Project Financing and Budgeting
Developing the project budget is a process for allocating administered and departmental funds necessary to build a financial foundation for producing stated project deliverables. When we talk about the project budget and financial resources we mean the solid framework that helps project managers to deal with the “on budget” part of the project implementation process. This framework involves cost planning and control.
For successful delivery of the project product, the project manager should effectively estimate costs, track expenditure over time and adequately react to situations when the financial resources are over-spent or under-spent, or there are opportunities for savings in the project budget.
A Project Budget is the total amount of authorized financial resources allocated for the particular purpose(s) of the sponsored project for a specific period of time. It is the primary financial document that constitutes the necessary funds for implementing the project and producing the deliverables. The project budget gives a detailed statement of all the direct and overhead costs required to carry out the project goals and objectives.
A project budget template should be designed and managed under supervision and control of the project manager. Also the customer and sponsor should be involved in allocating and managing financial resources. Project budget management is a set of activities for estimating the necessary amount of financial resources for the project, controlling project costs within the approved budget and delivering the expected project goals.
Steps of the Budgeting Process
As an independent process, project budget management includes a series of steps to define and produce a budget sheet. The key steps include:
- Development: estimating a necessary amount of financial resources and creating a project budget sheet.
- Use: utilizing the authorized financial resources and executing the budget.
- Measurement: viewing cost performance and controlling the budget.
- Updating: viewing changes to the cost baseline and making updates to the project budget sheet.
1: Budget Development
The first step of the project budget management process involves the project manager in developing cost estimates and identifying the total amount of money resources necessary for implementation of all the tasks and activities defined and stated in the WBS and the Schedule.
Budget development should cover both capital and operating expenses to ensure successful project completion. The project manager needs to define funding requirements and then send a formal request to the sponsor who reviews the requirements and make a package decision on providing the necessary money and financial resources. The sponsor can use the initiation documents (like Feasibility Study, Business Case and Project Charter) to make that decision.
Such estimation methods as expert judgement, cost baseline measurement and cost aggregation can be used for developing a project budget sheet. The project manager in cooperation with the key stakeholders can use a combination of the methods to estimate a necessary amount of financial resources and develop a project budget template.
2: Budget Use
The second step in project budget management is to allocate the identified financial resources and start executing the budget. The project manager should control and keep track of the budgeted resources in order to make sure that every scheduled task or activity is performed with necessary funding and that there is no lack of money for the implementation of the entire project.
The greatest way to track and control budget use is to develop an investment plan. This formal document includes justifications and approvals for the acquisition of necessary procurement items and services required in support of the project. An investment plan describes the acquisition process with reference to the feasibility study (often in larger projects a feasibility study template serves as a foundation for developing a project investment plan).
The project manager needs to send an investment approval request form to the stakeholders and wait for their approval/rejection. In case the plan is approved, the manager uses it to control the budget execution. In case the document is rejected, the project manager should receive stakeholder suggestions and make necessary amendments to the plan template. Then the process may repeat until the plan is approved.
3: Budget Measurement
The third step in managing the project budget refers to taking actions necessary for providing appropriate cost performance. The manager needs to use work performance data (like status of the deliverables, cost-schedule estimates), the funding requirements request and the cost performance baseline to check the budget appropriateness.
By conducting variance analysis, performance reviews and forecasting, the project manager can compare the current cost performance against the planned amount of financed resources stated in the project budget template. In case of any gaps or deviations it is necessary to make formal change requests and modify the budget accordingly.
The project manager can develop corrective actions and send suggestions for approval to the key stakeholders. The further budget control and measurement should be done with the necessary evaluations and approvals.
4: Budget Updating
Once all the changes have been approved by the key stakeholders, the project manager can proceed with updating the budget sheet and make changes to the existing breakdown structure of financial resources. This will be the forth step of project budget management.
Cost estimates, resource activity estimates, the cost performance baseline and the cost management plan should be updated in accordance with the approved changes.