It is difficult to accurately estimate the cost of a project. One of the biggest challenge that project managers faced is that they are held accountable for their budget estimations despite the uncertainties that the project is facing.
Accurate budgeting becomes an essential skill for a project manager, it is important that project managers find an appropriate approach to use to facilitate their project management.
There are two main approaches to take when creating a budget – top-down approach and bottom-up approach. Top-down approach requires the project management to decide how much the project will cost and dividing the amount between the work packages; bottom-up approach requires the project manager to estimate the total cost of the project by costing the lowest-level work packages and rolling up.
Top-down budgeting approach
In this approach, budget decision is often made by the senior management. The budgeting is done by dividing the cost between the work packages. Prior projects that were executed before can be use point of reference to budget allocation, and whether the decided cost is realistic based on the scale of project.
One of the advantages of using this approach it is targeted at achieving project objectives within the allocated budget. This way, project team can avoid inefficiencies and wasting unnecessary resources.
However, this is not without a down side. This approach is made based on the assumption that the person who created the budget has the relevant knowledge and expertise to make a reasonable cost estimate. if the project manager does not have the relevant knowledge, there is a risk that an unrealistic budget that is insufficient to deliver the project will be set, threatening the progress of the project.
Bottom up budgeting approach
In this approach, the project team will first identify the tasks and activities involved in the process of the project. The budget will then be calculated based on the lowest-level work packages and rolled up to arrive at the total project costs, including direct and indirect costs.
The advantage of the bottom-up budgeting is its accuracy, as long as all aspects of the project is well accounted for and nothing is missed out. The project manager’s involvement in the process can establish teamwork and enhancing team morale.
The disadvantage of this approach is the difficulty in consolidating the complete list of tasks and activities for the project. There is a risk of overlooking or late addition of activities that will affect the allocated budget.
Managing Project Costs and Budgets is a 3-day course that will provide personnel involved in project management effective skills and knowledge that will allow them to manage the dynamic project cost function. Through these skills and new knowledge, participants will take home the ability to implement the application of techniques that will contribute directly to more efficient project financial management processes. For more information, please visit us at http://www.opuskinetic.com/training or contact us at [email protected].
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