BEDER INTERNATIONAL έΪ˰˰ΑΔ˰˰ό˰˰ϣΎ˰˰Ο

UNIVERSITY
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JAAMACADDA BEDER EE CAALAMIGA AH

Project Finance and Budgeting

Chapter 3 : Project Budget

 Chapter Outline
After reading this chapter, the students will be able to
understand:
 What is project cost
 Characteristics of a good budget
 Objectives of project budget
 Importance of project budget
 Approaches of budgeting
 Inputs of cost budgeting
 Tools & techniques of cost budgeting
 Outputs of cost budgeting
 Introduction
A project budget is the total sum of money allocated for the
particular purpose of the project for a specific period of time. The
goal of budget mngt is to control project costs within the
approved budget & deliver the expected project goals.
Definition of a successful project is one that meets 4 success
criteria: that the project’s scope is delivered on schedule, it is
delivered within budget and, once delivered, it meets the quality
expectations of the donor and the beneficiaries. For project
managers to be truly successful they must concentrate on
meeting all of those criteria.
The reality is that most project managers spend most of their
efforts on completing the project on schedule. They spend most
of their time on managing & controlling the schedule & tend to
forget about monitoring & controlling the budget.
 What is Project Budgeting?
• Project - unique process, consisting of a set of coordinated
& controlled activities with start & finish dates, undertaken to
achieve an objective conforming to specific requirements
including the constraints of time, cost & resources.
• Cost is a resource sacrificed or foregone to achieve a
specific objective or something given up in exchange. Costs
are usually measured in monetary units like dollars, & so on.
• A budget is a financial document or an action plan which is
prepared & used to project future income & expenses. It
outlines an project’s financial & operational goals. It can also
include non- monetary information with the monetary
information. They need to be made & approved in advance
before used or implemented.
Budget is the process of aggregating the estimated costs
of individual activities or work packages to establish an
authorized cost baseline. The key benefit of this process is
that it determines the cost baseline against which project
performance can be monitored and controlled.
• Project budget is a detailed estimate of all the costs
required to complete project tasks. It is much more
detailed than the high-level budget developed in the
Initiate Stage. The typical budget specifies costs for staff
labor, materials procurement, ongoing operating costs
and other direct costs such as travel or training.
• Project Budget: refers to a budget that shows how the
money given for the project will be spent. It breaks down the
financial details about the expenses & purchases needed to
make the project a success. The budget will show employee
wages, material purchases, supplies, tools & rent for
temporary office locations. The project manager will be able
to account for every single penny spent on the project.
• Project Costs: refers to the total sum the project in
question will cost the company. Executives use this figure to
make changes in the company’s other budgets, such as
operational budgets, master budget & expense budgets to
make room for the project in question. The total project cost
is calculated by adding up the total costs in the project
budget, so the business owners know how much to put aside
 Purpose of a Budget
A budget is a key mngt tool for planning, monitoring & controlling
the finances of a project. It estimates the income & expenditures
for a set period of time for your project.
Your budget can serve a number of important purposes,
including:
– The purpose of project budget mngt is to estimate & control
project costs within the approved budget & to achieve the
stated goals of the project.
– Monitoring the income & expenditures over the course of a
year (or a specific project time frame).
– Helping to determine if adjustments need to be made
– Forecasting the expenses for projects, including the timing &
the availability of income (such as additional grant funds)
For funders, a budget is also an essential tool and
provides an understanding of your work. Funders view
budgets to consider the following:
– How are you planning to use the grant funds?
– What are the other sources of funds for the work?
– Does the budget reflect local costs?
– Do the expenditures correspond to the activities?
– Does the budget fall within the guidelines of what the
funder can support?
– What percentage of overhead expenses (such as
salaries, rent, utilities) is included in the budget?
 Characteristics Of Budget
Following are the characteristics of a good budget:
• It is expressed in quantitative or monetary terms.
• It is prepared for a fixed period of time
• It is prepared before the period in which it commences
• Helps you work toward stated goals
• Practical to implement
• It spells out the objects and the policies to be pursued in
order to achieve the objective of the project
• Flexible enough to allow changes in the changing
environment
• On the basis of budget report performance of the project
is constantly monitored
• A Financial Roadmap
The budget is a pivotal piece to the project plan. It outlines
the financial resources available, which further determines
the HR that are required. The budget serves as a planning
tool & helps the organization to create a trajectory for how
they will proceed with the project from start to finish.
• Management Tool
As the team moves along the map & starts to implement
the project, they can use the budget to determine if they’re
on track to meet their goals. If it becomes evident that
corrections & changes are needed, we can move on to
prioritizing the pieces of the project.
• Prioritization
If the initially planned funds are not sufficient to complete
the project at once, the budget will support the organization
or project team in prioritizing which parts of the project can
be completed based on the remaining budget, while
simultaneously determining which pieces will be put on hold.
• Budgets provide an internal control
Perhaps the most obvious benefit of a budget is this: It
allows an organization to effectively monitor its finances . In
doing so, organizations can better guard against fraud &
other potentially devastating financial risks. Organizations
should prepare budgets on a monthly basis to make
tracking-to-budget relevant & accurate throughout the year.
• It should be flexible, A budget is not set in
stone. When your income level or marital status
changes so should your budget. If you started
budgeting when you were still single, you can’t use
the same budget when you already have kids, you’ll
have to factor in their needs in the picture. If you
suddenly lost your job, you might need to readjust
some portions of your budget to be able to ride
through this rough time. When you finally get another
job then you can readjust your budget to reflect it.
 Approaches To Budgeting
 Incremental Budgeting
 Zero-base Budgeting (Z.B.B)
 Base Budgeting
 Activity Based Budgeting

A.Incremental Budgeting: In Incremental Budgeting

last year’s budget is used as a starting point for the
new budget, and a number of increases are ‘pre-
programmed’.  These include inflationary increases,
salary increases, and overall market growth increases.
B. Zero based budgeting: In ZBB the budget for any activity
at the start of each year is set at zero.  All expenditure must
be justified on a cost/benefit basis, including justification of
continuing existence.
C. Base Budgeting: In BB, Phase 1 of the budget is designed
with ‘just enough’ resources to run the organization as a
going concern.  Any incremental spending above this level
must be justified on a cost/benefit basis.
D. Activity Based Budgeting: In ABB, the budget recognizes
that it is activities which generate cost in a project, & the
desire is to control these cost drivers.  For each identifiable
activity, the cost of a unit is measured, the demand is
measured, a budgeted cost is set for each unit of activity, &
the budget is designed around activity terms.
 Who is Responsible for a Budget?
• The project manager is responsible to estimate the
budget required to complete project activities. The
Project Manager should allocate all costs to project
activities, & all aspects of the project, including the cost
of internal & external human resources, equipment,
travel, materials & supplies, should be incorporated.
Managers and staff responsible for the activity should
prepare and monitor budgets and see detailed
transactions. Finance staff are a technical resource, who
often provide information and make sure that the process
is completed professionally.
The Project Manager will be responsible for managing and
reporting on the project’s cost throughout the duration of
the project. During the monthly project status meeting, the
Project Manager will meet with management to present
and review the project’s cost performance for the
preceding month. Performance will be measured using
earned value.
• The Project Manager is responsible for accounting for
cost deviations and presenting the Project Sponsor with
options for getting the project back on budget. The
Project Sponsor has the authority to make changes to
the project to bring it back within budget.
 Uses of project finance
1. Energy Project finance is used to build energy
infrastructure in industrialized countries as well as in
emerging markets.
2. Oil Development of new pipelines & refineries are
also successful uses of project finance. Large natural
gas pipelines & oil refineries have been financed with
this model. Before the use of project finance, such
facilities were financed either by the internal cash
generation of oil companies, or by governments.
3. Mining Project finance is used to develop the
exploitation of natural resources such as copper,
iron, gold mining operations in countries as diverse
as Chile, Ghana and Australia.
4. Highways New roads are often financed with
project finance techniques since they lend
themselves to the cash flow based model of
repayment.
5. Telecommunications The burgeoning demand
for telecommunications & data transfer via the
Internet in developed & developing countries
necessitates the use of project finance techniques
to fund this infrastructure development.
6. Other sectors targeted for a private takeover of
public utilities & services via project finance
mechanisms include pulp & paper projects,
chemical facilities, manufacturing, hospitals,
retirement care facilities, prisons, schools, airports
& son on.
 Importance Of Project Budget
Why the Project Budget is Important
• There are two key reasons the budget of your
project is important...
• First, the approved budget is what
drives project funding.
 It will tell stakeholders how much money is needed
and when it is needed.
 Your ability to get people, equipment, and
materials when they are needed are dependent on
the funding provided as a result of your budget.
• Second reason budgeting is important for your
project is
 Because it provides the basis for project cost
control,
 By measuring the project's actual cost against
the approved budget,
 You can determine if the project is progressing
according to the plan or if corrective action is
needed.
This is accomplished using a cost baseline.
It can be represented using a cost baseline as shown in the following
diagram.
• The cost baseline shows the
total planned costs at a point in
time. From the cost baseline,
you can then determine your
periodic funding requirements.
The funding requirements are
represented using the dashed
steps. Funding Point 1 (F1)
requires F1$, Funding Point 2
(F2) requires F2$, and Funding
Point 3 (F3) requires F3$. The
total project budget is F1$ +
F2$ + F3$. Cost Baseline & Funding Requirements
 Inputs To Cost Budgeting
• Cost management plan. describes how cost variances will
be managed. A cost mngt plan may be formal or informal,
highly detailed or broadly framed based on the needs of the
project stakeholders.
• Activity cost estimates are the individual cost estimates
for each activity or work package that your project will
complete. For each activity, the cost estimate generally
includes direct labor, materials, services, facilities, &
information technology.
• Basis of estimates documents supporting details about the
activity cost estimates. For example, how the estimates were
made, assumptions & constraints, & the confidence level of
each estimate.
• Project schedule is the tool that communicates what
work needs to be performed, which resources of the
organization will perform the work & the timeframes in
which that work needs to be performed. The project
schedule should reflect all of the work associated with
delivering the project on time.
• Resource calendars will let you know which resources
are assigned to the project & when they are assigned.
Using each rates for each resource & combining with the
project schedule you can then determine resource costs
over time. Also used to reflect specific working hours,
vacations, leaves of absence & planned personal time
for individual resources.
• A Risk Register, also referred to as a Risk Log, is a master
document which is created during the early stages of your
project. It is a tool that plays an important part in your Risk
Mngt Plan, helping you to track issues & address problems as
they arise.
• Contract: is an agreement between the project team & an
external supplier for the acquisition of a defined set of
products to meet the procurement requirements of the
project.
Once you have the above information, then it is simply a
matter of summing up the costs to determine the budget for
your project. 
 Tools & Techniques For Cost Budgeting
• Expert Judgment
Expert judgment, guided by experience in an application
area, Knowledge Area, discipline, or similar project, aids in
determining the budget. Such expertise may be provided
by any group or person with specialized knowledge, skill,
experience, or training. Expert judgment is available from
many sources, including, but not limited to:
– Consultants,
– Project managers,
– Stakeholders, and
– Professional and technical associations.
• Historical Relationships
Any historical relationships that result in parametric
estimates or analogous estimates involve the use of project
characteristics (parameters) to develop mathematical models
to predict total project costs. Such models may be simple
(e.g., residential home construction is based on a certain
cost per square foot of space) or complex. Both the cost &
accuracy of analogous & parametric models can vary widely.
They are most likely to be reliable when:
 Historical information used to develop the model accurate,
 Parameters used in the model are readily quantifiable,
 Models are scalable, such that they work for large projects,
small projects & phases of a project.
• Reserve Analysis
• Budget reserve analysis can establish both the
contingency reserves & the management reserves for the
project.
– Contingency reserves: allow for future situations that
may be partially planned for (sometimes called known
unknowns) & are included in the project cost baseline.
– Management reserves: allow for future situations
that are unpredictable (sometimes called unknown
unknowns).
• Cost Aggregation is simply summing the costs for each
work package to the control account up to the project
level. You can aggregate this information by time period to
see the scheduled spending per time period. 
 Outputs From Cost Budgeting

• Cost Baseline:
The cost baseline is the approved version of the time-
phased project budget, excluding any mngt reserves,
which can only be changed through formal change
control procedures & is used as a basis for comparison
to actual results. It is developed as a summation of the
approved budgets for the different schedule activities.
• Project Funding Requirements:
Total funding requirements & periodic funding requirements are
derived from the cost baseline. The cost baseline will include
projected expenditures plus anticipated liabilities. The total
funds required are those included in the cost baseline, plus
mngt reserves, if any. Funding requirements may include the
source(s) of the funding.
• Project Documents Updates
Project documents that may be updated include, but are not
limited to:
 Risk register,
 Activity cost estimates, and
 Project schedule.