Budgets

Purpose

Budgets provide a categorized breakdown of anticipated project costs. They define, by area, anticipated costs (including any pass-through, mark-up, contingency, or administrative percentages). The cost breakdowns are available for individual elements and are subtotaled by category and totaled for the project as a whole. When authorized, budgets serve as the organization’s expectation for project spending.

Application

In most organizations, budgets are established so that funds may be properly allocated to a project. Although they are defined here as planning tools, they may be used during the initiation process in certain organizations where only well-defined cost plans are used in making the project go/no-go decision. They serve as a spending baseline, to determine when project costs are or are not within the anticipated boundaries for spending.

Depending on organizational preference, the budget line items may be broad in scope (with a heading like “Resources”) or extremely detailed (with individual human and material resources, identified by name). The budget is decomposed to the degree necessary for the organization to effectively use the information, and to the degree where the information’s accuracy may ultimately be reconciled with actual costs at project completion.

These actual costs normally include a percentage to acknowledge the organization’s investment and expense in administering a project. This burden rate may be different for human and material resources, depending upon the organization’s accounting practices. Normally, budget costs are broken out by resources and materials so that the burden for each can be easily incorporated and so that management can discern between human resource costs and material resource costs.

Content

Because the components of project budgets are highly specialized (based on the nature and type of work being performed), their “standardized” content is limited.

Approaches

Some budgets are generated only at a very high level (with virtually no detail) because the information available early in the project planning stages is scant. Others break down the hours committed on a per-resource basis rooted in the resources committed at the work package level of the work breakdown structure. In either case, the depth of the budget should be acceptable to senior management, because their authorization is required to convert budget predictions into organizational allocations of funds.

Considerations

Although project budget allocations may change as project requirements shift, the original budget baseline should be retained for the life of the project as an historic artifact. Regardless of the number of changes which are approved, the original budget remains significant in that it is normally the only financial allocation tool that receives the approval of the highest levels of management.

In some organizations, budget figures are arbitrarily adjusted by senior management, under the assumption that there is an inherent level of unauthorized reserve or “fudge” nestled within the numbers. Such arbitrary downward adjustments contribute to an ongoing cycle of inaccuracy, as team members learn to anticipate the management adjustments and modify their estimates accordingly.

Sharing budget information with management and the team may depend largely on organizational protocols, but unless there are overriding reasons, budget information may be shared openly with the team. Some organizations advocate “open book” management, which means that budget information is readily available to team members in a secure internal environment. If the information is to be made readily available to team members in such an environment, consistent forms and formats become crucial to ensure consistent interpretations of the data.