Budget Allocation and Resource Planning

A budget is defined as patterns of expenditure and revenue over the life of the project (SEAGA 2001). In general, it is a prediction of the possible costs that will be incurred by carrying out the activities planned in a project. 

Realistic planning of finances is key to the implementation of a project or programme. A professional and transparent approach to budget planning will help convince investors, development banks and national or international donors to make financial resources available (PHILIP et al. 2008).

Generally, the budget has mainly two functions. First, it estimates, as realistically as possible, the cost of completing the objectives identified in the project proposal. The sponsoring agencies will use the budget details to determine whether the proposal is economically feasible and realistic. Secondly, the budget provides a means to monitor the project's financial activities over the life of the project. In this way, it is possible to determine how closely the actual progress toward achieving the objectives is being made relative to the proposed budget (UNIVERSITY OF VIRGINIA 2010).

Many sponsors, especially government agencies and international organisations, provide either a form or a format for the budget. It is therefore imperative to follow the donor’s instructions explicitly. In fact, the first thing you should do is read the application guidelines carefully so you are sure of what you need to include — or exclude — in your budget.

In case there is not a specific guideline for the development of your budget, the following section will help you to prepare a realistic and well-balanced budget.

Before drawing up the budget, it is necessary to get an overview of the type of inputs needed to achieve the objectives of the project. Typical categories may be, for example (adapted from PHILIP et al. 2008):

● people (such as researchers, consultants, other partners’ staff-time)

● travel costs (such as bus tickets, meal allowance)

● vehicles (such as rental, petrol, driver’s time)

● equipment (such as machinery, measuring instruments and other tools)

● consumables and supplies (such as material, pumps, bricks or containers)

● Subcontracts (services and construction work)

Listing all the categories in columns in a spreadsheet application, such as excel, will help you to organise your costs. As the budget should be in line with the activities set in the work plan, you should work through the narrative of the proposal identifying all the costs that must be incurred in order to carry out each single activity planned. In order to identify systematically the different expenditures, make sure you list all the activities in the rows of the same (excel) table, where you previously defined of the costs categories.

Once you have identified the type of expenditures your project will have, the next step is to classify them according to standard budget categories. Budget’s items are generally divided into two classifications: direct costs and indirect costs.

According to the European Commission (EC 2009) “direct costs are all those eligible costs which can be attributed directly to the project and are identified by the beneficiary as such, in accordance with its accounting principles and its usual internal rules”. Direct costs can be:

• Personnel costs: They should reflect the total remuneration, including salaries plus social security charges (holiday pay, pension contribution, health insurance, etc). Usually, the personnel costs are calculated in terms of ‘man days’ or ‘man months’ of junior, medium and senior grade persons. You will have to identify the productive hours per employee per year to compute the hourly rate, and these should exclude annual leave, public holidays, weekends and sick leaves.
• Travel and subsistence allowances: First determine what travel expenses the granting agency will allow, and then itemise the cost of each trip, e.g., round-trip airfare, lodging and meals, taxis, visa, etc (UNIVERSITY OF IDAHO 2010). You can plan the reimbursement of the costs to your employees based on actual costs or a lump sum or per diem payment. This last can be calculated through a simple addition of the possible costs that one employee might have spending one day (with and without night) outside his/her residential area.
• Vehicles: Usually, this cost will be included in the travel and subsistence item. You will need to consider the costs of renting or maintaining a car for the purposes of the project. If you plan to drive your own car, you may claim a certain amount per mile.
• Durable equipment: Any item which will retain its usefulness beyond the grant period is considered capital equipment. Funding agencies have different views on the purchase and maintenance of equipment, so be sure you know the policy of the agency before including such costs in your budget (UNIVERSITY OF IDAHO 2010).
• Consumables and supplies: Include enough supply money for all activities in the project. Typical consumables are stationery, duplicating supplies, typing/computing supplies, and software.

Indirect costs are all those eligible costs which cannot be identified by the beneficiary as being directly attributed to the project, but which can be identified and justified by its accounting system as being incurred in direct relationship with the eligible direct costs attributed to the project (EC 2009). Indirect costs, also called overheads, Facilities & Administrative Costs, typically are costs of operating and maintaining buildings (electricity/gas/water bills), grounds and equipment, depreciation, general and departmental administrative salaries and expenses and library costs. Rules for determining the overhead in a funding programme is usually given by the donor, so be sure to find out what percentage, if any, the funding source will allow for indirect costs, and determine which portion of your budget the percentage applies to (EPA 2010). Sometimes indirect costs are a percentage of the total direct costs, or of the personnel costs, or of the salary and wages item alone.

When you are determining the actual rate of the costs related to your action, be as close to reality as possible. It is important that the budget is compiled in close cooperation with staff from the financial department, so you would obtain realistic numbers.

A budget format has usually three parts: (I) Personnel costs, and (II) Non-Personnel costs, (III) Indirect Costs. Source: EPA (2010)

• It is important that the budget is realistic, as otherwise a donor will not take it serious. On the other hand, an underestimated budget might lead to a standstill or even a complete termination of activities in the midst of implementation (PHILIP et al. 2008).
• Before preparing a budget, determine what would be an appropriate amount to request. The guidelines usually tell you the maximum amount allowed. Request the maximum if you can justify it, but never request more money than the programme allows (UNIVERSITY OF IDAHO 2010).
• The numbers should be specific. Rounding an item to the nearest thousand dollars does not inspire confidence. It also suggests you have not done much work preparing your budget (EPA 2010).
• Your planning should allow for contingencies. For example, a cost of living increase will happen before the grant begins. In this case, you should base salaries on the increased salaries (EPA 2010).

Some donors require that some part of the cost of a project be borne by the applicant institution. When cost sharing is required and no rate is specified, about 5 to 10% is acceptable (EPA 2010). This is usually provided by pledging some portion of personnel salaries and in some cases, indirect costs. Therefore, do not forget to list in-kind support and matching revenue, where appropriate.