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Budgeting in project management

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Every project needs a budget and funding. Without these resources, the project would not have been possible.

Budgeting aims to indicate all costs and to define the sources of funding according to the calculated costs.

These topics are traditional and mandatory in project management.

Budgeting in project management and types of budgets

What is the project budget?

The budget is a cost-effective financial plan of the project resources needed to carry out the activities. It shows what will be done, how much money will be made and what are the sources of funding.

Purpose of the budget

  • serves as a tool for mapping activities to funds
  • serves to value resources
  • shows the appropriateness of the costs
  • provides information on cost-effectiveness
  • provides information on the necessary funds at any time
  • assists the organization in the project management process
  • is required when applying for funding
  • serves the donor as an element of project evaluation

Budget requirements

  • To be drawn up in the currency specified by the sponsor
  • To be as realistic as possible in terms of prices (actual market prices at the time of project preparation)
  • Be as accurate as possible when determining the types of costs
  • Apply for exactly as much money as you need
  • Convince the donor that these are the necessary and sufficient amounts (no more, no less)
  • Make a justification showing how you got the numbers
  • Explanations to it must be detailed and comprehensive

Sponsors usually provide a special application form and requirements (instructions) for drawing up the budget. These guidelines shall state:

  • the types of budgets to be drawn up
  • the type of currency in which the budget is to be drawn up
  • the number of funds that can be applied for (maximum and sometimes minimum amount)
  • the maximum total value of the project
  • the amount of own participation
  • type of own participation (financial and non-financial contribution)
  • other sources of funding
  • the type of costs
  • eligible and ineligible costs
  • percentage of certain types of expenditure and the total value of the budget

Types of budgets

  • Activity budget
  • Budget by type of expenditure
  • Budget by the source of funding
  • Budget by stages of financing
  • Budget by time (months, years)
  • Territorial budget
  • Institutional budget

The form and type of budget are usually set by the funding institution. Very often it is required to develop several types of budgets, which carry different information about the necessary funds. Combined budgets are also used for convenience.

Activity budget

  • must follow the logical sequence of activities envisaged in the project
  • the valuation of each activity is based on the valuation of the resources used
  • the valuation of resources should be done at the prices valid at the time of preparation of the budget, taking into account the expected inflation
  • the activity budget gives an idea of ​​the distribution of funds to achieve a corresponding effect
  • gives an idea of ​​how much it costs to achieve each project result
  • it is checked whether the planned distribution of funds between the individual activities corresponds to the degree of their importance

Budget by type of expenditure

  • is made based on the plan-schedule of resources, as they are grouped by types (budget items)
  • the guiding principle is what kind of cost it is, not what activity it refers to
  • the calculation of the value of each budget class is based on the quantity of each required resource and its unit value (price).
  • the determination of the prices of each cost is based on the information gathered by the organization from offers
  • a unit of measurement is determined for each type of resource
  • the summarized data by budget items are analyzed and evaluated given the realism of the budget and the possibilities for optimization of some of the resources.

Cost Classification

  • Remuneration
  • Business trips (travel, daily, hotel)
  • Equipment costs (furniture, equipment)
  • Materials and consumables
  • Administrative costs
  • Editions
  • Seminars / Conferences
  • Other expenses

Budget by the source of funding

  • Own funds
  • Attracted funds
  • Grants
  • Borrowed
  • From partners

Budget by stages of financing

  • used in tranche-funded projects
  • the amount of the tranches and the stages of financing are determined by the sponsor
  • there are standard and individual approaches
  • this type of budget gives us information about the necessary funds at each stage of project financing

Time budget

  • prepares based on the necessary resources for fixed equal periods (months, years)
  • provides information on the rate of spending of funds in the budget

Territorial budget

  • it is necessary when a project is implemented in different territorial units (countries, districts, regions, municipalities, settlements, etc.)
  • provides information on the distribution of funds by territory

Institutional budget

  • required when different institutions participate in the project and receive separate funding
  • it is important for international projects where resource prices and accounting standards are different.

Short-term and long-term types of budgets

The budget should be divided into long-term (strategic), medium-term (tactical), and short-term (operational) classes, and the management reserve can be included at the strategic and tactical levels. This reserve acts as a buffer against uncertainty and should be used by transforming it into certain linear budget lines.

The project budget presents the planned costs and revenues as a function of time. This simplest approach to the budget makes it possible to estimate the expected costs and revenues associated with each activity and task. Based on the project plan, certain dates are given for these costs, and the budget is obtained. However, this can only be a partial budget, as some of the indirect costs are usually included in the preliminary stages. Typical indirect costs are those for management, aids, and quality control, which do not always relate to the specific activities. Adding these costs results in a more complete project budget.

This gives grounds for developing a detailed clear budget. Developing a detailed project budget based on planning and compliance with resources is the first step in a mixed approach. The next step is to integrate the project budgets into an acceptable budget for the organization.

It should be borne in mind that changing the duration of activities also changes the costs and revenues associated with these activities.

Non-critical and free-access activities are not significantly affected by the change in their duration, while critical activities can only be postponed at the cost of delaying the completion of the project.

Early start planning

Early start planning leads to relatively higher costs in the earlier stages of the project, while late start planning leads to higher costs in the later stages.

The choice between early and late start planning affects the level of risk associated with project implementation on time. Using late start planning means that all activities start as late as possible without any backlash to serve as a buffer against uncertainty and increase the likelihood of delays. Therefore, the budget preparation process must resolve the conflict between the project budget, which supports the organization's budget requirements, and the high risk of an overdue plan.

Projects with a larger number of activities have a wider choice of plans and related budgets.

Duration of the project activities

In addition to using discrepancy management as part of the budget development process, there may be another option: to change the duration of the activity by selecting different technologies to carry out the activity and by adding or removing the necessary resources.

So far, we have assumed that every activity is carried out most economically. Thus, the combination of resources allocated to each activity is considered to have been chosen to reduce the total cost of carrying out that activity. In many cases, however, it is possible to reduce the duration of the activity by spending more money.

Such replacements exist between the minimum cost option of long duration, on the one hand, and any other option that reduces the duration of the activity at higher costs. This is the essence of the original version of construction and installation, which puts equal emphasis on time and cost.

Emphasis is achieved by compiling a time-cost curve for each activity, which curve shows the relationship between the direct cost of the activity and the resulting duration.

Budget structures

The budget of a project can be presented in different structures:

  • Labor, material, general expenses;
  • Allocated costs;
  • Management reserve;
  • Unallocated costs;
  • Non-distributable costs.

Unallocated costs are those that are to be incurred under a plan or contract, but the time has not yet come for them. The costs are non-distributable. which cannot be defined.

Different types of draft budgets have been developed:

According to the substantive scope:

  • budget of activities and tasks;
  • budget of the separate organizational units;
  • budget of the individual units of the technological structure of the project.

According to the time for which they are being developed:

Long-term budgets are also called strategic ones. They cover the entire time covered by the project - from a few months to several years. Such budgets are usually subject to update;

Medium-term budgets. They cover from 12 to 24 months. Such budgets are developed at the beginning of continuous planning. They are updated mainly every three months;

Short-term budgets. They are developed for a period of up to one year. They reflect in detail the costs of materials, labor, etc. for each activity.

According to the stage of the life cycle:

  • preliminary (evaluation);
  • approved (official);
  • current (adjustable);
  • in fact.

Read more: Project life cycle

Iterativeness in budgeting

Budgeting is an iterative process. The procedures can be performed from top to bottom, from bottom to top, and mixed. There are advantages and problems with each of these approaches.

When the budget is developed from top to bottom, there is a problem in the distribution of funds between the various managements. The problem with bottom-up budgeting is that overall management is somewhat disengaged. It is more or less confronted with fait accompli. Because the future contractors have more information, although the administrative positions of the general management are stronger. For such reasons, a mixed approach is preferable.

As mentioned, the structure of the budget depends on the structure of the organization, while its level of detail depends on the planning horizon. The budget must present the objectives of management, expressed in measurable results: for example, the successful completion of tests or the development of a new software module. These results must be presented with their budgetary constraints. Thus, the budget presents the available resources and the objectives that will be achieved using these resources.

This idea can be applied to other objects of project management: operations, tasks, projects, programs.

Project management involves the use of a comprehensive cost management system, which includes cost analysis, cost planning, provision of cost information, as well as accounting and cost control.

Cost planning involves description, planning of individual works; identification of cost estimation indicators; developing a cost plan that includes costs by type and total costs.

When planning costs, it is mandatory to assess and look for different impacts to reduce them. Reducing the cost of a project can be achieved by:

  • the precise planning of the individual activities with the time needed to carry them out and the time stocks along the chain of activities leading to the ultimate goal:
  • appropriate allocation of resources by individual types of work, where the deadlines for project implementation require the least costs;
  • proper concentration of work - to the beginning, to the middle, to the end of the project period. Not only the amount of risk is related to this, but also the effect of the project implementation.

The cost control system requires a comprehensive and accurate assessment of the costs studied over time, timely observations of these costs. It is considered acceptable to do so for one week.

Variable and fixed costs

Variable costs change as activities change. It can affect the volume of activities, as well as their nature. Fixed costs, or more precisely relatively fixed, are not directly related to the volume and nature of activities. Such are, for example, overhead costs.

Past data cannot be relied upon to determine project costs. For many tasks that find a place in the projects, norms, standards for labor costs and materials have been created. Based on such norms, standards can form cost estimates for individual projects.

In the 1960s, Johnson H. Kaplan, Cooper, and others. develop a new costing methodology called ABC in which, as the name itself suggests, it is not the product, not the service unit, but the individual activity that is taken as the basis for calculating the costs. The costs for the individual activities are related to:

  • the number of operations to carry out an activity;
  • the duration of the activities;
  • the costs directly calculated for the operation.

One-time and running costs

One-time costs are investment costs. These are costs for machinery, equipment, design, etc. They in turn are divided into direct, ancillary, and related. Direct costs relate to research, design. The accompanying costs include the costs that have to be incurred for the construction of roads, for electricity supply. and related costs refer to the costs incurred in connection with the implementation of a project when additional investment in capacity is required.

Running costs are production and sales costs. They can be studied in planning by economic elements: salaries, materials. external services, depreciation, social security, as well as by items of the calculation, which are known to offer a more comprehensive range of observed costs.

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Author: Linda Grace Published on: Saturday Jul 3, 2021
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