Next: Define "How Much?"
Creating a Time-Phased Budget
After creating a schedule of activities for the project, the next pivotal project planning step is addressing the "How Much?" question. We need to estimate the costs associated with creating and delivering the project scope—and then, using that information, create a realistic, time-phased budget and funding profile for the project. To do this right involves careful consideration of various factors such as labor needs, materials and equipment (i.e., non-labor), and other expenses that could impact our budget needs. By accurately estimating these items, we set ourselves up for success and ensure that our project remains viable from a financial standpoint throughout its life.
Creating a time-phased budget during this planning stage is essential for effective project management. It allows us to forecast cash flow needs and track expenses against our established timeline. This proactive approach helps identify potential financial bottlenecks early on, enabling us to manage resources efficiently. Communicating this budget clearly to stakeholders fosters transparency and sets realistic expectations. By thoroughly addressing this "How Much?" question, we can ensure that we have the financial backing to bring our projects to life, ultimately leading to successful outcomes that fulfill both technical specifications and stakeholder satisfaction.
So how do we create accurate cost estimates and turn that into a realistic budget? While every project is unique, the methods used to estimate costs typically follow the same framework:
First, we begin with the integrated project schedule and estimate the cost of the work it describes. If we’ve created a complete and accurate schedule, then the sum of the listed activities represents the total work that must be performed to create/provide and deliver the project scope. Each activity will require a certain amount of money to perform. If we can accurately estimate the cost of each activity, and then add these up, we will end up with a total cost for the entire project.
Each schedule activity will have three primary costs: labor, non-labor, and indirect costs. Our job is to estimate each of these three cost types for each activity. How we perform these cost estimates will depend on the project, as well as the stage that it’s in. Early in conceptual planning stages, we may not need highly accurate estimates; ballpark figures may be fine. But as we approach the start of project execution, our cost estimates should be much more accurate and precise.
Labor costs are typically estimated by multiplying the number of FTE (full-time equivalent) hours by the hourly rate of the employee(s). For example, three people for one week, each earning $50/hour would be: 3 x (40hrs/week) x (1 week) x $50/hour = $6K. You will also need to factor in things like non-productive hours, fringe and other labor expenses.
Non-Labor costs range from materials and supplies, to contracts and purchases, to travel, etc. You can estimate the costs for each of these via several methods, ranging from obtaining actual vendor quotes, to using historical costs (inflated appropriately, of course), to educated guesses by subject matter experts.
Indirect costs represent the overhead, fees, and other expenses that you will have to pay in order to perform the work. For example, at the institution that I work, our parent company charges ~10% on top of all expenses. This is essentially a “tax” that a project pays to the parent company, in exchange for which we receive human resources support, purchasing and legal support, and so on.
The total of each activity cost (of labor, non-labor, and indirects) then represents the overall project cost estimate. Typically, we add some additional buffer to this (as budget contingency, which we’ll cover in an upcoming blog post) to cover the cost of project risk. The total of the base budget cost estimate and the budget contingency equals the Total Project Cost, or TPC.
It’s useful to perform so-called “sanity checks” on the TPC by comparing it to past, similar projects. It’s also helpful to bring in outside experts to review and try to find fault in your estimates.
Finally, we spread the required cost expenditures out over a timeline to create our time-phased budget needs. For simple, short-duration projects, we might simply ask for all the money up front. But for longer, more complex projects that run for multiple years, we usually need to request a certain funding profile that is agreed upon by your stakeholders and funding entity.
Estimating costs and creating a time-phased budget is a critical step in project planning that bridges the gap between a schedule of planned activities and the actual execution of those items. By carefully estimating labor, non-labor, and indirect costs for each activity, we can create a comprehensive financial roadmap for our project. This process not only helps us secure funding but also enables us to proactively manage resources and anticipate financial challenges. Remember, the goal is not just to create a budget, but to develop a realistic financial plan that supports project success. As we move forward, this budget will serve as a tool for tracking and reporting on progress, making informed decisions, and ultimately delivering our project on time and within financial constraints.