Understanding what is project budget and how to do budgeting for a project is an important part of a project manager’s job. If a project manager doesn’t know the basic concepts of budgeting, he won’t be able to plan, execute and control the projects properly. The projects managed without such knowledge will be bound to fail.
In the last post, we have already learned about project scheduling and explored the related concepts. Let’s move forward to budgeting area of a project in this post and see the ins and outs of this part as well.
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Although this is an important area of a project and a project manager needs to have a good understanding of project budgeting concepts, it’s not very difficult to grasp the basic concepts. In this post, you’ll learn what it is all about, what key factors are involved, how it is done, and who helps in budgeting. It will also show you what issues a project manager can face during this process, so those issues can be avoided.
What is Project Budget?
Cost is one of the triple constraints of a project: scope, schedule, and cost. It’s an important factor of project success. The budget is the estimate of all the costs a project will incur. It includes the cost of labor, material, equipment, fees, and other project expenses.
Importance of Project Budget.
- One key factor of triple constraints
- Provides project justification
- Sets project cost expectations
- Helps in cash flow management
- Helps measure project performance
- Improves overall project planning
Important Factors of Project Budget.
- Budgeting is an iterative process
- Initial step is to baseline the budget
- Estimate for total project and each phase
- It should include all the costs
- Keep a reserve for unknowns
- Document budget assumptions
Costs Included in project Budget.
- Labor or staff cost
- Material and equipment cost
- Costs of fees and licenses
- Any operational costs
- Training and travel costs
- Includes unknown/unexpected costs
Process of Creating Project Budget.
- Take project schedule as input
- Identify resource requirements
- Identify labor rate and material rates
- Review organizational policies of costs
- Estimate cost at the lower levels
- Prepare initial budget & baseline
- Get the budget approved
Tools and Techniques of Budgeting.
- Use a budgeting software or spreadsheet
- Use appropriate budgeting method
- Commonly used is bottom up approach
- Estimate costs at work package level
- Apply cost control methods
- Report at an appropriate level
Cost Management Plan Document.
This is the document which helps plan, manage and track project budget. It contains the following items:
- Cost management approach
- Measuring project costs
- Cost reporting formats
- Cost variance response process
- Project budget
Hopefully, by now you understand what involves in creating and managing budget of a project. The key concepts must be clear and you should be able to explore more advanced concepts related to the topic.