UNIT 4

PROJECT BUDGETING
 Unit Outline
• Overview of project budgeting
• Determining the project budget
• Types of Project budgeting
• Requirements of project budgeting
• Project budgeting tools and techniques
• Outcomes of project budgeting
• Developing budget contingencies
 Overview of project budgeting
• A project budget is a plan for future activities within a
given project and is usually expressed in monetary terms
• Process of preparing and monitoring the cost of a project
• Account for the costs to be incurred on a project
• Serves as a control mechanism during the lifecycle of the
project
• Forecasting what projects resources will cost, the
quantities required, and when they will be needed
 Overview of project budgeting
• Prepared in advance and determined by the nature of
the project
• Help project managers and the team to achieve their
planned objectives with a planned financial structure
• Project budget is based upon an estimate of the income
expected so that related expenses can be projected or
controlled to remain within pre-agreed limits or ceiling
• Includes all the funds authorised to execute the project
 Determining the project budget
• Involves the process of aggregating the estimated costs
of individual activities or work packages to established
an authorised cost baseline.
• Based on the activities in the WBS for the project
• Includes
– Total budgeted cost – aggregated amount of all activities to
complete the project
– Time phased budget – distribution by time period of the total
budgeted cost for the project over its expected time span
 Determining the project budget
• Total budgeted cost (Budget at completion)
– Sum of the estimated cost of all specific activities
that make up a work package
– Cannot exceed total amount of funds allocated for
the project
 Determining the project budget
• Time phased budget
– Created to determine how much of the budget
should be spent at any point in time
– Imperative for project cost control
– Information from the WBS are used to create time
phased budgets
 Determining the project budget
• Time phased budget
 Types of project budgeting
• Top-down budgeting
– Requires input from top management
– Based on collective judgements and experience based on
similar projects
– Provide budget for the overall project as well as major work
packages
– Overall project budget cost fairly accurate as compared to the
budget of individual activities
– Subcontractors and project team member must develop their
own budgets based on the overall top down contract
 Types of project budgeting
• Bottom-up budgeting
– Begins from the WBS to apply direct and indirect cost to
project activities
– Requires detailed project plan
– Reduces management control and oversight of the budgeting
process
– Facilitates coordination between PM and functional managers
– It is time consuming but more accurate
 Types of project budgeting
• Activity based budgeting
– Assigns cost to activities first then to the project
based on each project’s of resources
– Based on the premise that project consumes
activities and activities consume resources
 Types of project budgeting
• Activity based budgeting steps
1. Identify the activities that consume resources and assign
cost to them (as in bottom up budgeting)
2. Identify the cost drivers associated with the activities
(resources; personnel, and materials)
3. Compute a cost rate per cost driver unit or transaction
(labour = cost rate/unit = R Cost/hour)
4. Assign costs to projects by multiplying the cost drive rate
times the volume of cost driver unit consumed by the project
(Cost of PM = R40/hour and working for 80hours should be
equal to R40*80 = R3200)
 Requirements of project budgeting
• Project management plan
– Cost management plan
– Resource management plan
– Scope baseline
• Project documents
– Basis of estimates
– Cost estimates
– Project schedule
– Risk register
 Requirements of project budgeting
• Business documents
– Business case
– Benefits management plan
• Agreements
• Environmental factors
• Organisational process assets
 Project budgeting tools and
techniques
• Expert judgement
• Cost aggregation
• Data analysis (reserve analysis – management
reserve, budget reserves)
• Historical information review
• Funding limit reconciliation
• Financing
 Outcomes of project budgeting
• Cost baseline – approved version of time
phased project budget excluding management
reserves
• Project funding requirements
• Project documents updates
– Cost estimates
– Project schedule
– Risk register
 Developing budget contingencies
• Budget contingency – allocation of extra funds to cover
uncertainties to ensure that the project can be
completed within the time frame originally specified.
– Added to project budget after the identification of all project
costs
– Budget doesn’t include contingency as part of activity based
budgeting
– Contingency calculated as an extra cushion on top of the
calculated project cost.
 Developing budget contingencies
• Reasons for contingency budgets
– Project scope subject to change
– Murphy’s law is always present
– Cost estimation must anticipate interaction costs
– Normal conditions are rarely encountered.
Thank you

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