This article is a part of our two-part series on the business of IT project budgeting.
- How To Budget IT Projects for Your Business (this article)
- Calculating IT Asset Life Span, Depreciation, & ROI
How To Budget IT Projects for Your Business
Understanding how to budget for larger IT projects is critical. But it is the specter of unexpected costs and budgetary over-runs that can intimidate even the most seasoned executive. In this article, we will lay out the logic for major project budgeting and provide some rules of thumb to smooth out the process.
Defining & Creating a Scope of Work for Your IT Project
Project Scope Creep & Change Orders
General Eisenhower said, “Plans are worthless, but planning is everything.”
When it comes to scope creep and change orders on IT projects, there are two ideas that appear to be contradictory, but both are true:
- The number one buster of IT budgets is project scope creep and changes.
- In the world of IT projects, there are always alterations and changes.
The key is to create a scope of work and project plan that is as thorough as possible, anticipates possible future requirements, and understands the limitations.
Involve Internal & External Resources in Scope Planning
Most of the time, in-house technical staff is fully occupied operating and supporting existing systems. This makes sense. A business is smart to staff for the normal day-to-day IT workloads and to supplement that team with external resources for larger projects and when specialized skills are required.
Sometimes a company or business can have an experienced IT team that can thoroughly work through the requirements and create a scope of work. This is difficult enough when a task is going to be completed from start to finish by an in-house team. It is reasonable to assume that the same reasons you are considering the use of external IT resources on a project are applicable to the process of defining and scoping that project. This brings us to our first rule of thumb for successful IT project budgeting:
“Create a general scope for vendor selection and then make the detailed final scope in collaboration with the vendor.”
This will allow the project plan to fully include mission-critical functionality, create an open architecture in anticipation of features and functions that will need to come later, clearly define whether what tasks and requirements will be needed from the and the entire project can be timed to align with the realities of company expense requirements.
The Main IT Project Budget & Fudge Factors
Once you have come to an agreement with your vendor, you’re probably not done yet. A reasonable IT budget should have some room for built-in for the current unknown. By definition, unknowns cannot be accounted for, but we know that all projects have some unknowns. So, it is reasonable to allow a margin within the budget. “Unknowns” can include things like:
- Systems or software deployed during the project that requires additional API or integration.
- Hardware, software, firmware, OS, and other updates occurring during the project that require additional work.
- Mission-critical features missed, changed, or discovered during the project.
Again, most experienced developers will allow for a bit of this within their bid. This usually covers most of the common contingencies. This brings us to our second rule of thumb for successful IT project budgeting:
“We recommend that businesses prepare for an additional 5% to 10% of potential project ‘unknown’ contingencies.”
You may not need this contingency budget — may projects don’t. But preparing for this possibility in advance will help prevent unnecessary delays if circumstances change.
Ongoing IT Support & Maintenance Cost Budgeting
Intuitively, we all understand that websites and software applications require maintenance. Everything that performs in the real world does. For example, when we buy a new car we reasonably expect it will require little more than regular oil changes for the first few years. On cars, maintenance costs tend to rise after that. But IT assets are different from most things in the real world.
Your vendor agreement will likely include some basic support and warrantee provisions — things like normal patches and needed optimizations that reveal themselves shortly after the IT asset has been deployed into production. But that is not what we are talking about here. IT assets live in dynamic environments with changing business conditions. They rely on operating systems (OSs) and servers and data on networks and the internet. IT assets need to keep up with things like:
- Code platform updates (.NET Core, C#, etc.)
- Database updates (Microsoft Sequel, MySQL, etc.)
- OS updates
- Emerging and active security threats
- Changing business needs
- Increasing service and data loads
- New network hardware, firmware, or software
- Documentation related to any of the above
When setting a project budget, it is important for a business to keep this reasonable expectation in mind. This brings us to our third rule of thumb for successful IT project budgeting:
"The ongoing annual costs of updating and Maintaining IT assets generally range between 10% and 20% of the initial project development cost."
In this article, we’ve laid out the logic for major project budgeting and provided some rules of thumb to smooth out the process. Every project is different and business conditions change all the time. But in our experience, this simple template provides a solid foundation to reduce IT budgetary surprises.
In our next article in the series, we will review anticipated IT project life spans and how to use that to calculate depreciation and return on investment (ROI) from a business perspective.