Tuesday, July 23, 2019

Why you should express your project budget in terms of expected value

Why you should express your project budget in terms of expected value
Your project budget should always be expressed in terms of expected project value.

Simply put, project success occurs when outcomes add value to the business. This implies that the value of a project is defined by subtracting all of the (in)direct costs from all of the (in)direct benefits the project delivers.

Using this logic, when your expected project value is USD 3M and your company wants a return on investment (ROI) on each invested dollar of 50%, your project budget is USD 2M. In other words, project budget = project value / 1.5.

If the estimated value of your project goes down, your project budget goes down. It is that simple.

Many people confuse real project budget with the authorized project budget. The authorized project budget is the total amount of authorized financial resources allocated for the particular purpose(s) of the sponsored project for a specific period of time. It is usually based on a mixture of project cost estimations, department budgets, free cash flow, and other factors.

But as soon as your costs go over the authorized project budget (which is highly likely for technology projects), or the estimated benefits are not as big as planned (highly likely as well) you should ask yourself what the real budget of your project is and if you are willing to spend it or not.

How do you know whether you’re looking at the right factors when it comes to determining the real budget?

Whether or not your company can spend this money is a financing and risk question, not a budget question. You could even secure a loan to do certain projects. This increases risk and reduces ROI (because of paid interest) but can be a valid option.

Whether or not this budget is enough to realize the project is a cost estimation and risk question, not a budget question. You should never confuse your cost estimations with your budget. Budget is what you can spend, while cost estimation is what you think you will spend. Ideally, the latter is less than the former.

And whether or not your organization is willing to spend their money on this project is a prioritization question, not a budget question.

Always express your project budget in terms of expected value delivered and you’ll have a better idea of the real budget of any project.

When you need some guidance on how to define and measure project success, just download the Project Success Model here
Posted on Tuesday, July 23, 2019 by Henrico Dolfing

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