Budgeting
Budgeting is making sure that you have enough money to pay for what you have bought and to cover the ancillary costs. The first step then, is to estimate what a project will cost and therefore how much money has to be found to pay for it. The first estimate of costs is very approximate, simply because the project at that stage is just broadly defined and the costs are based on a variety of historical information. As the project becomes more defined the "definition" uncertainty reduces as, to a small degree, does the "pricing" uncertainty. As the "price" is actually what someone (the contractor) in the future will require to be paid for doing the work it is clearly subject to a degree of uncertainty.
The Project estimate is thus comprised of:
- Contract estimates i.e. estimates of the price that will be charged at some future date for actually doing the work;
- One or more estimated contingency amounts to cover costs which might (but are not certain) to occur while the work is being done, these include contingency amounts for:
- changes in the work to be done;
- additional payments that may become due under the contract;
- costs for consumables, such as electricity costs not covered by the construction contracts;
- costs for expert assistance, engineering, supervision and consulting services;
- costs for administration of the Project;
- land acquisition costs, and
- costs for the financing of the Project.
A significant reduction in uncertainty as to final Project cost and time occurs whenever a contract is awarded and the Contract Price and the Time for Completion are known. However, this only reduces the uncertainty for that contract; it does not remove it entirely. The Contract Price may change to enable what is being built to respond to new demands; the time of completion may increase as delays occur from bad weather and the like. These changes are a natural and normal part of major construction project. If these changes in the Contract Price are within the contingency amounts allowed for them the budget does not need to be revised. If however, circumstances are encountered that result in the contingency items being exceeded then the budget has to be revised.
A budget is a tool for managing finances and it is a tool that has to be used sensibly. If a budget is too optimistic it will need to be revised frequently. If too pessimistic it may never need to be revised at all but it will prevents the allocation of spare funds to other deserving issues.