How to Succeed in Project Budget Management?

We sat down with our Co-Founder and CEO Andrei Bernovski to get his thoughts on Project Budget Management. He has worked in a variety of agencies and consultancies, experiencing many ups and downs and process struggles of both big and small project-based businesses.

He also personally gives a “Project Management Crash Course” to all our new employees, which is why we approached him to give some practical insights, so you could also get some tips on improving your project budget management process.

So, Andrei, how does one succeed in Project Budget Management?

It is funny to me how people over-complicate this process. The concept of managing project budgets is really simple. It’s all about regularly comparing your plan to actuals. The more granular your initial plan, the easier it is to track.

The first step is to understand the budget and know the budget even before the project starts. Like designing a house. You’d be surprised how often there isn’t any basis for the original estimation and it’s just a random number. Unless you have a good enough Baseline Estimate that you have broken down well, you are headed for trouble.

Ironically it’s Estimating your Budget properly that is the key to project budget management? How is the Estimation Process usually handled in your experience?

Estimation can be handled in many ways. One way of getting to that high-level budget figure is a salesperson or somebody in Client Services agreeing on a budget with the client before Project Managers are getting involved. Then, as a Project Manager, that’s what you get and you have to make the best use of that money considering the actual project requirements. Effectively, doing your estimation after the revenue is confirmed. Even if it is a Time & Materials project no client is happy for you to go drastically over your estimated budget. So it’s not something that I can fully recommend. Unless your salespeople are also PMs or at least have experience in the field.

Another and perhaps a better option than somebody just picking a number out of nowhere is having Project Managers already involved in the initial stages assessing the project scope. It may even be something down on a napkin. A rough estimate of “we will have one month of development, two months of design, etc, and it will cost X amount.”

That’s already better and probably good enough for the initial assessment but not for the entire project and it won’t help you successfully manage the project financials in the long run.

How could one improve their estimations to better manage their projects?

Increase the Granularity of your baseline budget estimation. To continue with the house analogy, when you have your design locked down, you need a detailed project plan before you can build your house successfully.

Same in Project Management. The reason you have your budget figures broken down by Role or Task in your statement of work or contract is, of course, for the client to see what they will get for their money. But also to discipline you to actually do the work necessary to come up with those numbers. If you have to provide a breakdown of the budget by both activity as well as by the team members involved and their effort – it triggers you to actually plan it out. This is very important because that’s what you will use to track your success against.

Alternatively, if you are working in an Agile way – you are likely to be using some sort of parametric estimation process (where parameters may be your sprints or storypoints). Then your breakdown is somewhat semi-automated.

Once you have the breakdown, It is very important to understand the correlation between your budget and what you’re actually planning to do within this budget in terms of time and scope.

Can you give us an example?

Sure, Let’s take a very non-popular waterfall project. You may plan your timeline and do a very good job having your tasks and your work breakdown structure worked out. You may even assign resources to the right projects and you would know how long things will take. However, this on its own doesn’t give you the slightest clue of what your budget or project cost is unless you go and then apply the correct Bill/Cost rates to your estimates, which means you have to assign correct resources at the correct capacity. It’s like dominos, everything affects everything.

That’s a lot of work and it takes time. But what it gives you is the understanding that this task, which is taking me two months to deliver, actually means that I will have John, Sandra and Mary, my resources, working on the project for 1 week which will ultimately take 8 weeks to complete and it will cost X amount. Your Basic Project Management Triangle: Scope – Time – Budget. Baseline Vs. Actuals. 

One week of work, but takes 8 weeks to complete, could you explain how is that?

Absolutely! What’s important to understand in project planning is that effort and duration are very different things.

For example, you will have a task that will take one week. What that one week breaks down into is not that straightforward. You and your team will work for three days. Then you send it to the client for a day to review. Then the client comes back with feedback. You make some changes based on their feedback. You send it back to get their sign off. In the end, your efforts were 3 days but the duration was 5+ days. So effort and duration are very different things and it’s not the duration that drives the budget it’s the effort. It’s important to understand both.

We looked at the T&M projects example. Let’s look at Fixed Price projects. What are the differences in terms of project budget estimation and management?

With Fixed fees, the budget is already, by definition, something detached from your actual plan to deliver the project. Or at least, at the point you lock it down, it becomes detached from the actual effort spent. But there is always a reason why you’re agreeing to a certain fixed price.

I hope the reason is that you know the budget, now locked down, is going to give you enough wiggle-room to achieve project success. So at some point, no matter what the project is, be that T&M or Fixed Price or Retainer, it’s still relevant to go through the same budget estimation exercise.

What is the Biggest mistake people make when managing project budgets?

Well, as I mentioned, it is skipping that estimation process of working out the baseline budget and having that broken down on a granular level.

The worst thing is when your budget was done very quickly off the back of very little input or even worse – somebody just plucking a number out of the sky.

The concept itself is so simple. You compare where you are today to what you’ve planned. If you look at just the total budget figure and you don’t have anything driving it (you quickly just came up with this number) – you will only be able to see whether or not you are over or under that one total figure. Which gives you an indication of whether you are on track or not, but it does not tell you that important “WHY?”.

The good news and the opportunity for a lot of professional services businesses out there is that the Actual Budget figure already has some valuable data driving it. Most likely, these are your timesheets. But here’s the catch – you won’t be able to compare that granular timesheet data to your top-level plan because you wouldn’t have the granular breakdown of the plan.

So all you can do is compare those top-line figures, which tells you very little and doesn’t help you improve things going forward.

Unless you go through the exercise of initially planning things at a certain level of granularity, you will never have a base for comparison and analysis and as a result – no way to improve your project management process.

Also, people seem to miss the hidden benefit of this data – recording the historical plan vs real, timesheet, data allows you to constantly improve all future estimations. Essentially, this gives you templates of successful projects to reuse.

Can you remember of an example where somebody was making this critical mistake of not planning on the granular level?

I remember having a call with a prospect who wanted detailed analysis on project performance, but said that estimations in our tool (Price&Cost – https://www.priceandcost.com) were too granular. Yet, they were using a time-tracking system that was giving them very granular data back. And they wanted to be getting actionable insights comparing granular actuals to top-level plans. Little did they know – they were asking for impossible.

So they say, “I want to have a very top level text-based plan for my financials, but then my people track time every day and I want to get back a granular understanding of what’s spent, how much have we delivered and how much is remaining in the forecast as well per resource”.

I’d love that to be possible. Unfortunately, you’re not going to have detailed tracking ability unless your estimation is as granular as your actuals. I think the conflict that we had with them was that they felt this was too granular and unnecessary exercise. Truth is – that granularity is the basis for the rolled up budget total to be correct and accurate.

But I understand people’s intimidation with granular planning. I don’t think that all of us are such data geeks to want to manage their projects like that. I think what this is showing is that even in, what sounds like a mature company, people sometimes try to get away with not doing the hard work of thorough estimation and detailed tracking. And there is a good reason. It’s difficult, it’s boring and it’s quite often not that rewarding because chances are – you’re going to find some flaws of your own.

It’s very rare that you review a project where the current budget is tracking above the agreed plan, but when you actually look at the granular data, you find out that things are good. Never the case.

Essentially what you’re doing is digging in, spending a lot of time to understand that things are off track and it’s on you to figure out why that is and how to get things back in order. It’s like that old comedy sketch where the wife is trying to convince the husband to go to the doctor just for a checkup, but the husband doesn’t want to because he’s afraid to find something’s wrong. Unfortunately, that’s what I’ve found needs to be done if you want to consistently manage your project budgets successfully.

To sum up, I think the biggest issue with project budget management is actually a lack of sufficient projects estimation and knowing what the budget breakdown is on a granular level. Without it – you won’t be able to understand the “why” when the budget starts to suffer.

Thanks so much, Andrei! I’m sure many will find this to be very useful. Finally, could you give our readers a place to start, some Top Tips?

Absolutely! Here goes: Top Tips for Project Budget Management

1. As a Project Manager, be involved in the initial project pricing conversation or at least ensure your Client Services or Sales teams are providing you with a clear reasoning of how the agreed Project Budget number came to be.
2. Once the project is handed to you, break down your estimation as granular as you wish to track it to ensure you stay on budget every step of the way.
3. Look for ways to use your previous successes as the basis for future ones – Analogous Estimation.
4. Implement a granular way of tracking your progress, I recommend timesheets. There are many tools out there (Harvest, Toggl, Timecamp, etc.), find what works for you, but please don’t waste your time on tracking time (pun intended 🙂 ) in spreadsheets or reinventing the wheel and coding your own time-tracking tool that you will grow out of in a year or two.