The Ultimate Project Manager, Chapter 6: The

Project Budget (RV-10430)

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Table of Contents

Course Description ....................................................................................................................... 3

Learning Objectives ...................................................................................................................... 3
Pricing Projects ............................................................................................................................. 3
Why Prices are Not Equal to the Project Budget ....................................................................... 3
The Direct Labor Multiplier ........................................................................................................ 4
Value-Pricing vs. Cost-Based Pricing ........................................................................................ 5
Pricing Government Jobs .......................................................................................................... 5
The Five Methods to Budgeting the Project .................................................................................. 6
Upward (Zero-Based) Budgeting ............................................................................................... 7
Advantages ............................................................................................................................... 8
Disadvantages ........................................................................................................................... 9
Three Upward Budgeting Scenarios ......................................................................................... 9
Downward Budgeting .............................................................................................................. 11
Unit Price Budgeting ................................................................................................................ 13
Staffing Level Budgeting ......................................................................................................... 14
Upward Budgeting ................................................................................................................... 15
Downward Budgeting .............................................................................................................. 15
Unit Price Budgeting ................................................................................................................ 16
Staffing Level Budgeting ......................................................................................................... 16
The Project Budgeting ................................................................................................................ 18
Typical Costs Incurred to Complete a Project ......................................................................... 18
Methods of Handling Contingency and Profit .......................................................................... 19
Contingency ............................................................................................................................ 19
Profit ........................................................................................................................................ 19
Common Mistakes Made in Budgeting .................................................................................... 20
Forecasting the Project Budget ............................................................................................... 20
Tips for Increasing Profit ......................................................................................................... 21
Summary ..................................................................................................................................... 22
Resources ................................................................................................................................... 23
References .............................................................................................................................. 23
Final Exam .................................................................................... Error! Bookmark not defined.

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Course Description
Price, cost, budgets, estimates, fees, revenues, etc.—there always seems to be confusion
about these terms. Are they the same thing or different? If they are different, what is the
difference? These are some of the questions that we will answer in this course. This course will
not attempt to make the project manager into an accountant; however, a basic understanding of
these terms is vital to establishing the project budget. Assuming that the PM has completed the
planning and scheduling phase, it is now time to align the project budget to the tasks in the
project management plan.

Learning Objectives
At the conclusion of this course, you should be able to:

• Describe the different aspects of project pricing

• Explain the five common methods used for budgeting a project
• Recognize the pitfalls that should be avoided in the common budgeting methods
• Describe the components of a typical project budget
• Recognize the common mistakes that are made in budgeting a project

Pricing Projects
Why Prices are Not Equal to the Project Budget

Before getting into the details of how to budget, a couple of things need clarification. First, the
price the client will pay is not equal to the project budget. Second, the price does not
necessarily equal the total costs the firm will spend to finish the project.

When the design firm receives fee payments, usually called revenues, from the client, that
amount is usually divided to pay five typical components:

1. Direct labor

The salaries of the people who will perform the work by charging the job.

2. Overhead

Holidays, vacation time, sick leave, payroll taxes, rent, vehicles, administrative staff, etc.
(Some firms combine employee benefits and payroll taxes with direct labor—often
referred to
as “direct personnel expense.”)

3. Other direct costs

Consultants’ fees, travel costs, printing fees, and other related out-of-pocket expenses
required
to perform the project

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4. Contingency

A cushion to handle unforeseen problems based on the risk profile being assumed by
the design firm in the completion of the project

5. Profit

The necessary reward for the owners of the firm for assuming business risks. The firm,
to provide the stability that enables it to operate through lean times without going out of
business, retains some amount of profit.

The Direct Labor Multiplier

Many design firms measure their financial performance by calculating the direct labor
multiplier. This measurement divides net revenues by direct labor. Net revenues equal total
revenues minus other direct costs (such as consultants’ fees, project expenses, etc.) but not
direct labor. Most firms establish pricing targets for direct labor multiplier and then compare
the actual multiplier achieved during the execution of the projects to this target level. A typical
target multiplier is 3.0, implying that net revenues are equal to 3 times direct labor salaries.

The following chart indicates how a typical project (assuming a direct labor multiplier of 3.0)
distributes the major parts of the multiplier to direct labor, fringe benefits, overhead, and profit.

The project manager is responsible for establishing and controlling direct labor, other direct
costs, and contingency. To the extent that some overhead costs might be under the control of
the project manager, he or she must be aware of project decisions that impact these costs, for
example, if the project requires renting additional space, purchasing new computers, etc.
Profits should be removed from the project budget and put in the bank as soon as the contract
is signed. It belongs to the owners of the firm, and the project manager should not use any of it
to complete the project.

This means that project managers should be judged not on how much profit they have made,

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but on how closely they have adhered to the project budget (before profit).

One possible exception to this rule is when the contract is based on a standard fee schedule
that includes the profit in the billing rates. In this case, the project manager must monitor the
total fee (including profit) to be sure that it does not exceed the authorized amount in the
contract.

Value-Pricing vs. Cost-Based Pricing

Many design firms develop the proposed price by adding up all the estimated costs (e.g., direct
labor, overhead, other direct costs, expected profit, etc.). They begin the contract negotiation
with this value as the proposed price and usually end up with the final price being below their
proposed amount. This is a good example of cost-based pricing—add all the costs plus profit to
get the price.

Value pricing attacks the issue of pricing from a different perspective—what price should the
market pay for the value being delivered by the design firm? In simple words, what is the
market price? If the service being offered is not unique (more like a commodity), the market
price is probably very near (or sometimes below) the total of the firm’s costs plus minimum
profit. On the other hand, if the service is unique or the firm can convince the client that their
individual approach is significantly different (i.e., differentiated from other competitors), the
market price should be higher—the design firm is adding more value. Note that value pricing
starts with the market, not the total of the firm’s costs. Using value pricing can make a
significant impact on the profits of the firm, as the following figure indicates:

In the preceding situation, the market price (and the client budget) is higher than the
cost-based price for the firm’s services. If the firm submits its proposed price based on its
cost and minimum profit, it loses the ability to achieve the higher levels of profit indicated
above.

Pricing Government Jobs

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Performing work for a government agency is a different situation. Most state and local
government agencies follow federal government rules when it comes to allowing certain costs
to be recovered by the design firm. Before moving on to budgeting, here are some details.

The federal government has issued regulations with respect to how it will do business with
private firms. These regulations (Federal Acquisition Regulations or FAR) contain very
specific rules on including certain costs in calculating a firm’s prices. Section 15.404-4 of the
FAR states: “For architect-engineer services for public works or utilities, the contract price or
the estimated cost and fee for production and delivery of designs, plans, drawings, and
specifications shall not exceed 6 percent of the estimated cost of construction of the public
work or utility, excluding fees.”

The following provides a sample of the types of costs that must be excluded from government
pricing:

 Interest paid
 Officer’s life insurance
 Charitable donations
 Time of employees in charitable activities
 Auto allowances
 Entertainment
 Bad checks
 Travel costs in excess of federal per diem
 Advertising (except help wanted)
 Public relations expense
 Marketing costs for private sector work
 Legal fees on bed debts or liability lawsuits
 Costs of reorganizations or mergers
 Bonuses paid for ownership
 Dividends
 Federal income taxes
 Education cost not business-related
 General promotional materials
 Accrued but unpaid leave time
 Rent paid on owned property in excess of actual ownership costs
 Office coffee or other beverages
 Any cost not for the normal conduct of business

Most design firms that are involved in proposing work to government agencies have separate
policies and procedures for these projects. Many create separate business units or subsidiaries
in order to separate this type of pricing from the type used for private sector clients.

The Five Methods to Budgeting the Project

There are many more aspects to pricing projects such as market risk, intensity of competition,
breaking into new markets, etc. But as the project manager, your next step is to budget the

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project. So how do you do that?

The following indicates the five typical methods to budget a design project. The first four
methods are the most common, and the fifth reflects what happens typically:

1. Upward (zero-based) budgeting

2. Downward (fee-based) budgeting
3. Unit price budgeting
4. Staffing level budgeting
5. “Real world” budgeting

Upward (Zero-Based) Budgeting

Upward, or zero-based, budgeting uses the approach of starting at the most detailed level and
moving upward. Each task is first analyzed to determine its cost, and then other costs and profit
are included. In zero-based budgeting, the estimator typically:

1. Uses the task outline from the project plan that meets contract requirements
2. Estimates staff hours required to complete each task
3. Estimates direct hourly labor rates
4. Calculates direct labor costs for each task by multiplying the results of Steps 2 and 3
5. Adds overhead costs as a percentage of the direct labor costs determined in Step 4
6. Estimates other direct costs (such as airfare, printing, and subconsultants) for each task
7. Adds the appropriate contingency
8. Adds the desired profit

The following worksheet can be used with this form of budgeting:

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Advantages

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The advantages of the zero-based budgeting approach include:

 Zero-based budgeting forces the project manager to thoroughly plan the job prior to
creating the budgets. The task outline has been developed and sequenced to show
relationships. The scope of each task has been established clearly.

 When completed at this detailed level, it provides the project manager with the baseline
information essential for monitoring and controlling the project budget and schedule.

 It records commitments made by the responsible individuals involved in estimating the

level of effort required for each task.

 It develops the resource information needed to calculate manpower requirements.

 If completed during the proposal stage, it provides information that can be invaluable
during fee or contract negotiations. It also forms an excellent foundation for future
change control activities during the project.

 When forecast against the project schedule for each task, it generates cash flow
information to the firm’s financial managers.

Disadvantages

Despite all these inherent advantages, the zero-based budgeting method does contain a few
potential pitfalls.

 The primary concern relates to built-in contingencies. When examining each individual
task, the project manager may tend to pile contingency upon contingency, ultimately
over-budgeting the job.

 The PM may fail to identify every subtle cost that must be figured into the typical
project.

Three Upward Budgeting Scenarios

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Three specific examples of upward, or zero-based, budgeting, demonstrate its challenges.

NUMBER ONE: Overestimating During Proposal Stage

A well-respected environmental engineering firm received an RFP to design a groundwater

treatment facility whose construction was estimated to cost approximately $1,250,000.

The firm assigned one of its most experienced project managers (call him Jim) to prepare the
proposal and estimate the engineering costs. The engineering estimate that Jim submitted to his
principal was for $655,000! The principal was shocked at the extraordinarily high ratio of
engineering cost to construction, and asked to review the breakdown.

The first task listed was “characterize groundwater.” When asked why so many hours were
budgeted for this task, Jim recited a story about a project that he had managed several years
back in which a similar task turned out to be unexpectedly complex. Not wanting to repeat the
problem, he provided an ample number of man-hours in case this happened again.

The next task was “develop process design criteria.” Again Jim’s principal thought the
man-hour estimate was inordinately high. Jim responded with another story about a different
past project in which a similar task had been greatly under budgeted. Not wanting to be caught
again, Jim budgeted sufficient man-hours to protect himself.

Each time Jim was asked about a task with an apparently high man-hour estimate, he had
another horror story to tell about one of the many projects he had managed during his career.
And just in case he might experience some problems he had never before encountered, Jim
added a 25 percent contingency at the end!

Jim fell into the same trap that experienced project managers often encounter in zero-based
budgeting. They remember past problems on similar jobs, and their budget assumes that
anything that went wrong on other projects will go wrong on this one. While it would be nice to
have such budgets, clients will generally be able to obtain a lower price from someone else.

NUMBER TWO: Forgotten Activities

A project was being budgeted that consisted of sending a two-person crew to an intersection to
make a traffic count for a one-month period. The obvious costs of this project are:

1. Two months of labor for the field crew

2. Travel costs for the field crew to get to the intersection

However, a more careful analysis of the project requirements revealed additional costs that
must be included in the budget, such as:

 Office coordination of the on-site activities

 Meetings with the client
 Mobilization and demobilization
 Collection and analysis of traffic data
 Report preparation and printing
 Maintenance of project records

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A detailed task outline prepared prior to the budgeting will help to minimize the activities (and
costs) that fall through the cracks.

NUMBER THREE: More Forgotten Activities

An interior design firm is asked to evaluate a client’s existing furnishings and to integrate new
furnishing purchases with older furnishings before the client moves into a new office building.
The obvious costs for such a project are:

1. Staff hours for a field inventory of furniture

2. Travel time to and from various client offices
3. Design time to select appropriate new furnishings
4. Drawing time to lay out old vs. new furnishings

Closer scrutiny of such a project would reveal that some additional costs must be included
before budgeting the project:

 Tagging of all old furniture for moving and locating in a new facility
 Meeting time with client to review specific pieces of furniture
 Cost of supplies for the tagging and inventory of old furnishings
 Expediting costs involved in the purchase of new furniture
 Cash-flow costs incurred if the firm purchases furnishings on behalf of the client
 Replacement costs of furniture damaged or lost before or during a move, including time
 to evaluate the problem and select another piece of furniture

When requesting proposals, most clients tend to consider only the obvious costs, ignoring the
less visible items. Unfortunately, it’s the project manager’s job to create a task outline that
includes both the apparent and not-so-apparent costs. Otherwise the project budget will not
start on a firm foundation.

Downward Budgeting

The process used to perform downward budgeting starts from the opposite direction from
upward budgeting. The assumption made by the design firm is that the value of the project has
been established, i.e., the client has stated clearly what her or she is willing to pay to complete
the work. The downward budgeting worksheet that follows indicates this process.

The budgeting process, therefore, starts with a total price (fee) that is not necessarily related to
the cost of actually performing the work. This price might be a lump sum, percentage of
construction, or unit-based calculation; in any case, the price has been established using some
method other than adding all the costs, including profits. It may be all the client can afford. It
may be the design firm’s best estimate of the competitive market price to win a project. Items
that impact each of these two scenarios include:

 Estimating the market price means knowing who your competitors are, the nature of
their pricing structure, the level of effort they will probably use for budgeting the job,
and how hungry they are for work.

 Finding out the client’s budget involves probing to determine the kinds of guidelines that

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the client usually uses (for instance, percentage of construction cost or dollars per
square foot). In some cases, the client’s budget may even be public information that can
be obtained for the asking.

Once the amount of fee has been established, budgeting the project involves subtracting the
profit to determine the firm’s total costs (what must be spent to execute the project).
Contingency, direct expenses, and overhead factors are then subtracted until you have
determined the direct labor dollars available to pay for the project team to do the actual work.

This is the critical point in the downward budgeting process. In this case, the dollars available
for direct labor costs should dictate the scope of work that can be performed. Too often, the
tendency is for project managers to squeeze a scope of work, determined by their assessment
of what the project requires, into a budget that has been determined by subtracting the non-
direct labor costs from a client-imposed maximum fee.

Projects undertaken for fees based on this method require careful planning and control. The

PM must understand that he or she is starting with an assumed fee, and it is critical that the
scope of work be developed to match this fee—not the reverse.

The major advantage of downward budgeting is that it does establish a project budget that will
(at least theoretically) meet all the firm’s financial goals as long as the scope of work complies
with the client’s requirements. In addition, it is based on the client’s fee requirements and
should therefore meet those expectations.

The primary disadvantages of downward budgeting revolve around its tendency to not match
the final budget and the scope of work that the project team believes is required. Therefore:

 Because the fee has been “forced down” on the project team, it does not obtain as high
a degree of individual commitment from the project team.

 Unless the final budgets are aligned to each individual task, it does not provide the
project manager with essential planning information.

 It fails to identify tasks that cannot be done within the available financial limitations.

 The hours available to do the work may not relate to the level of effort required for the
various tasks.

Use the following worksheet as a guide for downward budgeting.

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Unit Price Budgeting

This process of budgeting is based on estimates of the number of units of work performed and
the number of hours or dollars per unit. Probably the most common use of the unit price budget
is the cost per sheet of design drawings. For example, if the estimate to complete a certain
project (or even a task within a project) involves the creation of 10 drawings and the current
unit rate for this particular type of drawing is 80 hours, the budget is 800 hours. Unit price
budgeting is used in combination with the other budgeting methods to develop individual task
budgets. In addition, it can be used to determine order of magnitude estimates for certain types
of projects. Other examples of unit price budgeting tools used in design firms include:

 Dollars per drawings

 Percent of construction costs
 Dollars per square foot of office space
 Dollars per foot of boring
 Dollars per acre of land
 Dollars per kilowatt of power generated
 Dollars per mile of highway
 Dollars per laboratory sample analysis

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To use unit cost budgeting with the best possible accuracy, it’s necessary to define very
carefully the exact scope of work contained in commonly understood units and then compile
historical cost data corresponding to these units. This is most effective for tasks at the
completion of repetitive type projects. Collecting accurate cost information and updating the
budgeting factors is extremely important to the validity of this method.

The main advantage to unit price budgeting is that it provides an objective estimate based on
actual historical costs for similar work. In many ways, if the actual costs are being tracked with
the necessary accuracy, these factors can take much of the personal subjectivity out of the
estimating process. They become tools that are commonly used by all members of the design
firm and are accepted as achievable by the project team.

The major disadvantage is that very few projects (or even tasks) are exactly alike.

 Even if two tasks were identical, the second time the task is performed, its cost should
be less because of the experience gained from the first—the learning curve. Also, the
firm must account for yearly cost increases (e.g., cost of living increases, escalation,
etc.) in order to keep the unit price factors aligned with the actual costs of completing the
scope of work.

 In addition, these factors must incorporate changes such as productivity increases

resulting from computerization, additional work required by new government
regulations, and changes in efficiency resulting from staff changes, etc.

 Finally, the unit cost budgeting approach, unless it is aligned to the lowest level of detail
of the task outline, does not provide the project manager with the quality of planning
information that can be obtained from the zero-based budgeting method.

Staffing Level Budgeting

This type of budgeting works particularly well for very small projects. For example, you have a
small design project that will take a total of six weeks. You know you are going to use 100
percent of Fred’s time on the project, 50 percent of Bill’s time, and 25 percent of Matt’s time,
and some clerical help will be needed for about 50 percent of the time. The following is an
example of a budget that is developed using this technique.

This budgeting method works in situations where the specific tasks of the new project are not
yet well-defined. However, from experience you do know the number and type of team
members who were used on a similar project. Until the actual scope of work is established, an
initial budget assuming those same staffing levels is established.

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This type of budgeting should not be used to develop fixed prices for the new scope of work,
since it has not been defined as yet. As soon as the actual scope of work is developed, the task
outline can be finalized. Then the upward budgeting process should be completed and the
project planned, scheduled, and budgeted accordingly.

As a final comment, recall that if the budget is based solely on the staffing level process, a
delay in the schedule will almost always result in a budget overrun.

Pitfalls in the Common Budgeting Methods

Upward Budgeting

On the surface, this method seems like a logical, methodical process that is perfect for the
experienced PM to use. While it is logical and sensible, however, even experienced project
managers fall prey to over-budgeting for contingencies.

Every experienced project manager will remember an instance where a particular task went
over budget for one reason or another and thus will add a cushion to the budget for the same
task on this project.

There is a tendency for the PM to remember all the problems that happened on past projects
and to make an allowance just in case all the same problems occur again. The resulting budget
will account for every contingency the project manager can think of—but the final budget is
completely out of line with the price that will win the job.

Downward Budgeting

If you start with the amount of fee as a given and work backwards to determine the staff hours
available to do the work, there is usually no relationship between the scope of work and the
time (or dollars) to complete the tasks. Any correlation between the two—budget and scope of
work—is more luck than design. When the PM attempts to exercise control over the budget
and get the work completed, there is a lack of individual accountability among the team

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members. Those who have been assigned to perform tasks using mandated budgets have no
sense of commitment to either completing the task or meeting the budget.

Unit Price Budgeting

Unit price budgeting assumes the present project (or task) is exactly like a previous one or, in
fact, like all the other similar projects that have been completed and used to price this one. This
is very seldom the case. Even if two jobs were actually identical, the second one should cost
less to complete, taking into account a typical learning curve.

Another concern with unit price budgeting is keeping the cost factors up to date. Historical unit
cost data are collected over a number of years, but things change from year to year and
cumulatively over time. All change factors do not cause prices to rise necessarily.

Certain costs go up, such as labor and materials, but other costs may go down as a result of
improvements in efficiency and the introduction of new technology to produce project
deliverables in fewer hours. As a result, the data that you collected five years ago may be
inaccurate in its ability to reflect your current unit cost.

Staffing Level Budgeting

Budgets prepared using this method are, at best, “gut feel” numbers. In most situations the
scope of work is not well-defined. As such, they should not be relied upon as the only way to
budget a project. One obvious problem occurs when a project budgeted this way falls behind
schedule. As soon as the schedule is delayed, the assigned people need more time on the
project, so you’ve lost the budget, as well. Unless the commitment is for certain people for a
certain time, don’t ever use this method to budget a fixed price project.
“Real World” Budgeting

In most situations in the real world, budgets are established by a combination of the upward
and downward methods. The project team budgets the project using the upward method and
arrives at a proposed fee to accomplish the project. If the proposed fee exceeds the amount the
firm believes it can achieve, the downward budgeting process is initiated to attempt to lower it.
This process continues until the PM arrives at a project budget and fee that both looks and feels
right. This is the most successful and the most common method for arriving at a budget. Some
additional items to keep in mind:

 Remember the concern about matching the final scope of work to the available budget.
In the end, the size of the scope of work must fit the budget being committed to by the
design firm.

 Consider using as many of the four budgeting methods as possible on every project; at a
minimum, use no less than two of the methods. This creates a process of “checks and
balances”—the hidden pitfalls in each method that can be compensated for by the
strengths of the other methods. Used together, these four budgeting methods provide a
sound basis for determining your project budget.

 No matter how the budget was created, it must be translated into the zero-based
budgeting format to allow proper monitoring and control of the project. Each task must
have a specific budget, and the total of all task budgets must equal the project budget
(excluding contingencies and profit). Also, the task outline that you use for the budget

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must exactly match the one used to develop the schedule.

The following chart reflects how most budgeting in the “real world” is really achieved. The firm
usually begins with upward budgeting and reaches a proposed fee that is too high. Then the
firm uses the downward process to begin adjusting its estimate and scope of work. This iterative
process—using the two fundamental methods, upward and downward—continues until a
proposed price is established for the project.

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The Project Budgeting

Typical Costs Incurred to Complete a Project

Design firms incur many different costs in the process of completing projects and staying in
business. Many of these costs are not always obvious to the project manager. The PM must be
aware of what it really costs the firm to do a project and how the firm accounts for all these
costs. Costs to the firm that must be taken into account when preparing the project budget
should include:

 Direct raw labor salaries

 Salary burden, including:

o Benefits—health insurance, life insurance, etc.
o Vacation and holiday time off
o Social Security and other payroll taxes

 Overhead salary and expenses, including:

o Contract negotiation
o Marketing effort
o Legal fees
o Audit costs (for government work)
o Collections
o Rent
o Insurance—liability, property, etc.
o Overhead labor (not job chargeable)
o Outside experts
o Subconsultants
o Direct and/or reimbursable expenses
o Printing costs
o Reproduction costs
o Computer costs
o Quality Assurance/Quality Control (QA/QC) costs

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Methods of Handling Contingency and Profit

After the project is budgeted, the question usually arises, what happens to contingency and
profit. How should the project manager and the firm treat each one?

Contingency

There are four ways to view contingency and its possible use. The senior management of each
design firm should determine how it views contingency and make this clear to the project
manager.

1. The “Piggy Bank” View

This view treats contingency as funds that will not be used under ordinary circumstances
but are there for emergencies.

2. The “Cookie Jar” View

This view treats contingency as something project managers can have if they can justify
why they need it—whether an emergency or not.

3. The “Ostrich” View

This view removes all mention of contingency from project records and denies that it
exists at all.

4. The “Blank Check” View

This views contingency as funds to be spent at the discretion of the project manager.

Remember, any contingency funds that are not spent on a lump sum project go directly to the
bottom line—as profit. Sometimes contingencies that are identified on reimbursable contracts
are never required to be used, and are never billed to the client. The client may view this as an
under-run to the project budget. When an under-run occurs on a reimbursable contract, the firm
should take the opportunity to point this out to both current and future clients.

In general, however, the design firm should consider contingency part of the project budget.
The firm should assume that it will be spent by the project team to complete the scope of work.

Profit

Profit, on the other hand, should disappear from all project budgets on the first day of the job.
The profit should never be considered as additional funds that the project can spend to
complete the job, or to help it get out of trouble. It belongs to the owners of the firm and is not
to be spent on project tasks. Remember, the project budget allows expenditures up to the total
costs for the project; but profit is not one of these costs.

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Common Mistakes Made in Budgeting

Budgeting the project is a challenge for the most experienced project managers and project
teams. Many of these challenges can be overcome by following the project management plan
process. Develop the scope of work, and break it into the tasks needed to complete the work.
Then plan the work by sequencing the tasks in the most logical order, with all the dependencies
identified. Schedule the tasks to meet the commitment dates, and then budget the individual
tasks on the schedule.

By using the four common budgeting methods in combination, fine-tune the project budget and
get the commitment of the team members responsible for each task. In the process, look out for
the following common mistakes. Not coincidentally, these budgeting pitfalls are similar to
those found in scheduling:

 Failing to budget for the corrections that invariably will result from project review
activities

 Failing to budget for project management as a separate task, which can represent up to
15 percent of the project cost

 Forgetting about the impact of “soft” tasks—the non-technical issues such as phone
calls, e-mails, and meetings

 Assuming that all tasks have been anticipated and budgeted, and having no contingency
plan to implement when they are not

 Forgetting that project activities will continue beyond the completion date of the
contract (project closeout tasks)

 Failing to obtain commitment from sub consultants on the individual budgets that have
been allocated to them

Forecasting the Project Budget

Having developed the budget and the schedule, these can now be combined to forecast how
the costs will be incurred over the life of the project. By plotting the budgeted cost of each task
across its duration during the project, a table can be created that will total the cost per week or
month forecasted throughout the life of the project. Once you have done this, these incremental
costs for each period of the project (weekly, monthly, or as appropriate) can be used to
calculate the cumulative costs over the duration of the entire project.

These data can be plotted on a graph to show the forecast cost over the life of the project. A
baseline expenditure forecast should be done once, at the beginning of the project. It should be
changed only if there is a significant change in the scope, schedule, or budget.

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This budget forecast will establish a baseline for monitoring and controlling the schedule and
budget on your project. This forecast can be used to determine an appropriate invoicing and
payment schedule to manage the cash flow of the project.

The following diagrams demonstrate how the schedule and the budget are integrated to
develop a graph that shows the projected expenditures over the life of the project.

Tips for Increasing Profit

1. On lump sum projects, reduce work level on unimportant areas that do not impact
clients’ perceptions of the value of your work (nor on your liability).

Do you put excess effort into the drafting of your presentation drawings? Are they
drafted for eye appeal instead of usability? How “fancy” are your reports in
comparison with the significance of their findings? Do you produce for your own
benefit instead of the clients?

2. On lump sum projects, do the work in fewer hours by increasing productivity and
eliminating excess perfection.

Stay on budgeted hours by putting your best people on lump sum projects. This
will increase your average hourly rate charged.

3. Increase utilization rates and the use of overtime.

This allows you to charge more hours, reduce effective overhead, and increase
the average amount you receive for each hour you “buy” from employees
through payroll.

4. Expand your definition of reimbursable so that you bill more items separately from your
effective hourly rates.

This way you’ll receive more from the client for the same number of hours.

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Summary
The project budget is not equal to the total fee of the job.

The project budget should meet two fundamental criteria. First, it should include the
estimated costs to accomplish the scope of work as defined in the task outline and project
plan. Second, it should reflect only those costs under the direct control of the project
manager. The firm’s profit should not be included in the project budget.

There is a fundamental difference in concept between total costs and price.

The firm’s price for services should reflect the value-added component of those services to the
client. The price should not be the total cost of providing the service plus some appropriate
profit. Rather the price should reflect what the market would pay for these services—more for
unique or differentiated, less for more common services or commodities.

Government pricing has its own set of rules. Firms providing service to government clients must
obey a different set of pricing rules. The most common method of handling this type of business
is to establish separate business
units or subsidiaries.

Check the project budget by using different methods. The easiest way to validate the project
budget it to develop it using several different methods. Start with the upward, zero-based
method, and then check it using one or more of the other methods.

“Real world” budgeting combines the upward and downward techniques. Upwardly generated
budgets usually exceed the proposed fee due to hidden contingencies. Combining this method
with the downward process helps remove some built-in contingencies, but it must arrive at a
scope of work that is achievable using the final budget. The “real world” process continues
cycling through these methods until the scope and budget are compatible.

The baseline forecast reflects the initial budget and schedule. The initial budget, when aligned
to the project schedule, creates the baseline plan for accomplishing the project. This reflects the
first integrated project plan integrating scope, schedule, and budget. It should be used as a tool
to measure the progress of the project through execution of the work.

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Resources
References

PSMJ Resources, Inc. (2012). Chapter six: the project budget. The Ultimate Project Manager
Manual. Newton, MA: Author.

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