Your project budget should always be expressed in terms of expected project cost.
As stated before, project success occurs when outcomes add value to the business. This implies that the value of a project is defined by subtracting all of the (in)direct costs from all of the (in)direct benefits the project delivers.
Using this logic, when your expected project value is USD 3M and your company wants a return on investment (ROI) on each invested dollar of 50%, your project budget is USD 2M. In other words, project budget = project value / 1.5. If the estimated value of your project goes down, your project budget goes down. It is that simple.
Many people confuse real project budget with authorized project budget. The authorized project budget is the total amount of authorized financial resources allocated for the particular purpose(s) of the sponsored project for a specific period of time. It is usually based on a mixture of project cost estimations, department budgets, free cash flow, and other factors.
But as soon as your costs go over the authorized project budget (which is highly likely for technology projects), or the estimated benefits are not as big as planned (highly likely as well) you should ask yourself what is the real budget of your project and whether you are willing to spend it or not.
How do you know whether you're looking at the right factors when it comes to determining the real budget? Whether or not your company can spend this money is a financing and risk question, not a budget question. You could even secure a loan to do certain projects. This increases risk and reduces ROI (because of paid interest) but can be a valid option.
Whether or not this budget is enough to realize the project is a cost estimation and risk question, not a budget question. You should never confuse your cost estimations with your budget. Budget is what you can spend, while cost estimation is what you think you will spend. Ideally, the latter is less than the former.
Moreover, whether or not your organization is willing to spend their money on this project is a prioritization question, not a budget question.
Defining Product/Service Success
It is change, continuing change, inevitable change, that is the dominant factor in society today. No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be. Isaac Asimov
Product or service success involves defining the criteria by which the product or service that is delivered is deemed successful. For example:
- The system is adopted by all target users
- System uptime is 99.99%
- Customer satisfaction has increased by 25%
- Operational costs have decreased by 15%
Importantly, these criteria must be measured once the product/service is implemented and over a defined period of time. This means that you need to adopt a long-term view since product and service success cannot be measured immediately after the project ends.
Correlation does not imply causation. statistics adage
The problem that you need to solve critically determines which solution is needed. In turn, the solution that is needed determines what capabilities are required to achieve the desired outcome. Aligned with this, the efforts that are required to build these capabilities have a significant impact on your project delivery success, which will correspondingly have a big impact on the cost side of things. The success of the product or service determines the direct benefits, just as it impacts the indirect benefits and business value.
When your desired business outcome changes (e.g., a change in strategy or the market entry of a competitor) there is a high probability that you will need to solve a different problem than you started with.
The solution to the problem that you want to solve determines the capabilities you have to cultivate and/or improve upon.
Project delivery success
When the scope of your project changes (definition of scope) the costs and necessary time to build/improve upon these capabilities will also change.
When the scope of your project changes (definition of completion), the direct impact of the resulting project service/product will change as well.
Project delivery success
If your project costs explode, or if the project will be delayed by a number of months, your business outcome will change (perhaps even from net positive to net negative).
When your product benefits are less than expected, your business outcome will change (perhaps even from net positive to net negative).
4. Editor's note: If it is not so, then either you should get approval to increase your budget, or find ways to reduce your expected costs, or abandon the project altogether.