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PM CHP 05

This document discusses budgeting for projects. It defines a budget as a financial plan for an accounting period. There are two main methods for creating project budgets: top-down budgeting, where management estimates overall costs, and bottom-up budgeting, where those doing the work estimate task costs. True bottom-up budgets are rare as management is reluctant to fully trust and cede control to subordinates. Costs are estimated by determining resource needs like labor, materials, and equipment for each task. Budgets help allocate resources and allow management to monitor projects.

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52 views21 pages

PM CHP 05

This document discusses budgeting for projects. It defines a budget as a financial plan for an accounting period. There are two main methods for creating project budgets: top-down budgeting, where management estimates overall costs, and bottom-up budgeting, where those doing the work estimate task costs. True bottom-up budgets are rare as management is reluctant to fully trust and cede control to subordinates. Costs are estimated by determining resource needs like labor, materials, and equipment for each task. Budgets help allocate resources and allow management to monitor projects.

Uploaded by

Abbas Sky
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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BUDGETING THE PROJECT

A.Khaliq
Project Management Chapter 05
Two main points
A budget (derived from old French word
bougette, purse) is a quantified financial
plan for a forthcoming accounting period
The word project comes from the Latin word

projectum from the Latin verb proicere,


"before an action" which in turn comes from
pro-, which denotes precedence, something
that comes before something else in time
The word "project" thus actually originally
meant "before an action".
Planning for Resources
To complete a project, physical resources
are necessary whether they are in the form
of people, equipment, or materials.
Identifying the resources required and the
quantity needed is the focus of resource
planning.
Planning for resources start with the WBS,

historical information, the scope statement


and policies of the organization
(referencing to staffing, rental and
purchase guidelines).
Introduction
Budgets are plans for allocating
organizational resources to project
activities.
forecasting required resources, quantities
needed, when needed, and costs
Budgets help tie project to overall
organizational objectives.
Budgets can be used as tool by upper

management to monitor and guide


projects.
Overfunding / underfunding
METHODS OF
BUDGETING
METHODS OF BUDGETING

There are two fundamentally


different strategies for data
gathering:
Top-down
Bottom-up
Top-Down Budgeting
Based on collective judgments and
experiences of top and middle managers.
Overall project cost estimated by estimating
costs of major tasks
This process is directed from top to bottom
therefore called top-down budget.
In WBS when we move from top to bottom,
the work breakdown takes place. Similarly in
top-down budget the budget break down
takes place as we move from top to bottom.
Top-Down Budgeting
Advantages
accuracy of estimating overall budget
errors in funding small tasks need not be
individually identified
The experience and judgment of the top
management considers for small but important
activities to be factored into the overall estimate
Disadvantages:
First line managers complain about less
allocation of resources to the work units.
Bottom-Up Budgeting
WBS identifies elemental tasks from
bottom
Those responsible for executing these

tasks estimate resource requirements


(Lower first line managers)
Initially, estimates are made in

terms of resources, such as labor


hours and materials
The estimates are then

communicated to higher authorities


Bottom-Up Budgeting
Advantages:
Individuals closer to the work are thought to
have a more accurate idea of resource
requirements
The direct involvement of low-level
managers in budget preparation increases the
likelihood that they will accept the result with
a minimum of dislike
Involvement is a good managerial training
technique, giving junior managers valuable
experience
Bottom-Up Budgeting
Disadvantage:
Normally the lower management
overestimates the budget due to the
fear that top management shall
deduct a part of it.
Which method to be adopted for project
budgeting, top down or bottom up,
depends on the organization and the
situation. Some organizations adopt a
mix of both.
Budgeting
Top-down budgeting is very common
True bottom-up budgets are rare

Senior managers see the bottom-up


process as risky
They tend not to be particularly trusting
of ambitious subordinates who they fear
may overstate resource requirements
They are reluctant to hand over control
to subordinates whose experience and
motives are questionable
COST ESTIMATING
Work Element Costing
Determine resource requirements and
then costs for each task
costs (e.g., materials)
labor time
labor rate
equipment time
equipment rate
Overhead
General & Administrative costs
Work Element Costing
For example one of the work element in a
project is the salary of a machine operator.
Suppose you would pay $20 per hour to the
operator and he or she works for 8 hours
per day. Then we can calculate the
estimated cost of this work element
(machine operator) as follows;
Labor cost per day = No. of hours per day Rate
per day
Labor cost per day = 8 20
Labor cost per day = $ 160
Work Element Costing

Advantages:
The actual process of building a
budget - either top-down or bottom-
up is a complex process.
This method simply identifies the
work elements, estimates its cost
and prepares the project budget. In
this way it is considered to be more
simple.
Activity Versus Program Budgeting

Activity oriented budgets are based


on historical data accumulated
through an activity-based accounting
system.
expenses assigned to basic budget lines
With program budgets, each project
has its own budget.
expenses by task and time period are
shown
BUDGET UNCERTAINTY AND RISK
Estimate of Project Cost: Estimate
Made at Project Start
Three Basic Causes for Change in
Projects Costs

Errors made by cost estimator about


how to achieve tasks.
New knowledge about the nature of the
performance goal or setting.
A mandate.

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