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Tips on Building your Project Budget

I have previously posted about Planning and Estimating but another key aspect of Initiating a project is producing a Budget. Here are some tips on my approach to this activity.
When to produce your Project Budget

When to prepare Budget?

As suggested in the cartoon, the budget preparation is best done towards the end of Project Initiation when you have an idea what you are doing in the project, have undertaken planning, estimating etc and produced your Resource plan. 

How to produce the Project Budget?

There are some people who suggest that once you produce a detailed Project plan in your chosen scheduling tool (e.g. Microsoft Project), you press a button or two and then you have created the guts of your budget. I am not one of those people! If you have someone working within your plan for only half a day, in 95% of cases the project will need to fund that person for the whole day! Also you need to recognise that you may suffer from Planner's Droop.

I use a spreadsheet to determine the base budget and then consider contingency separately. Working in IT projects, most costed resources are human although the spreadsheet can handle other elements.

Project Budget creation and tracking spreadsheet
The key elements of such a spreadsheet
  • A weekly calendar throughout the project duration. If there are known public holidays, these can be marked
  • As I am a great advocate of the use of PRINCE2 Stages I mark the stage in each week so the spreadsheet can produce a base Stage budget as well as the overall project budget
  • You list every item which will be charged to the project from your planning with a day rate. As I use the same spreadsheet to track spend against budget (and most resources book in hours), I have a means of translating cost to hours but I find it easier to budget in days
  • Populate the cost profile for each item against the weekly calendar. So for human resources consider when they are brought into the project team, will they charge full time or part time and when they will be rolled off the project
  • Non human resources can be entered in the spreadsheet at the time the cost is likely to be incurred. So if something cost £5000, I would normally have the "day rate" as £1000 and put "5 days" against the week of planned spend.


You then need to consider your Project or Stage contingency fund which is in addition to the base budget. You have a number of ways of assessing what fund is required.
  1. The most straightforward way is review the Risk Log, use your judgement and view of historic projects (e.g. have the project team done similar projects before? is this a particularly risky project?) and choose a percentage of the base budget. A very rough guide might be 5% for a low risk project up to 30% (and above) for higher risk projects. Percentages can be misleading as a small project base budget may need a higher percentage.
  2. There are a number of "pseudo science" approaches to better assess the contingency fund required such as have a risk cost per risk, multiple by probability and sum to get a fund. I must admit that although I may use this approach to guide me, I will also factor in judgement as per method #1. Where this approach is mandated (e.g. a PMO), it is usually possible to fiddle the numbers to get to the fund you think you need, but don't tell anyone ;-)
  3. Sometimes you may be working with a client who doesn't believe in contingency funds. Then you might want to consider sandbagging to give you some wiggle room (e.g. holding some additional funds by hiding resources you don't need unless you have a problem, overestimating day rates, extending durations etc). Not that I have ever done such underhand tactics ;-)

Other considerations

  1. What costs can be capitalised? This will assist the business case
  2. What taxes need to be included in the budget e.g. VAT

Business Case implications

Once you have worked out your required budget as above and agreed this with your Sponsor, between the two of you, the Business Case should be updated to ensure the Project is still viable. If a pre-defined budget constraint is exceeded then potentially the scope or plan / resourcing can be adjusted to reduce the required budget, maybe at higher risk. In any event, the viability of the Business Case needs to be assessed in line with the other aspects of the Project Definition

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