though the budget was imposed from above and arbitrarily set at too low a level.
Remember the purpose of the project budget: to estimate at a reasonable level what the project will actually
cost the company. You may find it convenient to agree to an inadequate budget at the formation stage, but you
will pay for that convenience not only by having to explain variances to top management but by how you will
be perceived as a project manager.
You should always develop your own project budget, for several reasons:
1. You will be responsible for explaining future project expense and cost variances. That’s not possible
if you’re working with an imposed budget.
2. As project manager, you are in the best position to know what the project should cost. The budget
you develop is a financially stated goal, and it should serve a purpose on two levels: (1) to give you a
means for measuring success during the project and (2) to serve as a way to measure your performance
as a project manager.
3. You will also be able to develop the assumptions that go into the budgeted numbers. This is essential
if any future variance explanations are to make sense. The assumption is compared to actual, and
precise differences are isolated. Only when you can compare on this level will the budgeting process
work as intended.
Project budgets are developed, monitored, and acted upon differently from departmental or companywide
budgets because:
1. Projects are nonrecurring. Departmental budgets are prepared each and every year, and often are
revised every six months (or even more frequently). Projects, though, are finite activities; the budget
time frame is not tied to the fiscal year. Thus, project budget revisions are not likely to occur except as
a result of discovering a drastic error in the original budget or in response to a drastic change in the
scope of the project.
2. You have more direct control. Departmental budgets are often affected by coordination between
several departments: The accounting department allocates fixed expenses to one department, often on
the basis of estimates of another department; but decisions concerning systems and personnel are
restricted to top management. The project, in comparison, involves budgeting on two levels: (1) use of
existing resources—personnel and assets—that are already budgeted for at the departmental level and
(2) limited use of outside resources that will not be permanent. An additional employee for your
department usually translates into a permanent addition to your expense level; an additional employee
for a project most likely involves using someone already on hand.
3. The success of the budget is tied to scheduling and to resource performance. The success of your
project budget depends on how well you schedule each phase and on whether or not the people on your
team complete their tasks according to that schedule. If a phase is delayed because you need more time
and more human effort than estimated, your budget will reflect an unfavorable variance.
4. The cost and profit factors in projects may be more obvious than the same factors in a departmental
budget. Unfavorable variances in a project budget may be noticed more than similar, or even more
drastic, variances on the departmental level. Your recurring departmental budget is reviewed as part of
a larger company budget and forecast; variances may be overlooked, absorbed between departments, or
accepted as inevitable—especially if the budget was estimated by one department and then imposed on
another. But as project manager, you may be held accountable at a higher level, if only because you’re
responsible for attaining the cost goals of the project.
It’s true that the same standard should apply to every department manager—ideally. Each manager should be
responsible for ensuring that the budgeted levels of his or her department are not exceeded. But in practice,
few companies exercise the kind of follow-up that would allow such a procedure to be put into action. And
few companies allow department managers the level of involvement in budgeting that would make
accountability practical.
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