Would the real budget please stand up?

There has been no better example of budgeting incorrectly in recent years than the London 2012 Olympic Games.  When London bid for the games in 2005, the government announced a budget of £2.37 billion which ‘included a 50% contingency’.  In 2006, this figure was revised up to £3.3 billion. A year later a further £2 billion was added, bringing the total to £5.3 billion.

Finally, in 2007, the Government established a figure of £9.35 billion. In the five years that followed the Games were delivered roughly in line with this budget and are now considered a roaring success.  The moral is that it is much better to get the right figure on the table as soon as possible, instead of hiding behind exclusions and underestimates. In the end, it is often not the size of the number that matters, but your ability to deliver the project within that number!

It is therefore essential that you take the tough discussions at the outset of the project so that your client, contractor and design team know that they can achieve the project objectives in the appraisal or business case. Failing to get it right will cause delay and re-work, damage relationships, and further increase cost.

Here are 5 things you can do to give your project its best chance of success:

1. Capture the total budget: Demand and lead absolute clarity about what costs should be included; work closely with the client finance team and their cost codes and don’t skip over the detail.
2. Focus on estimating the costs you don’t know: These are the costs that will change and send you over budget. Check, re-check and discuss with the client your key assumptions and any areas about which you are worried.
3. Use a checklist based on your experience: If you have worked on 5 projects in your career you have probably experienced most of the things that can go wrong with a budget. So why wouldn’t you have created a fool proof checklist by now?
4. Use market knowledge: The market place is keen to be engaged early on, so why not talk to them at the very outset? Don’t put off this engagement, as it gives increased credibility to your advice.
5. Risk-based contingency: The contingency must reflect the risks of the project and these risks should be transparently costed and interrogated.

If you have diligently prepared the estimate, you can be sure of providing sound budget advice. The client may not like the answer, but once it is on the table it is clear what challenges the project may face, and these can be addressed collaboratively. Finance directors are unhappy with teams who keep asking for more funding; it erodes their confidence and creates uncertainty for wider business investment planning. Share your assumptions with the client and the finance team and make sure you are shoulder to shoulder with them. If there is a problem in the future, you will deal with it as a team.

Paul Wilson is Managing Director at Provelio Ltd, a strategic project management consultancy, and RICS Executive Education faculty member.

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