If the business community expects to succeed in a world that demands lightening-fast response to rapidly changing markets and economic conditions, we need more project expertise. More and more work is done in project mode. There are no signs of such trends slowing. Project expertise is fast becoming a must for both public and private organizations.
We must especially examine the ways in which project budgets differ from functional budgets, since the way we manage projects is so strongly impacted by the way we budget them.
BUDGETING DIFFERENCES
Project budgeting differs from fictional budgeting in four fundamental ways:
Functional budgets deal with familiar, repetitive work; project budgets deal with nonrepetitive, unique work efforts. Functional budgets are calculated from a base of work experience. In contrast, at the point most project managers are asked to estimate their project budgets, they have only the vaguest idea of the work that needs to be done. They rarely have a detailed description of client needs or a detailed, approved design specification before budget projections are required.
Unfortunately, instead of explaining the impossibility of forecasting the cost of unspecified work, project workers who have no “formal” project experience forge ahead as if such demands are perfectly reasonable. Partly because they need their jobs, but also partly because management presents their requests with such authority, many workers secretly believe they are lacking in some basic talent. After all, if management thinks they ought to be able to make such a prediction, they should clearly be able to do so.
It is bad enough the project team is expected to come up with budget projections before they have a definite idea of the problem. What is really ridiculous is that they are then challenged to turn their highly questionable predictions into reality This is hardly the way to produce the highest quality deliverables in the shortest time for the least cost.
Functional budgets rely on performance history; project budgets rely on estimates. Functional budgets are normally arrived at by examining past performance records, projecting changes in business volume (up or down) and calculating budget requirements for the coming period. Clearly, actual performance records are a key element in the calculation of the fictional budget.
Project budgets are arrived at by examining new requirements, estimating the required workload, selecting a risk factor, and calculating budget requirements. Almost every item in the project budget is either lacking in definition or information. Attempts to estimate the project workload are often both incomplete and inaccurate. They are guesses. This would not be too bad if the system allowed project management to track actual performance and use performance data to improve such guesses in the future, but that is not the way it works. Project teams are required to make their estimates. So right off the bat they do everything they canto protect themselves. This invalidates any attempt to collect bona fide performance data.
Functional budgets are low-risk; project budgets are high-risk. The functional budgeting world does not deal easily with risk and uncertainty. Functional work has been relatively stable. Functional budgets, therefore, are prepared yearly, and while they are reviewed periodically during the year, they are not normally increased or decreased in seesaw fashion to accommodate changing workloads. Once approved, the functional budget is a total constraint. In fact, managers who fail to request enough budget are often forced to hire consultants rather than increase staff because of the difficulty of adjusting the budget midstream.
Marie Scotto is a trainer and management consultant who has served the business and government community for 14 years. She is an avid student of information resource management and computer systems development as well as quality issues and project management concepts. She is a frequent course leader for the American Management Association, Columbia University Frost and Sullivan-Western Europe, and Penton Learning Systems.
She co-authored a new seminar for the American Management Association titled Achieving Excellence in MIS Through Total Quality Management, and is the author of Budgeting and Cost Management Techniques for Project Managers. A member of the Association for Systems Management, Quality Management Association, and PMl, Ms. Scotto is deeply involved in developing the New York PMI Chapter into a vital, energetic association of project professionals.
Projects, by their nature, are always high-risk enterprises. Even when we have detailed requirements and specifications, the probability of discovering hidden complexity or of needing to accommodate scope and definition changes is very high. Project budgets need to be able to expand and release like balloons to ensure the most economical approach to the job. The budget should, at each moment, reflect the current workload.
Functional budgets are limitations; project budgets need to be targets within limitations. Functional budgets are generally treated as limitations, as in “this is the most you have to spend.” While the functional manager tries not to overspend the budget limits, great pains are taken not to come in too far below them.
Project budgets should be treated as targets, as in “this is what we will aim for.” Too often they are treated as predictions, as in “this is what we will hit.” Big mistake! Even when management suspects that project budgets have a high probability of being insufficient, they still consider it a failure when the team fails to deliver as promised. Yes, project teams should be challenged by targets that make them stretch, but they should also be able to complete the project successfully, even if they overspend the target budget, as long as they come within acceptable range. Responsible management needs to fashion a budgeting system that allows for range estimating and creates a success environment for project work. This can be accomplished by publishing project budgets that name both the limit of resources that will be spent on a given effort as well as the target we wish the project team to shoot for.
CONCLUSION
The differences between project and functional budgeting identified here are only the most obvious. They are not the whole story. Nor will an appropriate budget system cure all the ills currently plaguing the business project world. Project success depends on a number of other issues as well as the budgeting approach, such as quality standards, teamwork, managing expectations, and understanding the tools and techniques of project management tracking systems. But if all the other factors were perfectly understood and incorporated, success would still not be attainable while the budget system, the way we allocate time and money, is inappropriate.
Editor's Note: For a more detailed discussion of this subject, see this author's article in the March 1994 Project Management Journal. ❏
Organizational Profile
The Scotto Group is an association of professional consultants and trainers with both project management and information systems expertise. We specialize in two distinct areas: (1) improving an organization's ability to use modern project management more effectively; and (2) improving productivity through restructuring the systems organization.
Many clients initially request special training seminars. Most soon realize that they also need guidance in adjusting their environments to optimize success opportunities. Understanding the requirements of a supportive project environment is our specialty. Companies and government agencies must learn how to restructure themselves to respond more quickly to their markets with high-quality products and services. This is probably the most important skill today's organizations must learn. The second important skill is developing the ability to repeat successful performances.
Though there are inevitably similarities between organizations, each client company has unique circumstances requiring both specific consulting approaches and tailored training. They are faced with issues such as new organization structures, new accounting methods, new employee relationships, new management skill sets, new quality standards, new work procedures, and new compensation systems. They need guidelines for implementing each of these. We provide insights to our clients in dealing with such changes.
We also work with our clients in a number of ways, ranging from complete turnkey to performing only those tasks for which the client is least likely to have the specific competency. It is our objective to improve the client's ability at implementing improvements after our assignment is completed.
