Creating the project budget

3.3 Creating the project budget

By this stage it should be clear what exactly the project will do. The next step is work out how much it will cost. Here programme, national and European rules play an important role: Each of the planned expenditures needs to be checked to make sure it can be claimed from the programme – some planned costs may need to be modified to fit the rules.

It is vital that projects start to consider financial issues and the project budget from the very beginning. Programme advice should be requested on the possible budget available as a way of defining the scope of the project – there is no point planning activities that you will not be able to afford to implement. Then, as planning meetings move from general objectives to specific objectives and an outline of the activities needed to meet them, each activity proposal should be budgeted to develop a realistic project budget.

Tip: Check whether the programme has maximum and minimum project budgets and whether these are guidelines or fixed limits.

All partners are equally involved in this process. When Lead Partners develop projects in isolation and later try to assign activities and budgets to possible partners it generates resentment in the partnership and results in unrealistic proposals: All partners need to take responsibility for their own budgeting and develop figures that reflect the price levels in their own country. Of course this approach requires preparatory work and planning meetings during the development of the project application. Time invested here, however, results in strong partnerships with clear responsibilities and well-justified budget allocations.

TIP: Successful project managers consistently identify good preparation as the main factor in smooth project implementation.

From activity planning to budget planning

How in more detail should a project move from an activity plan to a realistic budget? There is a three-step process that should provide the right level of accuracy: Resource planning, Cost estimating and Cost budgeting. These steps form the basis for cost control once the project is operational. At first sight this process may seem overly complicated and intimidating. In actual fact it is not. It is really just the same process you would use if you were going to re-decorate your kitchen – just on a bigger scale. Put basically, you need to decide what your new kitchen will look like, how and when you will do the work, what supplies you will need and how much outside help you will need for the specialist jobs. You then use this to put a price on everything. If you have tried something similar in the past, this experience will help to ensure that your planning is realistic. If not, you might want some expert advice to make sure you have not missed anything. You will probably also want to allow a little bit of extra money and time for those unexpected surprises that always happen. You need to apply the same thinking to your project budget.

Project Management Handbook

First, you need a clear idea of what you want to achieve and how you plan to do it. Identify the objectives and sub-objectives of the project. Break this down into work packages and decide what you will need to do to complete each work package. The work packages determine how the objectives will be achieved and who will do the work. Define a time plan with milestones.

TIP: In partnership projects it is particularly important to think about how different work packages fit together: The work of one partner often depends on delivery of another partner’s work and the outcomes from one work package are usually the stepping stone for the next. This needs to be emphasised to all partners and possible delays should be built into the time plan.

TIP: Identify the additional tasks required for the effective cooperation of the partnership and allocate resources to the partners who will incur these costs (regular face-to-face meetings of the partnership are a key success factor).

New partners often underestimate the time needed for administration and coordination – in many cases this will be a full-time job for the Lead Partner (though it depends of course on the size of the project).

Cost estimating

You should now have a reasonably accurate picture of what will happen over the course of the project. The next step is to try and work out how much it will all cost. Develop an estimate of the resources (i.e. people, equipment and materials) needed to complete project activities.

Estimate the cost for each resource. Some costs are reasonably easy to calculate. For example, you will know the number and type of staff required and the standard salary for this type of staff. Other costs are more difficult. For example, if you plan a pilot activity based on the results of initial research carried out by the project it will be impossible to know the exact

Defined

3. Project development and application

costs at the start. The best approach is to define a realistic maximum price for the activity. Do not forget to include indirect costs under ‘Overheads’ for each activity.

One question when drawing up the budget is always, ‘What if we do not have enough money to do what we plan?’ This question needs to be addressed during the risk assessment for the project and project managers generally ensure a small surplus of funds by adding a safety margin to the estimates: Even if things cost a bit more than expected, the project will have enough to pay. The problem is that by adding ‘a bit’ to every estimate, you can easily end up with a seriously over-budgeted project. See the section on de-commitment for the problems this can cause for Territorial Cooperation projects.

TIP: The partnership should keep budget estimates as accurate as possible and agree a small surplus to meet unexpected problems as part of the project’s risk management strategy.

Cost budgeting

You should now know the main activities, which partners will carry them out, the estimated start and end dates and the estimated resources (and therefore budget) required. The final step involves re-organising these figures to show the main categories of spending (sometimes called ‘budget lines’ – for example staff, travel, publications etc.)

TIP: Every programme has slightly different requirements for how budget information should be presented in the application and the level of detail required. Look at the budget section of the application as early as possible so you can see what is needed.

One other important part of most project budget tables is the annual budget targets for the project and for each partner. These are used by the programme to monitor whether the project is running according to plan. If the project is spending much more slowly than planned, the programme may make cuts in the overall budget (see the section on de-commitment for an explanation of this).

TIP: Think carefully about how you spread your budget over the project’s lifetime. The first few months of the project are generally slow as the first meetings need to be held and detailed planning completed. There are normally not many costs in this period and the budget needs to reflect this. If you have a big budget for the first year but do not use it by the end of the year, the programme may reduce your overall budget.

DOCUMENT LINK!

See the E-Teams partner budget checklist. The checklist shows how a detailed breakdown of the activities to be carried out can be used to accurately cost each partner’s participation. It also allows the Lead Partner to draw attention to some important financial rules during the budgeting stage.

The dangers of over-budgeting

Preparing the budget for the application is often the most complicated and time-consuming task but this time needs to be invested to avoid over-budgeting. Projects that have over-estimated the budgets they require have been a major problem in the

‘If someone gave you €1 million and told you to spend it by the end of the day, you would probably find it pretty difficult. If they warned you a week in advance, you would have plenty of time to think about what to buy. You have that time (and more).

Avoiding de-commitment is all about using

Project Management Handbook

current programmes and it is likely that programmes will be much less tolerant in future and will be quicker to reduce project budgets. This is largely due to the ‘de-commitment’ rules used in the programmes.

What is de-commitment and the n+2 rule?

De-commitment was introduced as a tool to encourage efficient financial management and avoid large amounts of funds being left inactive in programme accounts for many years. At the start of each year (year N), the Commission allocates or ‘commits’ funds to each programme. These funds have to be spent within three years (by the end of n+2). If they have not been spent they are returned to the Commission or ‘de-committed’ from the programme.

This means that programmes have to operate efficiently and begin allocating funds as quickly as they can. It has been a very successful tool in these terms and has meant that programmes have re-evaluated not just the way funding is allocated but a whole range of management issues from speeding up control work to building project development capacity in programme areas.

INTERREG programmes have sometimes struggled to spend the money in time because of the added challenges of building cooperation between different countries, which often delay both programme and project start-up. Despite this, the amounts lost to commitment have been lower than anticipated though many programmes avoided de-commitment of funds only with special efforts and increasing the reporting burden on projects. There is strong Member State support for the rule as a way of ensuring the efficiency of EU funds management so, even though it has been relaxed for some programmes in the new period (they now operate with N+3 for the first half of the programme), it is extremely unlikely to ever be abolished.

De-commitment deadlines for the first year of a programme:

2007 2008 2009 2010 2011 2012 2013 2014 N

N + 2

2007 2008 2009 2010 2011 2012 2013 2014 N

N + 2

What does it mean for projects?

One of the main causes of de-commitment problems has been that programmes estimate how much money they will spend each year from the amounts that projects say they will spend. Unfortunately, projects very rarely meet their spending targets and this means that programmes cannot report sufficient expenditure. Indeed, the threat of de-commitment led to the creation of the concept of ‘project under-spending’ (projects failing to meet the spending targets in their budgets).

Of course, programmes have safety margins and a small under-spend will not be a problem. The problem has come from badly managed projects that have spent substantially less than they budgeted and action will probably be taken against them in future. This is likely to take the form of grant cuts if budget performance does not improve.

3. Project development and application

Project managers need to check programme rules on what action is possible.

How do projects ensure that they do not fall into this group? One main problem in the current programmes has been that projects under-estimate the time needed for project start-up before main implementation can begin. Plan carefully for what needs to happen and how long this will take and reduce your budget for the first months accordingly. The other main problem is that projects simply over-budget: The safety margins built into the budget are too big and the project does not the need the full grant it has asked for. See earlier sections on building the budget for tips on how to avoid this.

In some programmes these difficulties have led to a dangerous misunderstanding: Projects feel that the most important thing is to spend money and there is no need to make cost savings. This is clearly not the case and financial control will continue to demand evidence of value for money actions. If you find that the project is over-budgeted, unnecessary spending is not the answer. Talk to the programme instead and it will generally be possible to find a compromise solution that safeguards both the project and the programme.