Project Budgeting and Cost Estimation PDF

IT 210 PROJECT MANAGEMENT PROJECT BUDGETING PROJECT BUDGETING A successful project is the dream of every project management team and investor. The project can be successful with two factors, i.e., completion within time and fund limit and meeting the expectations of stakeholders and the audience...

IT 210 PROJECT MANAGEMENT PROJECT BUDGETING PROJECT BUDGETING A successful project is the dream of every project management team and investor. The project can be successful with two factors, i.e., completion within time and fund limit and meeting the expectations of stakeholders and the audience it is being designed for. Seeking different perspectives, generally, the budget is the joint entity posing a limitation to any project. Thus, effective project budgeting is vital in delivering a successful project. PROJECT BUDGETING A successful project outcome is a result of doing three things well; delivering what the customer needs (scope) when they need it (time) and within the cost (budget). The scope and time aspects also boil down to cost eventually. Project Budgeting is a process that helps you understand the cost boundaries for your project and how well you are doing to stay within those boundaries. PROJECT BUDGETING A project budget is a plan outlining how much you intend to spend, on what, and when. The project budget encapsulates all costs that may be incurred during the project lifecycle, from planning to implementation and completion of the project. These costs may include personnel, materials, equipment, tools, software, travel, and other costs related to the project. WHY CREATE A PROJECT BUDGET? By creating a project budget, one can plan and allocate resources in a way that reduces the risk of financial barriers arising and the project staying within its financial targets. WHY CREATE A PROJECT BUDGET? Three Reasons Why Project Budgeting is Important: 1. Clear plan: By creating a project budget, one can plan and allocate resources in a way that allows the project to be executed without financial hurdles. The project budget helps break down the costs for the different parts of the project. WHY CREATE A PROJECT BUDGET? Three Reasons Why Project Budgeting is Important: 2. Identify issues: A project budget also helps highlight potential costs and problem areas in advance, enabling you to address them before they escalate. WHY CREATE A PROJECT BUDGET? Three Reasons Why Project Budgeting is Important: 3. Information and transparency: Having a clear and realistic project budget is also crucial to gaining support from decision-makers and stakeholders. If you can show that you have a thoughtful budget, where you have contemplated and planned for all costs, and the project is feasible within the budget, you increase your chances of successfully driving the project and the likelihood of a successful project. WHAT ARE PROJECT BUDGET COMPONENTS? A project budget comprises various interconnected components forming a comprehensive financial plan. The first is direct costs, which are expenses directly tied to the project’s deliverables and activities.  WHAT ARE PROJECT BUDGET COMPONENTS? Direct costs can include: Labor: The wages or salaries of team members and workers involved in the project. This includes the cost of their time and effort dedicated to project tasks. Materials: These can vary depending on the nature of the project, such as construction materials, software licenses, or manufacturing components. Equipment: The cost of purchasing, renting, or leasing specialized equipment or machinery necessary for completing project tasks. Space and facilities: The expenses of renting or leasing office space, warehouse, or other facilities needed for project work. WHAT ARE PROJECT BUDGET COMPONENTS? Indirect costs are expenses that indirectly contribute to the project’s success. They support the overall project but cannot be directly attributed to specific activities. WHAT ARE PROJECT BUDGET COMPONENTS? Indirect costs can include: Administrative overhead: Costs related to executive functions such as project management, office management, accounting, and general administration. Utilities: Expenses for electricity, water, heating, cooling, and other utilities required to operate the project workspace. Licenses and permits: Costs associated with obtaining licenses, permits, or certifications necessary for project compliance and operations WHO IS RESPONSIBLE FOR PROJECT BUDGETING? Typically, it is the Project Manager along with a financial officer who is responsible for project budgeting. The Project Manager is the person responsible for leading the project and ensuring it is completed within budget and timeframe. The project manager works with other members of the project team, including the financial officer, to ensure all costs are covered, and the project is feasible within the budget. The Financial Officer (Project Economist or Project Controller) is a person responsible for managing and overseeing the finances of a company or project. In the case of project budgeting, it is the financial officer's task to assist the project manager in creating a realistic project budget and ensuring all costs are covered using estimation techniques, such as comparing budgets from similar projects or working backward from a fixed amount. WHO IS RESPONSIBLE FOR PROJECT BUDGETING? One can view it as the Project Manager being knowledgeable about the steps in the project that need to be carried out and how much time and resources it will require, while the financial officer knows how much the different parts tend to cost. For smaller projects, however, it is usually only the Project Manager who sets the budget, which is then approved by the responsible steering group or boss. WHAT ARE THE TYPES OF PROJECT BUDGETS? Different projects may require unique budgeting approaches based on their nature, scope, and duration. Here are some common types of project budgets: Fixed budget - The budget remains static throughout the project, regardless of any changes in scope or requirements. Example: A construction project where the budget for materials and labor is set at $500,000 and remains unchanged regardless of any scope changes or unforeseen circumstances. WHAT ARE THE TYPES OF PROJECT BUDGETS? Different projects may require unique budgeting approaches based on their nature, scope, and duration. Here are some common types of project budgets: Flexible budget - The budget adjusts based on project changes, accommodating scope, resources, or deliverables modifications. Example: A software development project where the budget adjusts based on changes in requirements, accommodating additional features or modifications to the project scope. WHAT ARE THE TYPES OF PROJECT BUDGETS? Different projects may require unique budgeting approaches based on their nature, scope, and duration. Here are some common types of project budgets: Incremental budget - This budgeting approach involves incremental increases or decreases to the previous budget, often used for ongoing projects or those with periodic funding cycles. Example: A research project that receives incremental increases in funding each year to support ongoing data collection and analysis activities. WHAT ARE THE TYPES OF PROJECT BUDGETS? Different projects may require unique budgeting approaches based on their nature, scope, and duration. Here are some common types of project budgets: Zero-based budget - The budget requires justifying all expenses from scratch, regardless of previous budgets. Each budget cycle starts from zero, promoting a thorough review of all expenses. Example: A marketing campaign where the budget is built from scratch each year, requiring justification for all expenses regardless of previous budgets. WHAT ARE THE TYPES OF PROJECT BUDGETS? Different projects may require unique budgeting approaches based on their nature, scope, and duration. Here are some common types of project budgets: Rolling budget - The budget is continually updated, typically for a fixed period (e.g., 12 months). Each month or quarter that elapses, a new budget period is added, and the oldest period is dropped. Example: A sales project with a rolling budget updated quarterly, where each quarter a new budget period is added, and the oldest period is dropped to maintain a 12-month planning horizon. WHAT ARE THE TYPES OF PROJECT BUDGETS? Different projects may require unique budgeting approaches based on their nature, scope, and duration. Here are some common types of project budgets: Activity-based budget - The budget allocates funds based on specific project activities or tasks. This method helps prioritize resource allocation where it is most needed. Example: An event planning project where funds are allocated based on specific activities like venue rental, catering, marketing, and entertainment to ensure resources are allocated where needed most. WHAT ARE THE TYPES OF PROJECT BUDGETS? Different projects may require unique budgeting approaches based on their nature, scope, and duration. Here are some common types of project budgets: Performance-based budget - The budget focuses on the expected outcomes and results of the project. It ties funding to the achievement of specific performance targets. Example: A training program where funding is tied to achieving specific performance targets such as participant completion rates or post-training assessments. WHAT ARE THE TYPES OF PROJECT BUDGETS? Different projects may require unique budgeting approaches based on their nature, scope, and duration. Here are some common types of project budgets: Contingency budget - The budget sets aside a reserve of funds to address unexpected events, risks, or changes that may impact the project. Example: A construction project setting aside 10% of the total budget as a contingency fund to address unexpected delays, material price increases, or other unforeseen events. WHAT ARE THE TYPES OF PROJECT BUDGETS? Different projects may require unique budgeting approaches based on their nature, scope, and duration. Here are some common types of project budgets: Variable budget - The budget fluctuates based on external factors such as market conditions, economic trends, or customer demand. Example: An agricultural project where the budget fluctuates based on market conditions, weather patterns, and crop yields impacting expenses like irrigation costs or seed prices. WHAT ARE THE TYPES OF PROJECT BUDGETS? Different projects may require unique budgeting approaches based on their nature, scope, and duration. Here are some common types of project budgets: Hybrid budget - The budget combines elements of multiple budget types to suit the unique needs of a particular project. It allows for greater flexibility and adaptability while providing a baseline for control. Example: A technology project combining elements of fixed and flexible budgets to allow for adjustments in resource allocation while maintaining a baseline budget for control and monitoring purposes. APPROACHES TO ESTIMATING A PROJECT BUDGET Bottom-up estimation Bottom-up estimation is one of the best and foolproof ways to prepare a project budget. It anticipates estimating individual parts of the project, such as tasks, milestones, or phases, and totaling them to get project cost. The bottom-up method involves estimating costs for individual tasks or components of a project and then aggregating them to determine the total project budget. It offers detailed insights into costs but can be time-consuming.  APPROACHES TO ESTIMATING A PROJECT BUDGET Bottom-up estimation Example: For a construction project, each department provides detailed estimates of labor, materials, and equipment costs. The project manager aggregates these estimates to create a comprehensive project budget, ensuring accuracy and input from those directly involved. APPROACHES TO ESTIMATING A PROJECT BUDGET Top-down budgeting Top-down budgeting is a high-level budgeting approach where the overall budget is determined by top-level management or stakeholders without involving lower-level project managers or teams in decision-making. While this method is quicker and more straightforward, a lack of information from those in higher-level positions means that the budget can require further adjustments to ensure that the budget is aligned with project-specific needs. APPROACHES TO ESTIMATING A PROJECT BUDGET Top-down budgeting Example: Allocating a total budget of $1 million for a new product development project without detailed breakdowns for each stage. APPROACHES TO ESTIMATING A PROJECT BUDGET Parametric Estimating Parametric estimating involves using historical data and statistical relationships to estimate project costs and uses predefined parameters, such as cost per unit or hour, to quickly calculate budgets. parametric estimation involves using mathematical calculations and relationships between variables to estimate costs or durations. It is considered more accurate than analogous estimation as it scales data points for better accuracy. It is particularly helpful for projects with repetitive elements and well-established historical data.  APPROACHES TO ESTIMATING A PROJECT BUDGET Parametric Estimating Example: A software development team estimates the time and resources required to build a new AI-powered feature by analyzing data from similar past projects and calculating the average time it took to complete similar functionalities. APPROACHES TO ESTIMATING A PROJECT BUDGET Analogous Estimating The analogous cost estimation technique involves determining the costs based on experience and historical projects. Using analogous estimation, you would rely on the budget data and best practices from your previous projects to form an opinion about how much the current one could cost the client. APPROACHES TO ESTIMATING A PROJECT BUDGET Analogous Estimating Example: In a marketing campaign, project managers use data from past campaigns with similar target audiences and objectives to estimate the current campaign’s budget, considering lessons learned from previous projects.  BEST STRATEGIES FOR EFFECTIVE BUDGETING A well-developed project enables team management and collaborators to stay within their budget goals and deliver a successful result. Follow the strategies for effective budgeting. 1. All collaborators and investors must be asked to reveal the nuances that any person could miss. Furthermore, the involvement of all investors helps to ensure buy-in and due consideration concerning any alteration request. 2. Break the project into distinct categories of activities at different levels. This approach can help in understanding the micro and major-level tasks in detail. BEST STRATEGIES FOR EFFECTIVE BUDGETING A well-developed project enables team management and collaborators to stay within their budget goals and deliver a successful result. Follow the strategies for effective budgeting. 3. Never ignore indirect expenses of the project that may include currency conversion fees or tax. 4. Mandatorily associate the budget with project aims, goals, and organizational objectives. 5. The best project budget must be created at the beginning of the project. However, a consistent update is necessary to reflect the progress of the project and the changed conditions. WHAT TOOLS TO USE FOR PROJECT BUDGET MANAGEMENT? Project budget management can be significantly streamlined and enhanced with the help of various software tools and technologies. These project budget tools offer features and functionalities that simplify budget planning, tracking, and reporting, making the process more efficient and transparent. Here are the best apps for budget tracking and managing: WHAT TOOLS TO USE FOR PROJECT BUDGET MANAGEMENT? PROJECT BUDGETING The process of deriving a project budget in project management helps you manage your project effectively by establishing the requirements, assumptions, and risks. A good project budget will include all direct and indirect costs, including the costs for labor and materials. There are many qualitative and quantitative techniques available for project budgeting, and you can use those effectively in alignment with your project context to arrive at a clear and effective budget for your projects.