This may be basic information, but the project budget and meeting on-budget delivery expectations is huge in terms of project success and customer and/or executive management satisfaction. 

So, properly pricing the project – properly estimating the costs that go into the project – is critical for any size engagement. 

Therefore, it’s always a good time to examine and discuss the elements that go into the overall project budget because as a project manager, you may – if you’re lucky – have some influence of the inputs to the project costs and budget. 

And it’s a certainty that you’ll be responsible for it – even if you had no input at the beginning of the engagement.

Let’s examine the key parts when construction a project budget.

The people costs

These are the costs associated with the personnel on the project. They include salaries and the cost of benefits (such as vacation time and health insurance) if they apply. Employee or contractor salaries and expenses are one of the biggest budget items on any project.  If you happen to be working for a nonprofit company that is using all volunteers to complete the project work, your salary expenses may be smaller, but you'll still probably have expenses for subject matter expertise, contractors, the project manager's salary, and so on.

The administrative costs

Administrative costs are the everyday costs that support the work of the project but are not necessarily directly related to a specific task on the project. Phone expense, copier paper, heating expenses, and support personnel are examples of administrative costs. Project teams have to work and meet somewhere, so that means that there is some sort of facilities expense in the form of either rent, lease, or mortgage payments. If the building or facility was leased or purchased specifically for the project, it would be classified as a project cost instead of an administrative cost.

Project resource costs

Resource and project costs include things such as materials needed for specific tasks, equipment leases, travel expenses, and so on. These expenses are specific to the project. For example, if the project consists of building an office building in a prime downtown location, you'll need the use of a crane during the early phases of the construction to lift the steel beams and other. Resource costs are typically the largest expense for construction projects, and estimating these costs will require research by the project manager and team.

If you as the project manager have initial budget input or responsibility for creating the initial project budget, then careful examination of each of these categories will help you come up with a reasonable budget for the project.  If not, being aware will help you identify what may have been missed and it will certainly help you as you manage the project budget on an ongoing basis throughout the engagement.

Direct Costs versus Indirect Costs

In addition to the three categories of project costs we discussed above, there are also two types of costs: direct and indirect costs. Direct costs include costs such as salaries, equipment rentals, software, and training for team members. Any cost that can be directly attributed to project work is a direct cost.

Direct costs = Cost specifically related to the work of the project.

Indirect costs are not specific to the project. When your project team works with other members of the organization who are not working on the project in the same building, things like the lease cost of the building would be considered an indirect cost because it is not specifically related to the project. Another indirect costs would be administrative staff who will be assisting you with project activities but aren't assigned specific project tasks themselves.

Indirect costs = Costs associated with the project but not directly related to the work of the project.

Each organization is different, so work with accounting to see how indirect costs should be handled in your project budget.

Gather the Docs

The first step in creating the project budget is to gather all the Planning documents for reference. You will want to start with a review of the project goals and deliverables for obvious budget expenses. Next, take a look at the task list, the WBS, and the network diagram. Record tasks or items that will have costs associated with them on your list. Also, using a collaborative viewing tool like Seavus’ Project Viewer, you can review the project schedule, followed by the resource list, and roles and responsibilities chart for expenses you may need to account for. Don't forget to include equipment rentals, facilities, and material expenses associated with tasks and WBS elements.

Start your budget list on a piece of paper or a spreadsheet, and record the items needed in one column and estimated costs in another column (if you know them at this point; otherwise leave that column blank). If you want to be really organized, you could use the project schedule and start recording initial costs right on the tasks listed on the schedule. We'll look at some sample budgets later in this chapter.

The Budgeting Process

The process for creating the budget is similar to identifying the resource requirements and creating the project schedule. Review the planning documents to uncover all the materials and resources you'll need, estimate their costs, record them in the budget, and finally get approval of the budget. Here are the steps you'll follow to get your budget process rolling:

  • Review the Planning documents.
  • Create cost estimates and integrate them with the project schedule (we'll cover this shortly).
  • Submit the budget for approval to the project sponsor or project committee.
  • Notify the appropriate project team members and stakeholders when the budget is approved.
  • Assign the code of accounts to the WBS elements if this hasn't been done previously.
  • File the budget in the project notebook.

As the project manager, you should go into the project fully equipped to execute the project based on the resources available. In order to accomplish this you need an accurate budget to use as your guideline.

Net let’s look at some of the items that should not be overlooked when estimating project expenses and constructing the project budget.  Regardless of the type of expense, you need to identify everything needed for the project and document its estimated cost.

You can use the same techniques for identifying budget items as you probably did for identifying deliverables and tasks. Review the statement of work, interview stakeholders, ask project team members who have worked on similar projects in the past, interview vendors, and definitely hold a meeting with key team members and stakeholders to brainstorm on the budget items. To save time, you could consider starting a list of budget items yourself before meeting with stakeholders or interviewing team members, especially if the project is small. You'll be able to identify many of the items simply by reviewing the Planning documents. Then let others look over what you've done and give you estimates for the things you've identified or add new items of their own.

Ask stakeholders or team members who have experience working on similar projects to help you create the budget for this project. Their experience will help assure that you don't miss anything important and will make the process go faster.

Here is a list of some of the common budget items to help you get started identifying them for your project. You could use this list as a checklist for future projects, adding your own commonly used items that require budget allocation and deleting the ones that don't occur on the types of projects you typically work on.

  • Project team salaries
  • Equipment and materials expense
  • Rent or lease costs for facilities
  • Marketing costs, including focus group and market research costs
  • Legal costs
  • Travel expenses
  • Advertising costs
  • Research costs
  • Feasibility study costs
  • Consulting services for subject matter expertise or as project participants
  • Phone charges
  • Office supplies
  • Internet access charges or website hosting fees
  • Software
  • Hardware
  • Training

Budget Woes

Budgets, like project schedules, can be the cause of conflict. Project schedules, particularly the resource assignments associated with the schedules that you share using a tool like Seavus’ Project Viewer, are typically the biggest source of conflict on any project, and budgets probably run a close second. Be prepared to defend all of the budget items you’ve come up with to the project sponsor or senior managers. Be ready to explain why the items are needed to successfully complete the project and the impact on the project if those items are not funded. You may need to call upon your negotiation skills to complete this process successfully.

Use top-down estimating

Top-down estimating is also called analogous estimating. The idea behind the top-down technique is that one lump-sum estimate is determined for the entire project. This technique is also used for the level-two WBS elements (the deliverables level) on large projects. This technique requires the estimator to have lots of experience with previous projects that are similar in size and scope to the current project.

The act of top-down estimating basically establishes one overall estimate for the project. This is the least accurate form of estimating. This technique works best for small projects or individual deliverables on small projects. It's best to use this technique in combination with the next one we'll discuss, bottom-up estimating.

Use bottom-up estimating

Bottom-up estimating is the opposite of top-down estimating. This involves estimating each task or work item individually and then rolling up those estimates to come up with an overall project estimate. For example, each task at the work package level is estimated, and then these estimates are added together with other work package-level estimates to come up with WBS level-three and level-two estimates. Then these can be added together for an overall project estimate.

The act of bottom-up estimating basically establishes individual estimates for each task and adds them all together to determine a total estimate for the project.  It’s worth noting that bottom-up estimating used in combination with top-down techniques can be very useful for large projects. Top-down estimates are given for the individual tasks or work package levels, and then these estimates are rolled up to come up with one estimate for the entire project.

Use computerized tools

Most project management software packages allow you to put cost estimates on the tasks listed on the project schedule. The software will then automatically calculate the total project costs for you. And if you're using a collaborative schedule viewing tool like Seavus' Project Viewer, then you can also easily share that information with the rest of your project team.  You could use a spreadsheet program to accomplish this as well by listing all the budget items in one column with their associated costs in another.

Ask your internal experts

Interviewing techniques work well for estimating tasks. Ask stakeholders, subject matter experts, vendors, and project team members with previous experience on projects like the one you're working on for estimates. Many times functional managers who've loaned out resources on similar projects in the past have fairly accurate estimates ready. Never be afraid to ask.

Another useful technique in this category is to peruse historical documents. Past project documentation can be referenced to determine how much was actually spent on tasks that are similar to the ones on the current project. This is a great technique if the past project was completed fairly recently because you have actual costs to use as a base instead of estimates.

Ask your vendors

Vendor pricing lists are a good source for estimate information. Start first with your procurement department. They may have lists of vendors who've provided pricing guides for certain activities or resources that you can reference and use as initial estimates for your project activities.

When you actually need to include costs for activities vendors will perform on your project, be sure to get input from more than one vendor when asking them for estimates; they can vary widely. Ask different vendors to give you estimates so that you can check one against the other. Be aware that some vendors hope to get future business from you, so they will purposely provide a low initial estimate. They also may be using this project as a pilot project in the hope of getting business from other companies similar to yours. Keep these things in mind when comparing estimates from different vendors. Also make certain that all the vendors providing estimates on the project have the same understanding of the requirements, assumptions, and delivery dates.

If the estimates are coming in high and the budget is tight, ask the vendors for a discount. I've used this technique with vendors, especially with the vendors I work with all the time. This isn't something you should do for every project, however; be judicious about when to use this tactic.

Last, always ask vendors to put their estimates in writing. This will help assure that you're getting estimates you can rely on throughout the project and will help you avoid setbacks later on.