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Date Created: 12/22/15
Project Management for Development Organizations Doing the Right Projects, Doing the Projects Right The Project Budget A project budget is the total sum of money allocated for the particular purpose of the project for a specific period of time. The goal of budget management is to control project co sts within the approved budget and deliver the expected project goals. Our definition of a successful projec t is one that meets four success cri- teria: that the project’s scope is de livered on schedule, it is delivered within budget and, once delivered, it meets the quality expectations of the donor and beneficiaries. For project managers to be truly successful they must concentrate on meeting all of those criteria. Budgeting serves as a control mechanism where actual costs can be compared with and measured against the budget. The budget is often a fairly set parameter in the executio n of the project. When a schedule begins to slip, cost is proportiona lly affected. When project costs begin to escalate, the project manager shou ld revisit the Project Plan to de- termine whether scope, budget, or schedule needs adjusting. To develop the budget, the applicab le cost factors associated with project tasks are identified. The development of costs for each task Consulting, Training, Workshops, Technology www.pm4dev.com The Project Budget Page | 2 should be simple and direct and consist of labor, material, and other di- rect costs. The cost of performing a task is directly related to the per- sonnel assigned to the task, the dura tion of the task, and the cost of any non-labor items required by the task. Estimating the Budget The project manager is responsible to estimate the budget required to complete project activities. The Project Manager should allocate all costs to project activities, and all aspects of the project, including the cost of internal and external human resources, equipment, travel, materials and supplies, should be incorporated. The budget should be much more detailed and more accurate than it was on the project proposal. In the case the project manager starts her job with a contracted budget, the project manager needs to review the assumptions made during the project proposal stage and verify th at the agreed scope can be accom- plished in the contract budget. The Project Manager can use manual or automated tools to generate the budget estimate. The budgeting tool s may be simple spreadsheets or complex budget estimating tool. For historical purposes, and to enable the budget to be refined, the Project Manager Project Budgeting is per‐ should always maintain notes on how this budget formed at the initial stages was derived. Cost estimating checklists help to ensure that all prelimin ary budgeting information of project planning and is known and all bases are covered. The Project usually in parallel with the Manager must also include in the budget the cost of both the human resources and the equipment development of the project and materials required to perform the work. The schedule. The steps asso‐ method by which staff an d products will be ac- ciated with budgeting are quired for the project will directly affect the bud- highly dependent on both geting process. the estimated lengths of A number of constraints, financial, political, and tasks and the resources as‐ organizational, may dictate the methods by which resources such as perso nnel, equipment, services signed to the project. and materials are acquired. The Project Manager needs to be aware of existing resources acquisi- tion policies, guidelines, and procedur es. In addition, the preferences of the beneficiaries and/or the donor representatives may influence acqui- sition decisions. Information from si milar past projects can be used to gain an understanding of budgeting strategies; those that were success- ful and applicable may be considered for implementation on the current project. .com www.pm4dev.com The Project Budget Page | 3 Once all project requirements have been documented, the next step is to determine the costs of each requirement which will result in the crea- tion of the project budget. A cost es timate, which is the process to ap- proximate the costs that the project will spend to get or use the project resources Budget estimates are obtained from the people responsible for manag- ing the work efforts. They provide th e required expertise to make the estimate and provide buy-in and ac countability during the actual per- formance of the activities. The team members identify people or labor categories required to perform the wo rk and multiply the cost of the la- bor by the number of hours or days required to complete the task, as discussed in schedule management. Determining how long the task per- The projects’ Work Break‐ formance takes is the single most dif- down Structure (WBS), ficult part of deriving a cost estimate. scope statement, historical The labor costs should factor in vaca- tion time, sick leave, breaks, meet- information, resource in‐ ings, and other day-to-day activities. formation, and policies are Not including these factors jeopardiz- es both schedule and cost estimates. inputs used to determine Non-labor charges include such items the resources for the as material costs, travel, computer project. The main output is equipment, and vehicle costs. a list of resources require‐ As with developing a project sche- ments that provides the ba‐ dule, documenting assumptions sis for budget estimating made while developing the project budget are critical to the success of and budget controls, and the project. Without a clear docu- provide valuable informa‐ mentation of these assumptions, tracking the budget is not only diffi- tion to the project resource cult but risky. management process. Estimating Techniques There are four basic methods to estimate a budget: analogous, top- down, bottom-up and parametric estimating. Analogous, this estimate technique us es the actual costs of a previous, similar project for the basis for es timating the costs of the current project. This method is generally less costly than others, takes less time but is less accurate. Analogous esti mates are most reliable when a pre- vious project is similar in the object ives and activities to the current .com www.pm4dev.com The Project Budget Page | 4 one. Additionally the people prepar ing the estimates must have the re- quired expertise to determine if cert ain activities will be more or less expensive on the new project. Top-down estimate, it is a budget estimate when the total project budget is known and the project n eeds to know the costs of each individual activity, in this scenario the project determines the num- ber of activities or outputs the project can produce with a given budget. A fixed budget is the brok en down using the WBS to de- termine the number or quantity of activities that can be achieved with the budget. The project may de cide to reduce or increase cer- tain activities or reduce the number of WBS levels to fit the budget limitations. Top down uses actual bu dgets from activities in similar past projects. Bottom Up estimate requires estimating the individual activities and the cost of each input and adding them up to get the project total. A detailed WBS is needed to dete rmine all the activities in the project and determine all required resources such as personnel, equipment and materials. Staff resp onsible for an activity or with expertise in a specific area develop the estimates of the lowest lev- el of the WBS and all estimates ar e added to create estimates for each higher level of the WBS and fi nally for the entire project. In this technique the estimate starts with a fixed number of activities and the estimate calculates the total budget. Parametric estimates use standardized parameters that define the costs of an activity or task for a specific rate or output. For example the costs of training one person are a rate that can include people, material and equipment costs that once it is mu ltiplied for the required number of people that need to be trained, gi ves the total budget for the activity. For this example the parameter may include the type of location, length of the training. Parametric model is quite popular in construction projects, costs can be estimated based on square meters of construction to arrive at the total cost for a bu ilding. The accuracy of this method depends on the data available and whether or not the model can be scalable to different conditions. .com www.pm4dev.com The Project Budget Page | 5 Budget Control Monitoring and controlling the project budget ensures that only the ap- propriate project changes are included in the budget baseline, that in- formation about authorized change s are communicated and corrective actions are taken by those in charge. The action of budget control is al- so a process of managing the budget. Usually the finance department’s responsibility is to Controlling the budg‐ record, track and monitor the budget from a cost ac- et is a critical respon‐ counting perspective and ge nerates reports for the organization management and the donor as part of sibility of the project manager, and it is compliance requirements su ch as ensuring the cor- rect accounts are properly used and recorded. equally important that the organization Budget management is the process by which costs defines the roles and or expenses incurred on the project are formally responsibilities of all identified, approved and paid. Purchase order forms are completed for each set of related project ex- parties involved in penses such as consulting services, equipment and budget control. material costs. Depending on the authorization level the purchase order forms are approved by the project manager and recorded by th e finance unit for tracking, donor reporting and auditing purposes. .com www.pm4dev.com Page | 6 The Project Budget These series of articles focuses on conc epts and practices related to development projects. It is our hope that the ideas an d methodologies presented here prove useful to anyone who is engaged in managing projects in the broader development communi- ty, and helps bring sustainable benefits to the communities and beneficiaries who need it the most. The Millennium Devel- opment Goals aim by 2015 to reverse the grinding poverty, hun- ger and disease af- fecting billions of people. PM4DEV is committed to provide resources and develop know- ledge and expertise to support development organizations in their efforts to achieve this ambitious goal. Project Management For Development Organizations www.pm4dev.com email@example.com Copyright © 2011, PM4DEV, reserved rights. .com www.pm4dev.com
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