Manage Budget Procurement
Understanding Project Budgets
The importance of budget setting
Project budget: The estimated monetary resources needed to achieve the project’s goals and objectives.
When reviewing a project budget, you need to consider all of the potential and projected costs needed to complete the project.
- You break the budget down by milestones and list activities and tasks alongside their associated costs. -> This ensures that you calculate the correct expenses for a particular period of time.
- This is considered a forecast, a cost estimate or a prediction over a period of time
- You’ll frequently review your project budget and it will evolve throughout the project life cycle.
- These budgets usually contain items such as labor, operating costs and costs associated with obtaining necessary materials like hardware, software, or equipment.
The importance of a project budget focuses on more than just saving money. In project management, a budget is
- a deliverable
- a success metric
- a tool to communicate exactly what is needed and when it is needed with stakeholders
Budget creation takes place in the initiation phase of your project. Keep in mind that the budget will be adjusted as needed throughout the lifecycle of the project. Depending on your role in the company, you won’t always be the sole creator of the budget.
The budgeting process usually happens in conjunction with the scheduling process, because the steps of the scheduling process are highly dependent on the costs.
Budgeting is one of the most important aspects of project management. When you start, to stay on budget is one of the trickiest tasks.
- It’s important not to go over budget and cost the company extra money, and it’s equally important not to be under budget either since that might affect the company’s budget for the next year.
- A project manager must show the requested amount of money was used in order to secure enough budget for future projects.
Key components of a project budget
When creating a budget, a project manager must account for
Understanding stakeholder needs
Budgeting for surplus expenses
Maintaining adaptability
Reviewing and reforecasting throughout the entire project
There are several factors to consider when creating a budget
Resource cost rate
Example: labor, tools equipment, materialsm and software.
You’ll want to ask yourself: how much will each of these resources cost the company?
Reserve analysis
Contingency budget
- Money that is included to cover potentially unforeseen events that aren’t accounted for in a cost estimate
- Purpose: Compensate for the uncertainty that occurs in cost and time estimates, as well as unpredictable risk exposure
Cost of quality
- All of the costs that are incurred to prevent issues with products, processes, or tasks
- Includes prevention costs, appraisal costs, internal failure costs, and external failure costs
Project budgeting 101
Best practices
- Reference historical data Your project may be similar to a previous project your organization has worked on. It is important to review how that project’s budget was handled, find out what went well, and learn from any previous mistakes.
- Utilize your team, mentors, or manager Get into the habit of asking for your team to double check your work to give you additional sets of eyes on your documents.
- Time-phase your budget Time-phased budgeting allows you to allocate costs for project tasks over the projected timeline in which those expenses are planned to take place. By looking at your tasks against a timeline, you can track and compare planned versus actual costs over time and manage changes to your budget as necessary.
- Check, check, and double check Make sure that your budget is accurate and error-free. Your budget will likely require approval from another department, such as finance or senior management, so do your best to ensure that it is as straightforward to understand as possible and that all of your calculations are correct.
Categorize different types of costs
Categorize different types of costs in your budget so that you can ensure you are meeting the requirements of your organization and customer.
Direct costs: Costs for items that are necessary in order to complete your project. These costs can include:
Wages and salaries of employees and contractors
Materials costs
Equipment rental costs
Software licenses
Project-related travel and transportation costs
Staff training
Indirect costs: Costs for items which do NOT directly lead to the completion of your project but are still essential for the project team to do their work. They are also referred to as overhead costs. These costs can include:
- Administrative costs
- Utilities
- Insurance
- General office equipment
- Security
Develop a baseline budget
A baseline budget is an estimate of project costs that you start with at the beginning of your project.
Once you have created a budget for your project and gotten it approved, you should publish this baseline and use it to compare against actual performance progress.
It is important to continually monitor your project budget and make changes if necessary. Be aware that budget updates can require the same approvals as your initial budget.
You should “re-baseline” your budget if you make significant changes.
- Re-baselining refers to when you update or modify a project’s baseline as a result of any approved change to the schedule, cost, or deliverable content.
Perform a reserve analysis
- Review all potential risks to your project and determine if you need to add buffer funds (a.k.a. contingency budget). These funds are necessary because new costs that you did not expect are likely to happen throughout the project.
- Account for cost of quality in your overall project budget
- The cost of quality refers to all of the costs that are incurred to deliver a quality product or service, which can extend beyond material resources. This includes addressing issues with products, processes, or tasks, along with internal and external failure costs.
Managing a Project Budget
Creating a project budget
Research historical data
- You can find out what past project managers did right and wrong.
- The more experienced you become as a project manager, the more historical data you will have to draw upon, and the better your estimations will be.
Leverage experts
- Gather experts’ insights to do something more effectively.
- Reaching out to colleagues who worked on a similar project in the past will be a great resource for you as an entry-level project manager.
- If you’re asking someone outside of your company for advice, be sure to avoid sharing any confidential company information with them.
Bottom up
- Think about all the parts of a project from the beginning to the end, including making a list of every material, resource, contract worker, or anything that comes with an associated cost, and adding all of that together.
- You should also ask the vendors you are thinking of working with for quotes, so you can get a rough estimate of how much their work will cost.
Confirm accuraccy
Set baseline
Account for buffers and reserves
- You’ll need to factor in unexpected costs that may come up later on. Be sure to leave yourself with some buffer room.
- A standard practice is to choose 5% of the overall project budget as buffer. Depending upon how much detail you know about the project already, you can raise or lower your percentage for reserves.
- You’ll want to include a planned cost versus actual cost column too. This way, you can keep track of your cost every step of the way. Your goal is to get your estimated cost as close to the final cost as possible.
Templates
Microsoft Excel Website Budget Template (applicable to any project)
Maintaining a project budget
Monitoring the budget is crucial for a project manager to enforce accountability in terms of spending.
Milestones are a great opportunity to re-review the budget to identify if anything needs to be reset or revisited throughout the project.
You may have agreed in your contract that you get paid at certain milestones rather than at the end of the project.
- Fixed contracts are usually paid for when certain milestones are reached.
- Time and materials’ contracts are usually paid for monthly based on the hours worked and other fees associated with the work, like travel and meals.
Cost control: A practice where a project manager identifies factors that might impact their budget and then creates effective actions to minimize variances.
- It is much better to be proactive with your budget than to be reactive with your budget.
- In order to control costs, you should establish a sign-off plan and inform the appropriate stakeholders of any changes that occur.
- You’ll have to ask yourself which stakeholders or sponsor will be approving the contractor or vendor time sheets.
- You’ll also need to make sure any changes within the project budget are agreed upon.
- In order to control costs, you should establish a sign-off plan and inform the appropriate stakeholders of any changes that occur.
- Manage changes as they’re made
- Accept the budget misses will happen
- It’s your job to bring the expected cost overruns within acceptable limits. Before the project starts, collaborate with the project sponsors and key stakeholders to determine an acceptable limit.
- Adequately account for, adapt, and manage your budget with that risk in mind
Overcoming budgeting challenges
Budget pre-allocation
Budget pre-allocation: budget is already set before you even start the project.
If you are given a pre-allocated budget
- Work with your customer to set expectations on scope and deliverables within the allocated budget. To deliver a great product within your allocated budget will require detailed planning.
- A pre-allocated budget should also be routinely monitored to ensure the amounts you have budgeted are sufficient to meet your costs.
- Be sure to carefully track all expenses in your budget.
- Regularly match these expenses against your pre-allocated budget to ensure you have sufficient funds for the remainder of your project.
Inaccurately calculating TCO
Total cost of ownership (TCO) takes into account multiple elements that contribute to the cost of an item. It factors in the expenses associated with a product or service over its lifetime, rather than just upfront costs.
Example
Let’s say you buy a vehicle for a certain price, but then you also pay for things related to the vehicle, such as license fees, registration fees, and maintenance. If you add all of this up, you have your TCO for that vehicle. So now that you know what your TCO is, you may consider those fees before you buy your next vehicle. For example, you might opt for a vehicle with fewer maintenance requirements than one that requires more frequent service, since you know that will save you money overall.
If you have a service requirement for a software technology that your team is using, for example, then it is important to budget for the costs of maintenance for that service. Additional types of costs you may need to account for when calculating TCO include warranties, supplies, required add-on costs, and upgrade costs.
Scope creep
Scope creep is when changes, growth, and other factors affect the project’s scope at any point after the project begins. Scope creep causes additional work that wasn’t planned for, so scope creep can also impact your budget.
There are several factors that can lead to scope creep, such as:
- A vague Statement of Work (SoW)
- Conversations and agreements about the project that aren’t officially documented
- Unattainable timeframes and deadlines
- Last-minute asks from priority stakeholders
Addressing these factors as you plan your project can help prevent scope creep from impacting your budget.
Budgeting terms
Cash flow
Cash flow: inflow and outflow of cash on your project
Cash that comes into your project allows you to maintain and compensate resources and pay invoices for materials or outside services.
- In some cases, a project may start out with all of the cash it will receive until the end. If this is the case, it is important to monitor your outflow to ensure that you have enough funding to complete the project.
Monitoring cash flow allows you to have a reference point for your project’s health.
CAPEX and OPEX
Organizations have a number of different types of expenses. These expenses can be organized into different categories. Two of the most common are
CAPEX (capital expenses)
An organization’s major, long-term, upfront expenses, such as buildings, equipment, and vehicles. They are generally for assets that the company will own and keep. The company incurs these expenses because they believe they will create a benefit for the company in the future.
OPEX (operating expenses) Short-term expenses that are required for the day-to-day tasks involved in running the company, such as wages, rent, and utilities. They are often recurring.
You may need to account for both OPEX and CAPEX on your projects. It’s a good idea to talk to your finance or accounting department when you start working on your project budget to see how they determine the difference between OPEX and CAPEX. This will guide you in properly allocating capital and operating expenses for your projects.
Contingency reserves
One way to prepare for unplanned costs is by using contingency reserves. Contingency reserves are funds added to the estimated project cost to cover identified risks. These are also referred to as buffers.
To determine the amount of your contingency reserves, you will need to go through the risk management process and identify the risks that are most likely to occur.
Contingency reserves can also be used to cover areas where actual costs turn out to be higher than estimated costs.
Management reserves
While contingency reserves are used to cover the costs of identified risks, management reserves are used to cover the costs of unidentified risks.
For example, if you were managing a construction project and a meteor hit your machinery, you could use management reserves to cover the costs of the damage.
Contingency reserves are an estimated amount, whereas management reserves are generally a percentage of the total cost of the project. To determine a project’s management reserves, you can estimate a percentage of the budget to set aside. This estimate is typically between 5–10%, but the amount is based on the complexity of the project. A project with a more complex scope may require higher management reserves. Note that the project manager will generally need approval from the project sponsor in order to use management reserves.
Introduction to Procurement
Understanding procurement
Procurement: Obtaining all of the materials, services, and supplies required to complete the project
Vendors: Vendors are individuals or businesses who provide essential goods and services
Vendor management: procurement for indivduals or business
- Covers the activities included in researching and sourcing vendors
- Is often a matter of sourcing for a specific service or talent and then managing that relationship
- Sourcing talent: Includes researching and obtaining estimated costs from different partner companies you may use on a project
- Entails
- Sourcing vendors
- Getting quotes for their work
- Deciphering which vendors will best fulfill your needs
- Negotiating their contracts
- Setting deadlines for them
- Evaluating performance
- Ensuring payments are made
- Familiarizing yourself with regulations
Not every project will require vendors or contractors, and so every project won’t require vendor management.
The procurement process
General steps of procurement process
1. Initiating: planning what you need to meet your project goals
The planning process of defining what help you may need outside of your current resources to hit the project goals. In this step, you will also make a case for getting extra resources via the procurement process.
💡 Tips
- Figure out which materials, resources, and supplies you will need to get the job done
- Decide which items will be internally procured and which items will be externally outsourced
- Once you’ve decided which items you need to outsource, compare each of those items specifications, components, quality measurements, standards, and characteristics with your project’s requirements.
- You may find that some of the items have features you don’t need. If you can identify those unnecessary features, you will know exactly what you want and don’t want in an item, possibly reducing your total cost.
2. Selecting: deciding which suppliers and vendors to use
Entails deciding what supplies you need and which vendors you’ll go through.
After you’ve identified your preferred vendors and suppliers, interview them to learn more about their products and services. If possible, make site visits to see exactly how each vendor runs their business in person.
3. Contract writing: developing, reviewing, and signing contracts
- Requires excellent attention to detail, pay close attention to the inclusions and exclusions in the vendor’s offer.
- There may be some items included in the vendor’s price that you can provide in-house at low or no additional cost.
- Sometimes, the vendor may write the contract. In this case, checking carefully for clarity and accuracy ensures that you know exactly what you are getting from the vendor.
- Whether the contract is written by you or by the vendor, you will almost always want to consult with a legal and compliance team to ensure that everything in the contract is ethical and legal.
4. Control: making payments and maintaining and ensuring quality
Make payments, set up logistics and requirements to maintain quality, and ensure the service agreement is being met.
💡 Tips
- Periodically review the performance and quality of each vendor
- When communicating with vendors, remain professional but firm to ensure that all project requirements are being fulfilled and that all major milestones are being met on time and at cost.
- Building and maintaining a good relationship with your vendors benefits the team and the overall project.
- Taking certain measures, like conducting regular check-in meetings, will ensure that the work is being completed according to plan.
5. Completing: measuring your success
Measure the success of the procurement.
Ask yourself
- Were the materials created good quality?
- Were there any issues with labor contracts?
- How were your relationships with vendors?
During this step, it is also important to document any lessons learned.
Different type of procurement
- Agile
- More collaborative with both the project team and the end supplier than traditional approaches
- Emphasis on the relationship between these parties
- Project team plays a larger role in identifying what needs to be procured
- Tends to have a living contract that can be adapted based on the evaluation of the project
- The team reviews the project or deliverables on a reoccurring basis and consistently addresses feedback.
- The contract may need to be renegotiated at multiple points during the project. -> It is very important to have a positive relationship with the procurement supplier.
- Traditional
- Focus on standard contracts with clear terms and deliverables
- Project manager may be responsible for end-to-end procurement instead of the entire team providing input
- The contracts may feature lengthy and extensive documentation that includes fixed requirements and comprehensive detail of the services and deliverables.
- While this may appear more rigid, the benefit is you’ve outlined clearer workstreams and deadlines. -> You’re much more protected from unforeseen circumstances and may not have to pay for unpredictable changes.
- The negotiation process can be a little bit trickier. You won’t necessarily have the room to renegotiate contracts if something changes, so you may have to start the whole process over again. That’s why being as detailed as possible and spending more time in the negotiation phase is incredibly important in a more traditional project management approach
Common procurement documentation
| Phase | Documentation |
|---|---|
| Initiating | Non Disclosure Agreement (NDA) |
| Selecting | Request for Proposal (RFP) |
| Contracting | Statement of Work (SOW) |
Non Disclosure Agreement (NDA)
It’s best practice to ask external contract workers to sign an NDA
Purpose: Keep confidential information within the organization
Request for Proposal (RFP)
- A document that outlines the details and requirements of an organization’s project to be passed on to vendors
- RFPs are used to solicit bids from vendors so that you can then select which vendor might be the best for your project.
- Typically includes an overview of the project, the desired outcomes, and goals, budget, deadlines, milestones, and contact information so each vendor can get back to you with a detailed proposal of how they plan to tackle the job.
- When creating an RFP, make sure to add the following headers to your document
- Overview
- What is the purpose of this project?
- What problems will it solve?
- What new doors will it open for the company?
- Your goals.
- What are some measurable results you can aim to achieve throughout the process?
- Scope of work
- What are the specifics of the project?
- How are you going to achieve those goals and make sure the project launches successfully?
- Milestones
- Submission requirements, e.g., “Please submit the RFP as a presentation and include three prototypes”. And the questions you’d like the vendor to answer as part of the process.
- Overview
Statement of Work (SOW)
A document that clearly lays out the products and services a vendor or contractor will provide for the organization.
Provides a description of the contractor’s needs and requirements to properly perform the agreed-upon services.
An SOW is sent after the vendor is selected and evolves as the project goes on.
Creating a Statement of Work (SOW)
Although the SoW covers the customer’s needs, it’s equally as important to include the organization’s needs and the vendor’s needs too. It’s critical that all parties involved understand what is expected from each of them in order to deliver the best possible products or services.
The project manager is tasked with developing the SoW but often asks for input from subject matter experts or SMEs for technical expertise that the project manager may not have. Your organization’s legal advisors will review this document with you and may even be crafting it alongside you.
Steps to create a SOW
- Include page headers with your company name, project, and creation date on them
- At the top of the page, include important stakeholders like yourself as the project manager and the name of the sponsor
- Construct a table for revisions
- Create a purpose section where you will go into detail about exactly what the desired outcomes are. Make sure to include a section regarding your target audience and make sure it’s inclusive of everyone.
- Scope section: include what the service entails
- Mention what’s out-of-scope
- Deliverable section: you’ll want a concise statement about what your project will deliver.
- Include milestones
- Add terms and conditions and any other disclaimers
- Payment terms: outlines when your suppliers need to be paid
Navigating Procurement Challenges
Obtaining procurement support
The procurement process doesn’t end after you’ve selected vendors and signed contracts. You’ll use performance trackers and meetings like quarterly business reviews to track and evaluate overall performance to ensure that both parties are living up to their initial agreement. When there are contracts and paperwork with terminology that you may not be familiar with, you will enlist the help of a legal team. Depending on the company size, the legal situation may vary.
There will nearly always be laws in place that you’ll need to follow around topics like fair and ethical trade.
- A team of people in the ethics and compliance departments are tasked with ensuring that the day to day operations are adhering to their value statement and governmental policies.
- These team members will also be tasked with duties like working to prevent discrimination and making sure that the company is practicing adequate corporate social responsibility.
You’ll all need to be aware of any pertinent meetings regarding legal or compliance issues, and you as a project manager will have to remind the team about when those meetings are being held.
Ethics in the procurement process
Project managers have a big job when deciphering whether or not every aspect of their project is sourced ethically. It helps if the project manager thoroughly oversees the project to make sure the safety, economic, and environmental ethical risks are mitigated.
Steps to safeguard ethical procurement
- Understand Legal and Ethical Requirements:
- Familiarize yourself with your business’s legal obligations.
- Refer to professional codes of ethics, such as PMI’s Code of Ethics, emphasizing honesty, responsibility, respect, and fairness.
- Conduct Thorough Research:
- Assess vendors’ safety, economic, and environmental risks.
- Evaluate labor practices, ensuring fair treatment, good conditions, and adequate compensation.
- Consult Experts When Needed:
- Seek advice from subject matter experts (e.g., legal team) when in doubt.
- Stay informed about international regulations, particularly in cross-border procurement.
- Monitor Procurement Risks:
- Be vigilant about risks like bribery, corruption, or unethical sole-supplier sourcing.
- Justify sole-supplier decisions transparently.
- Engage Ethically with Government Entities:
- Adhere to stricter regulations when working with state-owned entities or officials.
- Evaluate Project Ethics During Initiation:
- Ensure the project aligns with your business’s and governmental ethical standards.
- Assess labor sourcing and environmental ethics early.
- Scrutinize Suppliers Before Contracting:
- Vet suppliers for ethical practices and fair pricing.
- Gain a complete understanding of the supply chain.
- Maintain Oversight Post-Contract:
- Conduct audits, enforce quality control, and review invoices to ensure compliance.
- Manage vendor relationships and monitor deliverables.
- Rely on Judgement and Team Support:
- Trust your instincts—if something feels wrong, investigate.
- Collaborate with your legal team or stakeholders for guidance when necessary.
Avoiding ethical traps in procurement
Ethical trap: An ethical dilemma that causes us to make a certain decision without regard for our ethical principles.
Common ethical traps
Corruption and bribery
- When a vendor seeks to reduce the competition for a contract during the bidding process. A company may attempt to bribe members within the organization to sway their decision into a favorable outcome for the vendor. Bribes may include things like money, gifts, tickets to events, and more.
- Another type of corruption scheme is to offer a certain percentage of an awarded contract—also known as a kickback—to an official who can ensure that their company wins the bid.
Sole-supplier sourcing
- Having a vendor who a company is already familiar with smooths the procurement process and works well for both parties. Ethical issues arise when other vendors aren’t even allowed to bid for contracts for which they are similarly qualified.
- When the buyer’s organization decides to work with that vendor based on their previously-established relationship, that limits competition before the bidding has even begun. When this happens, companies and the public miss out on the advantages of competition, such as reasonable pricing, product quality standards, or speedy delivery options.
Interactions with state-owned entities
- There are some instances in which government agencies require an organization to adhere to stricter ethical standards than they might have otherwise.
- If you are unfamiliar with any governmental restrictions that may affect your industry, organization, or project, you could unintentionally fall into an ethical trap.
Avoiding ethical traps
Understand the legal requirements for your procurements.
- Every country has regulations to adhere to when conducting business in that country. Be sure to research the legal and ethical requirements based on your project and procurement needs.
- If your organization has a legal team, make sure to lean on them for support and advice.
Stick to your ethical codes.
- Honesty, responsibility, respect, and fairness are the values that underpin ethical behavior in the project management profession.
- The Project Management Institute’s (PMI) code of ethics provides detailed guidelines to help ensure you maintain ethical conduct in your projects.
Test your ethics.
- When you face an ethical dilemma, ask yourself questions in each of the following categories:
- Shame: Would you be ashamed if someone knew what you did?
- Community: Would you want your friends to know the decision you made?
- Legal: Would you face legal action if you took this action?
- Situation: Would your actions be justified in this situation?
- Consequence: Would a negative outcome be worth your actions?
- When you face an ethical dilemma, ask yourself questions in each of the following categories: