Project Management

Cost Estimating: Budget Formation Principles

Bernardo Antunes, PMP is a project manager in Belo Horizonte, Minas Gerais, Brazil.

According to A Guide to the Project Management Body of Knowledge (PMBOK® Guide)—Fifth Edition, here are some ways to estimate your budget:

  • Analogous cost estimating uses a value such as scope, cost, budget and duration or measure of scale such as size, weight and complexity from a previous, similar project as the basis for estimating the same parameter or measurement for a current project.
  • Parametric estimating uses a statistical relationship between relevant historical data and other variables to calculate a cost estimate.
  • Bottom-up estimating is a method of estimating a component of work. The cost of individual work packages or activities is estimated to the greatest level of specified detail. The detailed cost is then summarized and rolled up to higher levels for subsequent reporting and tracking purposes.
  • Three-point estimating is a method estimating an activity cost by considering most likely cost, optimistic cost and pessimistic cost.

After choosing the way to calculate the budget, you will need to set up the currency and its conversions for purchases in the project and, if applicable, the currency for selling.

Budget formation for CAPEX
When doing a budget for capital expenditure (CAPEX) projects—usually done by companies that contract projects to increase production capacity, optimize or update equipment and/or systems—…

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