Even if budget is only one factor that influences project performance, it is a significant one: erroneous cost projections account for 28% of project failures. To accurately anticipate the cost of a project, it needs expertise and experience, and as you’ll see below, even experienced project managers need software to help them.
We discuss with a lot of customers at ClearPoint about how to format their project cost data in our reporting software. As a result, we have a better understanding of the project budgeting process and the various methods to project budget management. From the necessity of budgeting in project management to budgeting methodologies to tracking and reporting cost data, this piece covers all you need to know. Let’s get started.
What is Project Budget Management?
The practice of administering and overseeing the finances associated with corporate initiatives is known as project budget management. It’s not just about coming up with a single overall figure—say $20,000 for a specific project to be completed—but also about comprehending various cost parts and budget tracking logistics. It entails considering issues such as:
- How is the total number calculated?
- How will the costs be distributed among the project’s milestones?
- How will you keep track of project expenses?
- Will you utilize project budget tracking software or another tool to report cost data on a regular basis?
- How will you deal with situations where projects go over or under budget?
- What method do you use to learn from previous projects so that future project budgets are more accurate?
Budgeting Is Crucial In Project Management
One of the most typical metrics used to judge whether a project was finished effectively is the budget. (Note that, while budget, scope, and schedule are markers of project delivery success, an overall assessment of project success must also consider whether the outcome has supported the overall organisational strategy.) But it’s not just about finishing the job and staying on or under budget. Budgets are crucial for a variety of reasons.
An organization’s finances decide the projects it will pursue. Some businesses design projects as part of their strategic planning process, while others do periodic project charter reviews. Cost is a factor in any new project evaluation. Organizations must determine if a certain item is acceptable.
Is the initiative financially feasible for the organization? Will there be money available in the future if the study generates a result that necessitates continuous funding?
Strategic money distribution is also a challenge for organizations. What are the priorities of the organization, and how should money be spent? Which of three projects, if two could be completed for the price of one, would have a superior outcome? In certain circumstances, deciding between two projects is the better option; in others, the more expensive project may have a greater impact. It’s crucial to strike a balance between these difficulties and the project budget.
And, if your company does project budget management correctly, you’ll have data from previous years to indicate what worked and what didn’t.
Coming in under budget isn’t as great as you think it is…
In general, most finance departments believe that a project can be considered a success if it comes in under budget. That may possibly be true from their perspective. However, we would argue that a company’s long-term prospects are better served by stressing budget accuracy over keeping projects under budget.It is better for a company’s long-term prospects to prioritise budget accuracy over keeping projects under budget.
Under-budgeting isn’t always a bad thing, but if it happens frequently, your company is certainly missing out on growth prospects. Let’s say there are three projects on the table for discussion, each with a budget associated.
Budgeting in the “Goldilocks” Style
Most high-performing firms employ a “Goldilocks” approach to project management, attempting to find a balance between being budget-obsessed and completely carefree by giving the “just right” amount of emphasis to the budget.
Your project budgeting process should include a technique of gathering qualitative data (in addition to quantitative data) that provides the “story” behind the numbers to better analyse a project budget and all of its twists and turns. Why was it more expensive? Why was it less expensive? Having that knowledge will allow you to make more educated budget modifications and better project estimations in the future. It will also aid communication within your organisation about your project and its budget.
Project Management Budgeting Methods
There are several approaches to project budgeting. Because many organisations have various sorts of projects, operational methods, and resources, creating a project management budget template that can be used by all is tough. Finally, it’s possible that your company’s project management office may make the decision for you.
The following are some of the most frequent project management budgeting techniques:
- Bottom-up—This method examines individual project components, assigns expenses to each, and then adds them together to arrive at an estimated cost. Employees from various departments outline the tasks and actions required to execute their component of the project using this method.
- Top-down—This is the polar opposite of bottom-up, in which you start with a rough estimate of the project’s total cost and divide it up among various project responsibilities. Management may consider the cost of previous projects, previous budgets, current economic conditions, and other factors when determining the original value.
- Three-point estimate—This method considers the best- and worst-case cost scenarios for each project work, as well as a number indicating the most likely estimate; the values are then reconciled to arrive at a budget estimate. Because it carefully analyses the hazards inherent in a project, this strategy can be beneficial.
- Parametric estimation—This method divides the project into several parts and calculates expenses using specified parameters based on industry data and past projects. For example, if installing a fence took 10 hours and 3 people three years ago, you may use current industry rates to calculate how much it would cost this year. This approach is very accurate, but it is also rather complex, and it is not widely used.
- Analogous estimation is evaluating the cost of a current project by comparing it to the costs of similar previous initiatives. This method may be accurate if the projects are highly comparable, but in general, you should make sure you are making suitable comparisons to obtain the most trustworthy cost estimation.
We recommend revisiting the budget item after each project or set of projects—how accurate were your estimates? The more you study your data, the more knowledgeable you will become about being a responsible steward of your company’s resources. You could start with a bottom-up or top-down strategy, but once you’ve gathered enough data from your projects over time, you could try a more accurate analogous or parametric technique. Many large companies use some combination of these project management budgeting strategies in their estimates.
Do you require project budget tracking software (and why)?
Once you’ve established a budget, you still have two more steps to complete: tracking costs and reporting on them. Leaders are just as interested with a project’s economics (how the budget is performing) as they are about the project’s status (what’s going on and when).
However, project managers confront a few tracking and reporting issues:
- They don’t have the means to connect project data to the organization’s goals. Most (but not all!) initiatives are designed to assist your business in achieving its major objectives, but they are tracked separately from other projects and outside of the overall strategic plan and portfolio budget.
- Numbers might be difficult to comprehend. You can hand out spreadsheets with expense statistics, but this “wall” of numbers requires effort to comprehend and provides little context.
- It takes time to collect cost information from a large number of people. Between the time it takes to issue reminders, fill in figures, and assess the latest cost data against expected budgets, project managers can spend hundreds of hours updating financial documentation.
Tracking and reporting don’t have to be as difficult, but many project teams become mired in an Excel rut after creating their budget in the application. Even when a project is approved, they continue to track figures in the same spreadsheet, physically updating fields and creating copies before each meeting. In terms of budget analysis, rigorous benchmarking and comparisons are frequently overlooked.
With simply a few numbers given in an Excel spreadsheet, it would be difficult for any project manager to stimulate interest in the budget.
All of these issues may be solved with the correct project budget tracking software, providing you a better understanding of how projects are functioning with a lot less effort.
Simplify and Improve Your Project Budget Reporting with ClearPoint
ClearPoint is a comprehensive strategy management programme that provides insight into your projects that other project management software solutions (such as Microsoft Project) cannot provide:
It allows you to easily link projects to corporate or departmental goals, allowing you to track not only individual project budgets, but also budgets as a whole to track strategic project spend.
The goal of pursuing initiatives is to produce results—ideally, outcomes that can be measured with performance indicators. If a project is successful, you expect to notice a shift in those performance indicators, which will influence your objectives. ClearPoint makes it simple to see how well your projects are performing.
Every company wants to complete projects effectively, and being able to anticipate project expenses properly and consistently is essential. Project budget management isn’t easy, but with practise, your system will improve. You’ll get better at allocating project funds more precisely if you keep reviewing not only project results (were projects under budget or above budget, and why? ), but also what contributed to those results (the qualitative data stated above).
ClearPoint can assist you in developing a more sophisticated budgeting strategy.
It not only provides you with a unique viewpoint on your projects in connection to organisational goals, but it also provides you with the tools you need as a project manager to track and report on budgets (and other elements) in a way that suits you.
Do you want to give it a shot? ClearPoint is available for a 15-day trial period with no obligations. Let us know if you’re ready to see how your budget statistics look in ClearPoint. We’ll give you a tour and assist you in getting set up so you can test it out.