Budgeting and Costing
Preparing a budget is an integral part of establishing the business case for a project. An evaluation of the financial requirements is central to establishing whether the project is viable or not. In cases where external funding is being applied for, the budget will form an important element of the bid and the Benefits Model. At the most fundamental level, budgeting should answer the questions, What is the cost of undertaking this project? Is any external funding sufficient to cover the costs? Where there is competition for resources, is this project a priority? To what degree do cost and benefit balance up?
As with any forecast or plan, the budget is likely to change as activities unfold. It is therefore useful to undertake a sensitivity analysis to look to what likely impact any change in costs and income may have on the overall budget and assess whether the project is high or low risk in financial terms. This will normally be covered during the risk assessment/risk management process and will inform the broader cost-benefit analysis for the project.
IT related projects are notorious for running over budget yet there is no reason why this has to be the case if you take time to cost the project properly at the outset. It is not uncommon to see project budgets that cover only part of the costs. There are many reasons for this such as:
A tendency to focus on initial purchase costs and ignore elements such as staffing
Poor planning that doesn't allow sufficient resources for training and staff development
Blind faith in 'optimistic' supplier estimates
Project managers don't think their senior managers could cope with knowing the true cost
The last point should not be under estimated. In many organisations the fact that IT projects always run over budget is accepted as the norm. Managers find it far easier to keep asking for small incremental sums than to give their sponsor the shock of saying 'this is what the whole project will actually cost'. Project costs are relatively easy to 'hide' in large IT departments where existing staff are carrying out the work.
The types of costs incurred in a project will be split between capital or one-off costs and operational costs. The table below shows some of the major cost headings and suggests issues to think about when trying to cost those items.
Cost Heading | Issues to consider |
|---|---|
Hardware | Is it more cost effective to buy or lease? Include maintenance agreements. If purchasing will you pay up-front or enter into a financing agreement? |
Software | How many licences are required in each phase of the project? Are future annual increases capped? |
Equipment | Is it more cost effective to buy or lease? Do you need maintenance agreements for printers etc? |
Project Staff |
Include recruitment costs e.g. advertising or agency fees. Include employers on-costs e.g. pension & NI. Where staff are on incremental pay scales allow for annual increments. Allow for annual pay increases. Do you need to allow for overtime working? What will happen at the end of the project - do you need to build in redundancy payments? To find out more about the SiriusWeb staff cost calculator designed to help education institutions cost projects use the following link, SiriusWeb staff costs calculator. |
Other Staff Time | Do you need to reimburse other departments for staff time assisting the project e.g. porters moving equipment, IT staff overtime, staff attending meetings/training? |
Consultancy | Are consultants paid a daily rate or a fee for the job? What are their daily travel and expenses limits? Where will they be travelling from and how often? Find out more about costing consultancy in Managing Consultancy Input. |
Staff Development | What training is required at each stage of the project and for how many people? Can you save money by advance block booking of external training? Is it more cost effective to train on-site rather than pay travel costs? Are there any online training materials available? For IT staff weigh up the cost (including time) of training versus taking on skilled staff at higher salaries. |
Office Overheads | Include any chargeable items such as heating, telephones, security, postage etc. |
Travel | Include travel to meetings, conferences and training courses. |
Hospitality | Will you be required to provide catering for meetings or training events? |
Consumables | Stationery, printer cartridges etc. |
Contingency | What is a reasonable contingency estimate given the amount of risk and uncertainty in the project? |
Reviewing and reporting on the budget is a routine part of Managing Project Boundaries. The Project Manager is likely to have been given a budget and indicative Tolerance Limits. There may also be contingency funds set aside to cover specific risks which may occur. The section on Resources and Budgets in the Programme Management infoKit gives more information and links on this topic
Financial information is often prepared on an exception-reporting basis with the focus on things which are significantly different to the original budget. When any major discrepancy occurs, the Project Manager is charged with the responsibility to identify why the variance has happened and whether it constitutes a systemic failure. Appropriate corrective action can be agreed and implemented.
Most financial reporting makes no immediate allowance for project tasks and activities being performed early or late. If things are going well and outputs are being delivered early, then the project may be spending money quicker than planned. Conversely, if the project is behind schedule operationally, costs may not have been incurred by the planned dates, so expenditure figures look artificially good. As long as any variance can be explained it is quite normal to review and update the budget at appropriate intervals in order to reflect actual activity.
When the project comes to an end various accounting tasks need to be performed such as making sure that all invoices have been received and paid and any regular charges have been cancelled or transferred to operational budgets (e.g. office costs, insurances etc.). A final check should establish whether all commitments have been discharged and whether there are any unused commitments which can be cancelled. At this point there will need to be agreement about what to do with any underspend or overspend. You may also need to account for the transfer of responsibility/ownership for capital assets and facilities used by the project.
In a minority of cases where the project was set up as a separate legal entity with financial independence from the host organisation, then it may be necessary to formally wind up the business, requiring specialist financial support and advice.
The final report on project activities will include the final accounts and a review of costs and benefits. External funding agencies will often provide templates for reporting purposes, with advice on retention periods for official documents and records.
