Project Budgeting Overview

PROJECT

In BST11, project budgeting is the key to project control and management. Project budgets are defined in the value of the currency assigned to the project and become the comparative numbers for later management activities. These budget values may be initially established, later adjusted or modified, and also removed.

Budgets are expressed in effort values (Budget Effort), which are the multiplied / billable / marked-up value of the expected charges posted against the project. Budgets may also be expressed in cost values (Budget Cost) which may have an effect, in conjunction with Budget Effort, on revenue calculations when using cost based revenue recognition.

 

Note: Budgets may also be entered for hours (Budget Hours) but are purely informational and have no impact on revenue recognition.

For more information about revenue recognition and an example of how effort and cost budgets can influence revenue, see ClosedRevenue Recognition and Budgets.

Revenue Recognition and Budgets

BST offers either a Cost method or an Effort method of recognizing revenue on projects. This method, referred to as Revenue Basis, is established on each individual project. The value of the Revenue Basis property defaults from the owning company of the project but may be overridden on a specific project.

For fee types with revenue rules that utilize budgets for revenue recognition (Lump Sum or Cost Plus to a Maximum), Budget Effort will always be involved in driving revenue. The difference in the revenue recognition methods comes into play when the revenue calculation depends on the progress of work performed on a task.

As a simple example, assume a task with a Lump Sum fee type and Budget Effort of $10,000. If 50% of the work has been done, the revenue calculates as $5,000. This is straightforward if a percent complete of 50 is manually entered. However, BST does not require a percent complete to be entered in order to calculate revenue.

If the Revenue Basis on the project is set to Effort and no percent complete is entered, then the actual effort (billable value) of the work that has been charged to the task will be compared to the Budget Effort to determine the percent complete, i.e., Effort/Budget Effort x 100. Therefore, if Effort = $3,500 and Budget Effort = $10,000 then percent complete = 35%.

Similarly, if the Revenue Basis on the project is set to Cost, then the actual cost of the work that has been charged to the task will be compared to the Budget Cost to determine the percent complete, i.e., Cost/Budget Cost x 100. If Cost = $2,000 and Budget Cost = $8,000 then percent complete = 25%.

Once the percent complete is determined (entered manually, calculated from effort, or calculated from cost), it will be multiplied by the Budget Effort to arrive at Revenue.

Therefore, using the figures above:

  • If Revenue Basis = Effort, then Revenue is $10,000 x 35% = $3,500

  • If Revenue Basis = Cost, then Revenue is $10,000 x 25% = $2,500

  • If percent complete is entered at 50%, then Revenue is $10,000 x 50% = $5,000
    (regardless of how Revenue Basis is set)

While revenue calculations can be much more complex, this simple example illustrates how Budget Cost and Budget Effort may interact. Whether a project’s Revenue Basis is Cost or Effort, both budget types may be entered.

BUDGET CONCEPTS

Project budgeting begins with the definition of the project as a global entity. This setup includes a variety of reference information, several items of which are key control elements that constrain the budgeting process. The use of those controls will be discussed later.

A project is subdivided into one or more tasks. Tasks allow you to manage project segments. Tasks are discrete work elements of projects that are defined to help organize project scope and ensure project budgets, assignments, and charges are recorded appropriately. Tasks are assigned to and operated on in a list format with a hierarchical indention capacity of up to ten levels.

When a project is set up, a root level task is automatically added. This represents the total project and cannot be deleted. Various fields from the project are defaulted into the root task and kept in sync with the project. Tasks must be defined with certain required data. Values established at a higher level are pushed down to lower levels as defaults. Beyond the required fields, tasks may have a variety of additional data assigned to them.

Tasks must have start and finish dates assigned to them for project planning purposes. The dates may be defined manually in conjunction with duration under the control of the various calendars to define the project schedule.

And most crucially, tasks may also have budgets and resources assigned to them.

Actual budget assignments are made by companies and organizations with the task. In order to simplify this discussion, the company / organization combination will simply be referred to as Organization. If the organization being budgeted is not currently authorized for the project, an authorization for that organization is automatically added to the Authorizations view with all of the options allowed. This allows hours and monetary transactions to be charged against the organization on the task.

Budgets may be further broken down by Budget Categories. Budget categories might represent Labor entries versus Other Direct Charges or the like. Some combination of task, organization, and budget categories becomes the level at which revenue and variance are tracked.

PROJECT BUDGET CONTROLS

Here is where the project budgeting controls mentioned earlier come into play. There are four of these controls to be considered: Budget Method, Variance Level, Organization Variance Responsibility, and Budget Category Variance Responsibility.

  • Budget Method: This control has two choices: Variance or Detail. When this control is set to Variance, budgeting adheres to the combination of the remaining three controls described below. When this control is set to Detail, budgeting may occur at lowest task level for any organization, and any budget category regardless of the remaining controls. In this case, the remaining controls are only used for revenue recognition purposes.
  • Variance Level: This control has two choices: a numeric level number (depending on the levels setup in the project's task structure) or Lowest. Variance level becomes the level of the task hierarchy (and the related organization and budget category combinations) on the project where revenue is recognized and variance can be managed. For Variance Budget Method, budgets can only be entered on tasks that match the selected variance level. For Detail Budget Method, the selected variance level is ignored, and budgets can only be entered on lowest level tasks.
  • Organization Variance Responsibility: This control has two choices: All or One. When this control is set to All, any active organization can be budgeted and accrue variance. When this control is set to One, a variance level task’s owning organization is the only one that can accrue variance. For Variance Budget Method, it is also the only organization that can be budgeted, but for Detail Budget Method, any organization can be budgeted.
  • Budget Category Variance Responsibility: This control has two choices: All or One. When this control is set to All, any active budget category can be budgeted on an organization and accrue variance. When this control is set to One, only the budget category identified in Global Settings can accrue variance. For Variance Budget Method, it is also the only budget category that can be budgeted, but for Detail Budget Method, any active budget category can be budgeted.

In summary, these project controls work in tandem to determine the level of budgeting, variance analysis, and revenue calculation on a project. The following table further outlines the impact of the controls on budget entry:

If Budget Method = Variance, the budget entry is: If Budget Method = Detail, budget entry is:
Performed on the Tasks tab-Budgets Split, Earned Value tab or new Budgets tab. Performed on either the Tasks tab-Budgets Split or Budgets tab (No budget entry on Earned Value tab).
Constrained to tasks that are at the level matching the Variance Level setting (1-10 or Lowest). Only allowed at the lowest (leaf)* task level, regardless of Variance Level setting.
Allowed on either all organizations or limited to the task’s owning organization (Organization Variance Responsibility = All or One). Allowed on any organization, regardless of Organization Variance Responsibility value.
Allowed on either all budget categories or limited to the budget category defined in Global Settings (Budget Category Variance Responsibility = All or One). Allowed on any budget category, regardless of Budget Category Variance Responsibility value.

Additionally, when the Detail Budget Method is selected, the Earned Value tab will sum and display budgets on variance level tasks for responsible organizations and budget categories.

For more information on constructing project budgets, see ClosedBudget Entry Examples.

BUDGET ENTRY EXAMPLES

So you’ve explained the levels and controls that are available within the project for budgets. What do I do to set up budgets on a project? Let’s look at four variations of the same project, using different combinations of control settings to support different budgeting needs. These examples illustrate working with Budget Effort but also apply to Budget Cost. Budget Cost is relevant only when a project's Revenue Basis is set to Cost.

in all of the following examples, let’s assume the project has the task structure shown below:

As indicated by the triangle in the leftmost column, the variance level is set to 2 and the task structure is built to level 3. Further specifics related to this project set up are:

Budget Category in Global Settings = 10 - Labor Task 100 Owning Organization = 1025
  Task 200 Owning Organization = 1050

Example 1

In the first example, we want to track variance on level 2 tasks, and budget one organization and one budget category at the variance level. To do that we will use the following control settings: Budget Method = Variance, Variance Level = 2, Organization Variance Responsibility = One, and Budget Category Variance Responsibility = One.

So we do the entry and our results might look like this:

Budgets Tab

Earned Value Tab

Both tabs show the task structure only to Variance Level. Budgets may be added at the variance level on either tab (or the Budgets Split) only for the task’s owning (responsible) organization and only for the default Labor budget category. The Manager assignment is inherited from task manager and is editable on both Budgets and Earned Value tabs.

Example 2

Let's move on to a more complex project where we still want to track variance and enter budgets on level 2 tasks, but this time with multiple organizations and budget categories. To do that we will use the following control settings: Budget Method = Variance, Variance Level = 2, Organization Variance Responsibility = All, and Budget Category Variance Responsibility = All.

So we do the entry and our results might look like this:

Budgets Tab

Earned Value Tab

Both tabs show the task structure only to Variance Level. Budgets may be added at variance level on either tab for any organization and any budget category.

Example 3

Our next example is a more complex project, where we want to track variance on level 2 tasks for multiple organizations and budget categories, but budget those organizations and budget categories on lowest level tasks. To do that we will use the following control settings: Budget Method = Detail, Variance Level = 2, Organization Variance Responsibility = All, and Budget Category Variance Responsibility = All.

So we do the entry and our results might look like this:

Budgets Tab

Earned Value Tab

The Variance Level = 2 but the task structure actually goes down to level 3. Budgets are entered on the Budgets tab (or Budgets Split) across budget categories at lowest task level. The Earned value displays task structure down to the variance level and budgets are read-only on Earned Value and summed to the variance level task. The Manager assignment is inherited from task manager on Earned Value and is editable; displays on the Budgets tab but is read-only.

Example 4

Now we'll switch to a project where we want to track variance on level 2 tasks for one organization and one budget category, but budget multiple organizations and budget categories on the lowest level tasks. To do that we will use the following control settings: Budget Method = Detail, Variance Level = 2, Organization Variance Responsibility = One, and Budget Category Variance Responsibility = One.

So we do the entry and our results might look like this:

Budgets Tab

Earned Value Tab

So, on the Budgets tab, we see budgets entered at the lowest task level across any organization and any budget category. And the Manager displays from the owning organization on Earned Value tab.

And, on the Earned Value tab, tasks display only down to the variance level. The Manager assignment is inherited from task manager but may be changed. Budgets sum to the owning organization (even when owning organization wasn’t budgeted). And budgets sum to the single budget category