Nothing is easier than spending the public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody.
President Calvin Coolidge, 30th President of the United States (1923–1929)
Unlike President Coolidge’s public money, a project budget does belong to somebody: the project sponsor. And while the temptation may still be there to bestow that budget on everything that comes across a project’s path, the PM must master the practices for managing the spend within limits.
Here are four proven practices that will help to define and manage more effectively.
1. Define the Budget
The basics of a project budget are usually predictable. The major components are resource time & expense and ‘stuff’. “Stuff” may be furnishings for upgrading a college program’s new social space; software (like ERP and CRM); or contract resources.
Some less impactful but equally important budget impacts are depreciation, taxes, and fees. To determine how to calculate these line items, follow the practices in place within your organization. However, to ensure a robust financial plan, check to see that you have considered the following questions:
- Has risk been appropriately mitigated to avoid significant timeline and cost deviations?
- Has buy-in on the budget been obtained from the management team of those that will be doing the work? In other words, did your estimates come from the right source? Were the right stakeholders appropriately involved in vetting and approving the numbers? Or did your team pull the numbers out of the air…?
- Are all estimates documented with assumptions to allow for variability and to ensure accountability later in the project?
- Are there vendor quotes?
- For internal employees, have chargeback rates and policies been confirmed for everyone in the resource plan?
These are just a few questions that will help you refine your budget and prevent surprises later.
2. Know Variance Thresholds
Most organizations have acceptable variance thresholds. If a project has been clearly defined, formal variance thresholds for spending (for example, ±10%) may be quite narrow. When there are no formal thresholds, one will need to be proactive.
Clarify expectations with sponsors and be sure to document decisions. A verbal confirmation is insufficient. Whether a sponsor has formal or informal thresholds, set expectations, and document these details for the team so that there is no confusion later. Clarifying acceptable variance thresholds proactively – before there is an issue – is crucial to your ability to control expectations.
3. Define Budget Processes and Tools
This third practice is critical: ensure you have the necessary tools in place for tracking time and expenses. It is important to be able to include actuals, calculations for estimates, and variance for both hours and expense. A tool may be a spreadsheet or a sophisticated portfolio management software component. In either case, make sure that processes are nailed down before starting.
First, setup an easy-to-use budget management tool that will show variances and where the budget issues are within the project. Ideally a tool could be linked with other systems used for time tracking or expenses. However, system integration is less important than a tool that is functional, easy to use, and accurate.
Second, confirm that the tool and processes are in place for all inputs to the budget management tool and that the team knows how to use them:
- Time entry and approval for employees and for vendors
- System and process for invoice receipt and payment
- Overtime approval policy
- Deadlines for time submission
Solidifying these items upfront will help to manage the budget throughout the project and prevent weekly fire drills trying to figure out where the project stands. Once there are a budget, variance thresholds, and processes and tools in place, you are ready to manage your budget.
4. Manage your Budget
It is common for project budgets to be managed monthly. However, a lot can happen in a month or even a few short weeks. By the time one discovers an issue, figures out what to do about it, and makes a change another month may easily slide by.
Good budget management requires weekly attention. Sometimes it may be even more often but, in general, weekly management should keep the situation well in hand. If tools and processes are set up correctly, it should take very little time each week to update actuals.
If the budget has been diligently defined, acceptable variance thresholds are clarified, and processes are properly defined, one can expect excellent insight into the financials. Diligent budget management is straightforward if the proper planning goes into it. The more time you spend on practice 1-2-3 above, the easier that practice 4 becomes.
While the average PM will never become President and won’t have a Congress to help them allocate their spend, every PM should understand their duty to control project funds. As the Japanese proverb says, “Getting money is like digging with a needle, spending it is like water soaking into sand.” Make sure you don’t soak your project and only bestow funds on a well-managed budget.
