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Questions and Answers
When should the budget be developed?
after the identification of the activities
Why is it important to develop a project budget?
A project budget has no effect on the project implementer's financial viability.
False
Budgets are usually prepared after the activities are _____.
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Match the budget formulation types with their descriptions:
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What are administrative costs related to?
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What is contingency in the context of project budgeting?
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Which of the following are considered equipment and supplies?
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Supplies are used up quickly, whereas equipment is considered more permanent and longer lasting, such as ________.
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What percentage of direct costs do administrative costs normally not exceed?
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Contingency is a planned provision for an unforeseen project event or circumstance that normally exceeds 10% of the direct costs of the project.
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What is an example of a non-eligible cost in a project budget?
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_________ is a widely used project cost estimator with plenty of project estimate templates.
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Match the following budget categories with their descriptions:
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What is an example of a contingency provision?
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Currency exchange losses are eligible costs in a project budget.
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What is an example of administrative costs?
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Contingency provision normally does not exceed _______% of the direct costs of the project.
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What is an example of equipment?
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Study Notes
Project Budget
- A project budget is a tool used to estimate the total cost of a project and includes a detailed estimate of all costs likely to be incurred before project completion.
When to Develop a Budget
- If a project is funded by an external donor, a draft budget is developed after identifying activities to ensure the total cost does not exceed the maximum budget available.
Project Budget Cycle
- The project budget cycle involves resources planning, budget estimating, cost budgeting, budget control, and budget adjustments.
Project Budget Adjustments
- Budgets are prepared after activities are scheduled, and adjustments are made to reflect project planning.
Why Develop a Project Budget
- A project budget must be developed to: • Obtain and justify resources • Plan for allocating organizational resources to project activities • Tie the project to its final outcome through its Results Chain • Act as a tool for top management to monitor and guide the project
Benefits of a Project Budget
- A project budget: • Secures project funding • Provides a basis for project cost control • Affects the project implementer's financial viability
Budget Formulation Rules
- There is no standard budget typology, and each funding agency has its own requirements for procedures, budgets, and cost categories.
- A realistic and cost-effective budget should be provided.
Preliminary Rules for Budget Formulation (2)
- All costs should be included and detailed, whether financed by funding agencies or contributed in kind.
- Avoid using sub-activities for budget formulation as it complicates the process.
Project Budget Formulation (1)
- A budget can be presented in two ways: • Not detailed, with costs disaggregated by intermediate outcome or cost category • Detailed, with costs disaggregated by output or category and subcategory, and by year
Project Budget Formulation (2)
- Budgets can be formulated in different ways, including: • Activity-based budget, where costs are calculated by disaggregating all activities generating each Results Chain output • Cost category budget, where costs are calculated by disaggregating all project costs by cost categories proposed by the funding agency
Results Chain
- The Results Chain includes: • Final outcome • Intermediate outcomes • Outputs • Activities • Cross-cutting activities
Activity-Based Budget
- Direct costs are those required to produce all Results Chain outputs.
- Indirect costs are those required to produce non-specific outputs listed in the Results Chain.
Activity-Based Budget Formulation
- Direct costs are categorized by activity, output, and cost category.
- Operating costs and cross-cutting costs are added to direct costs to calculate the total budget.
Operating Costs
- Operating costs are resources that are cross-cutting and functional to manage the whole project.
- Cross-cutting costs are those that cannot be assigned to any single activity.
Direct Costs
- Direct costs are calculated by subtracting operating costs, contingency, and administrative costs from the total budget.
Cost Category Budget
- Cost categories are proposed by the funding agency, such as human resources, travel, equipment, and supplies.
Cost Category Budget Formulation
- Costs are categorized by activity, output, and cost category.
- Operating costs and cross-cutting costs are added to cost categories to calculate the total budget.
Cost Category Budget Total Cost
- The total budget is calculated by adding all cost categories, operating costs, contingency, and administrative costs.
Activity-Based Budget Categories
- Direct cost categories may vary depending on the funding agency and may include: • Human resources • Equipment and supplies • Infrastructure • Other costs
Activity-Based Budget Operating Costs
- Operating costs may vary depending on the funding agency and may include: • Project staff • Project management office • Support equipment • Other costs
Calculating Budget
- Calculating budget involves: • Disaggregating costs into key categories • Calculating the total cost of each activity • Grouping costs by output and intermediate outcome
Activity-Based Budget Final Format
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The final budget format includes: • Intervention logic • Budget • Unit cost • Total cost • Sources of finance### Calculating Budget using Cost Category Approach
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The cost category approach includes cross-cutting activities, contingency, and administrative costs.
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The approach can be used with Excel software or alternative cost estimator software.
Cost Category Budget: Final Format
- The final format includes intervention logic, budget, unit, unit rate, and cost.
- The cost categories are:
- Human Resources
- Travel
- Equipment and Supplies
- Local Office
- Other costs
- Contingency
- Administrative costs
Administrative Costs and Contingency
- Administrative costs are related to the overall management of the project and do not exceed 7% of the direct costs.
- Examples of administrative costs include HQ staff technically backstopping project staff based abroad.
- Contingency is a planned provision for unforeseen project events or circumstances and does not exceed 5% of the direct costs.
- Examples of contingency costs include internalizing a training that was originally a contribution from a project stakeholder.
Budget: Non-eligible Costs
- Non-eligible costs include:
- Debts and provisions for losses or debts
- Interest owed
- Items already financed in another framework
- Purchases of land
- Currency exchange losses
- Taxes
- Credits to third parties
Cost Estimator Software
- There are several cost estimator software options, including:
- Microsoft Excel
- Google Sheets
- Price&Cost
- BrainLeaf
- Eastimate
- Simplestimate
- Web Development Project Estimator
- CMAP Software
Project Budget: Preliminary Rules
- The applicant should provide a realistic and cost-effective budget.
- All costs should be included and detailed, whether financed by funding agencies or representing a contribution in kind or a valorization of stakeholders.
Project Budget: Formulation
- The budget can be presented in two ways: not detailed or detailed.
- A not detailed budget is disaggregated by intermediate outcome or cost category and might be included in the project proposal.
- A detailed budget is disaggregated by output or categories and subcategories, and by year, and must be annexed to the project proposal.
Project Budget: Formulation (2)
- Budgets can be formulated in different ways, including:
- Activity-based budget: calculates costs by disaggregating all activities generating each Results Chain Output.
- Cost category budget: disaggregates costs by category and subcategory.
Activity-Based Budget: Formulation
- Direct costs are calculated by disaggregating all activities generating each Results Chain Output.
- Operating costs include cross-cutting costs and contingency costs.
- Administrative costs are not included in the direct costs of the project.
Activity-Based Budget: Total Cost
- The total budget includes direct costs, operating costs, contingency costs, and administrative costs.
Cost Category Budget: Total Cost
- The total budget includes category costs, contingency costs, and administrative costs.
Activity-Based Budget: Categories
- Direct cost categories may vary depending on the funding agency and include:
- Human Resources: costs of all human resources required to implement a particular activity.
- Infrastructures: costs of building or renovating physical structures.
- Equipment and Supplies: costs of equipment and supplies needed for the project.
- Other costs: costs that cannot be included in the other categories.
Activity-Based Budget: Categories (2)
- Additional categories could be proposed, such as:
- Travel: costs of travel related to the project.
- Services: costs of human resources and technical assistance.
- Works: costs of infrastructures.
Activity-Based Budget: Operating Cost
- Operating costs include:
- Project staff: costs of staff working in all project areas.
- Project management office: costs of fixed and variable costs of the location and equipment.
- Support equipment: costs of equipment and supplies needed for operating the project.
Activity-Based Budget: Operating Cost (2)
- Operating costs may include:
- Travel: costs of national and international travel.
- Equipment and Supplies: costs of equipment and supplies.
- Local Office: costs of local office and equipment.
- Other costs: costs that cannot be included in the other categories.
Administrative Costs and Contingency
- Administrative costs: costs related to the overall management of the project, normally not exceeding 7% of the direct costs.
- Contingency: a planned provision for unforeseen project events or circumstances, normally not exceeding 5% of the direct costs.
Budget: Non-Eligible Costs
- Non-eligible costs include:
- Debts and provisions for losses or debts.
- Interest owed.
- Items already financed in another framework.
- Purchases of land.
- Currency exchange losses.
- Taxes.
- Credits to third parties.
Cost Estimator Software
- Cost estimator software includes:
- Microsoft Excel: widely used for project cost estimation with templates.
- Other software with time- and budget-tracking functionality.
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Description
Test your knowledge of project planning, budgeting, and evaluation. Learn when to develop a project budget and how to verify costs.
