Chapter 9

Budgeting 101

This chapter concludes the coverage of the Planning processes. You've reached a major milestone in the project's Planning process; the budget is the last Planning document you'll create.

If you're lucky enough to be working on a project where “money is no object” (very doubtful), you still should read this chapter. I'll talk about what makes up a budget, tracking the budget, and establishing a cost baseline. Stakeholders want to know the project costs and whether what you're spending on the project is on track with what you estimated. Stakeholders will use this information to determine future project budgets, so you'll want to do the best job you can estimating, tracking, and reporting on the project budget.

Then you'll pull together everything you've done so far and document this as the official project plan.

What Makes Up a Budget?

The project budget will be used throughout the remainder of the project to track project expenses and measure the money actually spent on project activities against the estimates given for those activities. The final budget figures are based on estimates provided by the project team, key stakeholders, vendors, and others after careful review of the Planning documents.

Project Costs

Most of the costs expended on the project, known as project costs, are fairly obvious and apply to most projects you'll work on. For example, salaries, office supplies, and telephone charges will apply to almost all projects. These project costs and most others fall into one of three categories: human resource costs, administrative costs, or resource costs. Let's take a look at each of them in more detail.

Human Resource Costs

These are the costs associated with the personnel on the project. They include salaries and the cost of benefits (such as vacation time and health insurance) if they apply. When you are calculating salary expense and including benefits such as health insurance, vacation time, life insurance, disability insurance, and so on, this is often known as a loaded salary or fully loaded salary.

Salaries, or contracting fees for human resources, can be one of the project's largest expenses if you're working on a labor-intensive project. For example, information technology projects typically require folks with very specific skills. These skills come with a price — usually a high price — and you'll find a large portion of your project budget allocated to them. If you happen to be working for a nonprofit company that is using all volunteers to complete the project work, your salary expenses may be smaller, but you'll still probably have expenses for subject-matter expertise, contractors, the project manager's salary, and so on.

Administrative Costs

Administrative costs are the everyday costs that support the work of the project but are not necessarily directly related to a specific activity on the project. Utilities, phone expenses, copier paper, and support personnel are examples of administrative costs. Project teams have to work and meet somewhere, so that means there is some sort of facilities expense in the form of rent, lease, or mortgage payments. The facilities expense in this example should be proportionate to the amount of building space that's dedicated to the project. If the building or facility was leased or purchased specifically for the project, it would be classified as a project cost instead of an administrative cost.

Resource Costs

Resource costs include things such as materials needed for specific activities, equipment leases, long-distance telephone expense, travel expenses, and so on. These expenses are specific to the project. For example, if the project consists of building a new set of luxury condos in a prime downtown location, you'll need the use of a crane during the early phases of the construction to lift the steel beams and other needed items several stories in the air. Resource costs are typically the largest expense for construction projects, and estimating these costs will require research on your part.

Examining each of these categories of resource costs will help you identify your initial budget items. If you think about the human resources, the administrative support, and the project resources needed for each activity, you'll have a list of budget items started in no time.

Direct Costs versus Indirect Costs

In addition to the three categories of project costs, there are also two types of costs: direct and indirect costs. Direct costs include costs such as salaries, equipment rentals, software, and training for team members. Any cost that can be directly attributed to project work is a direct cost.

Indirect costs are not specific to the project. For example, your project team probably works with other members of the organization (who are not working on the project) in the same building. The lease cost for the building is an example of an indirect cost because it is not specifically related to the project since all the company employees work there. Another example of an indirect cost is administrative staff, managers, or other functional members who will be assisting you with project tasks (such as someone from the procurement department) but aren't assigned activities themselves.

You'll need to find out from the accounting or finance department how indirect costs should be accounted for in the project budget. Each organization has its own procedures for accounting for indirect costs, so you'll want to check with them before finalizing the budget.

Gathering the Docs

I'm not talking about a gathering of doctors here, although some budgets are so sick they need budget doctors to make them healthy. I'm talking about the Planning documents you've diligently created.

The first step in creating the project budget is to gather all the Planning documents for reference. You should start with a review of the project goals and deliverables for obvious budget expenses, which you can find in the project scope statement. Next, take a look at the activity list, the WBS, and the network diagram. Record activities or items that will have costs associated with them on your budget list. In addition, look over the project schedule, resource list, and roles and responsibilities chart for expenses you may need to account for. Don't forget to include equipment rentals, facilities, and material expenses associated with activities and WBS elements. Keep in mind that you can capture all of these costs in most project management software programs, and you can also include fully loaded salaries and resources right on the project schedule in most programs.

Start your budget list on a piece of paper or an electronic spreadsheet, and record the items needed in one column and estimated costs in another column (if you know them at this point; otherwise, leave that column blank). If you want to be really organized, you could use the project schedule and start recording initial costs right on the activities listed on the schedule. You'll look at some sample budgets later in this chapter.

Budgeting Process

The process for creating the budget is similar to identifying the resource requirements and creating the project schedule. Review the Planning documents to uncover all the materials and resources you'll need, estimate their costs, record them in the budget, and finally get approval of the budget.

Here are the steps you'll follow to get your budget process rolling:

1. Review the Planning documents.
2. Create cost estimates, and integrate them with the project schedule (I'll cover this shortly).
3. Submit the budget for approval to the project sponsor or project committee.
4. Notify the appropriate project team members and stakeholders when the budget is approved.
5. Assign the code of accounts to the WBS elements if this hasn't been done previously. The code of accounts is a unique numbering or lettering system used by the organization's accounting department. These unique numbers or letters (codes) should be assigned to the WBS work packages.
6. Publish the project budget on the project's intranet site.

As the project manager, you should go into the project fully equipped to execute the project based on the resources available. To accomplish this, you need an accurate budget to use as your guideline.

Now let's take a closer look at some of things you'll want to include in the budget.

Budget Items

Regardless of the type of expense, you need to identify everything needed for the project and document its estimated cost.

You can use the same techniques for identifying budget items as you did for identifying deliverables and activities. Examine the budget from previous projects of similar size and scope, interview stakeholders, ask project team members who have worked on similar projects in the past, interview vendors, or hold a meeting with key team members and stakeholders to brainstorm on the budget items. To save time, you could consider starting a list of budget items yourself before meeting with stakeholders or interviewing team members, especially if the project is small. You'll be able to identify many of the items simply by reviewing the Planning documents. Then let others look over what you've done and give you estimates for the things you've identified or add new items of their own.

Here is a list of some of the common budget items to help you get started identifying them for your project. You could use this list as a checklist for future projects, adding your own commonly used items that require budget allocation and deleting the ones that don't occur on the types of projects you typically work on:

• Project team salaries
• Equipment and materials expense
• Rent or lease costs for facilities
• Marketing costs, including focus group and market research costs
• Legal costs
• Travel expenses
• Advertising costs
• Research costs
• Feasibility study costs
• Consulting services for subject-matter expertise or as project participants
• Phone, fax, and long-distance charges
• Office supplies (remember all those sticky notes we used!)
• Internet access charges or website-hosting fees
• Software
• Hardware
• Training

Budget Woes

Budgets, like project schedules, can be the cause of conflict. Project schedules, particularly the resource assignments associated with the schedules, are typically the biggest source of conflict on any project, and budgets probably run a close second. Be prepared to defend the budget items to the project sponsor or senior managers. Be ready to explain why the items are needed to successfully complete the project and the impact on the project if those items are not funded. You will likely put a heavy dose of negotiation skills to use during the budget process.

For some reason, senior managers seem to think it's politically beneficial to cut the project budget (and/or the schedule) just so they look good in front of the big boss. They may have no other motivation than to appear as though they're saving the company money, even though it negatively impacts the project. Or they may have projects of their own competing for the same funds, and cutting your budget helps ensure that their own project budgets won't get cut. Although cutting the budget might make them look good to the big boss, it will definitely impact the project, which may not make you look so good at the end of it all.

Your best defense against this happening is to communicate with the project sponsor and make certain they understand the importance of the items included in the budget. At that point, they'll have to go head to head with the other executive managers and fight to secure the funding for the project. But they can't do that if you haven't first communicated the importance of the things you'll need to successfully complete the project and why. The important thing to keep in mind in this case is for you to know the reason the items are needed and their impact on the project if they are not obtained, and you need to be able to communicate this information when senior managers start wielding their big scissors at your budget.

If the project is not successful as a result of an inadequate budget from the get-go, no one is going to come out looking good. If your project budget is woefully inadequate because of cuts made before you reach the Executing process, I recommend you pass on the opportunity to lead the project if you can, because it's highly probable that it will end up as an unsuccessful project.

Following the Processes

Many organizations have a procurement department that will help you purchase the items needed for your project. They may also help you create the budget. Always check with the procurement department to determine whether there are procedures you should follow when preparing your budget. Also be certain to work with the procurement department when purchasing services from vendors or contractors. You may need to follow a specific process, for example the RFP process, to the letter so as not to hold up the project schedule (and ultimately cost you more money).

Your organization may have a finance manager in addition to the procurement manager, or the finance manager may act in both roles. In large organizations, the responsibility for determining project costs will likely rest with you and the finance manager. And sometimes the finance manager is the one who works up the budget and gets approval from senior management, and you're simply told what the final budget is and are expected to work with it. If this is the case, use your communication and negotiating skills to work with the finance manager and ask them whether you can contribute to the budget process.

Estimating Techniques

The WBS has been a handy tool so far in the creation of Planning documents, and it's indispensable in the budget process. The WBS is used to identify, estimate, and assign costs to each element of the project. The work package level is where you'll see individual costs and estimates for each activity (provided the work package level shows activities), whereas the higher levels in the WBS will show rolled-up costs.

Before I get into the details of each estimate, let's look at the most common estimating techniques you can use during the budget process.

Analogous Estimating

The analogous estimating technique determines estimates for the current project based on the actual costs of previous projects that are similar in size and scope to the project you're working on. The key here is that the project you're using to base this project's estimates on should be very similar in all respects: size, complexity, scope, quantity of resources needed, quality criteria, and so on. Sometimes projects may look alike on the surface, so make certain you analyze the two projects side-by-side before using this technique.

Analogous estimating is easy to perform and doesn't cost a lot of money. However, it's also a less accurate form of estimating than the other techniques you'll look at. This technique works best when you're trying to establish estimates early on in the project before a lot of information is known or for small projects or for individual deliverables on small projects. It's best to use this technique in combination with the next one I'll discuss — bottom-up estimating.

Bottom-Up Estimating

Bottom-up estimating is the opposite of top-down estimating. This involves estimating each activity or work item individually and then rolling up those estimates to come up with an overall project estimate. For example, each activity included in the work package level is estimated, and then these estimates are added together with other work package−level estimates to come up with WBS level-3 and level-2 estimates. Then these can be added together for an overall project estimate.

Resource Cost Rates

Resource cost estimates usually involve obtaining quotes on the work to be performed (or resources to be procured). For example, perhaps your project requires the purchase of two new servers. You can jump on the Internet, obtain a quote from a supplier for the equipment, and, voilà, you have your budget estimate. Apply the same principle for other resources needed for the project such as contract labor, equipment and supplies, services, and so on.

Some vendors have published price lists that you can use for this activity. Along those lines, some organizations require vendors to supply an updated price list to their procurement department on a yearly basis for just this purpose. Check with your procurement department first to see whether such a list exists. If your organization does a lot of procurement throughout the year, chances are you'll get a better price off the price list than from the vendor's website.

Parametric Estimating

We discussed parametric estimating in Chapters 5, “Breaking Down the Project Activities.” This method of estimating is quantitatively based and multiplies the number of units times the cost to determine the estimate. For example, if you know your project requires 100 hours of contract staff assistance at an hourly rate of $65 per hour, then the estimate for this activity is $6,500.

Computerized Tools

Most project management software packages allow you to put cost estimates on the activities listed on the project schedule. The software will then automatically calculate the total project costs for you. You could use a spreadsheet program to accomplish this as well by listing all the budget items in one column with their associated costs in another.

Ask the Experts

Interviewing techniques work well for estimating activities. Ask stakeholders, subject-matter experts, vendors, and project team members with previous experience on projects like the one you're working on for estimates. Many times functional managers who've loaned out resources on similar projects in the past have fairly accurate estimates ready. Never be afraid to ask.

Another useful technique in this category is to peruse historical documents. Past project documentation can be referenced to determine how much was actually spent on activities that are similar to the ones on the current project. This is a great technique if the past project was completed fairly recently because you have actual costs to use as a base instead of estimates. Don't forget to adjust your historical estimates to account for inflation or increases in salaries if the data is old.

Ask the Vendors

Vendor bid analysis is a good source for estimate information. This technique is especially useful when contracting out the work of the project. Start first with your procurement department. They may have lists of vendors who've provided pricing guides that you can reference and use as initial estimates for your project activities.

It's a good idea to get input from more than one vendor when asking them for estimates because they can vary widely. Ask different vendors to give you estimates so that you can check one against the other. Be aware that some vendors hope to get future business from you, so they will purposely provide a low initial estimate. They also may be using this project as a pilot project in the hope of getting business from other companies similar to yours. Keep these things in mind when comparing estimates from different vendors. Also make certain that all the vendors providing estimates on the project have the same understanding of the requirements, assumptions, and delivery dates.

If the estimates are coming in high and the budget is tight, ask the vendors for a discount. I've used this technique with vendors, especially with the vendors I work with all the time. This isn't something you should do for every project, however; be judicious about when to use this tactic.

Last, always ask vendors to put their estimates in writing. This will help ensure you're getting estimates you can rely on throughout the project and will help you avoid setbacks later.

Estimating Costs and Finalizing the Budget

The question you'll hear most often from executive managers is, “How much is this going to cost?” Now that you've learned what makes up a budget and how to derive the estimates, you're ready to answer that question. Let's look at an example project to pull all this together.

Your project involves opening a computer retail store in a new strip mall being constructed in your city. One of the deliverables involves building out the store space. This includes things such as signing the lease, installing counters and shelves, installing display cases, assembling a workspace area in the back room, and building five checkout counter lanes. The partial WBS for this one deliverable looks something like this:

Using a combination of analogous and bottom-up techniques, your team has identified the costs in Table 9.1.

Table 9.1 Cost estimates

The deliverables level (which is level 2 on the WBS) shows item numbers 20-1, 20-2, and 20-3. These are in bold in Table 9.1. Each of these items is the total cost of all the individual activities below it. These costs have been rolled up, using the bottom-up estimating technique, to give a total for each level-2 item. Each of the level-2 estimates can be added together to come up with a total budget for this level-1 element titled “Store Build-Out,” for a total of $63,800. When you've established the cost of the other level-1 elements, you can add all of those together for an overall project estimate.

Questions to Ask

Once you've plugged in some initial numbers and created the first draft of the budget, you'll want to sharpen up the estimates by asking some questions. You want to be certain you've identified all the budget items and that the estimates you've recorded are accurate. Here are some questions to help you with this activity:

1. Are the budget estimates for salaries and contractor expense realistic? How do these compare to past projects of similar scope and size?
2. Have all materials and supplies estimates been checked by the procurement department or another subject-matter expert? Letting a second pair of eyes double-check the estimates is a good idea to see whether something looks out of place or to uncover estimates that seem too high or too low.
3. Have you identified the potential risk to the project if the requested budget item is not purchased? Identifying the risk will help you justify the expense if this is an item you must have. If it's an item you can compromise on, identifying the risk is the first step in helping you examine the alternatives.
4. Ask whether the budget item requested is absolutely necessary in order to deliver the product or service of the project. Will this item be needed in order to complete a task or deliverable that is required to consider the project a success?
5. Are there other costs associated with the purchase of this item? For example, software programs often have ongoing maintenance expenses in order to get support for the product or upgrades. Depending on the length of the project, these may or may not be considered project expenses, but the end customer will have to pick up these costs when the project is delivered, so you'll want to tell them about them.

Finalizing the Budget

Now you're ready to finalize the budget and submit it for approval. You've established estimates and double-checked your work. Before you submit the final budget for approval, though, there a couple more things you should do to make sure the budget is accurate. (P.S. Taking the time to triple-check your estimates is not a bad idea.)

Contingency Reserves

Way back in ancient times (as my children call it) when I was a teenager, I remember asking my dad for money to go to the movies with my friends. My dad wasn't a big movie-goer himself, so he never knew exactly how much the movie cost. I confess that I used this to my advantage and padded my request to include enough money for popcorn and soda. (Don't tell him, though; I don't think he suspects a thing!) This usually worked well. Sometimes I could save up enough change from several movie trips to buy sodas for my friends. That was a really big hit. Or I could stash some so that if Dad didn't have enough cash on hand, I could pull out my reserves and still go to the show.

Project budgets work the same way. You'll want to build contingency reserves into the budget for unexpected items that are bound to pop up — I only recommend that you be honest about what you're doing. Movie money is one thing; a few million dollars added to the project budget for your spending pleasure can land you in the unemployment line or maybe even in jail!

In Chapters 7, “Assessing Risk,” I talked about contingency plans and contingency reserves. Contingency reserves give you a buffer zone to absorb unexpected costs or deal with unanticipated risks as they arise. You can't know everything, and your team can't predict everything that will occur on the project, so having a contingency reserve in place will help you out of those tight spots as they arise.

One method for calculating reserves is to add an additional percentage of the total budget back into the budget for contingency. This percentage is going to vary depending on the project. The risk identification and planning process can help you zero in on a reasonable contingency number, and the risk response plans will help justify your need for a contingency reserve. Or you could research historical project documents to see how much reserve was used on projects in the past and then adjust it as necessary for your project.

Be careful with contingency reserves, though, as they can backfire. If you consistently add too much into the budget, stakeholders will always be leery of your estimates. If you don't add enough, you're going to be stuck figuring out how to solve problems within the budget you have because you aren't likely to get more. Make certain that the contingency amount you're using is reasonable and accurate. Document how you came up with the reserve amount, and be certain to control the use of these reserves. Again, ask the experts to take a look at your reserve estimate and see whether it sounds reasonable based on their past experience with similar projects.

One More Time

Ask the key stakeholders on the project to give the budget a thorough examination. Experienced project team members are also a good source for giving the final budget a good look before submitting it for approval. Ask them to think about some of the questions I talked about earlier and to identify anything that was missed or looks miscalculated.

If stakeholders question your contingency reserve, ask them to tell you why it should be adjusted. Don't let them convince you that a contingency reserve is unnecessary. All good project managers build in contingencies to the project budget; it's a common practice.

Down Memory Lane

Sometimes you'll find that funds are short and project budgets are not going to adequately cover the expenses of the project because of cuts or lack of approval for certain expenditures. If this leaves you high and dry, you'll have to go back through the Planning process and make adjustments. Start examining some of the Planning documents to find ways to either cut or reduce activities to accommodate the decreased budget. You'll also need to revisit the project's Planning processes when others tell you that your estimates are off or need adjustment.

Here are some of the first things you should look at to help reduce or adjust budget estimates:

• Reduce the project scope.
• Reduce features or functionality of the deliverables.
• Reduce the number of team members.
• Perform activities in-house that were originally scheduled to be completed by contractors.

Planning and tracking the budget will allow you to make adjustments to the project schedule, scope, or deliverables as needed. Revisiting the Planning processes will happen often during Planning, so don't be dismayed when you have to pull out the project schedule for the fourth or even fifth time to make adjustments. It's part of the project management process, and going back through Planning processes is to be expected.

Are You in Control?

Who has signing authority for budget item purchases? This is a question you'll want answered up front in the Planning process. Some organizations have strict controls over budget expenditures requiring management signatures, the finance officer's signature, and the project manager's signature. If this is the case, you'll need to make a note to build in the lead time needed to get all those signatures, or you could have team members sitting around twiddling their thumbs waiting for important deliveries to arrive.

The ideal situation is for the project manager to have control over the budget. This doesn't mean you should have unlimited signing authority, but you should be able to sign for normal supplies, contractor invoices, and so on. Work with the finance manager and your project sponsor to establish some level of signing authority for yourself so that you don't have to get signatures every time you need another box of screws or need to place a support call to a software vendor.

The organization may be set up such that finance managers have all the control over the budget. They approve budget item purchases, sign for them, and see that payment is made. If at all possible, you should negotiate with the finance manager for some signing authority so that there isn't a delay in the delivery of day-to-day needs. If the finance manager is the only one allowed to purchase and sign for items, you should not be held responsible for the condition of the budget. Also make certain that the adherence to the budget is not part of your performance evaluation for the project.

What's the Cost?

Some projects seem to have a life of their own. Information technology projects are a perfect example. I can't tell you how many projects I've witnessed in this industry where the project estimate conversation goes something like this:

Can you guess what happens next? The project manager agrees to this unrealistic schedule and decreased budget, but, miraculously, they deliver the project on time. So, how did that happen?

The real question here is, at what cost did that happen? Although the project may have been delivered on time and on budget, that isn't the end of the story. To accomplish this feat, many of the deliverables were postponed to the second phase, and the programming team had to cut out several important steps to meet the unrealistic deadlines. Your project team likely worked extraordinary hours to accomplish their activities, and even though the overtime didn't cost the project in terms of dollars, you now have a lot of unhappy team members on your hands.

In the end, the extended support costs because of lack of design and proper planning, coupled with all the extra hours needed by the programming staff to fix the problems, cost much more than the initial project budget. If Ms. Sponsor would have taken the time to examine the project's Planning documents, the critical deliverables, and the critical activities needed to complete the project successfully, she might have approved the original budget. Instead, the costs to fix the problems far surpassed the approved budget, making not only the sponsor look bad for sponsoring an unsuccessful project but the project manager as well.

Budget Approvals

The last step in the budget process is getting the budget approved. The project sponsor, key stakeholders, and the finance manager are the folks most likely to approve the budget, but every organization is different. Check your organizational procedures to determine how to go about getting the approvals for the budget. Whatever the process is, you cannot proceed without approval of the budget.

Establishing a Cost Baseline

The budget is used to allocate costs and resources to the project activities. As such, the finalized budget becomes the cost baseline. The project's actual costs are measured against the cost baseline throughout the Monitoring and Controlling process to ensure that actual costs are in line with the budgeted costs.

Depending on the project, the budget could be very small with only one or two items, or it could be a large budget with several layers of detail. You may also have a case where the project is so large, the budget is divided up at the work package level so that the subproject managers are responsible for their own portion of the budget. You'll want a copy of each of the individual budgets from the subproject managers to keep with the project documentation. You can then create an overall project budget that shows the total budgets for each of the WBS elements.

There are several ways to record your budget. You can use a spreadsheet format like the one in Table 9.2 to track the activities, the budgeted amount, and actual amounts. Table 9.2 shows the partial budget for the Store Build-Out deliverable for the new retail store project.

Table 9.2 Budget spreadsheet

Another good method of tracking the budget is to record the budgeted costs along with project information in a spreadsheet, such as the one shown in Table 9.3.

Table 9.3 Project schedule with budget estimates

Most project management software packages allow you to put cost information at the activity detail level of the project schedule. You can run reports on the cost information right from the software and track budgeted versus actual expenses. When it comes time to report on project progress, you can simply print the budget report or print the spreadsheets shown previously in Tables 9.2 and 9.3, depending on how you're tracking and recording the budget.

How you display and track the project budget is a matter of personal preference, unless your finance department has specific guidelines you should follow. At a minimum, you must include the activity number, the activity description, and the estimated cost.

Call It a Plan

Congratulations! You've made it all the way through the project's Planning process. I warned you early on that Planning was a lengthy process. But it's a process that's well worth the effort because this process is critical to the success of the project. It's your map throughout the course of the project, and it needs to be updated on a regular basis.

Table 9.4 recaps the major planning activities you should complete for all projects. Take a look at the following processes to see how everything you've done interrelates.

Table 9.4 Project planning processes

All of these documents together make up the project plan. Remember that the goals and objectives and the assumptions and constraints are contained within the project scope statement. The roles and responsibilities chart is also part of the project scope statement, and this outlines everyone's responsibilities on the project. If your plan is lengthy, you could add a table of contents in the front to direct readers to the pages they're interested in, for example the roles and responsibilities chart. Don't forget to include the project team directory discussed in Chapters 6, “Planning and Acquiring Resources,” as part of the project plan.

How Big Is It?

So how big is the project plan, you may be wondering. That depends on the project. If your project is small in scope and duration, all of this information can be captured in just a few pages. If the project is lengthy in duration and large in scope, it's probably going to take several pages per Planning activity to complete the project plan. You should keep the plan as concise as you can, and experience will tell you how much detail you should include in each plan. It's always a good idea to add some narrative description with these documents to help the stakeholders and management team understand the information that's being presented.

I also recommend adding an executive summary at the front of the project plan. An executive summary gives casual readers a high-level overview of the project, the project goals, and what the product or service of the project will look like when completed.

The better the project plan, the better prepared you and the project team will be to carry out the work of the project and deal with unexpected events. Reviewing and keeping the plan up-to-date is as important as writing the plan in the first place. Doing so lets you effectively judge new situations that come up and make the necessary corrections to get the project back on track.

Large Projects

Large project plans consist of several subproject plans that roll up to a master project plan. Subproject managers are the ones responsible for creating the project plans for their deliverable. The project manager oversees the preparation of the subproject plans and consolidates them to form the master plan. Each subproject manager follows all the Planning processes I've talked about to come up with their subproject plan.

The following graphic contains a sample portion of a WBS for a large project. Each of the deliverables at level 1, “Information technology,” “Store build-out,” and “Retail products,” requires its own project plan.

It's possible that this project is so large that each level-2 WBS element requires a subproject plan that is in turn rolled up to a level-1 subproject plan. All the level-1 plans are then consolidated into the overall project plan.

Obtaining Approvals

The project sponsor and key stakeholders should approve the final project plan. At this point, approval is really a formality because they've seen and approved each of the documents that make up the plan. But this gives them one last chance to look over the plan as a whole and make recommendations before approving the project plan.

Don't assume because you've made it to this point that the project is automatically going forward to the next phase. Things can change between the time the project was first selected, the time the project plans were completed, and now. For example, you might be preparing the plans for a high-profile project that the entire organization is excited about only to have the CEO or some other top executive resign at the conclusion of the Planning process. You guessed it — a new CEO comes on board and wants to know what the heck everyone thought was so great about that old project when their new project is much more important!

Fortunately, that doesn't happen often. But be aware that projects can get killed in the Planning process. Don't take it personally (unless of course it was poor planning or incomplete planning on your part that killed the project). Business changes over time; organizational goals change; personnel turnover occurs, changing the dynamics of the team; and even the risk tolerance of the stakeholders can change, given economic indicators or new marketing data or a host of other reasons, ultimately giving executives reason to kill the project.

Once the final plan is approved, you're ready to execute the project…er…progress to the Executing process, that is. That's where the work of the project happens. You'll kick off that process in the next chapter.

Terms to Know

analogous estimating	cost baseline
bottom-up estimating	direct costs
budget	indirect costs
contingency reserves

Review Questions

1. What is a project budget?
2. Name the three categories of project costs.
3. Describe the two types of project costs and give an example of each.
4. Describe the analogous estimating technique.
5. Describe the bottom-up estimating technique.
6. What is a contingency reserve used for?
7. Your project budget has been approved, but it's been approved at a lower amount than the original request. What are some of the things you can do to deal with this situation?
8. What is a cost baseline and what is it used for?
9. Changes in project scope typically require changes to what other two project's Planning processes?
10. Does approval of each of the Planning documents guarantee overall project plan approval? Why or why not?