Budget and Cost Estimates- PMP/CAPM

Budget and Cost Estimates are two terminologies that even senior project managers use them interchangeably all the time. Well! one may say that these are the opposite side of the same coin.

Estimate – To produce a statement of the approximate cost of (Merriam-Webster Online, http://www.m-w.com/dictionary/estimate)

Budget – plan expressed in quantitative, usually monetary, terms that covers a specific period of time (Accounting Text & Cases, Anthony, Hawkins, and Merchant, Twelfth Edition, page 697)

Budget

The budget of a project is put together using the project schedule and cost estimates. It provides an overview of the cost from a periodic perspective. The project budget must align with the organization’s funding limitations to make sure adequate finances are available. Typically, budget refers to the sum of money that has been assigned for a purpose. In terms of project management, a budget represents an accepted estimate for either the complete project or for a specific schedule activity or work breakdown structure. At times, the budget is modified with approval from the higher authority. Though the ideal situation is to stick to the pre-defined budget.

Project budget determines the total amount of finances allocated for the project use. Project manager along with the consultation of team estimates the project budget. This comprises of all the costs that are required to complete the project. If the project budget is estimated poorly, you will perhaps need to modify the budget sooner or later. A project manager usually uses four techniques to estimate the budget including parametric, analogous, top-down, and bottom-up.

Budget is an effective tool to estimate the costs and essential efforts for projects, work packages, and activities associated with project management. Cost budgeting involves the approximation of costs, setting a certain budget, and managing and monitoring the actual costs in comparison to the estimated ones. These costs are assigned to the project activities and work packages in a project. A prudently executed schedule and resource plan allow a more precise cost budgeting. However, changes are made in the following circumstances:

  • There is scope variation
  • A new budget is more practical
  • Planned costs are not adequate for certain tasks
Budget and Cost Estimates
Budget and Cost Estimates

 

The cost estimate is a list and quantification of all of those with a dollar amount attached to it. Budgeting relies on that good estimates. Budgeting is the process of identifying not the amounts, but the sources of the funds to be used to cover the cost estimate.

Cost Estimates

To progress in the field of project management, the capability to estimate the cost is crucial to the project. Being a project manager, accurate and realistic estimates are important to estimate metrics that need to be executed. A project manager helps in preparing accurate estimates to get all inputs appropriate when calculating the cost. Typically, there are two ways to estimate the cost of a project including ROM and definitive estimate. The cost estimates are just the costs associated with the activities and work packages in the project schedule. The cost estimate is determined using parametric, three-point, or analogous estimating techniques primarily depending on the work package or activity.

Estimating is a crucial part of project planning comprising a quantitative estimate of project finances, resources, and duration. Cost estimation in project management is the procedure of predicting the financial and other resources required to complete a project within a definite scope. Cost estimation involves every element needed for a project from materials to finances and estimates a total amount that defines a project budget. For this, an initial cost estimate is determined that figure out whether the project should be moved forward. If the cost estimation is very high, an organization may not want to proceed with the project or modify the tasks according to their affordability. As the project progresses, the cost estimate is used to manage all associated costs to keep the project on budget.

Summary of Budget and Cost Estimates

Ideally, all the  estimates should be organized against Work Breakdown Structure (WBS) and simple roll-up will be converted directly to the budget

An estimate is an approximation of what your project (or piece of it) will cost. The budget is what you’re allowed to spend. The estimate provides a guideline, the budget provides hard edges. You can’t go ‘over-estimate’, but you can go over-budget.  Management usually speaks in ‘budget’ terms, the team in ‘estimate’ terms.PM4NGOS

In the best-case scenario, the estimate comes before the budget. The sequence would be:

  1. Scope is prepared
  2. Schedule is prepared
  3. Cost Estimate built
  4. Budget determined

Further Readings

    1. Project Cost Management
    2. Planning Process Group
    3. PM4NGOSMudassir Iqbal, Professional Skills Trainer
    4. What is the Difference Between Project Cost Estimate and Project Budget?Mudassir Iqbal, Professional Skills Trainer

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Mudassir Iqbal, PMPMudassir Iqbal, PMPMudassir Iqbal, PMPMudassir Iqbal, PMPMudassir Iqbal, PMPMudassir Iqbal, PMP

 

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