This task deals with planning the budget and resources we will need to complete a project. It covers topics such as estimating, creating an overall project budget that contains contingency reserves to handle unknowns, and monitoring budget and resource needs.  

2.5.1 Estimate Budgetary Needs

Estimate budgetary needs based on the scope of the project and the lessons learned from past projects.

Estimate based on scope and lessons learned
(Estimate based on scope and lessons learned)

Anyone who has renovated a home, raised children, or even budgeted for a vacation will know that costs can come from many areas and add up quickly. As project managers, we are expected to anticipate these costs and generate as realistic as possible estimates and budgets.

Cost estimates

Developing cost estimates involves developing an approximation of the cost for each activity and required element in a project. Costs include:

Cost Categories

Costs such as labor and materials are classified as direct costs. This is because they are costs incurred only because we started the project. However, other costs such as facilities (the shared costs for buildings), services, IT equipment, etc are indirect costs that may also be passed on to the project by prior agreement.

Project managers need to be clear on which costs will be charged to the project when creating estimates.

 

Direct labor – The cost of people’s time – Mala’s hourly rate is $100 and we need her for 50 hours, so that will be $5,000

 

Materials – things we consume during the project – We need 1 vending machine ($4,000), 5 liters of paint ($30). 50 liters of pig food $80 and 1,000 paper cups ($20). Total $4,130.

 

Equipment – tools, supplies – We will need paintbrushes, rags, brush cleaner and rubber gloves $25.

 

Facilities – any facility costs the project incurs. Bill said we can store our equipment in his shed if we pay him $50 for his trouble.

 

Services – the shared costs of groups and services – such as if we had to pay for anyone’s time for legal, advertising, etc.

 

Information technology – computing-related costs – if we incur any IT costs.

 

Indirect costs – Other indirect costs –  such as management overhead if agreed to.

 

Contingency reserves – funds set aside in case things go wrong – We might want to set aside $250 to clean up, or repair Bill’s shed if we make a mess.

How to Estimate

There are several approaches we can use to estimate costs. They each have advantages and disadvantages.

 

Analogous Estimation – uses analogy (comparison) to previous projects where the costs are known. So we could say, the last project like this one ended up costing $2M, so we should use $2M as our starting estimate.

Advantages

  • It can help ensure no class of work is accidentally omitted from the estimates since it is based on similar aggregated totals.
  • Helps address generally underestimated activities because it is based on final costs

Disadvantages

  • Projects are rarely the same as previous ones, so direct comparison is unlikely. Then we get into “a little larger” and “easier in this area” adjustments that are usually approximations.
  • Does not help price or apportion out sub-elements for management by other managers since it is a high-level summation. So, when the project starts, additional break-out discussions will likely be necessary.

 

Parametric Estimation – Parametric means calculation based. If tiles are $4 per square foot and we have 320 square feet to tile, then our cost estimate might be $4 x 320 + say, 5% for wastage after cutting edge pieces. When agile teams estimate work in story points, this is a form of parametric estimation. It requires historical data (5% wastage) and an algorithm to apply.

 

Advantages

  • Quick if the input data is available

Disadvantages

  • Likely to be inaccurate if the historical input data is no longer applicable.
  • Misses non-calculation based work elements.

 

Bottom-up Estimation – In bottom-up estimation, we add up the estimates for all the identified work packages or the smallest identified components to create a total estimate. This is usually based on the WBS.

Advantages

  • Can be accurate if all the low-level items can be identified
  • Provides sub-component costs for independent management

Disadvantages

  • Can only be made after all the WBS elements are identified
  • Can be very time consuming to create
  • For knowledge work projects, it is often difficult to identify all the sub-components in advance
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Since no estimation approach is perfect, we should consider using multiple techniques and look for convergence within the ranges they predict. If we arrive at a similar set of estimate ranges using various approaches, we can have more confidence in the forecast.

Estimate Convergence

Guidelines for Estimating

Additional tips to bear in mind when estimating include:

  • As well as using multiple approaches to estimation, engage multiple people. Everyone has a bias and blind spots; enlisting a small estimation team will limit individual oversights.
  • Gather all the relevant input information that will help prepare the estimates ahead of time.
  • Check with the resource supplier to make sure no incorrect assumptions have been made.
  • Determine which estimating techniques will be used.
  • Make sure everyone is clear on the units of measure that will be used (person-days, dollars, ideal time, etc)
  • Consider possible risks that may impact cost – do we need to develop and include a contingency?
  • Review the list of assumptions for possible additional costs or the need for contingency if any prove false.
  • Make sure estimates include costs for all people involved and the resources they will need.
  • Consult any relevant lessons learned registers. They contain valuable cost-estimating information—both successes and shortcomings — and can help in estimation and budgeting.

2.5.2 Anticipate Future Budget Challenges

Estimate budgetary needs based on the scope of the project and the lessons learned from past projects.

Use scope and lessons learned to anticipate future budget challenges
(Use scope and lessons learned to anticipate future budget challenges)

We cannot know what the future holds. So it would be unrealistic and irresponsible to estimate for only what we can see required today. Instead, we need to build reasonable and transparent buffers/reserves/contingencies into our estimates and budgets. This allows us to proceed when the inevitable surprise occurs.

The challenge is to create reserves appropriate to the uncertainty and likelihood of additional costs. If we estimate too low, we may have to stop the project and go back to the sponsors for more money. On the other hand, if we estimate too high, then worthwhile projects might not get funded because the ROI looks poor, or we are criticized for overly padding our estimates.

Another problem can occur when there is poor transparency or communication. For example, when asking our team for activity estimates, we should be clear if we want them to add contingency or if we will. We want to avoid the situation where everyone adds contingency, and the final estimate is far from the likely cost.

The solution is to have a clear plan and make sure everyone involved in estimating activities and reserves understands the process and communicates.

Budget Estimating Process

Estimating the project budget consists of adding the estimated costs of individual activities (or work packages) to create an approved cost baseline. This baseline budget should contain all the funding needed to complete the project.

As the project progresses, the project cost performance is then measured against this cost baseline. The typical evolution from activity estimates to project budget and a cost baseline is shown below.

Project Budget Components

(1) Cost estimates for the various project activities, along with any contingency reserves for these activities, are added to form work package costs. (2) The work package cost estimates, and any contingency reserves estimated for the work packages, are aggregated to control accounts (3).

The summation of the control accounts makes up the cost baseline (4). Because the estimates that make up the cost baseline are directly tied to the schedule activities, this enables a time-phased view of the cost baseline, which is typically displayed in the form of an S-curve. For projects that use earned value management, this cost baseline becomes the performance measurement baseline.

(5) Finally, management reserves are added to the cost baseline to produce the project budget. As project managers, we do not get to access these management reserves as regular project funds. Instead, if changes requiring the use of management reserves arise, the change control process is used. Approved change requests trigger approval to add the applicable management reserve funds to the cost baseline.

Cost Baseline

The cost baseline is the approved version of the project budget, excluding any management reserves. It can only be changed through the formal change control process. It is time-phased and used as a basis for comparison to actual results.

The cost baseline will include projected expenditures plus anticipated liabilities. Here we see the cost baseline as the solid green curve and expenditures shown by the dotted orange line. Funding often occurs in incremental amounts that may not be evenly distributed, which is shown by the dotted line steps. The total funds required are those included in the cost baseline plus any management reserves needed (purple).

Guidelines to anticipate future budget challenges

Short of having a functional crystal ball to predict the future, there are good practices we can use to help planning and budgeting. These include monitoring:

Trends – Monitor project trends such as are we getting more change requests, missing small deadlines, having more quality issues than before. We can extrapolate trends to provide insights into what might happen if the situation continues. How will this impact our budgets?

 

Stakeholders – Keep the stakeholder register up to date and be aware of changes to project requirements if new stakeholders are added to the project.

 

Risks – Monitor risks and assumptions frequently. Look for new risks and changes to existing ones.

 

Performance – Monitor the performance of team members, suppliers and vendors. Are they on track?

 

Change Requests – Monitor all changes to the project and follow the Change Management System to keep them within budget if possible.

2.5.3 Monitor Budget Variations

Monitor budget variations and work with governance processes to adjust as necessary.

Be on the lookout for significant variations

As the project progresses, we need to monitor the budget and be on the lookout for significant variations. The primary tool for tracking costs is the cost baseline that is usually illustrated with an S-Curve graph.

Creating the Cost Baseline

As we have seen, the cost baseline is the approved time-phased budget. Time-phased just means it is structured to show when the costs are anticipated. Here is an example based on our case study of creating a pig food vending machine.

Cost Baseline table

Form this table, plotting the cumulative spend against the weeks, gives us the S-Curve Graph.

As project costs are incurred against the project, we can plot the actual project spend compared to the cost baseline.

S-Curve Graph with Spend

If there are deviations under the S-Curve, this could be a sign that we have not yet processed the payment or that the work did not occur when scheduled (1). Variations above the line might indicate unauthorized expenditures or cost overruns (2).

2.5.4 Plan and Manage Resources

Plan for and keep track of people and things
(Plan for and keep track of people and things)

Life would be simple if things progressed as planned, but they rarely do. We often start with flawed plans and are unaware of where they are deficient. Problems occur, things take longer than they should, and requirements change. Like life, it is how we choose to react to these events that determine our success or failure.

Some general tips for planning and managing projects that also relate to budgets and resources include:

Get agreement on what “Done” looks like – Make sure the relevant stakeholders agree on what the final, acceptable state of a work package or activity is. We do not want the team to think it is done, but the customer or downstream consumer of this work believes it is not finished. Agile teams use a “Definition of Done” jointly created with the Product Owner to agree on the full set of activities that need to be completed before something can be declared Done. Predictive projects describe quality requirements and acceptance criteria in the WBS dictionary. Whichever project lifecycle is being used, including hybrid, make sure people discuss and agree on “Done.”

Frequently confirm understanding – Language is imprecise, and there is often a gulf of understanding between two parties. Reduce the impact of different interpretations by frequently confirming understanding. Create prototypes, test designs and give demonstrations of product increments. The sooner we uncover a mismatch in understanding the quicker and cheaper it is to address.

Select planning horizons appropriate for the uncertainty at hand – When we know the way, we can plan the entire trip in advance. However, when in new or changing territory, we need to explore, find the best way forward and maybe back-track if we reach a dead-end. Our plans and budgets should reflect this level of certainty. Projects in hard to predict, complex, high-change environments should plan in short intervals with inspection, feedback and adaptation between periods. More predictable projects can operate with longer planning horizons.

Check-in with stakeholders – Check to see how things are going. Often when people are struggling, or issues occur, they go quiet rather than communicate the problem. Do not assume that no communications mean no issues. Go see, ask how things are, where people need help.

Track Progress – Plans are yesterday’s best guesses. How are things actually progressing? Which work items are getting completed, which are falling behind, and which are blocked? Track the progress objectively. “Almost finished” is not finished.

Pay attention to risks – We go to a lot of effort to identify potential threats, analyze them, and create avoidance and mitigation strategies. Do not let this work go to waste. Frequently review the risk list. Schedule a weekly meeting in your calendar with you and the risk list if that’s what it takes to ensure you revisit them frequently. Ask the risk owners how their monitoring is going. Any news? Do we need to change anything? Don’t forget the opportunities either; ask what can we do this week to exploit them?

Ask the team for solutions – When faced with problems, setbacks and issues, do not be shy to ask the team for help when appropriate. They have first-hand task execution experience and may have seen similar problems before. We do not have to implement their suggestions, but they often have ideas we may not have thought of.

Proactively manage change – Not all project changes are bad. Sometimes, even late-breaking changes that bring a competitive advantage are useful. Sometimes after building a rapport with the customer or client through collaboration, a change or our suggested solution might even lead to a simplification. More often than not though, changes mean more work and more budget consumed. Change requests are processed through the change control process for predictive, traditional projects or the product owner for agile projects. When changes impact the budget, be sure to update the associated cost baseline and performance measurement baseline.

Deliverables and Tools

  • Cost baseline
  • Management reserve
  • Resource management plan
  • Change requests
  • Cost forecast
  • Risk analysis
  • Estimating techniques (three point, analogous, parametric, T-shirt sizing, planning poker)
  • Leverage PMIS
  • Understand change control
  • Use velocity data and analysis
  • Throughput analysis
  • Cost Variance, EVM, EAC

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