Why is Being Under Budget Bad?
Updated: Nov 13, 2022
During project execution, the project manager may only focus on being under budget fearing that being over budget will get them in trouble. This is flawed thinking because being under budget can be just as bad as being over budget. In this article, we will discuss how a project manager can avoid being under budget and also avoid being dragged into PMO Steering Committee meetings to explain why the project manager has large variances on the project.
Why it may be bad to be under budget?
It is very rare that a project's costs will equal the project's budget at the end of the project. Variance is expected but it depends on how big this variance is. If the project finances are severely under budget, the project manager's estimation skills will be called into question.
For example, if there is a budget of $100,000 to cover the expenses of internal labor and costs are only $50,000 the project manager has not estimated well at all. When estimating internal labor, the project manager should be meeting with resource management to get good estimations as to how much these resources cost. From these estimations, the budget should be adjusted to match the estimations. If the final estimation is $50,000 and actual costs are $48,000 this is much better than having a 50% variance between estimations and the budget.
Of course, resources are out sick and take vacation but the project manager must proactively manage the budget to take these types of changes into consideration. If there is extra money that the project is holding and the project manager is certain that holding this money is not necessary, a change request can be submitted to reduce the budget which leads to the next point...
Another reason being under budget is bad is that the project is holding extra money that other underfunded projects within the program can use to execute. Going back to our previous example, if there is $50,000 of extra money that the project is not using, this $50,000 can be allocated to another project that really needs the $50,000.
What are the usual budget variances allowed?
Depending on the processes established at the Project Management Office (PMO) there are variance thresholds that will put the project into the GREEN, YELLOW, or RED status. If the project is in either the YELLOW or RED status, the project manager will likely need to appear before the PMO senior management to explain why the project has such a large variance.
An example of the variance thresholds that an organization may observe are:
Green: A variance below 5%
Yellow: A variance between 5% and 10%
Red: A variance above 10%
What should a Project Manager do to Avoid Being Under Budget?
The foremost thing a project manager should do to avoid being under budget is to get accurate information to make accurate estimations. If the project manager is estimating internal labor, the resource management must be engaged to get accurate information. If a vendor is hired to do development, the project manager must coordinate with the vendor's representatives to estimate external labor. If ordering hardware, what is the vendor quoting? What other fees or travel expenses will the project have?
The budget estimation process doesn't end once the budget plan is created in the beginning of the project. This process continues throughout the course of the project until the project is over. If estimations change, then the budget changes need to be made to bring the project finances in alignment with the estimations.