Week 5 - Resourcing and Budgeting

Download as pdf or txt
Download as pdf or txt
You are on page 1of 8

Week 5 – Resourcing and budgeting

5.1. Introduction
The week's main topic is project budgeting. A project's budget is nothing more than the
total anticipated costs required to accomplish the project within a specified time frame. It
includes items like labor expenses, material procurement prices, and operating costs and provides
an estimate of project costs for each stage of the project. Budgets for projects must be evaluated
and adjusted as needed because they are dynamic.
Projects have a lot of resources. Money is one of their main assets. The foundation of a
project's funding is its budget. They explain to the project team and other interested parties how
much money is required to finish the project, why it is necessary, and when it is necessary. Budgets
are tools for controlling project expenditures in addition to serving as a blueprint for the resources
required for a project. The project budget is a strategy for project management and serves as a
benchmark to gauge performance once real expenses have been tallied for the project.

5.2. Learning Outcomes


Upon the completion of this week of study you will able to:
1. Assess the compatibility of project management approaches and processes:
2. Assess the connections between the strategic, operational, and project levels as well as the
larger environment that allows for the achievement of operational effectiveness.
• Establish project budgets.
• Be aware of the significance of a project's detailed, well-constructed budget.
• Recognize the function of procurement in projects.
• Correctly implement the various techniques used to create project budgets.
• Accurately classify project expense categories.

LJMU-7501-BEPG, Project Management Fundamentals 1|Page


5.3. Utility and importance of budgets in projects
Three key justifications highlight the significance of having a carefully crafted, correctly
organized, and realistic project budget plan. Budgets are crucial for gaining project finance,
which should be noted first. The figures show interested parties just how much money a project
need and when. Second, a well-structured budget serves as the framework for project cost
control. Project managers can compare the project's actual cost to the approved budget and
determine how much money has been spent at particular points in the project's timeline by using
a thorough budget estimate. Project managers can use it to determine how the project is
progressing and whether any adjustments to the plan are necessary. Finally, the financial
viability of the company is directly impacted by the project budget. A project budget will boost
the operating margin and boost overall project success when it is calculated with resource limits
in mind (Lock, 2014).

5.4. Constructing a project budget


To create a project budget, a number of different factors are required, such as direct and
indirect costs, constant and variable costs, labor and materials, travel, equipment and space,
permits, and everything else that can have an impact on the costs of the project.
A budget must be developed thoroughly, including every expense that must be covered, in order to
fully cover a project's financial requirements. Seven crucial processes for developing and
maintaining a project budget can be used to achieve this. Project managers who control project
expenses utilizing these stages as a framework have a solid base to guarantee the project's
financial success (Pitsis, 2003).
These steps are described in detail below:

Step 1: Historical data


Projects are never original or innovative because a comparable project might have happened before.
A excellent technique to start creating a project budget is by researching comparable projects and
their budgets (Park et al., 2005).

LJMU-7501-BEPG, Project Management Fundamentals 2|Page


Step 2: Lessons learned
Building on historical data, one can learn a lot from successes and mistakes of similar projects of
the past. That may provide a clear path that leads to more accurate budget estimates.
Step 3: Leveraging expert knowledge
Learning from the experience and knowledge of others, be they are other project managers or
subject matter experts in the field is always good practice. This practice can help a project stay
on track and avoid financial pitfalls.
Step 4: Confirm Accuracy
Creating a budget is just one step in ensuring its accuracy. Double checking a budget with the
help of technical experts and other members of the team is of utmost importance as it helps
toward its fine tuning.
Step 5: Budget baseline and re-baseline
A budget is the baseline by which a project manager measures progress once a project has
started. It is a tool that gauges variance of a project. But, re-baselining is also of critical
importance as changes occur in the project. Once the project change control board approves any
change re-baselining must occur to ensure accurate budget tracking (Pitsis et al., 2003).
Step 6: Real time updating
The sooner a project manager knows about changes in the project, the better it is for the health
and sustainability of the project. If the project uses tracking software that does not have real-time
capabilities and as such updating happens as soon as a project team changes their status, then
valuable and potentially expensive time may be wasted.
Step 7: Getting on track
The importance of utilizing a project management software that has real-time tracking
capabilities is that it gives project managers the information they need to get back on track
sooner rather than later. Things change and projects go off track all the time as they occur in
dynamic environments. So it is the projects that get back on track fast and efficiently that are
more successful.

LJMU-7501-BEPG, Project Management Fundamentals 3|Page


5.5. Project cost categories
Project cost planning is of fundamental importance of mapping out a project budget. To do so, a
project manager must create a list of line items that are relevant for the project (Park et al.,
2005).
The following are common project cost categories:

Project cost category Example

Human resources Salary rates of full-time and temporary workers

Travelling spending Anyone who travels from one location to another to do project
work (including budget for meals and lodging)
Training fees Conferences, workshops, outside contractors

Material resources All the items your team might need to perform the work,
including software, equipment, or other unique materials
Research expenses Studies or data to support your project and deliver the best value

Professional services Legal advice, consultants, market research firms, etc.

Capital expenditures Equipment or technical upgrades to complete the project

Contingency reserves Contingency funds to allow for flexibility and reduce risks of
budget overruns, usually 5-10% of the budget
Source: https://www.forecast.app/blog/how-to-create-a-project-budget

Some of the above costs, such as training costs to teach users to use a product or
maintenance costs, are often overlooked by project managers, so it is important to be proactive if
there are costs related to the project that will come up once it is complete.

5.6. Budgeting Methods


Four common types of budgets are used in projects, each with its own advantages and
disadvantages: incremental; activity-based; value proposition, and zero-based.

LJMU-7501-BEPG, Project Management Fundamentals 4|Page


Incremental budgeting: In incremental budgeting, a previous project’s actual figures are
taken and added or subtracted a percentage to obtain a current project’s budget. It is a very
common method of budgeting because it is simple and easy to understand. Incremental
budgeting is appropriate to use if the primary cost drivers which are direct causes of a cost and
its effect is on the total cost incurred. do not change from project to project.
Activity-based budgeting: Activity-based budgeting is a top-down budgeting approach
in projects that determines the number of inputs required to support the targets set by the project
manager. Each of these inputs has a financial figure attached to it.
Value proposition budgeting: In constructing a value proposition budget for a project,
we take into consideration the following questions:
• Why is this amount included in the budget?
• Does the item create value for customers, staff, and stakeholders?
• Does the value of the item outweigh its cost? If not, then is there another reason why
the cost is justified?
Value proposition budgeting is about making sure that everything that is included in the
budget delivers value for the project. Value proposition budgeting aims to avoid unnecessary
expenditures (Viter, 2021).
Zero-based budgeting: Zero-based budgets in projects start with the assumption that all
sub-budgets within the phases of the project scope are zero and must be rebuilt from scratch. As
such, project managers must be able to justify every single expense. No expenditures are
automatically approved. Zero-based budgeting is bottom-up, it is very tight, aiming to avoid any
and all expenditures that are not considered essential to the project.
The zero-based approach is best suited to use when there is an urgent need for cost
containment in the project and for addressing discretionary costs rather than essential costs.
However, it can be an extremely time-consuming approach.

LJMU-7501-BEPG, Project Management Fundamentals 5|Page


5.7. Project procurement
Procurement, vis-à-vis project management deals with the need to purchase, rent, or contract
with some external resource to meet project goals. Managing the relationships born out of this
need means getting the best quality from the outside contractors and vendors employed by the
company to assist in its activities. There are constraints in a relationship with contractors and
vendors that revolve around cost and time. Procurement management is a way to more efficiently
and productively in order to address the process of sourcing, requisitioning, ordering, expediting,
inspecting, and reconciliation of procurement.
It is important to ascertain whether goods and services needed for a project are required
from outside vendors before planning and purchasing decisions are made. Therefore, a project
manager must weigh the pros and cons of producing the goods or services in-house and
contracting the workout. Once a decision has been made, it is only then that a project manager
can move forward with confidence that the steps they are taking are financially sound and fit
within the set project timeframe.
Project procurement management can be broken down into four basic processes:
1. Plan Procurement Management
It is during the planning phase of a project that procurements are initially identified. First, a
request for proposal (RFP) is issued that describes the scope of the work needed in which
multiple contractors get to bid on the job, and the project manager can determine from their bids
who will get the contract. These RFPs are detailed and well-thought-out as they work as guiding
documents throughout the project. The more specific they are, the better as this way confusion is
avoided which help the development of more accurate plans. This process is described in the
procurement management plan, which includes requirement documents, a risk register, a
project schedule, activity resource requirements, and activity cost estimates. Then and for every
external contractor that is hired, there needs to be a statement of work (SOW) to serve as a
document outlining the work being contracted (Lock, 2014).

LJMU-7501-BEPG, Project Management Fundamentals 6|Page


2. Conduct Procurements
A project manager evaluates the submitted bids during the conduct procurement phase after the
first phase is complete to decide which one to accept. However, there should be a standard in
place to determine which proposal is best for the project and fits the logistical management of the
project before making a choice. Agreements are then finalized, and the project management plan
is revised. By conferring with the bidders, having methods for analyzing the offers, and having
independent estimates to ensure the bids are within the range of normal, the winners of
procurement activities are chosen. It is wise to consult professionals as needed at this point.
3. Control Procurements
The management of those contractors is included in the project's overall management duties once
contracts are signed. This is due to the fact that contractors may negatively affect budgets and
timetables, which may result in a project deviating from its original course or worse. Thus, it is
essential to receive regular status reports in order to analyze contractor agreements, evaluate
work performance, and confirm that the contractors are fulfilling the obligations set forth in their
contracts. Contracting a change control system and doing routine procurement performance
reviews, inspections, and audits are also effective practices to ensure the work is proceeding as
intended. Managers are also kept informed by performance reporting. A payment system, claims
processing, and a records management system must all be in place.
4. Close Procurements
What defines finished work should be specified in the initial contract with the contractor, just like
closing a project overall, to avoid any misunderstandings on the side of either party on when the job
is finished. This procedure is aided by both formal procurement negotiations and procurement
audits. All the paperwork related with this stage of the procurement process can be managed using a
records management system.

LJMU-7501-BEPG, Project Management Fundamentals 7|Page


References
Lock, D. (2014). The Essentials of Project Management. Taylor & Francis. Mishra, R.C.
(2015). Modern Project Management. New Age International Ltd.
Park, H.K., Han, S.H. and Russell, J.S. (2005). “Cash flow forecasting model for general
contractors using moving weights of cost categories”. Journal of Management in
Engineering, 21(4), pp.164-172.
Pitsis, T.S., Clegg, S.R., Marosszeky, M. and Rura-Polley, T. (2003). “Constructing the
Olympic dream: A future perfect strategy of project management’. Organization Science,
14(5), pp. 574-590.
Viter, I. (2021). Creating a project budget: A complete guide for 2021.
https://www.forecast.app/blog/how-to-create-a-project-budget.

LJMU-7501-BEPG, Project Management Fundamentals 8|Page

You might also like