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Practical Budgeting for Project Managers - Part III
September 7, 2009 | Author: PM Hut | Filed under: Cost Management, Risk Management
Practical Budgeting for Project Managers - Part III (#3 in the series Practical Budgeting for Project Managers)
By Ray W. Frohnhoefer
Budget Risk Assessment
Once you have created your draft budget, it should be subjected to the same review process as estimates discussed within the course materials. A line by line review should look for all the risks. Depending on your company and/or client policy, having a 15-25% contingency to manage risks is normal. You may want to consider an additional contingency for unplanned risks.
Most budgeting risk is centered around people. There may be project team members with unknown skill levels, insufficient staffing, outsourced work which cannot be managed as closely, or unique, specialized resources which are difficult to obtain at the right times. Another standard risk for the construction industry is the environment and weather. Each risk will require evaluation and a potential budget adjustment to ensure the best possible budget is formulated.
Longer term, multi-year projects need to consider inflation. Take the case of the interstate highway system which was constructed over a 35 year period. Inflation during the 60s and 70s was high and drove the project significantly over budget. Another example of a construction project impacted by inflation was the “Big Dig” in Boston. A factor for inflation might be added to the budget through the risk management process.
Budget Presentation
There is obviously no one single format for budgets. You should select categories according to the expense types and in alignment with your company’s financial reporting. Here’s an an example:
Ray W. Frohnhoefer, MBA, PMP is the Director of the Project Support Office at EDmin as well as a consultant, speaker, writer, educator, and mentor on Project Management. Ray is currently serving on the Component and Community Relations Governance Committee of the Project Management Institute, a past Component Mentor for PMI Region 7 (Southwest North America), a Past President of PMI, San Diego Chapter, Inc., and an adjunct faculty member at three San Diego universities. You can find out more about his professional roles at http://www.edmin.com/company/index.cfm?function=showBioDetail&id=80 and through his blog, The Project Notebook, at http://projectnotebook.blogspot.com.
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