External Funding Options and Financial Resources for Projects

PMBOK v8 Definition

Funding refers to how a project acquires its financial resources. Projects require funding to be successful, and monies can be provided by several means, including internal organizational budgets, customer contracts, grants, or customer-driven "crowdfunding." Funding proposals are often required either before or after projects have started, with estimated costs and reserves calculated as part of a business value proposition that is used to request funds from appropriate internal or external funding sources.

Why It Matters for the Exam

This concept appears frequently in PMI exam questions testing your understanding of project financing, Enterprise Environmental Factors (EEFs), and business value considerations. Expect situational questions where you must identify appropriate funding strategies or recognize funding as an external EEF that influences project planning and execution.

Key Points to Remember (for the exam)

• Definition of Funding Strategy: Any single approach, or combination of approaches, to secure needed monies for a project. Approaches range from organizational budget transfers to customer contracts to government or NGO grants.

• Common Funding Strategies:

  • Fixed or reallocated internal budgets (internally owned assets and employees funded by fixed annual departmental budgets)
  • Lump sum (entirety of project's budget and reserves allocated all at once)
  • Incremental disbursement (funds secured and allocated in multiple increments, specific to individual phases or key milestones)
  • External investment (high-net-worth individual or institutional investors providing capital, often in exchange for interest in long-term ownership or operations)

• Funding as an Enterprise Environmental Factor (EEF): External funding options and additional financial resources that may be required for projects are classified as EEFs external to the organization.

• Financial Constraints: Budget is generally the primary financial constraint, but it is not the only one. Sometimes the project is restricted to the use of a given type of financial resource.

• Funding Proposals: Projects often require dedicated funding efforts either before or after the projects have started. Certain phases may require specific funding requests to cover approved budgets associated with that phase.

• Value Proposition: Estimated costs and reserves are calculated as part of a business value proposition, which is then used to request needed funds from appropriate internal or external funding sources.

Typical PMI Exam Example

A project manager is planning a new innovation project for a startup. The organization has no internal budget surplus. The project requires significant capital investment before any revenue is generated. Which funding strategy would be most appropriate for this situation?

Answer: External investment, where high-net-worth individuals or institutional investors provide capital in exchange for interest in long-term ownership or operations.

PMI Exam Traps

• Trap: Confusing "funding" with "budget" Reality: Budget is the allocated amount; funding is how the money is acquired. A project can have a budget but still need a funding strategy to secure those monies.

• Trap: Thinking funding only happens at project initiation Reality: Funding efforts can occur before OR after projects start, and certain phases may require specific funding requests.

• Trap: Assuming internal budgets are the only funding source Reality: Funding can come from internal OR external sources, including customer contracts, grants, crowdfunding, and external investors.

• Trap: Confusing funding strategy with cost management Reality: Funding strategy is about how money is secured (procurement of financial resources), while cost management is about how money is spent and controlled.

Important PMI Connections

Quick Review Questions

1. A project requires capital for three distinct phases over 18 months. The organization wants to release funds only when each phase is approved. Which funding strategy should be used?

2. During project planning, the sponsor asks the project manager to identify how the project will acquire its financial resources. What process or consideration is the sponsor asking about?

3. A project is restricted to using only government grants for funding. Under which project management consideration is this restriction classified?

4. What is the difference between "fixed internal budgets" and "reallocated internal budgets" as funding strategies?

5. When a project manager calculates estimated costs and reserves to request funds, what document or justification is being prepared?

PMBOK v8 Reference

Section 2.2.1.2 - Enterprise Environmental Factors External to the Organization Section 2.5.2 - Funding Section 2.5.2.1 - Funding Strategy Section 2.5.2.2 - Funding Proposals