and you realize you have overspent your budget by $1,000. Should you raise an issue or a budget risk? Should you inform your client? It depends on your tolerance level. If you have a $10,000 budget, you should probably be concerned, because you are at risk of going over budget by 10%. If your project has a one million dollar budget, then the thousand dollars is not material at all (in fact you would be a hero if you delivered within $1,000).

Some projects have no tolerance and must be completed within budget. This may be true with projects that receive government funding or if you are managing a fixed price project.

Use common sense and work with your client on the tolerance levels for budget. If you stay within the tolerances, you are fine. If you go outside those limits, you should be concerned.

Consider Earned Value Management for Understanding Schedule and Budget Status (4.1.2.1T.P4)

Projects, especially larger ones, are never executed exactly as they are planned. Some activities finish early. Some finish late. Sometimes it is not easy to know if you are ahead of schedule or behind. Likewise, sometimes it is hard to know whether you are under budget or not.

Let’s look at a simple example. Let’s say you have a six-month project and you have completed three months. Your schedule says that you should have spent 50% of your budget, but you realize you have already spent 65% of the budget. Are you in trouble?

You could be, but not necessarily. If you only have half of the work done, you might be in trouble. But what if you are actually ahead of schedule? If you are ahead of schedule, it might make sense that you are over budget at this point in the project. If you were 90% done with the work, and your budget was at 65% of total, you actually are in pretty good shape.

This is the purpose of earned value calculations. Earned value is a method for determining the progress of a project, given where you are versus where you expected to be. To learn more about earned value, see 4.1.2.3T Earned Value.

Be Proactive and Very Communicative When Managing Projects with Unrealistic Budgets (4.1.2.1T.P5)

If you are a project manager dealing with what you perceive to be an unrealistic budget, the first thing you will want to do is discuss this with your sponsor to see if there are any factors that are driving the project budget. For instance, there may be budgetary restrictions. If you are a vendor, it is possible your sales people committed to a fixed price for the project. In some cases your manager or sponsor might set an arbitrary budget without much justification. It does not necessarily make your challenge any easier, but you may find that by better understanding the reason for the fixed budget, you may have an easier time getting yourself and your team members motivated to achieve it. There are a number of responses to a project with unrealistic budgets

  • Reduce scope. Talk to your sponsor about reducing the project scope. See if there are features and functionality that he can live without for now so that you can deliver the project within the budget specified.

  • Identify and manage the budget as a project risk. Utilizing risk management will help better manage expectations early in the project and also be a way to gather input and ideas for ways that you might be able to hit the budget.

  • Manage scope with zero tolerance. On many projects, you start with an aggressive budget and the situation gets worse because the project manager does not effectively manage scope. If you are on a project with an unrealistic budget to begin with, it is absolutely critical that you manage scope effectively and do not increase scope without an approved scope change request. Disciplined scope management will ensure that you only have to deliver what was originally promised, and that any approved changes are accompanied by a corresponding increase in budget and timeline.

  • Look for process improvement opportunities. Lastly, take an honest look at your budget and your approach for executing the project. Talk to your team, clients, and manager about any ideas they may have for executing the project at a cheaper cost. This will get everyone thinking about being part of a solution. For instance, perhaps you could buy used equipment that will still meet your needs instead of new equipment.  

Although it appears that you are being held accountable for budgets that are not within your control, you do have control over the processes you use to manage the project.