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Budgeting and Costing in Project Management - Introduction

July 9, 2009 | Author: PM Hut | Filed under: Cost Management, Project Management for Beginners

Budgeting and Costing in Project Management - Introduction (#15 in the Hut Introduction to Project Management)
By JISC infoNet

Preparing a budget is an integral part of establishing the business case for a project. An evaluation of the financial requirements is central to establishing whether the project is viable or not. In cases where external funding is being applied for, the budget will form an important element of the bid and the Benefits Model. At the most fundamental level, budgeting should answer the questions, What is the cost of undertaking this project? Is any external funding sufficient to cover the costs? Where there is competition for resources, is this project a priority? To what degree do cost and benefit balance up?

As with any forecast or plan, the budget is likely to change as activities unfold. It is therefore useful to undertake a sensitivity analysis to look to what likely impact any change in costs and income may have on the overall budget and assess whether the project is high or low risk in financial terms. This will normally be covered during the risk assessment/risk management process and will inform the broader cost-benefit analysis for the project.

IT related projects are notorious for running over budget yet there is no reason why this has to be the case if you take time to cost the project properly at the outset. It is not uncommon to see project budgets that cover only part of the costs. There are many reasons for this such as:

  • A tendency to focus on initial purchase costs and ignore elements such as staffing
  • Poor planning that doesn’t allow sufficient resources for training and staff development
  • Blind faith in ‘optimistic’ supplier estimates
  • Project managers don’t think their senior managers could cope with knowing the true cost

The last point should not be under estimated. In many organisations the fact that IT projects always run over budget is accepted as the norm. Managers find it far easier to keep asking for small incremental sums than to give their sponsor the shock of saying ‘this is what the whole project will actually cost’. Project costs are relatively easy to ‘hide’ in large IT departments where existing staff are carrying out the work. The types of costs incurred in a project will be split between capital or one-off costs and operational costs.

JISC infoNet aims to be the UK’s leading advisory service for managers in the post-compulsory education sector promoting the effective strategic planning, implementation and management of information and learning technology.

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This entry was posted on Thursday, July 9th, 2009 and is filed under Cost Management, Project Management for Beginners. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

1 person has left a comment

Thanks for the post. In my opinion, working out the budget should include the cash flow. Splitting the “dreaded” amount into installments makes easier to sell the project.
As per the techniques to hide the IT staff’ costs in the “operational” costs is a sign of lacking of accountability in the whole organization.

Eugenio

Eugenio Magnone wrote on July 10, 2009 - 10:06 am | Visit Link

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