From the course: Project Management Foundations

Develop a project budget

From the course: Project Management Foundations

Develop a project budget

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- [Instructor] With most projects, money is important, whether you're trying to make it, save it, or stay within a budgeted amount. Project cost is one of the three key constraints you need to manage, and the project budget is your starting point. The project budget should be a realistic estimate of the cost to complete the project work. If your estimate is unrealistically high, the project could be canceled. If the estimate is too low, the project will cost more, which usually means it won't deliver the financial benefit it's supposed to. You estimate all the costs associated with completing the project work, including labor, materials, and other costs like travel. You can start with rough estimates for the first few levels of your work breakdown structure. Then create more accurate estimates as you learn more about the project. Labor cost is usually a big part of a project's cost. That is what you pay people who work on the project. If you hire vendors or contractors, their charges go directly into project labor costs. For employees, you typically use the burdened cost. That includes salary and employee benefits. You can get burdened rates for roles from your accounting or HR department. Projects might use other types of time-based resources. Think equipment or office space that you rent. These costs go into your calculations too. Then there's material cost. The hospital scheduling project could include a new server or training guides and documentation notebooks. Finally, be sure to include other types of costs that don't fit in the previous three categories. For example, travel, training expenses, and fees. Have you ever gotten into a cash crunch when you didn't have enough money on hand to pay expenses? Projects can run into cash flow problems too, which is why you figure out when project expenses will occur. When you assign resources and other costs to the tasks in your project schedule, you'll get a rough idea what your cash flow looks like. Let's say management has money allocated for the project, like the grants and donations earmarked for the hospital scheduling project. If your cost estimate is higher than the allocated amount, you have to look at ways to reduce the project cost. You might eliminate non-essential expenses or find less expensive resources. Maybe cut scope. In the hospital scheduling project, management allocated $850,000. The estimate, including contingency is 950,000. You might consider working with less contingency funds, ask for more money, or dive in to find ways to cut the total cost. The project budget is the cost target you aim for as you manage a project. For practice, think about what you can do about the $100,000 that exceeds the amount that management has allocated for the scheduling project.

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