Implementing effective project budget to control over costs

 

 

Before you implement the project, and it does not matter what kind of business project it is: the construction of a building, the opening of a new outlet, the development of innovative technology, to achieve the result, you need to observe three important criteria.

These criteria are a triangle:

• timing;
• budget;
• quality.

It is possible to call the project successful if it was completed in the previously established time, the costs of the project did not exceed the budget, the result of the implemented project satisfies the customer in terms of quality. Therefore, project management is limited to managing data to three components. The budget occupies one of the most important places because it affects other components – as well as them. Any good investor evaluates the project first according to the financial component of the plan: how much money has already been spent on the project, how much investors will earn from the implementation of this project. In order to competently manage the financial component of the project, you need to understand what lies under the concept of "budget".

Watch out! If the teacher finds plagiarism in the work, it is impossible to avoid major problems (up to expulsion). If it is not possible to write yourself, order here.

The project budget is a kind of plan of all the costs that are necessary for the implementation of the project, in financial terms. The budget includes the cost of purchasing building materials, and paying wages (including deductions to various social funds), services of side enterprises, depreciation of buildings, machinery, intangible assets, equipment.



The budget is formed, as a rule, in accordance with the stages of project implementation - areas of certain works, the implementation of which is controlled individually. The main parameters that affect the budget are:

• duration of work;
• number of participants;
• the amount of equipment that is used in the implementation process;
• special requirements for the result.

The main function of the project manager is to monitor the execution of the entire project budget. The budget execution process is controlled during the implementation of the project: the percentage of work and the costs that were planned for this stage are compared.

The concept of budgeting, the main components

Budgeting – development and planning of budgets, activities within the planning stages of the budget process, the process of adoption and preparation of budgets. Budgeting is one of the components of the financial management system. It is designed to better distribute the resources of the economic entity in time.

Budgeting can be called an integral part of such a management function as planning. It serves to specify the main objectives of planning. Budgeting is a kind of control and planning for areas of responsibility. It is used in the case of decentralization of decision-making rights and responsibilities in the organization.


The principles of budgeting include:

• unity of the budget system;
• completeness of the reflection of costs, expenses and income;
• differentiation of revenues, expenditures, expenditures between budgets;
• hierarchy of the budget system;
• the targeted nature of expenditures;
• balance of the budget system;
• personal responsibility for the preparation and implementation of the budget;
• collegiality of budget preparation.
• Budgeting horizon

The budgeting period (or horizon) is the time period for which the budget is drawn up. It can be a year, a month, a quarter, a week, a decade.



In practice and in the theory of budgeting, the following approaches are distinguished:

• from top to bottom;
• from the bottom up;
• combined.

The "top-down" approach involves the preparation of a budget by one of the divisions of the enterprise, usually the planning department. Then the budget is brought to the divisions of the organization, accepted for execution.



The bottom-up approach involves budgeting by unit managers in connection with the goals of the enterprise. Further, all individual budgets of subdivisions are combined into the total budget of the enterprise. There is also a scenario-based approach.

So managers make up three types of budget:

• pessimistic;
• optimistic;
• principal.

They are fixed by the results of the analysis with the question "what will happen if?". This is how the general budget is drawn up. That is, the one by which the organization will work at the beginning of a certain period.


Promising approaches to budgeting are called operational, budgeting according to specified parameters and kaizen budgeting.

Components of the project budget

The budget of expenses and revenues determines the profit of the enterprise and the total cost to the organization. The basis of the budget is contracts with customers and an estimate of the cost of implementing the project.

The structure of the budget includes two components:

• income;
• outlay.

Expenditure and revenue parts should be divided into items of expenditure and income. For accurate profit forecasting, the expenditure part should consist of a larger number of items and various analysts, because it includes both direct and indirect costs. That is, the labor of employees, services, materials, etc.



Project cost estimates are cost estimates that are distributed over time periods. It includes:

• operating expenses;
• management costs;
• overhead costs;
• reserve for unforeseen expenses.
• Project operating costs

Operating costs include the cost of resources that ensure the implementation of work according to the plan:

• costs for the purchase of building materials, as well as equipment;
• subcontractor costs;
• direct costs for the remuneration of employees.

Management costs

These are expenses that are associated with the management of the project, supporting its work, but they cannot be attributed to certain tasks and works. This type of spending is attributed to the whole project.

organization and management of project execution;
training of employees, certification of works;
business trips;
operation and maintenance of the current technical support of the enterprise.

Overhead

Overhead costs are costs that cannot be determined directly into a particular project, but they accompany production activities. These costs should be shared among the projects. There are several different options for solving the problem. Consider the most commonly used of them:

• Separate budgeting of the overhead item, write-off of these costs for the overall financial result.
• Use of overhead cost distribution factors.
• Determination of the percentage of reimbursement of base staff taking into account overhead costs. The rate helps to allocate overhead costs to projects in proportion to the time spent on them. However, this rate may vary for different groups of employees in the organization.
• Use of internal subcontracting. Usually, for this purpose, transfer prices are set between the divisions of the organization. They can be determined by the market price for similar works, or by the amount of employee labor costs, taking into account the percentage of overhead costs.
• Reserve for unforeseen expenses
• With the help of the reserve, it is possible to allow small deviations in the costs of the project. The size of this reserve should be calculated for each individual possible risk.

Note 1:
It is highly undesirable to dispose of the reserve as a constant percentage of income or cost, because in this case the reserve cannot be justified either by objective circumstances or by the real state of affairs in the project. The project reserve is obliged to reflect the real risks that may occur during the implementation of the project.


Sample budget design:

What are the types, features of budget formation

Let's consider the types of budget by stages of the project. At different stages of the project, different budgets are formed with different degrees of accuracy. Here are some of them:

• The stage of determining the concept (idea) of the project. At this stage, the volume of budget expectations is formed, which determine the needs for finance, preliminary planning of potential payments. The error coefficient of this type of planning is 25-40%. This is the largest error factor compared to other stages.
• Justification stage. At this stage, a preliminary budget of the project with a margin of error of 15-20% is formed simultaneously with the investment and feasibility study. Justify in the budget items of expenditure, the need to attract third-party financial resources.
• Stage of negotiation and conclusion of contracts. After the tender is completed, negotiations are held, contracts are concluded, an updated budget is planned with the involvement of contractors and suppliers. So the budget error at this stage becomes no more than 10%.
• Documentation development stage. In this phase, the final budget is adopted, a directive restriction on the use of resources is introduced. There may be deviations in this budget, but they are no more than 3-5%.
• Stage of project implementation, end of work. At this stage, they are already talking about the actual budget, there is a practical management of the cost with minimal errors.

The evolution of budgeting shows a shift from budget estimates through official ones to adjustable actual values.

Note 2:

It is impossible to form directive budgets immediately after feasibility studies. At this stage, they are only evaluative in nature. Only after agreeing on all formalities with the participants and interested parties is the official reference document approved. The current implementation process is compared with it.


If there is a discrepancy in previously planned indicators with current deviations, these discrepancies should be immediately reflected in the budget. At the end of the project, the resulting document should display the final actual values.

General principles of formation, construction of the project budget


Note 3:

The most important advice in this matter: you need to form a budget when all the activities of the project are planned. If you don't, the budget will be dishonest and unrealistic.



The project budget is primarily the responsibility of the project manager, not the accountant. Only the manager should draw up a budget, as well as be responsible for the expenditure of funds from it.

Basic principles of project budgeting

Consider the most important principles of budgeting:

• Reasonableness. The budget is obliged to ensure the implementation of all activities of the calendar plan. It is necessary to correlate the cost items and activities: so each cost item must correspond to a certain activity.
• Realism. Budget expenditures must correspond to market prices. If the project plan involves the purchase of technical support, payment for services, then in the comments to this item of expenditure it is necessary to add - if possible and possible - links to the market value of these goods and services on the Internet, attach to the application commercial offers from possible contractors, prices for the services of individuals.
• Completeness. The project budget will never be equal to the requested grant amount. In any case, you will have to make your contribution to the project: it can be your own equipment, volunteer labor, organization premises that already exist, attracted partner resources, etc. You need to indicate in the budget absolutely all the costs of the project, including co-financing - that is, the company's own contribution and the contribution of the project partners.
• Project costs are accounted for in their implementation phases. The Fund is unable to reimburse "retroactively" costs that were already incurred prior to the start of the project. It does not issue funds for costs that will be made after the completion of the project.
• If the advance payment was made before the start of the project for a year in advance of the lease of premises, communication services or other services that will be used, even for the implementation of the project, it is possible to indicate part of these costs as co-financing - the part that corresponds to the dates of implementation of the project.

What else should be included in the costs of co-financing

The following costs should be included in this item: no more than 30% should be spent on the services of contractors. If the services of subsidiary organizations, individual entrepreneurs are paid for at the expense of the grant, then the total amount of expenses for services cannot exceed 30% of the requested grant amount. This 30% may not include: office expenses, rental of premises, purchase of technical equipment, other property, property rights, travel, food, accommodation as part of the cost of business trips, expenses for holding events.

Example

Within the framework of your social project, a forum is held. In this case, the organization and direct conduct of the forum will be handled by your team. If more than 30% of the funds from the grant are planned to be spent on paying for the services of third-party companies in developing the program, selecting speakers, working with participants during and before the forum, then it becomes not entirely clear what your role, as a leader, in this project: your volunteers, your team.

How to calculate project budget, estimate, table

Make a project as early as possible. Evaluation of the profitability of the project must occur from the moment when the project is evaluated, the TAP is prepared. These budgets are drawn up with a large percentage of error, the necessary reserves, strengthened enough to convey only the idea of the upcoming tasks and work on the project. Further, as the requirements are clarified, the budgets are detailed by small items of expenditure, suppliers, subcontractors are selected, and the terms of the contracts are agreed.

The final budget is made after the conclusion of contracts with customers, the definition of all necessary works, the formation of all costs, taking into account the time that is given for the implementation of the project. Once agreed and approved, this budget gives rise to the project. All stages of the budgeting process are reduced to one table:


The ratio of budgets and stages of project implementation.


Project implementation phase

Budget

Preparation of the TAP, evaluation of the project

Make a preliminary budget with enlarged items, an approximate estimate.

Conclusion of contracts with customers, start of the project

Full project budget. It is worked out in detail, revenues and costs are distributed in accordance with the calendar schedule, as well as the stages of project implementation.

Project Execution

Adjustment budget. Deviations in the implementation of the project are periodically analyzed, the risks of project implementation are specified. In the event of a strong change in the project indicators for profit and expenses, it is necessary to re-approve the project budget.

End of the project

Final report on the implementation of the project, report on the achievement of the project KPI.


It is necessary to fix in the accounting policy of management accounting the mandatory discussion of the budget at each stage of the project implementation. At the stage of coordination, the preparation of supporting information should take place. Justification of the budget occurs in the analysis of the specified costs in the budget, whether they are necessary and sufficient in order to complete the project. The Finance Department should evaluate each item on the basis of actual market prices for comparable services, materials, check the correctness of the calculation of overhead costs and reserves.


Note 4:

After checking the budget funds, an analysis of economic efficiency is carried out, fixing the basic indicators of the project: revenue, profitability, profit. In order to approve the project, you need to make sure that all these indicators correspond to the goals of the enterprise, and the project itself is implemented with maximum efficiency at set costs.


If the project has a complex cost structure, the interaction of several departments. Additional sensitivity analysis may also be performed. This analysis allows us to assess the impact of various factors on the final indicators of the project.

Calculation of the project budget

Project budgeting is a complex process that is based on certain interdependent indicators and rules. To increase the percentage of accuracy of budget calculations, managers can use different programs to automate management accounting. Often, to automate the formation of budget funds, the software product "WA: Financier" is used. This is a software package that includes modules for automating budgeting, management accounting.


This solution allows you to use a special document "Budget" to make preliminary calculations, to form the final budget of the project. The document fixes the planned indirect and direct costs for turnover items for the period. Its duration is determined by the frequency of project planning.


After you enter data into the document, automatic negotiation starts. It allows you to carry out the approval process for a particular type of project along different routes, depending on the indicators of the project. In addition, the system can automatically determine whether the project budget corresponds to the top-level budget. Also, this system allows you to calculate the economic efficiency of the budget.

Project Budget Management Methods

It is necessary to ensure that the costs of the project are within the boundaries of the budget after its approval. It is necessary to monitor both current and projected costs. There are several implementation methods:


Normal cost control. This technique consists in comparing the "plan-fact" of all project indicators. This method shows the actual cost deviation of the project implementation.

Earned amount method. It differs from the first methodology in that the assessment of the current amount of work implemented, as well as the calculation of the forecast for the implementation of the project, differs.

Note 5:

The calculation of the earned volume is usually carried out in money. This allows you to evaluate the effectiveness of the use of project resources in accordance with the budget. The last method allows you to make a forecast for the main indicators of the project before the end of its implementation.