Better Budgeting For Projects

Published on Friday, 31 January 2014 10:44:56    Written by Marc
Anyone that does a project, be it a renovation, construction, or other type of project, often comes out of the project thinking that it could have been done better with a little more planning.  In fact, over the past twenty some years, I do not really recall any project that I did myself where I did not think about this at the end of the project.  It is common for people to tell themselves that they could have done better.

While this is normal and only helps one to become better at project management, not all of the items that we think about in retrospect are created equal.  Some of these items are very minor (for example, thinking that we could have gone to ask for the building permit a day or two earlier), others are more significant (we missed the scheduled project completion by X number of days).

However, I found that in private enterprises, very few of these items can be seen as bad as poor budgeting.  It seems that often (not always of course) a project can be delayed a little, it can have some items that needs to be fixed after completion and these things, while not good, pale in comparison to bad budgeting.  Nothing seems to go down in history in a company as a project that was not on budget, especially if the reason is lack of planning and even worse, if its lack of competence.  Yet, apart from some project where budget defining is difficult or almost impossible (think for example medication research), for more simpler projects such as building construction and renovation, you would think that with all the knowledge available today, budgeting would be one thing that people would easily get right.  Yet repeatedly it seems that lack of planning combined with lack of resolve seem to sink too many projects.

For example, how often do we see people in companies come up with a budget number for a project, only to change their mind in a fraction of a second, simply because a superior had a hunch or a feeling, or simply a comment about something?  In addition, the employee changed his opinion, turned 180 degrees around.  I saw this so often and each time I kept saying to myself that if the person could change his opinion so much and so fast, perhaps he did not have any opinion in the first place.  Was it fear?  Fear of being fired, reprimanded, and denied of something?  Is it lack of conviction?  Is it lack of proper information in the first place?  After all, if people plan their budget properly and have the entire backup they need, how could they possibly change their mind (and their budget) afterwards?

The best organizations obviously let people say their mind and stand their ground when it comes to budget for projects.  If the decision is to do something else, then so be it, but having a firm opinion and expressing it is often to the benefit of the company.  I will admit, this blog sounds a little more philosophical than normally, but I also think that most people come to this situation at one point in any company or organization.

The scenario often goes like this: Someone creates a budget for a project to build/renovate/purchase something and gets some kind of backup for his/her project and presents the information to upper management, which cuts the budget by X percent before approving it.  In doing, so upper management gets the feeling that it did its job in forcing employees to reduce costs.  The creator of the budget then goes back to his/her drawing board to try to do as best possible with the new reduced budget.  It may force some people in getting creative to do projects within a given budget, but is this process really benefiting the company overall?

A few years ago, a company where I was working was planning for a new extension to an existing site somewhere in North America.  My colleagues, one senior VP and a VP had mandated an architect, took a budget, and did plan layouts and everything to build a business case in order to get the capex approved.

Now, the capex business case spoke about expanding the building and did not go into details as for some of the added features they needed (a 2,000 kva plus generator, a 20 tons hoist and many other things).  It mainly spoke about the building shell itself.  When the capex request of $13M dollars hit the desk of our CEO, he was quick to compare this project with a previous building we had done less than three years before at a cost per square foot much lower than what they were proposing today.

A simple rule or three (comparing the square foot of the other building and the proposed extension) gave him a price of $8.7M.  Our CEO gave the guys the reasoning on how he came to this calculation and said that they should be fine with a budget of $9M.  None of the guys fought back our CEO or told him that they were not comparing the same things.  My boss, which sat close to the CEO, waited for comments from the guys, which never came.  The CEO and my boss then concluded, with good reason, that all were fine with a budget of 9M.

The guys went back to the architect and let him start the project, telling him that they would need to do their best to reduce costs along the way (I learned later that the architect was not even given the new 9M number).  Therefore, five months into the project the senior VP and the VP who were in charge of the project go to see my boss and tells him that they are getting over budget.  Someone had leaked that the cost for the project was now approaching $12M dollars and my boss got word of that.  I will not say who leaked the info but that person did report to me and was helping the team on a few items relating to energy savings component to be part of the expansion.  Naturally, he had my blessing to go and speak to my boss directly to let him know that things at the site were starting to look uglier by the day.

We had a meeting with my boss and the two VP’s in charge of the project.  My boss, John, while still standing up, asked them a direct question; are we over budget?  I heard we were approaching close to $12M dollars, is this true.  Obviously, by the tone in his voice, he was already fuming literally and with good reason.

The guys became extremely nervous, with great emotion in their voices told him, John, please sit down, and do not scream, we need to tell you something, we will not be at $12M, and we will be at $17M…

Tilt…

I remember thinking for a second that it was good we were not manufacturing baseball bats in our company, as someone would have really tested them that morning…

In the end, the project was finished for about $17M, almost double the preapproved budget.  Even the initial $13M budget was not good, as the planners did not foresee extra costs in excavation and numerous other areas.  The project was a planning disaster and a few months later, we were two VP less in the company.

Could the project have been better planned?  Yes, of course.  For starters, a better planning, basic core drilling in the ground for example would have probably help better estimate the cost of excavation.  The same applied for other extra costs that pushed the total cost way over the initial $13M idea.  In addition, the people should have stood their ground.  Had they known it was $13M or even $17M (had they done better planning), they should have stood their ground in front of the CEO and explain in details why the project costs so much more per square foot than a previous one.

They should have insisted, provided more backup, and even, informed him not to go ahead with the project if the budget was only $9M.  Worse case, they could have asked to be pulled off the project with that budget, but in corporate world, it is often easier to say that then to do it.  In addition, until corporations develop cultures where people can speak completely openly, we will still see many of this.

The sad part is that in our case, the company’s culture already allowed and encouraged employees to speak their minds and the CEO always listened to people and in many other cases, took their numbers over his, after receiving proper explanation.  There was in all fairness no reason not to stand their ground with a proper budget number.

Whenever possible, be open, be direct, give the real data, and stand your ground when it comes to budget.  If not, everyone stands to lose.  Obviously in real corporate life this seems easier to say than to do, as I have lived it myself so often, many projects still get cut by upper management for no other reason than cost cutting policy, regardless of how well prepared and presented the budget is.  However, if you backup your budget with proper data and let people know about this, at one point they may start to take note.  With some luck, they may even take your budget numbers at face value one day.