How To Create A Baseline Budget For A Project

What we all are lacking in, is the money or otherwise, we have so many wishes that we can spend as much money as we can get. Suppose you are an average earning person, therefore you have to spend your income wisely so as you can make the best out of it. 

For this, you prepare a budget, and abide by to follow it so as you can have all the basic necessities, fulfil some of our expensive wants and save some for the future. Now, we spend about 40% of our incomes on food alone. So all the other expenses should be done from the remaining 60%. Let’s take that you go on the last days of the month to refill your groceries and basic household things, and you prepare the budget at the start of the month for the same. Now for the budget, you must have listed all the things that you would be buying and their costs. You estimated that your expense to all this would be 5000 INR.

As you go shopping, the expense amounted to INR 5500. As no one has control over the future, while preparing the budget, we can only estimate the prices. We know that the price will rise in the future, but no one is certain about how much the price will rise.

So the budget you prepared in the starting of the month the known as the estimated or the Baseline Budget, as this the budget that we were supposed to follow. And the list of the expenses that you actually incurred, is known as the actual budget. By comparing the Baseline budget with the actual one, you can know where the deviance was and by how much. 

Here we were just talking about basic household budget. Now we will move towards budgets concerning a project. 

The first step in doing a project is Project Planning. There are many steps in planning a project properly, and one of which is preparing a budget. 

But, due to poor planning of the budget, on average,  projects go over budget by 27 percent of their intended cost. 

The fuel which projects use is money. The scope of the project decides the size of the budget. If you are doing a small project, then the budget will also be small and you may or may not face a little difference in the planned and the actual budget.

But, if you are doing a project that has a long lifecycle and you will need many resources or more men power, then remember the saying of Uncle Ben to Spiderman - “With Great Power Comes Great Responsibilities”. Likewise with such a great project comes with a great and a huge budget. The role of spiderman is to manage the responsibilities and likewise, your work here is to manage the responsibilities in the form of the budget.

Projects with budgets over $1 million have a 50 percent higher failure rate than projects with budgets under $350,000.

This happens due to poor budget management. Budget is not something that you just prepare and think that now everything will go according to this. You have to manage the budget throughout the lifecycle of the project, and this is done by managing the project baseline.

Project Baseline:

Baseline budget is a time-phased plan which includes the estimates of all the direct and indirect costs. This can be used as a base for all future activities and also as a performance and project analysis tool.

Baseline provides estimates of duration, revenue and spending. It consists of a breakdown of expected contract costs of various deliverables.It also includes indirect costs and the estimated duration for achieving various tasks and activities.

Here is a list of tips you should keep in mind while preparing your baseline budget:

1. Prepare the budget according to the stakeholder’s true needs and wants:

What the stakeholders in the project say they need and want is not as simple as it sounds. If a deeper knowledge is not gained on how to fulfil these needs and wants, then this may lead to unidentified goals and expectations on both sides.

If the Project Manager or anyone who is managing the project is not able to understand the true desires of the stakeholders, then it is almost impossible to identify the requirements of the project. You must have to spend as much time as needed to truly understand the requirements of the stakeholders and what deliverables they expect from you. After being sure about this only, you can start preparing the budget of the project.

Many projects get started around what the stakeholders need, but then changes are to be made according to the wants of the stakeholders. It is very important to understand the needs and wants, or the project would become upset for all and will definitely result in budget overrun. 

2. Prepare a surprise ready budget: 

Forecast all the problems that could be faced. This is a very essential step.

No budget can be planned perfectly as there are many factors that we cannot control. We know that external environmental factors can impact the pricing of supplies, labour and resources. There can be a change in financing, the shortage can arise in product or services needed, currency exchange and so on, according to the project description, can impact the budget.

Today’s pricing or rates will not be the same throughout the project lifecycle, thus inflation is to be considered while preparing the budget. You should also build some contingencies, just in case. 

Make sure that all the stakeholders have provided their inputs. Getting inputs from stakeholders like suppliers and vendors make sure that a more realistic budget is prepared, even if there are any unforeseen circumstances that may affect the price.

If you are prepared for the surprizes beforehand, you cannot be caught blind-sighted by such factors. 

3. Develop Relevant KPIs:

No budget can be managed without establishing Key Performance Indicators (KPI).

Key Perform indicator indicates the deviance between what was planned and what is originally achieved. Baseline budget is a type of KPI which tells you the deviance between the planned and the actual budget. Include these essential KPI’s to have effective project budget management.

Cost Variance (CV) - This indicates whether the actual budget is going above or below the estimated baseline.

Actual Cost (AC) or Actual Cost of Work Performed (ACWP) - This shows how much money has been spent on the project till date and you can compare it will the baseline budget. 

Earned Value (EV) or Budgeted Cost of Work Performed (BCWP) -  This shows the approved budget for the activities performed, up to a particular time. 

Planned Value (PV) or Budgeted Cost of Work Scheduled (BCWS) - This is the estimated cost of activities planned as of reporting date. 

Return On Investment (ROI) - This shows the profitability of the project. 

4. Follow the 3 R’s (Revisit, Review, Re-forecast):

Uncertainty has become a part/characteristic of Project. It is certain that there would be some problem or uncertainty. Thus, it is essential to keep an eye over the project so that the budget doesn’t get too far from our hands or too much over our pockets. Thus, revisit your budget on a regular interval to know and eliminate the deviations. 

A 5% would budget overrun would be easier to correct than a 50% budget overrun. If you do not keep an eye over it and re-forecast it, it will definitely become a 50% budget overrun, even before you know it. 

The point of baseline budget is to keep track of the original budget, while managing and comparing it with the planned or baseline budget. You can keep the project in the budget with frequent budget reviews far better, then you can manage the budget by forecasting it and forgetting it. 

You should also keep an eye over resources other than the budget too, such as resources that are going to be used in the project. If there is a delay in arranging resources, this can also cost you with billable hours, which will in turn cause overrun to your budget. You can use Task Management Softwares to manage the resources by making the task of the resources and assigning it to the respective employees.

5. Keep Everyone Informed and Accountable:

Limits bind the employees to work under only the money that is allowed. An efficient employee would do his best work in all the tasks, but as the budget is limited he will make use of his creativity to do his tasks and activities in the best possible way. Limits ensure that we are using our creativity to its maximum.

However, it is the duty of the project manager or whoever is handling the project to make sure that everyone is informed and aware about the budget and their respective duties. Only a well informed team can be a responsible and empowered team, which is extremely necessary for the success of the project.

Make use of Project Management Software ,to keep your team informed and aware of their deliverables and goals efficiently.