April 29, 2017

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Project management advice, tips, tools and recommended resources for existing and aspiring project managers.

Project Basics – Cost Estimation and Budget Development

By Linky van der Merwe

Cost estimation and budget developmentDuring the Planning Phase of a project an important responsibility for a project manager is to plan cost management, to estimate costs and to determine the project budget. When I work with new project managers, budget development is an area where they need most help. This article aims to give standard practice guidance to project managers who have not done budgeting before.

Cost Management

Part of cost management is to establish the policies, procedures and documentation to be used for planning, managing, expending and controlling project costs. The PM needs to have the scope and schedule baseline and understand what financial controls the organization is using. The cost management plan is part of the project management plan and will describe how project costs are planned, structured and controlled.

Refer back to the article about the Work Breakdown Structure (WBS) as a planning tool. Once you’ve defined all the lower level tasks and you allocated resources to the tasks, you are ready to develop the project schedule and project budget.

Time estimate

Normally you will work on deriving the work effort estimates for each of the tasks using various techniques like bottom-up estimating, top-down estimating, phased estimating and so forth. Then the duration of the tasks is dependent on factors like the assumptions made, availability of resources (are they full-time or shared between project and operational work), risks and historically how long the tasks would typically take to complete.

Cost estimates

Next you can estimate costs after you assigned your resources. There are different types of resources that will make up the costs of the projects. They include direct costs:

  • Labour (People)
  • Consultant fees
  • Equipment or hardware
  • Software licenses
  • Expenses like travel
  • Training, team building

Then there are indirect costs including:

  • Facilities
  • Materials
  • Overhead costs such as rent and phone bills

To estimate the labour costs you should know the resources and the cost of the resources. The non-labour expenses include all costs not directly related to salary and contractor costs.

Supporting data

It’s important to document supporting data for all the cost estimates. This includes a description of the scope of the work for which cost estimates were calculated. You need to describe how the estimates were calculated for each work package. Mention the techniques used to estimate the costs, for example expert judgement, if reference was made to any historical data to make the cost estimates and vendor/supplier proposals. Document all of the assumptions made when creating the estimates.

Contingency reserve

A contingency reserve or buffer is added to projects (usually a percentage of the total project cost and time) to cover risk. This fund is used when encountering unexpected events during the project. You should adjust your contingency reserve to the risk level identified for the project. If there are many risks or unknowns, the contingency fund will be higher.

Monitoring the budget

Once the budget is determined your project has a cost baseline.  The PM is responsible to monitor and control the project costs by regularly checking actual spending against budget estimates by using a spreadsheet. This will tell you whether the project is progressing as planned or if corrective action is needed.

Calculations/budget tracking

There are various calculations that need to be made through-out project execution. A sample of a Budget sheet can be seen below. To the left are the task descriptions, as per the WBS. Then you see a break-down of the budget and actual hours, then to the right is the break-down of the budget and actual costs. Using these numbers, calculations are made, including:

  • Estimate at completion (EAC)
  • Budget at completion (BAC)
  • Variance at completion (VAC)

Sample Budget Sheet

Source: Cioarchives.ca.gov

Budgeting is a team effort and cannot be done in isolation. It’s important to obtain buy-in on the budget from the people who will actually perform the work.  This participation gives people a stake in the success of the project and fosters accountability.

A project manager needs to monitor the budget and manage the expenses in order to finish the project under budget. This will reflect well on your ability to create an accurate budget and stick to it. Therefore, it’s important to review it often and make sure that you stay on track.

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