A Project budget reflects the financial
plan of the operations, divided into responsibility centres, with specific
goals clearly outlined along with the costs expected to be incurred. The
primary purpose of having a budget is to assign financial targets and resources
to each responsibility centre, to coordinate their activities, to form the
basis for controlling performance, and to make the participant’s cost
consciousness instead of purposeless routine working.
The budget uses the language of accounting
to state objectives and measure performance. The project budget integrates
monetary objectives, responsibilities and allocated resources. The base of the
budget is the project plan and its schedule of work. The project functional
organization is structured into responsibility centres. Each responsibility
centre is assigned labour, equipment and budgeted costs for the assigned goals.
And, finally, the project financial plan is presented in the form of the master
budget which summarizes all the budget information like profit and loss
statements, balance sheets, capital expenditure budget, cash flow forecasts and
performance indicators.
In a construction project, the client and
the contractor have separate budgets. Although, the project schedule of work
and work done value (or earned value) form the common baseline for developing
these budgets, their purpose differs.
The client’s construction budget is
primarily a capital budget designed to formulate time-phased funds requirement
and the sources from which these funds are to be provisioned. The client
capital budget includes the expenditure on preliminaries, procurement of land,
client supply resources, consultants fee, contractors payments and the cost of
working capital.
On the other hand, a contractor’s budget
is resources-cost and sales-income oriented budget. It includes quarterly
statements of income and expenditure and forecast of financial statements of
projected balance sheet, cash flow, profit and loss and performance measuring
baselines. The break up of a typical contractors budget is shown in fig.
The project budget making process goes through the following
stages:
a) Structuring responsibility centres.
b) Budgeting sales and assigning a sales
target to each responsibility centre.
c) Budgeting production expenses necessary
for the fulfillment of assigned tasks of each responsibility centre.
d) Provisioning for inflation and escalation.
e) Forecasting profit and loss, cash flow
statement and balance sheet.
f) Preparing a project master budget.
