Budget overruns turn out to be the litmus test for project failure or success. Not all businesses have a limitless budget, so project stakeholders often look at their bottom line to see if the project was a success or a colossal failure.
Managing project budgets effectively is a constant challenge for project managers. They have to worry about balancing quality with cost while ensuring that all user requirements are fulfilled. Each passing day both project leaders and their teams are pressured to meet tight deadlines, so managing the project budget can be difficult.
In this article, we will uncover five tips for keeping the project budget in control and prevent cost overruns.
Understand Stakeholder’s True Needs and Wants
In most cases, what stakeholders say they need or want upfront often isn’t as simple as it seems. This is why both stakeholders and project teams develop unidentified expectations and goals at the beginning of the project.
If your project team, vendors, and sponsors, don’t fully understand the stakeholders’ true desires, it’s almost impossible for you to identify project requirements accurately. It’s important to dedicate as much time as possible to get a deeper understanding of what the stakeholders want.
In the end, the stakeholder deliverables, expectations, and other requirements will define everything, including the budget. This is why the first step for keeping your budget in control is to ensure that you accurately identify, document, and confirm all project requirements with stakeholders. At the same time, you should communicate these details with all other parties involved.
Doing so will help you create a realistic project and define the scope of the project more clearly. The reason why most projects fail to meet projected budgets is that they are started around needs but completed around what the stakeholders want. Preventing this can help you avoid the risk of budget overruns in your projects.
Plan for Surprises
While estimating your project budget, it’s important to be realistic. As taking feedback from all involved parties is important, so is building contingency plans. As a project manager, you must factor in things that out of your control, including external factors that influence the pricing of supplies, product/service shortages, labor, financing, currency exchange resources, and so on.
The price rate you are estimating today will not carry through to the later stages of the project. This is why it’s important to ensure suppliers deliver on their promises and create a backup plan if prices vary disproportionately.
Asking input from other stakeholders and assessing vendors and suppliers goes a long way in helping you set a more realistic goal for your budget. By planning carefully and creating contingencies, you can manage unforeseen circumstances more effectively and deal with escalating costs in a way that it doesn’t affect your budget too much.
Monitoring Relevant KPIs
KPIs or Key Performance Indicators are extremely helpful for estimating the costs of a project effectively. They help project managers ascertain how much they have spent on a project, as well as how much the project’s actual budget is different from what they initially planned, etc.
Without establishing these KPIs, there is no way to monitor an over-running budget or take measures against increasing costs. To monitor your projects, you can use the following project KPIs:
Planned Value (PV)
Also known as Budgeted Cost of Work Scheduled (BCWS), the planned value estimates the cost for project activities you have scheduled or planned up till the reporting date.
Actual Cost (AC)
Referred to as Actual Cost of Work Performed (ACWP), it shows the amount of money you have spent on the project as of the reporting date.
Cost Variance (CV)
It shows whether or not the estimated project cost is below or above the set baseline.
Earned Value (EV)
Known as Budgeted Cost of Work Performed (BCWP), it helps project managers remember the approved budget for project activities his or her team has performed up to a certain time.
Return on Investment (ROI)
It tells project managers about the project's profitability, so they can perform a cost-benefit analysis.
Review and Re-Forecast
Failing to create budget management and re-forecasting system for your project can make costs spiral out of control. This is why it’s important for project managers to perform frequent budget oversights to prevent budgets from getting out of hand.
Managing a 10 % budget overrun is easier to control compared to an overrun of more than 50%. Unless you monitor your budget closely and re-forecast, even a small overrun can easily turn to project-failing overrun before you know it. Your likelihood of controlling budget overruns will be far greater if you perform frequent budget reviews instead of forecasting and forgetting about it.
Project managers not only need to revisit project needs from time to time, but they also have to track the project’s resource usage. The people you hire in your team also contribute to the project’s cost.
This is why it’s prudent to review the total number of members currently working on a project, as well as how many resources the project will need in the future. These estimates have to be made weekly.
Billable hours can quickly mount in your project and increase the project budget drastically. You should always track the utilization of all resources and monitor the scope of projects. However, by reviewing and re-forecasting frequently, you can manage these challenges more effectively.
Communicate Effectively and Implement Accountability
Keeping the project budget in control requires you to communicate the budget status to your team members whenever it is needed. By informing your project team about the project budget forecast, you can make them partially feel responsible for managing costs.
An informed team is more likely to takes ownership of its projects. Moreover, when your team is aware of budget constraints, it is easier for you to create a sense of urgency within the team and aim at high goals for the project.
Managing the project budget effectively is a constant struggle for project managers. It’s important to review project costs with stakeholders, vendors, and your team regularly. If you can carefully maintain budgets throughout the project life, you will improve your chances of delivering successful projects consistently, keep the management and stakeholders happy, and thus, experience greater career growth.