Budgeting in the Real World

Having calculated the cost of both red and green risks the project budget can be seen to be made up of:

A project with all of these elements in the budget is funded to survive in the real world. If the project manager only gets A then the institution is accepting the possibility that it will ultimately meet the full cost of all the unfactored risks. (N.B. Factored risk exposure is the estimate based on average EMV. Unfactored risk exposure is the worst-case scenario if all the risks happen). This isn't just theory it's the real world.

Failure to include risk response costs and contingency for risk in the project budget is a failing at the most senior level. This spend always occurs but in immature organisations it is either invisible or appears as project overspend.

It is usually the case that spending money up front to address the risks results in lower overall cost. However many organisations can't cope with spending money now to save in future and simply take their chances when the risks occur.

You can see from this that a lot of work has to go into setting a realistic budget. You can't work it out on the back of an envelope ten minutes after you've been given a rough brief. You may be able to give an indicative budget at an early stage when the Business Case for the project is being considered but there is much more work to be done as part of the Project Initiation before a detailed budget can be prepared. At this stage you may need to revisit the Business Case if analysis shows the project to be riskier, and hence more costly, than was at first thought.