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168 CONCEPTS AND ISSUES OF BUDGETING

Trap Try this one on for size. The development team devel-
ops a proposal with an expected cost of $2,000,000. With
profit, the project should be priced at $2,300,000. However,
the sales group sells a project at a reduced price of
$1,900,000. Senior management now expects the project
team to hold costs to $1,650,000 (to retain the expected 15%
margin). The project team prepares a plan, with a budget of
$1,950,000 (already attempting to squeeze a few bucks out
of the budget—recognizing that the job was sold at too low
a price). With a high awareness of the pressures on costs, the
project team delivers at a total cost of $1,875,000. This is 61/4
percent below the original estimate and almost 4 percent
below the already reduced budget. Yet, it is 131/2 percent
above the management target (based on the sales price).
Should the project team be commended for their excellent
cost performance (I think so) or should they be criticized for
missing the (artificial) target? If you want to have a valid
budget for performance analysis, that budget should be tied
to the full identified workscope, rather than an artificial,
sales price basis.

Spending Authorization Time or expenses should not be charged to a project
until such charges are authorized. A good vehicle for this authorization is the
project charter. The authorization document should specify who can charge and
to what accounts the charges can go. Spending authorizations may be granted by
phases. The project team should establish phase gates, which are used to evaluate
project progress before proceeding to the next major phase.

The Project Cost Plan (or Budget) We allocate project costs to elements of the
plan. If we can, we allocate costs taken from the estimate data. All too often,
however, the cost estimate structure and the plan structure do not match, mak-
ing it difficult or even impossible to use the estimate data. An alternate method
is to build a new cost estimate using the CPM plan and letting the system calcu-
late the budget based on resources and other expenses that have been assigned
to the tasks. If this method is used, it is a good idea to then reconcile the CPM-
generated budgets with the original estimates.