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Project Budgeting: Money Changes Everything

Part of a project agreement is a spending limit for the project. That figure sets the amount of money the team will have for creating the final deliverable. In this article (taken from the book, Cheetah Project Management), we’ll discuss the way the project team members re-examine the interim deliverables and determine the internal cost (labor costs) as well as the external costs (including materials) and when they will need the money for the completion of the interim deliverables (cash flow projections).

Depending on the company, there can be detailed cost-accounting methods for determining the budgets and procuring the funds necessary to produce the final deliverable. During the accelerated project launch, the intention is to get input from the team members for their budget needs to create their interim deliverables. The project leader works with the facilitator after the launch event to create the detailed project budget that is in line with their organizations accounting practices.

In the event that the budget is over the allotted spending limit, the project leader needs to work with the sponsor and the team to align the spending limit with the project budget. To accelerate a project, the team needs to secure the funding up-front to complete the project, preventing any delays and distractions. Without the funding, the funding mandate, or discussions about funding, you can lose the pace of your project.

This article includes all of the information you need to make sure that you stay within your budget to the best of your ability. You will also learn what you should do if you go over your budget. We cover the following topics:

  • Labor costs
  • External/Material costs
  • Cash flow
  • Aligning your budget and your spending limit

Labor Costs

The largest cost of most projects is the internal labor costs. Calculating labor costs can potentially be straightforward — just multiply a person’s labor rate by the number of hours specified in the task schedule. However, in many companies, the true cost of labor is buried in complex overhead calculations. Furthermore, in the business world there is usually a culture of secrecy regarding salaries. Given that these two business tendencies are so widespread, determining a labor rate for each project team member may, in fact, be quite difficult. To cope with the secrecy issue, it is helpful to find the going salary rate for outsiders and use that. For outside contractors, a flat-fee based on the contractor labor rate may be charged for a specific deliverable.

For the purposes of the accelerated project launch event, each team member needs to identify or estimate — prior to the launch event — his or her labor rate to be used in order to develop the internal labor cost calculations.

Figure 1: Labor cost estimate. Interim Deliverable: Secure Site Hosting; Due Date: 5/15; Activity Task Schedule Labor and Budget Estimates

Project Budgeting: Money Changes Everything

Using the labor rate data, the team members calculate their internal labor costs by multiplying their labor rate by the task time information they collected in their activity tasks scheduling. See Figure 1 for an illustration of the activity task schedule/labor/budget template for this calculation. The team members then develop their average cost, maximum cost, and minimum cost based on the average, maximum, and minimum time estimates (Figures 2 and 3).

Figure 2: Material and external cost estimate template. Interim Deliverable: Secure Site Hosting; Due Date: 5/15; Activity Task Schedule
Labor and Budget Estimates

Project Budgeting: Money Changes Everything

Figure 3: Material and external cost estimate template for the e-commerce project. Interim Deliverable: Secure Site Hosting;
Due Date: 5/15; External/Material Cost Estimates

Project Budgeting: Money Changes Everything

In the e-commerce example, the webmaster has a labor rate of $45 per hour. This is specified in the labor rate column. In the event that the webmaster must have someone else do a task for one of the deliverables, he or she will have to specify that person’s labor rate.

The internal labor cost maximum and minimum range is based on the confidence rating for each task.

When budgeting, some people put in a factor of safety and pad the budget. The method presented in this article provides a rational way to develop a margin of error in budget calculations based on the confidence the team member has in his or her task time estimates. This eliminates the need for arbitrary padding.

For the webmaster’s task, the maximum internal labor cost estimate is $587.25, and the minimum labor cost estimate is $312.75. The cash flow section shows different strategies for budget allocations based on the organization’s operational practices.

External/Material Costs

Each project team member needs to identify what he or she will need (material, facilities, outside contracting services, travel, and so forth) and the associated costs to create the interim deliverables. The team members must specify the cost estimates, their confidence in their cost estimates, and the timing of the costs. For material, they need to specify if it is rented or purchased; and if it will be purchased, how it will be allocated to the company once the project is completed.

If a team member needs a specific capital asset that is going to be used on other projects, the team should determine if it can sell the capital asset to the company when finished with it, thereby reducing the overall budget requirements of the project. Figure 2 illustrates a template used to estimate the material and external costs for the project. The team members use color-coded Post-its to fill in the template.

Cash Flow

Depending on the accessibility of the funds, the team members will use different figures for their cash-flow decisions. If they have immediate access to the funds specified in the spending limit and if their project budget is within the spending limit specified in the project agreement, then they can use minimum budget figures for labor cost estimates. The team uses the minimum budget figures when determining cash flow to coincide with the minimum hour usage needed to speed up the project.

For the external costs, it is best if the team has the maximum amount allocated to accommodate external pricing changes. If funding is allocated once, to be used for the duration of the project, it is best to use the maximum budget calculation for internal labor costs. This ensures that there is an adequate funding buffer in line with the time insurance buffer to handle tasks that may take longer than the minimum time specified. This is also true with funding issues within the company that are competitive for individual projects.

To emphasize cash-flow needs, the team puts one-by-two inch neon green Post-its on the deliverables schedule to indicate where the funding will be needed for the external material costs for each team member.

Figure 4 illustrates the external cash flow needs on the deliverables schedule for the e-commerce project example.

Figure 4: External cash flow for the e-commerce project.

Project Budgeting: Money Changes Everything

Once the team has completed its input to the budget calculations for internal and external costs, the project leader adds up the internal and external costs and checks the total budget against the spending limit set in the project agreement. For the e-commerce project, the original spending limit set by the sponsor in the project agreement was $100,000. Figures 5a and 5b summarize the internal labor costs and the external/material costs for the e-commerce project developed during the project launch event. It shows that the maximum cost estimate for the e-commerce project in total is $97,615. This means that the team is within the spending limit for doing this project.

Table 5a. E-commerce project budget: internal cost summary.

Project Budgeting: Money Changes Everything

Table 5b. E-commerce project budget: external and material costs, plus total project cost.

Project Budgeting: Money Changes Everything

Aligning Your Budget and Your Spending Limit

The ideal project budget situation is presented in the e-commerce example, where the maximum budget estimate is less than the spending limit. However, many project budget estimates come in over the spending limit. If this is the case, the team needs to take measures to align the spending limit with the project’s budget. Figure 6 illustrates the decisions the project team leader makes to get the project budget aligned with the spending limit.

Figure 6: Spending limit decisions.

Project Budgeting: Money Changes Everything

The project can start immediately if the project team’s maximum budget estimate is less than the spending limit. However, in any other situation, the team leader, the team sponsor, and the team members have more work to do before they can proceed.

The project sponsor has the first decision to consider. Can the spending limit be raised to cover the maximum budget estimate? If so, then the project can start right away. We recommend that the project sponsor not try to see how much cost it can squeeze out of the project team’s budget; the time needed to do this will slow down the pace of the project.

If the project sponsor can’t raise the spending limit, then the team must reduce the associated costs for completing the project. If the alignment problem is with the maximum budget estimate, the team members can work on improving their confidence levels for completing the tasks to create their interim deliverables. Additionally, they should try to get firmer estimates for their external costs. This may reduce the maximum budget estimate. If the maximum budget estimate (or, even worse, minimum budget estimate!) is still more than the spending limit, then the project team needs to change the requirements of the final deliverable to something within the realm of the spending limit. If the team can’t do this and the budget estimate is more than 20 percent higher than the spending limit provided, it shouldn’t start the project.


Budgeting can be done in less than an hour and a quarter:

  • Internal labor costs — 20 minutes
  • External labor estimates — 30 minutes
  • Cash-flow analysis — 20 minutes


This excerpt was taken from Cheetah Project Management by Michelle LaBrosse.

Written by Michelle LaBrosse

Michelle LaBrosse, PMP, leads the coalition of cheetahs at her company, Cheetah Learning, in project management training. She’s also the author of  Cheetah Negotiations: How to Get What You Want, Fast. Find her online at cheetahlearning.com.

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1 Comment
  1. I like it. It is very practical – real life example.

    Thank you for the time spent on this article. I recommend it to those looking for practical


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