- Analogous estimating. …
- Parametric estimating. …
- Top-down method. …
- Bottom-up method. …
- Three-point estimate. …
- Earned value analysis.
Economic considerations are crucial when choosing between competing projects during the conceptual phase of the project selection process. An estimation of the cost of each project is made in order to compare the simple paybacks or internal rates of return between them. Although the estimates must be precise enough for comparisons to be meaningful, the time and resources used to create the estimates should be commensurate with the scope and difficulty of the project. In general, the techniques used to determine the project’s cost during the selection phase are quicker and use fewer resources than those employed to produce detailed estimates in later phases. They rely more on the managerial expertise of seasoned professionals who can produce accurate estimates from sparser data. Early on in the project selection process, estimates are typically created using standardized formulas or data from previous projects that can be scaled to match the size and complexity of the current project.
An analogous estimate is one that is based on estimates from other projects. It is reasonable to assume that the current project will cost roughly the same if a project of a similar nature cost a certain amount. There are some projects that aren’t exactly the same size and complexity, so the estimate needs to be adjusted up or down to take those differences into account. The estimator’s judgment will determine which projects to compare to each other and how much adjustment is required. This assessment is typically based on years of project estimation experience, including inaccurate estimates that served as learning opportunities for the expert.
Less experienced managers can review the documentation from previous projects if they need to make analogous estimates. The manager can quickly locate projects that have profiles similar to the project under consideration if projects were assessed using the Darnall-Preston Complexity Index (DPCI), even if those projects were managed by different people.
The DPCI evaluates project characteristics, allowing for more informed choices when constructing the project profile. This index creates a distinctive project profile by evaluating the degree of complexity of a project’s key components. The profile provides information about a project’s characteristics that can be addressed in the project execution plan as well as a benchmark for comparing projects by indicating the level of project complexity. By categorizing 11 characteristics into the four main categories of internal, external, technological complexity, and environmental
John sold his apartment and purchased another one. It is now time to plan for the move. John consulted a friend regarding moving expenses. “I moved from an apartment a little smaller than yours last year, and the distance was about the same,” his friend retorted, I did it with a 14-foot truck. The rental truck, pads, hand truck, rope, boxes, and gas came to about $575. John’s initial estimate of the cost of the move was less than $700 due to the similarity of the projects, so he decided that the cost would be reasonable and the project could move forward.
Average costs per unit are available if the project includes activities that are common to many other projects. For instance, if you ask a construction company how much it would cost to construct a typical office building, the estimator will request the building’s square footage and the location of where it will be constructed. The company’s estimator can forecast the building’s cost based on these two elements: size and location. Size and location are examples of parameters—measurable elements that can be incorporated into an equation to determine the outcome. The estimator is aware of local labor costs as well as the typical office building’s average cost per square foot. The estimate is further refined using additional factors like finish quality. Parametric estimates are those that are created by multiplying measured parameters by cost per unit values.
The parameter used by a truck rental company to calculate the size of the truck required for John’s move is the number of bedrooms (Figure 12). 1). The business believes that the critical factor in determining the size of the truck required for a move is the number of bedrooms. John selects the 14-foot truck because he only has a one-bedroom apartment. When estimating the price of the truck rental, additional factors, such as distance and number of days, are used after the size has been determined.
Counting the cost of each item in each activity of the schedule, including labor and materials, is the most accurate but time-consuming estimation technique. Finding the cost of each item at the lowest level and then adding them up to determine the cost of higher levels is known as “bottom-up estimating” if you think of the project schedule as a hierarchy where the general descriptions of tasks are at the top and the lower levels become more detailed.
John decides the savings are worthwhile if he can complete the packing with the assistance of his friends after comparing the quotes provided by the moving companies. He makes the decision to create a thorough cost estimate (Table 12). 1) for packing materials and use of a rental truck. He compiles a thorough list of items, quantities, and costs after researching packing material costs and truck rental rates on business websites.
The estimate can be rolled up—subtotaled—to display less detail. This process is made easier using computer software. Spreadsheet software can be used to create cost estimates for projects of low complexity. Software that controls schedules on bigger projects can also control costs and display them by activity and category. Excel’s subtotal feature, for instance, could be utilized and collapsed to display the subtotals for the two cost categories (Figure 12). 2).
If the funding for the project is not available when it is required, even if the total amount spent on the project is equal to or less than the amount budgeted, the project may still be in trouble. There is a natural conflict between the project manager, who wants to ensure that there is enough money available to cover project expenses, and the financial staff at the company, who do not want to pay for the use of money that is simply sitting in a checking account. Before transferring funds to the project account, the financial staff prefers to keep the company’s money working in other investments until the very last minute. The vendors and contractors have similar worries, and they desire payment as soon as possible so they can use the funds within their own businesses. If activities go over budget, the project manager would like to have as much cash on hand as possible.
Most projects experience unforeseen events that drive costs above initial projections. The estimating method needs to be reviewed if estimates are rarely exceeded because they are too high. The activities that will cost more than anticipated cannot be predicted, but it is reasonable to assume that some of them will A later chapter will go into greater detail on risk analysis, which includes estimating the likelihood of such events.
Money is budgeted to deal with unplanned but statistically likely cost increases rather than overestimating each cost. Funds allocated for this purpose are called contingency reserves. It is included in the project’s overall budget because it is likely that this money will be used for something. If this fund can cover unforeseen costs, the project will be completed on schedule and within budget.
Money might be required to address the situation if something happens during the project that necessitates a change in the project scope before the project sponsor or client can discuss the change in scope. It could be an opportunity as well as a challenge. For instance, if a new technology emerged that would significantly improve your project, it would be worthwhile to incur additional costs and alter the project’s scope. At the manager’s discretion, funds may be made available to address requirements that would alter the project’s scope. These funds are called management reserves. They can be included in the overall project budget even though, unlike contingency reserves, they are unlikely to be used and are not included in the project’s budget baseline.
How to Create a Project Budget – Project Management Training
Why is budgeting in project management important?
When comparing the benefits of a project’s completion to its total costs, one of the criteria frequently used to gauge its success rate is its budget. The following are some key additional justifications for the significance of budgeting in project management:
What is project management budgeting?
Budgeting for project management is the process of calculating the total amount of money allotted for a particular project. The budget, which includes all anticipated costs for the upcoming project, is typically estimated by the project manager and the project management team. Understanding and accurately estimating individual costs for all the project’s components is the main challenge in developing a realistic budget.
When determining a project’s budget, a few factors that must be established are:
6 types of project management budgeting methods
The top six methods for choosing the right budget for a project are as follows:
1. Analogous estimating
This approach to budget estimation involves examining a previously finished project with a comparable scope to the current one and using its budgeting calculations, modified for variations in scope, quality, term of execution, or any other pertinent parameters. Although it is not always a reliable method, it can be used when there is little information available about the upcoming project and a quick estimate is needed. This approach is typically quicker and less expensive than others, but it can only be used by businesses that have completed projects of a similar nature in the past.
2. Parametric estimating
This estimation technique involves estimating the project’s scope, duration, and overall costs by using historical data and other pertinent variables. This is typically accomplished by looking up previous data, computing different costs per unit for various aspects that are shared by the current project, and adjusting the proportions to fit the new project’s scope. This method’s accuracy is typically inversely correlated with the caliber and applicability of the historical data on which it is based.
3. Top-down method
This approach entails examining the project budget as a whole and then determining individual costs for each of the necessary processes. Each component of the overall project is examined, its precise costs calculated, and then the results are contrasted with each component’s initial estimates. Project managers can decide to reduce the scope of some project components to keep it within the overall budget after seeing how cost-effective each process is based on the findings.
4. Bottom-up method
By using the bottom-up approach, the project manager seeks to directly generate a total project budget with the assistance of their project management team, as opposed to the top-down approach, which divides the project into multiple processes and calculates the individual costs for each. For this method, the accuracy of the budget estimates is typically inversely correlated with the accuracy of the data and professional advice obtained during the budgeting period.
5. Three-point estimate
This approach estimates a budget using three different calculations: the most expensive scenario, the most cost-effective scenario, and the scenario with the highest likelihood of occurring. By using these numbers, you can roughly estimate the necessary budget while also evaluating some of the project’s risks.
6. Earned value analysis
Using this technique, you can gauge a project’s budget’s accuracy as it is being carried out. It entails routinely comparing the costs of each project phase with those that were initially estimated, typically using one of the four methods mentioned earlier.
Tips for accurate project management budgeting
Consider these tips when determining a projects budget:
FAQ
What are the methods of project budgeting?
The project manager can determine the project’s budget in four different ways. A project manager can use analogous, parametric, top-down, and bottom-up estimating methods. To understand how they all function, we’ll talk about each of these strategies and examine an example of each one in action.
What are the 4 budgeting methods?
Businesses can use a variety of budgeting techniques, but the four that are most frequently employed are incremental budgets, activity-based budgets, value proposition budgets, and zero-based budgets.
