Project Budget Management and Process

Project Budgeting

Project Budget

One of the major limitations of any project is the capital. Almost every aspect of the project, such as the technology to be used in the execution, the workforce required, and the quality of materials needed, gets affected by its budget. Therefore, cost estimation and budgeting are essential parts of any planning process for the project. During the budgeting process, costs are estimated at the work package level, or activity level, in detail. These costs are then added to come up with the budget for the project.

The first step in project budgeting is making rough estimates of the costs based on the available information. The budget is then refined as the understanding of the project improves with time. Based on these estimates, the project budgeting is carried out. As the cost estimates improve, the budget may also need to be revised.

Estimating the Costs

In this process, you can estimate the cost of various aspects of the project. Project cost estimation involves estimation of labor cost, material cost, equipment cost, cost Of quality, services cost, facilities cost and other costs such as allowance for inflation and contingency reserves.

Project cost estimation must consider 'Full Life Cycle Cost'. This means that the estimators should also consider the cost of operations, maintenance and upgrade while estimating the project cost. In order to lower the project cost, one may make choices that tend to increase the operations and maintenance cost. For example, a bookstore wants to build a website; in order to reduce the cost of the project, it may decide to have a website with static HTML pages for each book. Over a period of time, this website will become difficult to maintain, as more books are added in the store, and hence, more pages are required to be added to the site. Every book will need one page, and the links to that page will need to be updated across the website pages. A better idea is to have a database driven site, which may cost more initially but will have lesser maintenance cost. There are many techniques that can be used for estimating the cost of the project. Some of these are as follows:

  • Expert Judgement: This method involves consultation with the experienced professionals belonging to a field, with the objective of acquiring an estimate of the cost related to the project. The experienced professionals are those who have been part of the similar projects in the past. They are aware of the different parts of the project and the costs associated with them. They have an idea of the possible pitfalls in the execution of the project and possible cost variance that may arise. If the project being undertaken is different from the past projects with which they have been associated, their estimates need to be adjusted for the current project accordingly.
  • Analogous Estimates: In this method, the data from similar projects is used for estimating the time or cost for the current project. This method proves to be quite reliable if the current project is like a previous project, in terms of objectives and activities.
  • Parametric Estimates: The process of estimating cost or duration by using the relationship between variables is called parametric estimation. This is considered to be more accurate than analogous estimates, as the variables reflect the features of the current project. For example, this method can be used for calculating the construction projects costs based on the total area for construction. Similarly, for the software projects, function point/object point analysis or Lines of Code (LOC) can be used for calculating the cost of the project. The accuracy of this method depends upon the availability of data and the scalability of the model to different situations.
  • Bottom-up Estimates: The project is divided into sub-deliverables or tasks. Estimates are prepared for each sub-deliverable or task and aggregated upwards to give the estimates for the overall project. The estimates for the cost of each task are Prepared after taking the feedback from the person directly involved in the task. This makes this estimate more accurate than many other methods.
  • Three-point Estimates: Three-point estimates are made for the duration as well as the costs of each task. The three-points are optimistic, most likely, and pessimistic estimates. The weighted average of these estimates can also be taken for estimating the task duration or cost. Such estimates give an idea of how the performance of the project may vary, so that the management can prepare for all the situations in advance.
  • Vendor Bid Analysis: The cost of the project can also be estimated by analyzing the bids submitted by multiple vendors. It must be adjusted for additional work or facilities required to be provided or procured in addition to the work done by the vendor. This method takes the advantage of the research conducted independently by all the vendors.

Once the cost estimate has been prepared and accepted, the next step is to prepare the budget for the project.

Determining the Budget

Determining the project budget is the process of sanctioning the costs approved in the estimation process. This step involves the creation of a time-phased aggregation of costs over the period of the project. Budget defines the amount of money required at different timelines in the project. Appropriate Contingency Reserves (CR) and Management Reserves (MR) are provided based on the risks associated with the project work. This budget is used to allocate funds, as well as monitor the performance of the project during the execution in terms of cost.

Monitoring and Controlling the Budget

When the project is under implementation, it is important that the expenses are monitored closely. Periodic reports of the expenses are compared with the baseline regularly, and any deviations are studied and analyzed carefully. Controlling the budget ensures that the unnecessary changes that may affect the project budget are not allowed.

The actual monthly cost incurred on the project is compared with the baseline. Each month, the latest data regarding the costs of personnel, raw materials, and other miscellaneous costs is compiled along with the progress status of the project. The cost and the status of the project are then compared with the baseline. It may sometimes happen that the money which was allocated has not been used; while at some Other instances, the expenditure of the project may be more than what had been allocated.

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