Short Guideline On How To Budget A Project
Updated: Dec 7, 2021
Following Wellingtone, 43% of companies pay a lot of attention to budgeting in project management and calculate development costs accurately. Anyway, it remains a challenge since not every enterprise knows how to do it in the right way.
Many promising developments from the private sector (KMart's modernization initiative in 2002) and the public one (like the healthcare exchange website creation initiated by the US government in 2013) can be shining examples of how poor budgeting can impact the result.
We will not let you repeat such a fate.
JEVERA invites you to evaluate a brief guide that allows you to understand what is a project budget, what parts it consists of, what should be taken into account within its creation, and how to work with it in the right way in general. Let's see what came of it.
Let's start with the project budget definition. It is a certain amount of the customer's monetary resources provided to cover all costs associated with the software creation. The budget is needed to control the funds' expenditure and analyze the development effectiveness.
The project budget is estimated following the Total Cost Ownership (TCO) criteria.
Here, the two groups of costs exist: the implementation and operating ones.
Implementation costs include:
internal costs (for example, the number of involved specialists on the customer's side),
external costs (development cost determined in the commercial offer)
infrastructure costs (the cost of software installing).
Operating costs comprise possible software updates during its life cycle (approximately 5-10 years, depending on the specific business structure).
Moreover, a company should understand how to keep track of expenses in this case. The financial industry uses two concepts: operating expenses and capital expenditures.
Operating expenses cover all the processes that help the company to function. Paying salaries, renting an office, and even purchasing office supplies are operating expenses.
Capital expenditures contribute to business growth. It is difficult to notice their impact on business success "here and now", but they will bring significant benefits in the long run. These expenditures cover offshore software development.
What about the internal one? - you might ask. Sometimes it is advisable to assemble a staff to create a software base. In some cases, it is even necessary. For example, it is believed that businesses in Germany prefer to design in-house solutions since they don't trust vendor products. So, if an enterprise needs to organize in-house development, its costs will be considered operational expenses. Here a limited number of company employees are involved in the work, and their remuneration is an operating expense.
How To Make A Proper Budget: Step-By-Step Instruction
The project budgeting process consists of the following 5 steps and can take from 3 to 6 months, depending on the development complexity.
Step #1. Initiative
The project budgeting process is a consequence of management initiative. If an employee has a proposal accepted by the general meeting on improving the business with a specific product, the process of analysis and preparation begins.
Step #2. Request Of Information (ROI)
Businesses often use ROI to understand what the market can offer and define the average development cost. A company submits requests to a certain number of vendors for framework proposals, providing general, vague requirements for what the client wants to receive. Suppliers estimate the project costs and provide the potential client with a rough software development budget. It allows a company to determine how much money it will need to set aside for development in the next financial period and clarify its requirements.
Step #3. Internal Estimation
If the company has the resources and expertise to check framework proposals, it can also perform its analysis. Employees can use standard techniques for project budget estimation.
Step #4. Request For Proposal (RFP)
The enterprise selects several framework proposals and implements RFPs to several vendors, providing a list of detailed requirements. Suppliers provide an accurate project estimation as part of a commercial offer. The client chooses one vendor as a partner.
Step #5. Creating A Project Budget
The company makes a detailed project budget plan for further agreement with the supplier based on the received data. After agreeing on all the essential conditions, the parties sign the corresponding contract.\
Client management should remember that the project budget is a dynamic category that can change depending on circumstances, risks, etc. To control software development costs effectively, businesses often use special digital products like Hubstaff, DeskTime, Harvest, actiTime.
Top 3 Widespread Project Budgeting Methods
The number of project management budgeting methods equal to the number of project estimation techniques. As you might guess, they are so similar. Here we will consider 3 methods actively used for budgeting and by both vendors and customers. Here goes!
One of the most effective methods if the company has previous experience with the most similar development. Employees can analyze documentation, funding plans for past projects to determine what budget needs to be allocated for new development. It is arduous to apply this technique for complex and long-term projects budgeting.
First, based on the above previous experience or expert judgment, the company allocates a certain total budget for the project. It then divides funds for a certain number of tasks within the project.
This approach involves a lot of effort not only on budgeting but also on scenario modeling. Here, the company should consider each task's cost based on the worst, best, and most likely scenario. Such a technique allows a customer to determine accurately how much money a project will require.