Project Management 4c. Preparing the Budget

A few methods exist for estimating a budget of a project.

The first is a percentage basis, and it provides a means of quickly estimating a project.  When estimating a budget using the percentage basis, the budget for a course or communication product is calculated as a percentage of the total cost of the project it supports.  This method only works in some instances, because these “rough estimates” only exist in some fields.  One area is software development, in which the cost of training and documentation (technical communication products such as user’s guides, help, and references) runs between 5 and 20 percent of total cost of developing the software.  (The exact percentage varies, depending on whether it covers both training and documentation.)  For hardware projects, a typical percentage is 10 percent.

But this only provides a rough estimate of the budget, so most project managers do not use this method to create official budgets.

Instead, they use the second method for estimating the budget of a project: calculating component costs and, for projects intended to generate a profit, revenues.

For a simple project with a single instructional designer or technical communicator, this involves the following tasks:

  1. Determine the cost of the instructional designer or technical communicator (core skill on the project)
    • Determine the total number of labor hours needed to create the course or communication product.
    • Estimate that the instructional designer or technical communicator will work 90 percent of that total number of hours.
    • Determine the fully burdened cost per hour.  Most organizations with experience in hiring instructional designers and technical communicators will have rates that they use; otherwise, you can contact a local professional organization to get a sense of rates for these skills.
    • Multiply the estimated number of hours for the instructional designer or technical communicator by the fully burdened cost per hour.
  2. Calculate the cost of the project manager by:
    • Estimate the percentage of hours the project manager will work (for estimating purposes, 15 percent of the total project hours).
    • Determine the fully burdened cost per hour .
    • Multiply the estimated number of hours for the project manager by the fully burdened cost per hour.
  3. Follow a similar method for estimating the rest of the labor costs.  Although the types of labor varies by project, some typical expenses include editing (10%), illustration  (will need to estimate (even roughly) the number of illustrations needed, then estimate about 4 to 8 hours per illustration, graphic design, programming, and production specialist (about 10 percent of the total project)
  4. Calculate non-labor expenses, such as:
    • Training
    • Hardware (equipment)
    • Software

    For each, contact the preferred vendor to get an estimate of expenses.

  5. Estimate project-related travel expenses.
  6. Total all of the expenses.
  7. For projects that are intended to generate a profit:
    • Multiply the labor expenses for the project by the desired project margin.  For example, if you desire a profit margin of 20 percent (typical in this field) and have total labor expenses of $78, 455, your intended profit would be $15,691.
    • Add the intended profit to the total labor expense.
    • Re-calculate the total expense of the project.
    • That is the revenue you intend to generate from the project.

Note:  Do not estimate revenues for a cost-recovery project.  Just present the expenses; if the sponsor approves these expenses, you will receive the funds.

Using this method, though, can lead to inaccurate estimates. This is happens because of the following:

  • Costs were mis-estimated. Two issues send estimates of expenses off-track:
  • Unanticipated costs—that is, costs arise on a project that no one planned for.  In some cases, no one could have ever planned for them but, in many instances, someone could have planned for these costs if someone had anticipated them.

They did not.

For example, suppose someone forgot to estimate the cost of renting a sound studio when recording voice overs for a training course.  The cost is unanticipated in the sense that no one did, but if someone had experience with this type of project, they would have included this expense in the estimate.

  • Under-estimated costs.  Sometimes the costs are included in estimates, but the amount estimated is insufficient.  In some instances, the number of hours was under-estimated and, as a result, costs were higher. For example, suppose you assumed that a course was 2 hours long and estimated labor to produce a 2-hour project.  But the actual project was 2.5 hours.  Actual labor costs would be approximately 20 percent higher.

In other instances, the number of hours for labor was properly estimated, but the rate of pay was not.

  • Scope creep—that is, the scope of the project grows after you have already estimated it.  This does not happen because you underestimated the size of the project; in such cases, estimates are likely accurate.  But so many changes occur that the project needs to be completely re-worked between drafts.

The tools for managing these problems vary.

To address these issues, most project managers add in a fudge factor—a percentage of the total project cost under the line named contingency, to address this specific situation. Another name for the contingency is fudge factor.

The contingency is calculated on the total of all expenses except printing. The actual percentage varies, depending on the stability of the subject matter of the project and the likelihood that the sponsor will make changes.  Table 7 suggests how to calculate the contingency for different types of projects. 

Table 7: How to Calculate the Contingency for a Project

Stability of the subject matter Calculate a contingency for non-printing that’s in this range
Extremely stable 10 – 20 percent of all non-printing costs (allows for a failure to estimate a cost as well as minor changes)
Somewhat stable 20-30 percent
Not stable 30 to 60 percent

So, for the project estimated in Table 7, total expenses excluding printing are:

$213,186.30

–  $  81,400.00

________________

$131,786,30

Assuming the subject matter for the project is only somewhat stable, would choose a contingency between 20 and 30 percent.  This is admittedly a guess-timate.  For this estimate, assume that the percentage is 25 percent.

25 percent of $131,786.30 is $32,946.58.

You would add $32,946.58 (the contingency) to the total non-printing expenses ($131,786.30 ) for a total non-printing expenses—with contingency—of $164,732.88.

In addition to including a contingency, most project managers include a project charter with their projects as a tool for limiting scope creep.  A project charter is an agreement that states specifically what will be produced and the extent of change permitted.  When sponsors request changes that exceed the project charter, project managers negotiate changes to the budget and schedule to provide sufficient resources to address the changes.  Or, sponsors might decide not to pursue the changes because the changes are more costly than they had anticipated.

In the Project Resources sub-section, check the Worksheet for Preparing the Budget for a Project.

Then continue with the next post, Project Management 5. Identify the Project Team and Members’ Responsibilities.

© Copyright 1996-2012. Saul Carliner. All rights reserved.  If sharing or excerpting, should be properly cited.

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About idmodelsandprocesses

Exploring, reporting, teaching, and advising on learning and communication for the workplace and consumers. saulcarliner.wordpress.com
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