Project Budgeting Best Practices for the Professional Services Industry

Highlights

  • Operating within budget is a litmus test for successful projects.
  • Project budgets are not just financial exercises. They are tools to ensure the optimal mix of resources and time to achieve slated business outcomes.
  • When budgets are built on dynamic models, project variables such as resources, time, cost or work breakdown structure can be modeled to compare tradeoffs or respond to changing conditions.
Johnny Grow Revenue Growth Consulting

The right project-based budgeting method will directly impact project quality and profitability. Here are four project budgeting best practices that we routinely use in our professional services projects.

1

Link Cost and Value

Most professional service budgets simply sum resource time and costs. Cost is important but it's not why the client kicked off the project. A professional service budgeting best practice is to focus on the project drivers.

Driver-based budgeting identifies and measures the factors that most influence the desired results. That will include hours and fees, and also project success as measured by the realization of slated business outcomes. If your budget is only a financial estimate and detached from the measurement of specific project objectives, you risk succeeding with the budget and failing with the client.

Project objectives are generally financial measures (i.e., increase revenues or decrease costs) but may include non-financial metrics (i.e., increase customer satisfaction or staff productivity). These non-financial metrics can be captured as statistical accounts in the budget. When your budget focuses on the ends and not just the means, you can model or manipulate the means to find more efficient routes to the targets.

When the resource-to-results links are established, the budget evolves from a cost schedule to a performance-based framework that can be analyzed and modeled to ensure that resources are allocated to the steps that drive the business outcomes. Simply allocating resources and fees, without creating a direct link among cost and outcomes disconnects cost and value.

2

Simplify and Streamline

When the budgeting process is overly complex and time-consuming staff will look for shortcuts or perform what they feel are the minimum steps to complete. This digression shifts the goal from producing an accurate budget to minimizing laborious work. A budgeting best practice is to simplify the budgeting process as much as possible while still achieving the clearly stated end goal.

Simplicity starts with aligning on the purpose and value of the budget process. If the purpose of the budgeting process is to complete the process, without a clear vision to use the budget as a tool to improve project performance, then budgeting is an administrative exercise and the budget is a tool with minimal value. Understanding how budgets can be used to drive project visibility, predictability and performance is the first step to budget creation.

Complaints with the current budgeting process are prime sources for initial remediation and simplification. If project managers or team members lament that the budgeting process is too time consuming, too manual, requires too many iterations or serves conflicting goals you have identified challenges to resolve.

The next step is to eliminate budget tasks or details that don't contribute value. Agile value stream mapping is a tool for this purpose. This technique reviews the budgeting steps and calculates process efficiency. Even better it identifies bottlenecks and non-value-added steps.

Agile Value Stream Mapping

The one thing that's better than making steps more efficient is eliminating steps that don't add value. One caution point here is that many people doing this for the first time apply an uneven focus toward budget efficiency. Effectiveness and efficiency are complimentary but distinct. Becoming highly efficient in low value or non-essential budget tasks does not improve the budget. However, when effectiveness and efficiency are pursued in concert, budget process time can be reallocated from low to high value actions.

Finally, technology is the tool to streamline budget creation. But don't put the horse in front of the cart. Automating a poor or inefficient process simply delivers poor and inefficient results faster. Process design must precede software automation.

Many service providers use Excel spreadsheets, but this basic level of technology often creates unrecognized formula errors, multiple out of sync versions, or links to other spreadsheets that are no longer current or have been deleted. These issues put data integrity at risk.

A better option is to use budget software which is designed to permit easier access to historical data, leverage budget templates, create dynamic budgets, streamline processes with task-based wizards or sequential process flows, and offer powerful reporting such as predictive analytics, What-If scenarios or the comparison of alternate routes. The ideal technology is a budget application within your Professional Services Automation (PSA) software.

3

Create Parameter-based Dynamic Budgets

The most powerful project estimates are model-based and constructed on assumptions, parameters and scenarios. The parameters are aligned with key input such as resources and time. Scenarios permit different end results to be tracked and forecasted based on different input. They can calculate multiple variations for the same conditions (such as projecting best case, worst case and most likely.)

The real power comes from the ability to flex and manipulate the budget model at any point in time. For example, if a new time constraint is imposed, such as the need to complete the project by an earlier date, the budget model can be flexed to calculate the amount of schedule crashing permissible under varying conditions. These models also aid capacity planning so that service companies can compare potential new projects or the sales forecast to available or excess capacity.

A dynamic, parameter-based budget model can forecast an endless number of possibilities, explore what-if analysis and compare alternate options or tradeoffs. You will need software technology to achieve this level of project budgeting performance. PSA software, and sometimes CRM software designed for service companies, can categorize projects by criterion or metadata in order to retrieve comparable historical budgets or individual budget components, apply parameters to model the budget and dynamically forecast results.

Not only does this approach create more accurate budgets and empower managers with options when needed, it becomes a valuable source of continued learning. In fact, if you're not learning and benefiting from every prior project you are needlessly recreating wheels and stifling your path to operational excellence.

4

Ensure Accountability

The people charged with achieving the budget must be active participants in creating the budget. Budgets should be done by the staff, not to the staff.

Team-based budgeting is needed to achieve alignment, buy-in and true accountability. Good budgeting isn't just a financial exercise, it's a team-building exercise that communicates the project's goals, priorities and allocation of scarce resources. To achieve real ownership, the team must contribute to the budget creation and be continuously informed of budget status, deviations and forecast. Invested and informed teams deliver the greatest accountability.

Sandbagging is a pervasive challenge. Some staff routinely pad their numbers to compensate for the unexpected. Collaboration and dynamic budgets built on facts and assumptions can help remedy this problem. Collaboration and co-creation can shift budget creation from posturing to gathering the input that leads to leaner, more realistic budgets.

Project budgets must be based on either facts or assumptions. Facts are known and less likely to change. If they do change, change orders will preserve budget integrity. It's the unknown that creates more volatility and should be managed with documented assumptions. The assumptions become parameters for dynamic budgets.

Finally, the budget creation process should conclude with a form sign-off. This closure step is part celebratory and part commitment affirmation. An electronic approval process can accelerate the process.

See the top 4 project budgeting best practices.

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