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Is a budget set in stone or is it just an estimate?

Budget Calculator

Budgeting a project can make or break a business. Get it wrong and you could follow in the footsteps of FoxMeyer who was the largest drug wholesaler in the USA. They had budgeted $65 million dollars to implement an ERP system. The final bill came to $100 million, and they were forced to file for bankruptcy – all down to bad budgeting.

However, when budgeting a long-term technical development project which is multi-disciplinary, there are various things to consider, and none of them are stable. These variables can affect all businesses and all projects, and it can be a difficult challenge to manage.

For example:

  • Optimism bias – Perhaps when the budget was put together they were just too optimistic about what could be done for the price.
  • An innovative project – For new projects which are unique and have never been done before, setting a budget can be challenging as there is no precedent to follow. In this situation all the budgeting quotes will be little more than estimates. 
  • Focusing on end price – Clients are often looking for an end total, and then trying to reduce that rather than a breakdown of costs of individual aspects of the brief, which in itself could be easier to tweak by changing deliverables to bring certain task costs down.
  • Inflation – The spending power of currency at the beginning of the project is potentially going to be different at the end of it. The annual inflation rate varies from year to year (e.g. in 2011 it was 4.46%, in 2017 it was 2.68% and 2020 it was 0.77%) which makes it very difficult to predict accurately.
  • Political/national/global situations – It is difficult to tell how political situations or global or national incidents will affect the price and availability of materials. A prime example is obviously the global pandemic which has had a financial knock-on effect for most industries including the unexpected chip shortage affecting manufacturing of tech, as well as Brexit which has affected costs of many services and products in both the UK and Europe.

All budgets are estimates

Being told “all budgets are estimates,” isn’t necessarily going to appease you and your shareholders and could potentially threaten the project if the finances can’t be located to deal with the overspend.

But it has to be considered, that with all long-term projects the quoted budgets are all estimations and should have allowances for at least a ten per cent error margin to account for this fact. The problems occur when these quotes are believed to be rigid and final cost estimates rather than a working figure.

An example of this is when we were asked by a client to make a projection for a significant development phase on a project which was expected to take nine months with more than 30 people working on it. The original estimate had been compiled by asking each member of the team to calculate their costs and man hours required to do the job.

We were then asked to re-evaluate this projected budget, without reference to any previous calculations or any other details of relevance. After analysing the tasks required, we came to a quote which was three weeks longer than the previous estimate. The senior management were quite concerned by this discrepancy. However, the overall estimate was within a ten per cent margin of error, and as we were working purely on our own experience the fact that we came to within 10% is actually quite remarkable. Both estimates, while derived by quite different means, agreed sufficient to support the resourcing and scheduling process.

If you have an information systems project that just isn’t running according to plan why not give Brandon Cross a call for an independent assessment. We can help get the project back on track with our down to earth, no fuss, honest advice.