Question

Explain how budget uncertainty changes as a project progresses.

Answer 1

The importance of budgeting in project management, lies in the ability to prevent unnecessary costs and to allocate the correct amount of the budget to each corresponding need. Being able to comprehend the importance of cost estimation and budgeting from the very initial phases of a project is critical.  

The zone of uncertainty is any risk that can be a negative or positive factor. In most cases, managers attempt to conform to all elements of the project in order to avoid any uncertainty. Unfortunately, we cannot predict the future and there is always the chance for uncertainties to arise.

Capital budget prepares the company for uncertainties by allocating finances and budgets to help during the dry period. The amount of budget which should be kept aside for the uncertainties varies from organization to organization, industry to industry and region t region. Therefore, companies take help from analysis such as throughput analysis, net present value (NPV), rate of return on investment and discounted cash flow to determine how much of the budget should be kept for the uncertainties.

You may have heard of the term “triple constraint,” which traditionally consisted of only time, cost, and scope. These are the primary competing project constraints that you have to be most aware of. The triple constraint is illustrated in the form of a triangle to visualize the project work and see the relationship between the scope/quality, schedule/time, and cost/resource.

Maintaining this balance is difficult because projects are prone to change. For example, if scope increases, cost and time may increase disproportionately. Alternatively, if the amount of money you have for your project decreases, you may be able to do as much, but your time may increase.

Any project has to be supported financially. The budget allocated to the project, however, is subject to uncertainty due to various financial, market, and political risks. The present paper incorporates budget uncertainty into project time-cost trade-off. The proposed model formulates financial feasibility as a stochastic constraint, transforms it into a deterministic equivalent in the case of normal, beta, or triangular distribution, and solves the equivalent accordingly. The direct result is a minimum time-cost curve, which relates the shortest project duration to different levels of budget. The present study shows that a higher degree of budget uncertainty represents a tighter financial constraint and, thus, needs extra contingency duration. Moreover, if the financial constraint has to be met at a higher probability level, extra contingency costs are necessary to ensure an on-time completion

Your project may have additional constraints that you must face, and as the project manager, you have to balance the needs of these constraints against the needs of the stakeholders and your project goals. For instance, if your sponsor wants to add functionality to the original scope, you will very likely need more money to finish the project, or if they cut the budget, you will have to reduce the quality of your scope, and if you don’t get the appropriate resources to work on your project tasks, you will have to extend your schedule because the resources you have take much longer to finish the work.