6 Project Management Budgeting Methods
Updated June 24, 2022
Being able to use some of the most widely known project management budgeting methods can help you complete a project within the allocated budget. Regardless of the project's characteristics, efficient budgeting can directly impact its chances of success. Being familiar with project management budgeting methods can be a valuable skill, but it requires research. In this article, we discuss what project management budgeting is, why it's important and list some of the most often used methods of budgeting in project management.
What is project management budgeting?
Project management budgeting is the action of determining the total funds that are allocated for a specific project. The budget is usually estimated by the project manager along with the project management team and consists of all the projected costs for the upcoming project. The main challenge in creating a realistic budget is understanding and correctly estimating individual costs for all the elements that go into the project.
Some of the things that need to be determined when calculating a project's budget are:
How the project's costs would be continuously tracked until its completion
How the costs are spread out across multiple project phases and milestones
What tools would be used to store and report cost data
What the plan is for situations in which the project is either under or over budget
How the project's budget fits into the parent organization's overall strategy
Why is budgeting in project management important?
A project's budget is one of the criteria often used to assess its success rate, as the benefits resulting from the project's completion are compared to its total costs. Some of the main additional reasons for the importance of budgeting in project management are:
It determines the organization's overall direction. Before agreeing to a specific project, an organization needs to determine how it fits into the overall strategy. The project's cost is one of the most important factors when determining that strategy, as too much spending on one particular project may affect the availability of funds for other potential projects. An organization needs to determine if the project's benefits are worth its costs, if its outcome requires additional spending and if the organization would be able to sustain these costs for the foreseeable future.
It helps an organization determine its priorities. Many organizations need to decide between multiple competing projects when allocating funds and a well-calculated project budget can help its decision-makers decide if one particular project would be an appropriate investment.
6 types of project management budgeting methods
These are six of the most popular ways of determining the appropriate budget for a project:
1. Analogous estimating
This method of estimating a budget consists of analyzing an already completed project with a similar scope to the current one and using its budgeting calculations, adjusted for differences in scope, quality, term of execution or any other relevant parameters. It is not always a completely accurate method, but it can be an appropriate method in situations when there is limited information regarding the upcoming project and a quick estimate is required. This method is usually quicker and less costly than others, but can only be used by companies that have had similar projects in the past.
Related: How To Manage a Budget
2. Parametric estimating
This estimating method consists of using historical data and other related variables for estimating the project's scope, duration and total costs. This is usually achieved by researching past data, calculating various per-unit costs for various aspects that are common to the current project and adjusting the proportions to fit the scope of the new project. The accuracy of this method is usually proportional to the quality and relevancy of the historical data it is based on.
3. Top-down method
This method consists of looking at the project budget in its entirety and then calculating individual costs for each of the required processes. Each part of the overall project is analyzed, with its exact costs calculated and then compared to the initial estimates for each. Based on the results, project managers can see how cost-efficient each process is and may decide to reduce the scope of some parts of the project, so it fits within its total allocated budget.
4. Bottom-up method
Unlike the top-down method, which divides the project into multiple processes and calculates the individual costs for each, by using the bottom-up method the project manager attempts to directly generate a total project budget, with the help of their project management team. As a general rule for this method, the budget estimation's accuracy is usually proportional to the accuracy of the information and expert advice received during the budgeting period.
5. Three-point estimate
This method uses three different calculations to estimate a budget: the most expensive scenario, the most cost-effective scenario and the scenario that's most likely to occur. By using these figures you can roughly estimate there required budget, but also assess some of the risks involved in the project.
6. Earned value analysis
This method is a way of estimating the accuracy of a project's budget during the execution of the project. It consists of constantly comparing the costs for each phase of the project with the ones that were previously estimated, typically by using one of the four previously-mentioned methods.
Tips for accurate project management budgeting
Consider these tips when determining a project's budget:
Focus on the organization's needs. When creating a budget for a particular project, it is essential to remember that the ultimate goal of any project is to help its parent organization reach its goals. By knowing exactly how valuable a project is to the organization you can improve your odds of accurately determining its budget.
Keep open communication with the stakeholders. Throughout the project's budgeting and execution phases, you must constantly communicate with the people who stand to benefit from its successful completion. Depending on their priorities and needs, you can determine if the project is correctly budgeted or if it needs adjustments in scope and budget.
Adapt to changing parameters. Various unforeseen events and situations may occur from the time a project is budgeted until its execution. When creating a budget, you need to plan for this eventuality and have enough flexibility to adapt to any change, internal or external.
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