5.1 Issues in Project Budgeting

Developing a project budget not only requires a knowledge of what resources are needed for the project, but also information regarding how many and when these resources will be needed. In addition, it is necessary to know how much the resources will cost. We examined the issue of cost estimation of project resources in the previous lesson and know that it is a daunting task. Unlike traditional organization, the budgeting process for project organization is considerably more complex. The reason it is more complex is that projects are unique, and therefore, project mangers may not have the luxury of accessing and using historical information that is typically available for ongoing and routine activities performed in traditional organizations. While the project manger may rely on budgets and reports from similar projects undertaken in the past, these can only act as rough guides. Consequently, all project budgets are based on estimates of resource usage and their associated costs. The budgeting process gets even more complicated for multi-year projects, as the plans, schedules, associated resource usage, and their costs, which are set early in the project life cycle, may change in future years. This may be due to the availability of newer equipment, more skilled personnel, and the availability of alternate materials for completing project activities.

The accounting systems and practices vary from one organization to the next. Consequently, effective budgeting also requires that the project manager has a thorough understanding of and familiarity with the particular project organization's accounting system and practices. Without this familiarity and understanding, exercising budgetary control over the project is impossible. Yet another budgetary issue that a project manger should be aware of is the way in which resources are actually allocated over the different time periods during the project. The actual usage of resources may be very different from the accounting department assumption about how and when resources are used. For example, assume that $10,000 of a given resource will be used to complete an activity over a five-week period. The actual usage of this resource was $3000 during the first week, none in the second week, $2500 in week 3, $4000 in week 4, and $500 in week 5. If this information about the pattern of resource usage is not included in the plan, the accounting department may distribute the expenditures equally over the 5-week period. While this situation will have no impact on the overall project budget, it certainly has an impact on the timing of the project's cash flow. Finally, the project manager in preparing a project budget should ensure that each and every expenditure is identified and tied to a specific project activity and its associated milestone. The mechanism through which the project manger can accomplish this is through the WBS, which has a unique account number for each element. The account is charged as and when the work is completed. This aspect of project budgeting is absolutely vital if the project manager needs to exercise budgetary control over the project.