Budget and Cost

When the project sponsor or customer is considering the project, cost is generally an important item. Because this concern precedes the planning of the project, the budget that the sponsor envisions for the project must be based on other considerations. Many times the sponsor's budget estimate is based primarily on the money that is available for this project. Sometimes this estimate is reduced by the sponsor because he or she is perceived as being financially responsible, as someone who gets a lot done for a little money. One element of the project manager's statement of work should be a feasibility analysis of the proposed budget as compared to the expected outcome cost. As the project specification is being created, the project manager makes cost comparisons between the project's allotted budget and the costs of other similar projects. Project feasibility depends on the relationship between the costs that have been previously charged to similar projects and the budget that the sponsor has allowed for the current project. Whenever similar projects have had significantly greater costs than the proposed project is budgeted for, the project manager presents this information to the sponsor. The recommendation must be: Either cut the outcome expectations or boost the budget.

The sponsor then may make an adjustment or wait until the project plan is completed. Either way, the project manager has alerted the sponsor of the budget-cost discrepancy.

Some projects, particularly projects within and for the benefit of a particular department, may not have a budget, and its cost may not be tracked. They may be folded into the continuing cost of the department's operations.

Technical departments like engineering and IT are sometimes considered project departments, each with a departmental budget. If the department supervisor accepts some project responsibilities, the cost may become part of the overall department expenditure and not separated out. For financial purposes, these departments are not judged according to individual project effort. They are judged overall by how many projects and by the size of those projects that they contribute to annually.

Note: There are fewer projects where cost is not tracked than projects where cost is tracked.