PM 714:

Project Budget Development

and
Implementation
A project budget … the need & some basics …
 The total projected costs needed to complete a project
over a defined period of time;
 A plan for allocating resources … PMBOK, Managerial
Approach, 6th Edition;
 Creating a project budget is a critical part of the project
planning process;
 It is typically not a static document/tool … can be revised,
updated;
 Project without funds won’t complete successfully;

That’s why a project budget is so important … the financial

commitment for a project …
Why need the financial plan i.e. the budget
… ANOTHER IMPORTANT ROLE OF HAVING A BUDGET …
The other part of the importance of a project budget is that it’s an
instrument to control project costs. How? Offers a baseline to
measure your performance;
It is an important part of planning & controlling a project i.e. by
properly computing the project's actual cost against the approved
budget, it is possible to determine if the project is progressing
according to the plan or not …
It is the same with different sectors:
Adolphe & Njenga, 2021 (Kigali Banking project)
Lichtenberg et al, 2016 (Engineering)
Ngure, 2008 (Tourism industry)
Yuan, 2014 (Education, Hospitality sector)… and others.
Why need the financial plan i.e. the budget … cont …
It’s an essential part of securing project funding. The numbers
will tell stakeholders exactly how much fund is needed, to
make decision to fund or not;

A well-planned budget provides the basis for project cost

control… measure the project’s actual cost against the
approved budget … give an understanding of how the project
is progressing and if any changes need to be made to the
plan;

A project budget has a direct effect on company's financial

viability. When calculated feasibly and with resource
constraints in mind, a project budget will increase the
operating margin and improve overall project success;
Project Budgeting Approaches

I. Top-down estimating
When the organization sets the cost and/or the duration of
the project;
With that figure in mind, the project manager seeks expert
opinions to help determine the budget.

II. Bottom-up estimating

Working from the lowest possible level of detail, then build
up the estimate from the work packages;
If you’re sure you know every detail of the project, bottom-
up estimating is proper.
Project Budgeting Approaches … cont …
III. Analogous estimating technique
Uses historical data to determine project cost … lessons learnt &
mistakes/successes;
Good choice when there’s little data available for the project,
making accurate estimates difficult.

IV. Parametric estimating

A statistical approach to estimating the time, cost and other
project resources;
Uses historical data, but also statistical data … a more accurate
estimate;
Advantage: more accurate. Why? it employs more than one data
set and uses the statistical relationship between historical data
Project Budget vs. Project Estimate

How do they differ from the project budget?

 A project estimate is what is thought as the project will
cost … the reason we want the project estimate to be as
accurate as possible;
 Once done (the research, the historical data & all the
activities and resources’ requirements for
implementation), the estimates are submitted … to be
approved as the budget.
Making a project budget
To properly meet the financial needs of the project, a project
budget must be created thoroughly, not missing any aspect
that requires funding;

An outline of essential steps toward creating (and managing)

a project budget:
Making a project budget
1. Use historical data
 The project is (likely) not the first to try and accomplish
a specific objective or goal;
 Looking back at similar projects and their budgets is a
great way to get a head start on building the budget.

2. Reference lessons learned

 Elaborate on historical data & learn from
successes/mistakes (positive/negative experiences);
 To get a clear path that leads to more accurate estimates
e.g. how they responded to changes and kept their
budget under control;
10
Making a project budget … cont …
3. Leverage the experts
 Another resource to build a project budget is to tap
those who have experience and knowledge … mentors,
other project managers or experts in the field;
 Reaching out to these experts can help to stay on track
& avoid unnecessary pitfalls.

4. Confirm accuracy
 Once the budget is estimated … still not complete;
 Look to ensure the figures are accurate;
 Seek the experts & other project team members to
check the budget and make sure it’s correct/factual.
Making a project budget … cont …
5. Baseline and re-baseline the budget
 The project budget is the baseline to measure the
project’s progress once it has started;
 A tool to gauge the variance of the project;
 As it progresses, the project team may want to re-
baseline as changes occur in the project;
 When the change control is approved, the PM can re-
baseline;
 Project management software simplifies the project
budgeting process … to reset the baseline as many times
as you need during the project to always be able to
measure the project variance instantly.
Making a project budget … cont …
6. Update in real time
 Re: changes … the sooner you know about deviations, the
better … to control;
 The project planning software … some are cloud-based
and updating as soon as the team changes it’s status.

7. Catch up/back on track … timely …

 The importance of having a PM software that tracks in
real time, is for the PM access to information needed to
reform/back on track sooner rather than later;
 Reality … project features change + issues happen
causing projects to go off track;
 The projects that get back on track faster that are
successful.
Other important features …
• Disposal costs
This category includes the costs associated with the disposal or removal
of whatever the project is replacing.
• Overhead costs
This category includes the common overhead costs incurred by any
project. Items typically included are facilities, administrative assistance,
security, and technology infrastructure.
• Costs of change
A focal point of project planning is to consider the “change” impact that
the project will have. This category would include any costs (change
management programs, initial productivity loss) that can directly
attribute to the change factor.
• No profit margin
For projects that are sold to clients, do not forget to include the profit
margin in your project budget and in your pricing decisions.
Making a project budget … cont … time considerations …

 Work element costing (and time analysis for budgeting)

 Each work element in the action plan or in a WBS is
evaluated for its resource requirements, to estimate the
cost of resources for each;
Making a project budget … cont … time considerations …

 Suppose a work element requires 25 hours of technician’s labour;

 Payment = TZS. 43,750/hour;
 Overhead costs = 84% of direct labour costs.
 Appropriate cost appear to be:

However, the accuracy of this cost depends on the correctness of the 25

hour estimate;
 Let’s say there's an allowance for 12% for unproductive time;

So, the uncertainty in labour cost estimating is in the estimate of time

spent;
 Non-inclusion of personal time leads to a budget under-estimate.
Classifications of budget components … Standard? Does it matter?
Different colour cells represent different budget contents
Capital expenditures Direct costs Land acquisition cost
Human resources Indirect costs Building materials
Travelling spending Labour costs
Training fees Capital budget Equipment/machinery
Material resources Operational costs Professional services
Research expenses Contingency costs
Professional services Fixed Inflation
Contingency reserves Variable costs Costs for financing
Renting
Licenses …
operational? Indirect?

What matters is inclusion of all important cost items

What does a project budget involve
Project budgeting … estimating the full cost of the project
involves the following features:

Budget planning: estimating costs and making a financial plan

based on a project estimate;

Budget tracking: keeping track of project expenses during the

project execution phase;

Project budget management: setting guidelines and control

procedures to guarantee that costs don’t exceed the project
budget (longer-term measures compared to tracking)
What are the distinct processes of the budgeting process?
1. Budget preparation-establishing an anticipated revenue and
expenditures for an upcoming project’s future period based
on prevailing internal and external factors;
2. Budget authorization-enactment/entrance into financial
obligations by a budget authority organ … an organ conferred
to authorise expenditure;
3. Budget execution-delivering services by undertaking
expenditures (financial resources made available for
execution). Involves monitoring, adjusting, and reporting on
the respective budget period ; and,
4. Budget accountability- the agencies report their actual
physical & financial performance … aided by performance
indicators.
Value engineering in budgeting
VE as a budgeting process

 The method first emerged in World War II, initially labelled “value
analysis” i.e. a systematic assessment of the production process at
reduced/reasonable costs while ensuring functionality &
performance is maintained;;
 It was necessary due to shortage of supplies, materials & skilled
labour during WWII;
 Eventually, this estimating practice evolved into a tool we still
depend on on today;
 Involves analysing every aspect of costing from start to finish.
VE as a budgeting process … cont …

Function Analysis: assess which items are essential to the

project’s success/performance and which may not be
essential and identify whether specific project input/activities
can be achieved at a lower cost .

Evaluation: identify & evaluate the alternatives (the pros and

cons) & establish how well will the alternatives perform
compared to the original plan/project/project activities;
… the goal is to stay exact to the original vision without
impacting function, performance, quality, durability ...
VE as a budgeting process … cont …
Cost Analysis
 Value Engineering is sometimes associated with cheap
(construction), where the need to save money is more
significant than providing quality & durability… this is why
conducting a cost analysis is imperative;
 Conducting a life cycle analysis by assessing all the costs at
every project stage;
 It is essential to mindful that choosing cheaper materials
will not reduce the long-term lifecycle performance of a
project.

… so, the essence is on contributing to a reasonable/realistic

estimate and thus, budget …
Recap ….

1. A project budget must be created thoroughly. Re:

essential steps toward creating (and managing) a project
budget:

2. How is a project budget an important part of planning

and controlling a project;

3. Improving project budget accuracy & precision by

analysing risks and accommodating risk management into
the project budgets.
Recap ….
 The budget should address the total project lifecycle.
This is a common oversight, especially for the
operational phases of the project;

 Normal conditions are rarely encountered

o Project cost estimates usually anticipate “normal
conditions. However, many projects are conducted
under anything but normal working conditions.
o Some of the ways in which the normal conditions
assumption is routinely violated include the availability
of resources & the nature of environmental effects;
 How estimators should use value engineering to add
value to budgets … an essential part of an estimator’s
job …
Recap … cont …
In order to develop a budget, we must forecast:
What resources the project will require;
The required quantity of each;
When are they needed;
How much will they cost-including the effects of potential price
inflation;
Include issues of uncertainty-some projects have less uncertainty than
others;
Budgeting skills (engaging an experienced estimator);
Issues on time estimating for activities-can add an error in the
estimates if not well timed i.e. can use work-studies in operations
research;
Value engineering with a thinking that, it is not about cost-cutting - it
is seeing that no extra costs are used up unnecessarily;