Project MGT

Budgeting & Cost Estimation Lecture # 10

Budgeting:
 A process of forecasting revenues and expenses for upcoming period.
 In project budgeting is very important tool in order to forecast or estimate the resources
to be used in a project in monetary terms over a specified time period.
 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(lead) projects.

Why do we do Budgeting:
 Because resources are always scares.
 Because we want to identify and overcome future uncertainties.

Cost Estimation:
 The process of forecasting or approximating the time and cost of completing project
deliverables
 The task of balancing the expectations of stakeholders and the need for control while
the project is implemented

Why Estimating Time and Cost Are Important:

 Estimates are needed to support good decisions.
 Estimates are needed to schedule work.
 Estimates are needed to determine how long the project should take and its cost.
 Estimates are needed to determine whether the project is worth doing.
 Estimates are needed to develop cash flow needs.
 Estimates are needed to determine how well the project is progressing.

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 Estimates are needed to develop time-phased budgets and establish the project
baseline(starting point).

Approaches used for Cost Estimations:

 There are two approaches followed in project cost estimations.
 Macro Approach / Top-down estimates.
 Micro Approach / Bottom-up estimates

Macro Approach / Top-Down:

 Based on collective judgements and experiences of top and middle managers.
 They are the rough estimate normally done by top management or Baord of directors.
 The detail work is done by the lower management on the project.
 Overall project cost estimated by estimating costs of major tasks

Advantages/disadvantages

 Accuracy of estimating overall budget

 Errors in funding small tasks need not be individually identified

Micro Approach / Bottom-Top:

 Done by those who are responsible for executing these tasks estimate resource
requirements
Advantage
 More accurate in the detailed tasks
Disadvantage
 Risk of overlooking(supervising) tasks

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When to Use Which Approach:

Condition

Macro Estimates

Micro Estimates
Strategic decision making

X
Cost and time important

X
High uncertainty

X
Internal, small project

X
Fixed-price contract

X
Customer wants details

X
Unstable scope

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Macro Estiamtion Tools:

i. Apportion(allocation) Method:
 Done on the basis of percentage.
 Just you have to define proportionary.

ii. Ratio Method:

 Used in construction project.
 We assign a specfic cost on a mutually agreed cost basis/unit.
 E.g, Per square feet, Per Unit etc.

Micro Estiamtion Tools:

i. Work Break Down Structure:

 Full project is divided into various activites and events or stages and then
estimates are done for each activity, event and stages.
 E.g, In constructing room possible tasks can be  construction walls,
electricity fittings, building furniture fixing etc.

Factors Influencing the Quality of Estimates:

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Padding(calculating)

1Horizon(limited)one sided

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