Friday, February 26, 2010

Project Budget

There are lots of different kinds of costs – fixed and variable costs, operational and capital costs. In planning project costs for small costs I like to distinguish between ‘cumulative’ and ‘lump-sum’ costs.

The cumulative costs are those that increase as you do more, or as tasks take longer – for example, when you are paying a contractor an hourly rate. The lump sum costs are those that will cost a particular amount – for example, when you have a quote from an electrician for lighting and power points. Lump sums can vary, but generally only under particular recognisable circumstances, such as when we later ask the electrician to add a new safety switch to the fuse box. In this case the electrician will have a legitimate reason to ask for more money.

Wrapped up in the need to budget is the need for a source of funds. Identifying and making firm friends (or at least developing a grudging mutual respect) with the person through whom you obtain the funds is very important.

You need to ensure that you can afford the unexpected – such as the people you are paying an hourly rate taking longer to get things done than planned; or needing to/wanting to do some things you did not initially put in the budget. You can do this by going back to the source of the project funds and asking for more money. Alternatively, you can add a contingency figure to the figures in your budget. This is generally to cover for small additional costs. A project managers’ rule of thumb is to always add 10%. If you have reason to expect to need more, you can consider adding more. But remember that a high contingency may stand out, and need to be justified. A really high contingency may prevent the project from going ahead (which may be the best outcome if the chances of cost overruns are high).

Microsoft Excel (or other spreadsheet program) is a good place to record your budget, although you can equally use a pen and paper (and calculator if needed).

ACTIVITY:
Identify what costs you will have, estimate how much they will be, and distinguish between cumulative and lump-sum costs. Then add 10% to see the impact of a modest contingency.

Regards

MZA

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