Costing and Budgeting – Introduction

Costing and Budgeting – Introduction (#33 in the Hut A Project Management Primer)
By Nick Jenkins

If scheduling is an art then costing could be considered a black art. Some projects are relatively straightforward to cost but most are not. Even simple figures like the cost per man/hour of labour can be difficult to calculate and in often approximations are used.

Accounting, costing and budgeting are extensive topics in themselves and I will not attempt to cover all of them here. Instead we will focus on the specific application of costing and budgeting to projects and attempt to give you a grounding in the necessary terminology and principles.

Some fundamental principles to keep in mind are derived from accounting practices:

• The concept of ‘prudence’ – you should be pessimistic in your accounts (“anticipate no profit and provide for all possible losses”).Provide yourself with a margin for error and not just show the best possible financial position. It’s the old maxim: promise low-deliver / high once again.
• The ‘accruals’ concept- revenue and costs are accrued or matched with one another and are attributed to the same point in the schedule. For example if the costs of hardware are in your budget at the point where you pay the invoice, then ALL the costs for hardware should be “accrued” when the invoice is received.
• The ‘consistency’ concept. This is similar to accruals but it emphasises consistency over different periods. If you change the basis on which you count certain costs you either need to revise all previous finance accounts in line with this or annotate the change appropriately so people can make comparisons on a like-for-like basis.

Note that the principles are listed in order of precedence. If the principle of consistency comes into conflict with the principle of prudence, the principle of prudence is given priority.

Next in the Hut A Project Management Primer:

Costing and Budgeting – Costing

Previously in the Hut A Project Management Primer:

The Fine Art of Scheduling – The Format of Project Schedules – Gantt charts

Nick Jenkins is an IT manager with 10 years experience in software development, project management and software testing. He’s worked in various fields of IT development in Australia, Britain and the USA and occasionally he learned something along the way. Now he lives on the banks of the Swan River in Perth, Western Australia, and he publishes the odd guide to help aspiring IT professionals. Nick’s website can be found at www.nickjenkins.net.