What is project budgeting and how is it done?

What is project budgeting and how is it done? A project without budget is like a car without fuel. Funding is essential to start a project and mobilize all resources. If you work as a manager in a project-based company, you will most likely be responsible for budgeting the project and helping to turn it around.

At first glance, budgeting may seem intimidating, but eventually, you’ll realize that all you need to do is plan for it. In this article, we will examine what factors affect project budgeting and how to calculate it.

What is project budgeting?

A project’s budget is the combined costs of all the activities, tasks, and milestones that the project must address and includes the amount you will need to complete the project and must be approved by all stakeholders. You begin budgeting the project at its inception stage and continue to monitor the budget until you reach the finish line.

What is project budgeting
What is project budgeting

Why is project budgeting important?

There are at least three reasons why project budgeting is important:

  • This work is an essential part of project funding. The numbers tell stakeholders exactly how much money is needed, and when, to start the project.
  • A well-planned budget provides the basis for project cost control. Having a final budget estimate helps you measure the actual cost of the project against the approved budget and see how much money you’ve already spent. This will give you an idea of ​​the progress of the project.
  • The project budget has a direct impact on the financial viability of the company. When calculated practically and with resource constraints in mind, the project budget increases the operating margin and improves the overall success of the project.

Common project cost categories

Project cost planning is an essential step in project budgeting. To do this, you need to create a list of items related to the project. Here are the typical project cost categories:

  • Human resources: salary rates for full-time and temporary employees
  • Travel expenses: if necessary to travel to perform project work from one place to another (including food and accommodation budget)
  • Training costs: conferences, workshops, overseas contractors
  • Material resources: Everything your team needs to do the job, including software, equipment, or other unique items
  • Research costs: studies or data to support your project and provide the best value
  • Professional services: legal advice, etc
  • Central costs: equipment or technical upgrades to complete the project
  • Contingency Reserves: Contingency funds to reduce risks from budget increases, usually 5-10% of the overall budget.

Project budget estimation approaches

Estimating the size and cost of a project can be very challenging because a project is by definition unique in nature and is often a new product, service or job creation. The larger the size and complexity of the project, the more difficult it will be to do this correctly. Here are five techniques that can greatly improve the project estimating process:

1- Bottom-up estimation

Bottom-up estimating is one of the best and most foolproof ways to budget a project. This involves estimating different parts of the project, such as tasks, milestones, or phases, and adding them up to arrive at the project cost. If you are in the process of creating a job statement, This method can be used. If you are sure that you know all the angles of the project, the best way is to estimate from the bottom up.

The downside of this method is that it takes a lot of time to get to the smallest details of the project. You may also suffer from inflation at times affecting the cost of your estimate.

2- Top-down estimation

Top-down versus bottom-up estimation is mentioned. This starts with the total project budget and involves breaking it down into smaller parts.

The main disadvantage of this method is unreliable estimates. It is difficult to accurately forecast the budget before understanding the scope of work and having a project plan.

3- Similar estimation

If you’re new to project management, you’ve probably managed a few projects before and can tell what factors influence them. Using probabilistic estimating, you’ll rely on budget data and best practices from your previous projects to come up with an idea of ​​what the current cost will be.

There are always similarities between projects, but that doesn’t mean you should make decisions based on them alone. Every project is unique. If you haven’t managed a project before, you can find examples that you can use with a quick search.

Needless to say, similar estimation is not as accurate as other techniques such as bottom-up estimation. But the advantage of similar estimation is that it is extremely fast and especially useful when there is limited information about the project.

4- Parametric estimation
Parametric estimation
Parametric estimation

Compared to similar estimation, the parametric approach is more accurate. It takes cost variables or data points from specific parts of certain projects and applies them to the current project, so you make more data-driven decisions.

The advantage of this process is that it is more accurate than similarity estimation because it uses more than one data set and uses the statistical relationship between historical data and variables.

The downside of this method is that it is often difficult to find useful data points in digital projects.

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