Budget overruns are a project manager’s nightmare. These project budget management strategies will keep your project budget under control — and your stakeholders happy.
Budget overruns are a litmus test for project success or failure. Few companies have an unlimited budget, so the first thing project stakeholders look to in determining whether their project was a great success or a colossal failure is the bottom line. This fact fuels the pressure project leaders, and their teams face with each passing day. As such, effective budget management is a primary area of focus for project managers who value their careers.
The following are five strategies for maintaining control of your project budget before it succumbs to whopping cost overruns.
Understand stakeholder’s true needs and wants
What stakeholders say they need or want in a project often isn’t as simple as it may seem upfront. This can lead to unidentified goals and expectations on both sides of the table. If a project manager, sponsors, team members and vendors don’t have a solid grasp of on stakeholders’ true desires, it’s almost impossible to identify what the requirements are for the project. Be sure to put in as much time as is required to get a deeper understanding of what stakeholders expect. Ultimately everything, including the budget, is defined by stakeholder expectations, deliverables, and other requirements. So the first step to an effectively managed project budget is to ensure project requirements are accurately identified, documented and confirmed with all stakeholders — and that these are communicated to all parties involved. This crucial step should be completed before budgets are set. Many projects have been initiated around needs but executed around wants, automatically putting projects at risk of budget overruns that leave everyone disappointed.
Budget for surprises
When it comes time to estimate costs, be realistic. Make sure to get input from all applicable stakeholders. More importantly, build in contingencies. This step is essential. You need to factor in things outside of your control, such as external environmental considerations that may impact the pricing of supplies, resources, labor, financing, product/service shortages, currency exchanges and so on. Today’s price or rate may not carry through to the later stages of a project. Make sure vendors can deliver on their promises and prepare a backup plan. Getting input from other stakeholders and vetting suppliers and vendors can go a long way to setting a more realistic budget that can be met, even if there are unforeseen circumstances that impact costs. I’ve seen many project managers get caught off guard with escalating costs, suppliers that couldn’t meet quoted obligations or other issues. Plan for surprises, so you aren’t blindsided.
Develop relevant KPIs
You can’t effectively manage a project budget without establishing key performance indicators (KPIs). KPIs help you ascertain how much has been spent on a project, the extent to which the project’s actual budget differs from what was planned, and so on. Here are just a few commonly known and used project KPIs that are essential to effective project budget management:
- Actual cost (AC), also known as the actual cost of work performed (ACWP), shows how much money has been spent on a project to date.
- Cost variance (CV) indicates whether the estimated project cost is above or below the set baseline.
- Earned value (EV), aka budgeted cost of work performed (BCWP), shows the approved budget for performed project activities up to a particular time.
- Planned value (PV), aka budgeted cost of work scheduled (BCWS), is the estimated cost for project activities planned/scheduled as of reporting date.
- Return on investment (ROI) shows a project’s profitability and whether the benefits have exceeded the costs.
Revisit, review, re-forecast
Moira Alexander, PMP, I.S.P., ITCP/IP3P, is a recognized project management influencer, thought leader, a regular correspondent for PMI’s Projectified podcast, Founder and Editor-in-Chief of PMWorld 360 Magazine, Founder of Lead-Her-Ship Group, and author of “LEAD or LAG: Linking Strategic Project Management & Thought Leadership”. Moira has over 25 years of experience in business (IS&T) and project management for small to large businesses in the US and Canada and has been quoted in various publications including Forbes. She writes thought leadership content for top-tier publications and business blogs and oversees or writes sponsored content and software reviews on PMWorld 360 Magazine.