A realistic project budget is a very important aspect of
project-management. First, the budget should play a significant role
in whether or not the project is undertaken. If the project budget is
higher than the result is worth, then one should give considerable
thought to whether or not the project is worth doing.
Assuming the project is financially worthwhile, the budget is also
important for ensuring that adequate financial resources will be
available when they are required. The budget not only identifies the
total amounts needed, but can also be used in combination with the
project schedule to identify when specific amounts are needed
throughout the project. For example, some materials associated with
the project may need to be purchased before it starts, while the
purchase of other items may be postponed until later in the project.
Salaries for project participants may be paid at fixed intervals
throughout the project. Suppliers may require progress payments as
milestones of the project are reached.
Contingency factors are important to help ensure that the project's
cost does not wind up exceeding the project's budget. Contingencies
can be used to mitigate risks, including design risk, risk of
weather-imposed delays, and problems with suppliers. This money that
is set aside just in case provides funds to deal with situations that
may arise where the actual costs substantially exceed the initial
estimates. By planning for these possibilities, the project manager
ensures that adequate financial resources are available to cover these
expenses and that they are not a big surprise.
The biggest step a project manager can take to avoid unforeseen
problems popping up in the middle of a project is to clearly establish
the project's scope and budget, in terms of both time and money, well
in advance. Having a full understanding of what is to be accomplished
and will be required before the project ever starts is crucial for
limiting the number of unforeseen problems that can occur. Risks
resulting from uncertain estimates can be addressed through
contingency factors in advance, but can cause considerable problems if
they are not identified before the project starts. Avoiding scope
creep as the project proceeds is very important in order to remain
within the initial budget and schedule. While small changes in and of
themselves may be manageable, the accumulation of many small changes
can result in drastic consequences for a project's cost and time to
complete. In extreme cases, a project's feasibility can be severely
The other key is to remain on schedule. "To maximize your chances of
meeting your project budget, meet your project schedule. The most
common cause of blown budgets is blown schedules. Meeting the project
schedule won't guarantee you will meet the project budget, but it
significantly increases your chances. And above all, manage the
project scope. Don't allow the project scope to "creep" upward without
getting budget and/or schedule adjustments to match."
"Part 4: Managing Costs, Money, and Profits" by F. John Reh, About.com
I also highly recommend the other three parts of his article on
Project Management 101, available at:
"Part 1: Basic Project Management Outline"
"Part 2: Managing Resources - People, Equipment, and Material"
"Part 3: Managing Time and Schedule"
Remaining on schedule requires the schedule to be realistic in the
first place. This means that the critical path must be determined so
that the project identifies the correct sequence in which tasks must
be performed. Identifying the people and equipment needed also is
important so that their availability to the project at the right time
Search terms: project-management budget contingency