Project Budgeting

Video Transcription

Hi, I'm Jeff. And in this lesson, we'll cover project budgeting.

This is the full cost to complete a project and if the project manager is responsible for the budget, this is a critical skill to learn because in addition to an accurate schedule, a project must also have a predictable budget. So let's get started.

The total cost of a project is the sum of two separate categories, real project costs and overhead costs. Real project costs are those items paid for directly out of the project budget. This includes any resources that will be used to complete the project deliverables, such as materials, labor, vendor, or supplier expenses, and equipment.

For example, the people who program software during a web development project would be considered a real project cost. Overhead cost can also come from resources that help create the project deliverable. But if those resources have a long term value to the organization beyond the project, then the organization might pay the cost instead of the project.

For example, if the computers used by programmers during a web development project will be used after the project, then they are often paid for by the organization and are considered overhead costs. Including overhead costs in the total project cost gives an organization a full accounting for a project.

However, since the overhead costs do not impact the money that needs allocated to a project and tracked by the project manager, it's reasonable not to include overhead cost, too. It's up to the organization or the individual project manager whether to include overhead cost in the project budget.

The project manager reviews various information to build the budget. The project scope should be reviewed for any budget requirements, the effort estimates in the project schedule will be used to budget for resources, and any equipment or other resources needed to complete activity should also be included.

It's also helpful to review budgets from other projects in order to find details that might be missed. When budgeting the effort estimates on tasks, the project manager includes the cost for all people resources. These estimates directly reflect the labor cost needed to complete the project.

For example, in the schedule shown, there are two people resources used to complete the work on the customer complaint form for the web development project. Stephen will spend 16 hours on the task and John will spend eight hours. In order to arrive at a budget number for this task, those hours are multiplied by the cost per hour of a resource.

Let's assume this cost is $45 per hour in our organization. The cost calculation on this task for Steven is 16 hours, multiplied by $45 per hour, which equals $720. John's cost on this task is 8 times 45, which equals $360. Adding Steven's cost and John's cost gives us $1,080-- the budget for this task.

This is then done for each task on a project. In some instances, the budget is done before the schedule. In those cases, when the schedule is complete, it should be reviewed to validate if the budget was accurate. Now, individual efforts in the schedule might be real cost to the project, or they might be overhead costs. The project manager should always include real cost in the budget.

And finally, any non-people resources, such as materials or equipment used to complete the project deliverables, are also budgeted in a project. Fixed cost for supplier support or consultants should also be included in these costs.

As with other costs, the project manager should determine if each non-people resource cost is a real or overhead cost, and whether to include them in the project budget.

All right. Excellent work on project budgets. You've learned about the two different types of cost in a project budget, real and overhead. You know what information project managers need to review when building a budget and you understand that budgets need to include the cost for people and non-people resources.

Thanks and have a great day.