Project Management

5 Ways to create a budget

From the The Money Files Blog
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A blog that looks at all aspects of project and program finances from budgets, estimating and accounting to getting a pay rise and managing contracts. Written by Elizabeth Harrin from RebelsGuideToPM.com.

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Categories: budget, Estimating


Blank spreadsheet, new project. Where do you start? Here are 5 options for creating your new project budget.

Bottom up

This is my personal choice most of the time. Work out the cost of the individual items included in your project budget and then you add them up to get the big picture. Simple. Especially when you can rely on subject matter experts to give you the figures. All you have to do is ask intelligent questions and make sure nothing is overlooked.

There’s more on how the elements of your budget fit together starting with the individual task estimates created through bottom up estimating here.

Top down

Parametric estimating is not a method that I tend to rely on, but it does work. It relies on you having sensible data to use at an overall level (although there is no reason why you couldn’t decompose your tasks and work it out at lower levels).

For example, if it takes one person three days to dig a trench and you need three trenches, that’s nine days of digging.

The risk with this very simplistic example is that maybe people need a rest day after they’ve been digging for two days. Or maybe one of the diggers doesn’t dig as fast as the others. Still, if you’ve got a reliable way of using data to extrapolate your estimates, you may as well use it to give you an overall, high level estimate while you consider other techniques to refine your approach if necessary.

I’d be interested in hearing about examples from people who have successfully used top down or parametric methods to work out their budgets to understand more about the type of projects it is useful for. Get in touch if you have anything to contribute on that topic.

Based on previous projects

This is a method I’ve also used successfully, although it does rely on:

  • Your previous projects having good cost management processes
  • Your previous projects being updated when estimates change
  • Making sure that you are using the latest estimate data and not the original budget forecast from the project initiation stage.

If you can get round that and use real, validated data from previous similar projects, then I think this is a very robust approach to putting together a budget for your new project.

For example, we often repeat project implementation phases in multiple sites. The initial planning and set up at one site might take a bit longer than by the time we’ve done it 25 times in 25 locations, but essentially the steps are the same. We use the data from the first two or three installs to determine the implementation plan for the other sites. Then it’s almost a case of working through a project checklist and productionising the deployment of software on site. Of course, we always hit some kind of unique problem, but if we know there will be something at each site the overall timescales are still virtually the same. It does mean that sites that will get the software in the future are able to know with a high degree of certainty about when the project team is coming to them.

Using three point estimating

Three point estimating takes some time to do. OK, all estimating should take time to do if you are doing it properly. But three point estimating takes more than the others as you aren’t estimating once, you’re estimating three times.

First, you estimate the optimistic time for completing the task. Then you estimate the most likely result. And finally, you need a view of how long it would take if it all went a bit wrong – the pessimistic view. Then you use the formula:

Take your most likely estimate and times it by 4. Then add on the optimistic estimate and the pessimistic estimate. Divide the total by 6. That gives you a weighted estimate of how much the task will cost, weighted in favour of the most likely cost, but taking into account the fact things might go well or they might not.

A combination of approaches

I know I’ve said that bottom up is the approach I rely on the most, but really, it’s this one. I use whatever works at the time, and in reality that’s a combination of approaches based on the data I have, the expert input available at the time and my best guess.

I think that given the choice, most project managers would opt for this approach to building their budget. It’s the most flexible, and gives you the best chance of coming up with a sensible budget. Where you’ve got data for parametric estimating, you can use it. Where you know how to decompose the tasks, you can plan from the bottom up, and so on. Why limit yourself to one way when actually a combination of methods would get you a better result?

The only thing to remember is to make sure that your cost management plan includes the assumptions and parameters you are using to estimate so that if someone else needs to review your budget it’s clear to them how you came up with the costs you are using for each element.

If you had to choose your favourite budget method, what would it be? Let us know in the comments.

Posted on: January 06, 2015 06:41 AM | Permalink

Comments (8)

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Murray Grooms Executive Advisor| RAMAC Consulting Inc. Victoria, British Columbia, Canada
Good article, thanks for the brief overview of the options. My team has just completed a project approval process that required three point estimating (Optimistic, Likely, Pessimistic). Instead of 4 times Likely we created a probability of which budget lines were most likely to be over and which under for each budget scenario. This brought a little probability and risk analysis into our planing activities. This process does take time but the results can be compared to the estimate and the process can be improved by adjusting the probabilities next time.

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Elizabeth Harrin Director| RebelsGuideToPM.com London, England, United Kingdom
Thanks, Murray, for taking the time to comment. Your approach shows the next level of analysis with the probability and risk planning - it sounds like a very robust way to approach building a repository of accurate estimates.

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fosco frongia Senior project manager| ENTE PATRIMONIALE CHIESA GESU' CRISTO SUG Fino Mornasco, Como, Italy
Very interesting article and a great opportunity fort thinking on the estimating matter. Many thanks to share it. To answer your question I need to make some considerations:
- First consideration: all methods are tools for estimating anything and, due to their result are an estimate; they are interested by a different grade of uncertainty. The reason to create or use a more sophisticated method resides in reducing this grade.
- Second consideration: as you commented in your article the top down method is based on data which you use to extrapolate parameters for your estimate. I think this characteristic is anyway included in other methods, excluding the analogous one. The difference resides in the level of details you are defining the task which influence the “reliability” of your estimate. I can explain better this concept considering your example - dig a trench: as you commented I can decompose this task in lower levels and, e.g., I can use the bottom up method to estimate it. it is possible that, at the last level, I will use parameters.
Under these considerations I think these methods are “interchangeable”. Don’t exist a method better than the other ones but exist a method better applied than the others ones in accordance with our needs.
Normally my projects are divided in different phases - design and construction are the most important – and I’m supposed to define/ re-define the budget at the beginning of every one.
In the first of them I have less data and I use the parametric one, in the second one it is possible to apply more sophisticated methods. I use it if the effort will justify the level of accuracy.
The effort we produce would be justified by the benefit we have: why not use the most sophisticated methods for the most important tasks and use the other ones for these tasks with less impact?


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Vitaly Glotov Strategic Alignment Telecom Expert and Certified PMP| Advanced Industries Packaging Frankfurt Am Main, Hessen, Germany
Dear Elizabeth,
Thank you for the article. It's very important issue and bloody difficult to make. The blank spreadsheets make me depressed on start, but when you fulfilled it correctly and doubts are gone, it makes you so exciting to go further. And as a PM you should always take in account that the budget you create should be perfectly linked and fitted in the future reporting systems.
Sincerely,
Vitaly Glotov

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Elizabeth Harrin Director| RebelsGuideToPM.com London, England, United Kingdom
Thanks, Vitaly! And Fosco too. Good idea to tailor the methods to the tasks with the highest priority.

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fosco frongia Senior project manager| ENTE PATRIMONIALE CHIESA GESU' CRISTO SUG Fino Mornasco, Como, Italy
Many thanks Elizabeth, the tailoring should be addressed every time on the direction to produce the best result with the minimum effort and our strategy should be sufficient flexible to allow the improvement of methods actions etc. if it is needed

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Manouchehr Madani Civi Senior Healthcare Project Manager Vancouver, British Columbia, Canada
Great. A brief overview on financial plan.

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Suha Alaah Warde PMP, Chemical Engineer| State company of oil projects El Cajon, Ca, USA
In fact a combination of methods would help to check the errors and bring them up. thank you for sharing.

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