The Project Budget Process - Paper Sample

Introduction

A project budget is an estimate of all total costs for completing a project within a specified timeframe. Every project requires resources that identify as costs. A project budget is an essential tool because it outlines the resource requirement for every project phase or activity. A project budget serves as a handy management tool that allows project managers to prioritize budgets parts and make better plans. Before plunging into a cost-estimate plan, it is vital to consider a few things such as cost estimates, budget contingency and budget monitoring (Izquierdo, 2020).

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The formation of a project budget is part of the planning stage of project management. Components of a project budget are direct and indirect costs that affect project expenses. Evaluating similar projects will help you get started with the current project budget. The following are the steps of the project budget process.

Identify Project Scope

Before identifying the tasks and costs estimates to include in the project budget, you must understand everything that you need. Project scope, timelines and deliverables are crucial for coherent cost estimations and project management (Kerzner, 2017). Establishing a realm involves pinpointing project tasks and milestones during the project management stage. Understand what the project entails. For example, in project management, deliverables refer to quantifiable services and materials up to project completion.

Define Resources

After understanding what the project entails, identify resources and materials that you will need to project completion. Izquierdo (2020) outlines four resource needs in almost all projects. These resources are staffing, equipment, sales and marketing, and miscellaneous. The best way to ensure that you capture all the tasks is by listing all the items and people you will need to complete the project within its deadline.

Total Costs

Now that you have a list of all resources you will need for your project; it is time to allocate amounts to each item. Foremost, it is vital to understand the number of resources you have. Consequently, it will be easy to know what additional expenditures you will factor in. Another effective way to come up with costs is by examining historical data for similar past projects (Bridges, 2019). You can use a spreadsheet with two columns of tasks and overheads so that you can easily and quickly calculate the total costs.

At this stage, use your project management software to build your budget. Remember to include a contingency fund in your project budget. Because of the uncertainty of the project, a contingency fund will ensure that you do not overspend and that the final product is a close reflection of the actual costs (Brannan, 2006). Also, when creating your budget, capture all assumptions you make along the way. Some of these assumptions may hold while others defy from the projections. Ensure that you can explain the rationale behind coming up the presupposition and provide support data and facts.

Obtain Approval

The final stage of the project budget process is receiving a go-ahead from the management and other stakeholders. Project stakeholders are persons or organizations that have an active engagement in the project, and the project may positively or negatively affect their interests (Project Management Institute, 2007). When presenting the budget for approval, ensure you understand, can explain, and justify the items and their respective cost allocations. Also, be sure to expound on the assumptions and other budget rationales you took into consideration. Implement the project budget once the management approves it.

Project Budget Inclusions

According to Kerzner (2017), project management refers to organizing, planning, directing, and controlling of resources for a specific project. The reason for the exclusion of staffing is because line managers provide this resource rather than the project manager. Every project translates to spending. A project budget consists of direct and indirect costs, fixed and variable overheads, labour, materials, equipment, licenses, taxes, and miscellaneous expenses.

Direct costs include expenses that a firm incurs rightly to a particular overhead (Lazar, 2015). Examples of direct costs are labour, materials, production supplies, piece-rate wages and commission. It is necessary to include direct expenses while preparing a project budget. On the other hand, indirect costs are expenses that the project budget manager cannot directly account them to a cost object (Lazar, 2015). Examples of indirect overheads are insurance, quality control fees, depreciation, general and administrative expenses, security, personnel, rent, and utilities.

A project budget is a tool for displaying total projected costs for completing a project. These expenses are either direct or indirect to the project or project activity. Deciding on which cost estimates to include or eliminate is a critical decision in project management and particularly during the project decision process. It is vital to consider all direct costs (Brannan, 2006). We can easily attach direct expenses to a cost object or activity in the project budget. Deliverables is another crucial concept when dealing with direct costs. Hence, it is simple to come up with costs amounts for deliverables.

On the other hand, since you cannot easily attach indirect costs to any project activity, then we can exclude them from the project budgets. A good illustration is depreciation charges, quality control costs, security, insurance, and general administrative expenses. However, we should include indirect costs such as utilities, personnel and rent in the project budget. Nonetheless, as the project manager, it is vital to ensure that you capture all the predominant costs for the completion and success of the project.

The Rationale

Whereas both direct and indirect costs are essential elements of a budget, direct overheads are outright and easy to identify and account for compared to indirect expenses. Accountability of direct costs is the rationale behind choosing all direct costs as inclusions for the project budget. Also, to uphold integrity, capturing of all expenses is vital in protecting the company’s image and reputation. The rationale for the choice of costs will be significant in the place where you have assumptions in coming up with direct costs. Again, it is vital to make a projected budget that is close to the actual performance.

Miscellaneous expenses are other crucial costs to include in the project budget. The business environment is full of a handful of uncertainties. The rationale behind it is to ensure you accommodate changes that happen during project implementation. On the other hand, by including indirect costs such as personnel, rent, and other service charges, you are showing that you understand the project’s scope. In case you need additional resources, then you can quantify and attach an estimated cost for each task. Project budget experts recommend using 10 per cent of total cost projections to come up with an estimate of miscellaneous expenses.

Conclusion

In conclusion, the project budget process is an essential element of project management. The project budget process starts with identifying the project’s scope. Consequently, define cost estimates, establish total amounts, build the budget, seek the stakeholders’ approval, and then implement the project budget. Ensure that you have a clear cut on what costs to include or exclude in the project budget by prioritizing costs that incur directly on project activity.

References

Brannan, L. (2006). Project budgeting using the project management knowledge areas. Paper presented at PMI® Global Congress 2006—Latin America, Santiago, Chile. Newtown Square, PA: Project Management Institute.

Bridges, J. (2019). 7 steps for a successful project budget.
https://www.projectmanager.com/training/create-and-manage-project-budget

Izquierdo, R. (2020). How to create a project budget for your small business projects.
https://www.fool.com/the-blueprint/project-budget/

Kerzner, H. (2017). Project management: a systems approach to planning, scheduling, and controlling. Hoboken, NJ: Wiley.

Project Management Institute. (2007). A guide to the project management body of knowledge (PMBOK® Guide).

Vargas, R. V. (2015). Applying neural networks and analogous estimating to determine the project budget. Paper presented at PMI® Global Congress 2015—North America, Orlando, FL. Newtown Square, PA: Project Management Institute.