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In some ways budget is much easier to track and manage than scope and time. This is primarily because budget is very easy to measure, the almighty dollar (or your particular currency!). Before developing your project budget it is critical to know what your project scope is. To demonstrate this, let’s use a developed project scope for building a fence.
For small to midsized projects Microsoft Excel is an easy and simple tool that I would recommend. Initially after having mapped out the job, for example as above, you will need to consider how you are going to deliver the job.
- Do the work yourself
- Get someone else to do specific tasks
- Get someone to do the all tasks
In all cases we assume that, as the project manager, you will be overseeing the completion of the work. If your role is only as a project manager you are likely to take option 2 or 3. Let’s explore the build up of the budget if we are going to take Option 3 and get an external person to do the entire task for us.
- Step 1 – Estimate the cost of the project. Consider your experience in similar projects, refer to project spend for other jobs you or your organisation may have completed or refer to industry costing information if available. This initial costing will be very rough. You can estimate how long you expect the project to take and then multiply this by a likely hourly rate. At this stage you should break to costing down to the task level.
- After rough costing check that the project is still going to go ahead. If you estimate a project is going to cost $50,000 and there is $15,000 available to spend you will need to reconsider your options and it is not worth refining your project budget.
- Step 2 – Get firm pricing. As a standard rule get three quotes to complete the work. However in larger organisation you will have standard procurement guidelines that will specify how many quotes and in what form they need to be requests, for example select or open tender. Once you have pricing for all elements of your project you can add them up to get the total budget cost of your project.
- Step 3 – Consider contingency. Once you have received your quotes or proposal amounts, you then need to add contingency. To optimise the amount of contingency you allow for consider the major risks for the project and who is likely to be responsible. If you are responsible add an estimate for the likely work required as a separate item in your project budget. For this consider the pricing method proposed by your supplier.
Pricing Methods
If you are project managing a project with outside contractors you typically have the following options: lump sum pricing, cost per hour and upper limiting fee. Briefly:
- Lump sum pricing – you are provided with a fixed price for the job. It is important that the scope is clearly defined, and if the contractor doesn’t deliver to time, or quality there are clear terms stated in the contract. In the fence example the contractor could quote $10,000 for the entire project.
- Cost per hour – you are provided with a rate for the personnel to do the job. There may be a number of different types of people working on your job at different rates. For example to construct your fence you may have three different people. A surveyor to assess the site and make measurements at $100/hour, a labour to construct the fence at $50/hour and a painter to paint the fence at $65/hour. As part of the project budget you will then have to estimate the time required for each task and what type of resource required. In most cases you will be able to seek advice from your contractor as to how long the job would typically take or you can estimate based on your own experience.
- Upper limiting fee – is almost a combination of the above. The contractor provides a cost to you that they will not exceed without authorisation. They will also provide to you a cost per hour that they will spend on the job. This method assists to reduce the contractors risk on a project. For example if the contractor was concerned about hitting rock when constructing your fence they would prefer to set an upper limiting fee of say $11,000 for the job with a rate of $60 / hr. You may estimate that by hitting rock the contractor would spend 20 more hours on the job. Therefore if they do not hit rock you should save $1,200.
Once you have worked through this process the output would look like the below.
Overview Presentation 
