How to Effectively Manage Project Budget

Service-based environment the success of a project is dependent on various factors such as timeframe, deliverables, and the team. However, the most important one is the project budget. A project is considered successful if the budget is on target. Therefore, having a fixed budget throughout the life cycle of the project implies that the project went as scheduled and was an absolute success. A study conducted by McKinsey & Company in association with the University of Oxford on projects across different industries showed that most of them run 45% over budget leading to a decrease of almost 50% in the value of their service. In the present economic scenario, this is considered a disaster.

Meticulously managing project budget is of utmost importance to project managers and there are a few strategies according to project management approaches that can be followed to control project budget and avert cost overruns.

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How to Effectively Manage Project Budget

1. The Perfect Budget Plan:

Allocating finances to different parts of the project begins with the accurate and detailed prediction of the total costs that may be incurred during the execution of the project. Perfection is the key here as every minute detail of the project needs to be considered and consultations should be carried out with everyone involved in order to calculate the exact figure. It is always wise to maintain a separate estimation for unforeseen situations which might escalate the budget otherwise the project might end up overshooting its completion date by a huge margin. The goal here should be to complete the project within the stipulated time and budget.

2. Periodic Forecasting of Budget:

If a project is run without periodic forecasting of budget, it is bound to head towards failure. The main reason is that without periodic budget oversight, the odds of the budget getting out of control are quite high. It is much easier to correct a 10% budget overrun than a 50% budget overrun. This increases the chances of keeping the project on track. Therefore, it becomes a necessity for financial forecasting calculations to be conducted to highlight the budgetary constraints well in advance.

3. Costs of Deliverables:

One of the main concerns while creating a budget for a project is the cost of deliverables. It has to be made sure that the final deliverables, which basically include the basic materials required for the successful competition of the project, is accurately accounted for by the budget.

4. Using Budgetary Controls:

One of the principal steps the project manager carries out is to determine the cost of the project. If the project manager overshoots the budget by even a small margin, it might result in the demise of the project. Some of the budgetary control methods that can be utilized to keep a check on the finances include variance analysis, financial forecasting calculations, and payback period. These can come in handy if project managers want to ensure the timely completion of projects. If there is mismanagement of resources, the projects can procure no returns on their investments.

5. Keeping an Eye on the Usage of Resources:

The cost of the project also depends on the people working on it. Therefore, even this aspect has to be checked upon to keep it on track. Constant review of the number of people working on the project and the future resource needs has to be reviewed by the project manager. By doing so, how many resources have been fully utilized and how much is remaining for future use can be easily estimated.

6. Considering Budget Creep:

One of the major causes of project overrun is scope or budget creep. An increase in unplanned work can lead to an out-of-control project budget. This can be anything from a change in the quality of the resource material to a change in the cost of supplies. They can have a huge impact on the functioning of the project and consequently the project budget.

7. An Informed Team:

The project team has to be kept well informed regarding the forecast of the project budget. An informed team can make educated decisions. By keeping the team members in the loop about the budget status, they are more likely to watch out for loose ends in the project which might lead to unwanted expenses thus preventing budget overrun.

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Top 5 Factors For Budget Overruns And How To Avoid Them?

Cost is one of the most critical aspects of a project. Considering the size and complexity of projects that are executed these days, especially in the construction and technology industries, budget overruns have become a common occurrence.

For example, Wembley Stadium, situated in London, is the home of English football. This stadium was renovated in the early 2000s, replacing the one which was built in 1923. The designers decided to create a novel steel arch surrounding the stadium which would add aesthetic appeal to the iconic structure. This arch was also load-bearing and minimized the need for internal support inside the stadium which would have otherwise obstructed the view of fans.

Something like this was never done before, and hence project planning was never going to be close to accurate. Bids were invited for the contract, and needless to say, the winning bidders were too aggressive with their cost estimates. Therefore, the cost of the project rose 36% between the time period of the bid being accepted and the contract being signed. After multiple complications, scope changes, re-planning, accusations of site workers using drugs, project delay information getting leaked to the press, sub-contractors being replaced, and several other issues, the project took 5 years more than initially estimated and cost 200% of the original budget.

This single example in itself covers the 5 causes of budget overruns in a project, which are explained below:

1. Plan:

It is a known fact that how much ever you plan, nothing good comes out of it if you do not execute a project well. Yet, planning is an important exercise because it gives targets, structure, and timelines, and helps organize work. Project planning needs to consider several aspects, such as the end product of the project, client requirements, resources required, communication schedule, timeline estimates, and historical precedents.

When planning is incomplete, everything else begins to crumble around it. Resources get stretched, unforeseen complications are not met with a backup plan, client requirements are not being met to specifications, and key deadlines are missed due to a lack of communication and coordination within the team. Hence, the project runs beyond schedule and consequently, the budget goes over the estimate.

Mitigation Tip:

A key activity while planning is to look up a historical precedent. Dig up lessons learned from previous projects. It is even more useful if you can find a similar project in the same industry. Scour through the lessons and consider all of them while planning for your current project. When there is no historical precedent, such as in the case of the Wembley project, it is almost impossible to prepare for uncertainties but still, you need to ensure that you brainstorm with other experienced project managers and try to plan for complications, both internal and external. This will go a long way in helping you to prevent budget overruns to a certain extent.

2. Scope:

A fundamental error in project management is not listening to the customer. From the first meeting with the client to the day when the contract is signed, client requirements tend to get misinterpreted or altered in the multiple iterations of communication between the two parties. ‘Scope creep’ is a dangerous thing to happen to any project. When client requirements are not clear, the scope of the project is never consolidated, and this leads to uncontrolled deviation in the objectives and end product of the project. The project tends to drag along without any fixed direction, tasks which the customer did not even ask for in the first place get completed, and then they need to be redone. Budget overrun becomes inevitable.

Mitigation Tip:

Listen to the customer. Meet with all the stakeholders before you kick off the project and set expectations. The customer and the supplier need to know exactly what the outcome of the project will be. The project scope document needs to be vetted, finalized, and signed off. No further changes should be made to this document unless it is an absolute necessity and approval must be taken from the project sponsor to finance the changes.

3. Design:

The design phase is important because this is where estimates are drafted in terms of manpower required and timelines. Considering the Wembley case again, the steel arch was a new innovative design that had not been done before. Hence, the whole designing phase of this project was always going to be a challenge. Designing physical structures or software programs is always performed using various tools and applications. Sometimes these designs, especially in the case of physical structures, may not be realistic and eventually warrant massive overhauls during the execution of a project. Moreover, any slight errors in design can lead to unprecedented changes in resource requirements in terms of time, cost, and manpower.

Mitigation Tip:

Extra caution always needs to be taken during the design phase. Accommodation needs to be made in the budget for testing the designs, especially in the case of new designs which have not been attempted before. The impact of environmental factors on the materials used for the construction of structures needs to be carefully analyzed. A solid and tested design lays the foundation for seamless execution, and as a result, helps prevent budget overruns.

4. Third-Party Vendors:

Vendor management is a tricky part of project management. Although contracts are made and agreements are signed on what the vendor will deliver, there are always issues, especially in terms of quality of materials and prompt delivery. Add another layer of subcontractors, and the maze of information flow gets very complicated. It is an almost impossible task for the project manager to manage the never-ending list of contractors and subcontractors. In the Wembley case, midway through the project, a subcontractor who supplied steel for the arch needed to be replaced due to delayed delivery and other quality issues. This eventually led to a delay in the schedule and a lot of extra resources being spent on finding another subcontractor, agreement negotiations, and other related tasks.

Mitigation Tip:

Recruit a strong legal team that can take care of all contract negotiations with vendors. Ensure that the contracts have incentives for vendors to stick to their promises as well as penalties when they fail to deliver. The legal team must work with the purchasing team to ensure that contracts are complete and the third-party vendors will be held accountable when they do not deliver on their promises. Another wise thing to do is to allocate a certain budget for vendor management, which will cover incentivizing vendors and the resources to be spent to handle unforeseen situations, such as having to replace them or pursue legal action.

5. External Factors:

Certain factors which influence a project are beyond the control of the project manager. Changes in government regulations, natural disasters, and negative publicity, such as in the case of Wembley Stadium, are some of the most prominent external factors which could seriously impact the budget and the eventual completion of a project.

Mitigation tip:

The only thing a project manager can do is to foresee these factors and account for them in the project plan and resource allocation. He or she cannot prepare for specific scenarios, hence it is advisable to categorize these factors, prioritize them based on probability and severity, and allocate time and a certain budget to tackle these complications when they materialize.

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A project budget is no doubt one of the most important ingredients for project success. However, unforeseen circumstances will arise that can drastically affect the outcome of a project even if every possible precaution is taken. A healthy project budget can be maintained by utilizing effective financial projections and budgeting techniques and carefully watching for creep to be in complete control of project objectives and ensure project success.

Know more about project management best practices through Invensis Learning’s Project Management certification training on PMP Online Classes, CAPM Classes, PRINCE2 Online Classes, Project Management Fundamentals, P3O, and MSP. We are a trusted training partner for Fortune 500 companies and Government institutions globally.

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Lucy Brown has many years of experience in the project management domain and has helped many organizations across the Asia Pacific region. Her excellent coordinating capabilities, both inside and outside the organization, ensures that all projects are completed on time, adhering to clients' requirements. She possesses extensive expertise in developing project scope, objectives, and coordinating efforts with other teams in completing a project. As a project management practitioner, she also possesses domain proficiency in Project Management best practices in PMP and Change Management. Lucy is involved in creating a robust project plan and keep tabs on the project throughout its lifecycle. She provides unmatched value and customized services to clients and has helped them to achieve tremendous ROI.


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