The budget is an important requirement and tool within all construction projects. It is necessary to maintain a successful project outcome and should not be seen as a target but rather a guideline of what needs to be bettered. It is an “an estimate of income and expenditure for a set period of time”.
The following are Kenham’s “5 Ways to Stop Your Project Going Over Budget”.
1. Understand client’s true needs and wants
What clients say they need or want within a project often isn’t as simple as it may seem upfront. This can lead to unidentified goals and expectations on ALL sides of the table. If a Contractor does not have a solid grasp of on client’s true desires, it’s almost impossible to identify what the requirements are for the project. Be sure to put in as much time as is required to get a deeper understanding of what clients expect. Ultimately everything, including the budget, is defined by clients expectations, deliverables, and other requirements. So the first step to an effectively managed project budget is to ensure project requirements are accurately identified, documented and confirmed with all clients — and that these are communicated to all stakeholders involved. This crucial step should be completed before budgets are set. Many projects have been initiated around needs but executed around wants, automatically putting projects at risk of budget overruns that leave everyone disappointed.
2. Budget for risks / surprises [known & unknown]
When it comes time to estimate costs, be realistic. Make sure to get input from all applicable clients and stakeholders. More importantly, build in contingencies to help cover risk. This step is essential. You need to factor in things outside of your control, such as external environmental considerations that may impact pricing of supplies, resources, labour, financing, product/service shortages and so on. Today’s price or rate may not carry through to the later stages of a project! Make sure suppliers and subcontractors can deliver on their promises and prepare a backup plan. Getting input from other stakeholders and vetting suppliers and subcontractors can go a long way to setting a more realistic budget that can be met, even if there are unforeseen circumstances that impact costs. I’ve seen many Project Managers get caught off guard with escalating costs, suppliers that couldn’t meet quoted obligations or other issues. Plan for surprises, so you aren’t blindsided and lose!
3. Develop relevant KPIs and maintain
You can’t effectively manage a project budget without establishing key performance indicators (KPIs). KPIs help you understand how much has been spent on a project, the extent to which the project’s actual budget differs from what was planned, and so on. Here are just a few commonly known and used project KPIs that are essential to effective project budget management:
Actual cost [AC], shows how much money has been spent on a project to date.
Cost variance [CV] indicates whether the estimated project cost is above or below the set baseline.
Earned value [EV], shows the approved budget for performed project activities up to a particular time.
Planned value [PV], is the estimated cost for project activities planned/scheduled as of reporting date.
Return on investment [ROI] shows a project's profitability and whether the benefits have exceeded the costs.
By adopting and maintaining a project Cost Value Reconciliation [CVR] will cover the above KPI requirements and give the Project Manager a robust commercial tool to effectively maintain the budget performance for the required works.
A project left to run without budget management and re-forecasting will lead to failure. Frequent budget oversight is essential in preventing budgets from getting too far out of hand. A 10% budget overrun is far easier to correct than a 50% overrun, and if you don’t keep an eye on your budget and re-forecast, that 10% overrun can turn into a 50% overrun before you know it. Your chances of keeping a project on track with frequent budget review are far greater than if you forecast once and forget about it. The maintaining of a Forecast to Completion will effectively mitigate the majority of surprises that may come too late to correct!
Just as a project’s budget needs to be constantly revisited to keep it on track, so too do the project’s resource usage, since the people working on a project contribute to its cost. This is often found in the breakdown of Preliminaries and General [P&G] section of the budget. Project managers should review the number of people currently working on a project and the project's future resource needs on a weekly basis. Doing so will ensure that you're fully utilising the resources you have and that you have the right resources ready for the rest of the project. Regularly revisiting the resource forecast will help keep your project budget on track. Scope creep is one of the leading causes of project overruns. Project Managers must carefully manage scope by creating change orders [or Variations] for work that isn't covered by the project's initial requirements. Change orders authorise additional value [revenue] for the project to cover the cost of extra work and thus keep the project aligned with its new budget.
5. Keep everyone informed and accountable – crucial communication!
An important part of staying on budget is to make sure all team members are aware of the current budget status as well. Keep the Project Team informed of the Project Budget Forecast [or Forecast to Completion]. An informed team is an empowered team that takes ownership of its projects. By keeping the team informed of the Budget Status, they will be more likely to watch their project charges and far less likely to charge extra “gray area” hours to your project — hours they know they worked but weren’t clear about what they were working on.
The Project Budget must be a living part of your projects — something you review with your team and client on a regular basis [min on a monthly routine]. Project Managers who carefully watch budgets throughout the life cycle of their projects will keep clients and management happy and thus experience greater project success!