PROJECT BUDGETING

AND COST ESTIMATION

By : PIO ARNEL BARDONASA

TRISTANE ERIC SUMANDE
• A well researched and planned cost estimation and budget is
necessary for the successful completion of any project.

• Project Managers need to thoroughly scope the project in order to

secure sufficient funding

• Scope involves estimating labor hours supplies and other

miscellaneous
expenses

• Budgets and Cost estimations are work in progress and should contain
room for change.
 COST ESTIMATION AND BUDGET
IN PROJECT MANAGEMENT

• Project Budgeting and Cost Estimation Goes hand in hand

• Project budget is detailed, time phased estimate of all

resource cost of a project

• Typically budget is developed in stages which are from a

preliminary rough estimate to a detailed estimate to a
completed, approved project budget.
 COST ESTIMATION

• is the practice of estimation of the monetary resources required to complete

tasks and project activities.
• This process uses almost the same tools as expert judgment, analogous
estimating, three-point estimating as in the estimate activity
duration process. However, in the estimate costs process, you make
forecasts for the costs of each activity

• “THE MORE PRECISE THE ESTIMATE OF THE PROJECT COST IS…THE BETTER
COMPETENT THE PROJECT MANAGER HANDLES THE PROJECT’S BUDGET”.
 THREE REASONS WHY ESTIMATING
PROJECTS COST IS IMPORTANT
• It makes possible the project manager to consider probable
benefits against estimated costs to see whether the project
is logical

• It permits the project manager to distinguish whether the

necessary funds are obtainable to sustain the project

• It provide as a guidelines to help ensure that there is

adequate funds to finish the projects
 TYPES OF PROJECT COST
• Direct vs Indirect Cost
Direct costs are the expenses that are directly
related to the project and can be measured with a
relatively good degree of accuracy. These would be
things such as raw materials, like steel and fiberglass,;
finished components, like electronics, windshields and
tires; and finishes, like paint, clear coating, and
upholstery. can also include the direct labor costs in
the form of employee wages. Keep in mind that this is
not an exhaustive list of direct costs. Direct costs will
vary from project to project.
 INDIRECT COSTS
• Indirect costs are those that are shared across multiple
projects. Indirect costs are sometimes also referred to as
Oversight costs.

• the cost of the project manager or architect will be shared

among the projects they are allocated to.

• Project managers are usually an indirect cost to the project.

This is because their work is to supervise. They don’t actually
do the work! The people who do the work, like developers
and designers, are Direct Costs to the project.
 RECURRING VS
NON RECURRING
• RECURRING costs are those that normally continue to
operate over the project’s life cycle

• Example of these are labor, materials, logistics, sales costs

since budgetary charge is applied to these costs during
significant portions of the projects development cycle

• NON RECURRING costs are those charges applied once at

the start or end of the project like preliminary marketing
analysis personnel training or outplacement services.
 FIXED VS VARIABLES
• fixed costs are those that stay constant despite changes in
the level of project activities
• Example of these are rent, insurance, premiums, or loan
payments

• Variable Costs are those that differ in direct proportion to

the changes in the level of project activities like hourly labor,
cost of materials, costs of supply, fuel bulldozer, and other
similar costs.
 NORMAL VS EXPEDITED
NORMAL COSTS
are those acquired in the regular process of working to finish the according
based on the original, planned schedule consented by all stakeholders at
the start of the project
Although there could be some changes as the project advances still the
costs are in accordance with the baseline project plan.

EXPEDITED COSTS
are those unplanned costs acquired accelerate the completion of the
project. Among these costs are overtime , hiring additional temporary
workers , contracting with external source for support , incurring high costs for
transportation as well as logistics for materials deliveries.
 FACTORS INFLUENCING THE
QUALITY OF ESTIMATES
• PAST EXPERIENCE OR HISTORICAL DATA
- similar past projects can be utilized as reference or a template for the current
projects estimates in terms of time and costs if there are only minor variations .
The current projects estimates should make small adjustments reflecting those
differences. This would aid projects managers in developing , schedules and
estimating costs faster with little possible deviations in the future.

• PROJECT UNIQUENESS
- the uniqueness of a project makes it more challenging for the project
manager to have a precise and actual estimation.
• PROJECT DURATION
- Vagueness in project estimates are likely to amplify with the
extent of the projects

• PEOPLE
people factor can also introduce errors in estimation of time
and costs . The knowledge and skill of task estimators , well
matched of their skills with the task requirements , the
competence of the project members in working jointly as an
efficient team , the turnover rate, and dedication are all vital
human factors that seriously have pressure on project
estimates.
PLANNING RANGE
the quality of estimates declines as the planning possibility of future
events raises.
Estimates made at the initiation phase of the project are normally
50% percent from the actual.
Estimates during the planning phase are budget estimates which are
in the range of 10% to 25% from actual estimated value . At the
planning or early execution phase od the project , estimates
become more perfect and would be in the range of 10 % form the
actual.

ORGANIZATIONAL STRUCTURE
This influence costs and time estimates . In the projectized form, the
team is entirely committed on the project and is working full time
which makes work delivery faster at an additional cost. Conversely in
the Matrix form, the personnel are common across the several
projects, saving cost but demanding more time to synchronize
among all the projects activities .
• PADDING ESTIMATES
in roder to reduce the risk of being late and most people
when asked to estimate an activity tend to add little padding .
The project schedule or budget becomes unbelievable and
unrealistic if all estimates are padded.

The situation would gravely affect negatively the reputation

and integrity of the project management profession. Padding
is actually a sign of poor project management practice. In
order to lessen padding, the project manager should make
available all the information that stakeholders require for their
estimations.
Any uncertainties must be treated as risks to be handled with
cautions as an element of the risk management process.
• ORGANIZATIONAL CULTURE
The culture of the organization greatly influenced project
estimating. Several organizations support estimate padding while
others promote greater precision. Some cultures consider it is
unattainable to forecast the future. Thus, it would be a squander of
time formulating comprehensive estimates . Others believe
correctness of the estimates is the key input for an effectual project
management practice.

NON PROFIT FACTORS

delays in equipment delivery, vacations, holidays, priorities, politics, visa
consultant issuance , and legal affairs are all cases of non project factors that
can significantly adjust time estimates.
 METHOD OF ESTIMATING COST
• ANALOGOUS ESTIMATING
an estimating technique that uses costs along with the measures of scale like
size, weight, or complexity from the previous project to estimate cost for similar
future project.

PARAMETRIC ESTIMATING
this estimating technique that uses a statistical relationship between historical
data and other variables (Exammple: square footage construction or lines of
code in software development ) to calculate an estimate for activity factors like
scope, cost, budget, and duration costs for project completion
 METHOD OF ESTIMATING COST
TABLE .17 SAMPLE PROJECT ESTIMATE

Project Name : Date :

WBS RESOURCE DIRECT INDIRECT RESERVE ESTIMATE METHOD Add. Range Confidence
ASSUMPTION
No. COSTS COSTS Info. Level
3.1.1 Jr. 40 hrs @ Php 0 Php Php Parametric Must obtain N/A Php 8
Programmer Php 20,75 20.75 1050.75 functional 1200
for 40 hours =Php manger -
1,030 approval to Php
assign to Jr. 1075
Programmer
3.1.1 Network 10 hrs @ Php 0 Php Php 322.80 Parametric Must obtain N/A Php 7
Specialist for Php 26.90 53.80 functional 300
10 hours = Php 269 manger -
approval to Php
assign to 350
Network
Specialist
3.1.1 Lease 12 hrs @ Php 0 Php 504 Parametric Assume tet Lease Php 9
Network Test Php 42 equipment form 500
Equipment = will be test -
Php 504 available Supply Php
510
• BOTTOM UP ESTIMATING

Is the method of constructing estimates by decomposing the

work into more detail. An estimate is planned based on the
requirements of each of the lower , more detailed pieces of
work and then later are combined into a total quantity for the
project , for this method the work breakdown structure (WBS)
necessitates to be broken down to the most detailed level
with every clear specifications.

TOP DOWN ESTIMATING

It is based on the collective judgements and experiences of
top and middle management and available past data
concerning similar activities.
 PROJECT COST
ESTIMATING ISSUES
• Short Initial estimates
• - caused by inadequate awareness of the project scope.

• Unpredicted Technical Difficulties

• - the assumption that technical problems would be minimal is
also a common problem in costs estimates . T he impact of this
issue could be lost f significant amount of money or worst and
more tragic is the loss of life

• Lack of definition
• - poor initial scope of development results in poorly defined
features, goals and purpose of the project.
• SPECIFICATION CHANGES
- many projects cannot avoid midcourse specification changes. A lot of
projects overrun their initials costs estimates due to serious changes to scope or
project specification. This situation makes the initial cost estimates basically
meaningless and useless.

• EXTERNAL FACTORS
- In most cases inflation and other economic impacts can cause a project to
overrun its estimates seriously.
 Project Phase (A) (B) (C) (D) (E) (F) (G) (H) (I) (J)
Percent Est. Average Est. cost Forecasted Forecasted Forecasted Forecasted Forecasted Forecasted
Duartion Hours Rate (BxC) Hours Hours Hours Costs Costs Costs
(low) (high) (high) (high)

Planning 25 10000 75 750000 10000 7000 75000 525000 975000

Execution

Requirements 5 50 50 2500 2000 1400 2600 15000 105000 195000

Def.
Design 10 30 70 2100 4000 2800 5200 300000 210000 390000

Development 10 30 70 2100 4000 2800 5200 300000 210000 390000

Test 10 30 70 2100 4000 2800 5200 300000 210000 390000

Implementation 10 30 70 2100 4000 2800 5200 300000 210000 390000

Controlling 10 30 70 2100 4000 2800 5200 300000 210000 390000

Closing 10 30 70 2100 8000 2800 10400 600000 420000 780000

Total 100 40000 28000 52000 Php Php Php

3,000,000 2,100,000 3,900,000

Note This is a Parametric Estimating worksheet designed to give an intermediate level estimate of costs
and hours, plus or minus 30 %
CREATING A PROJECT
BUDGET
• The are two ways of gathering to obtain input data for the budget which are
top down budgeting and bottom up budgeting.

• Top Down Budgeting

- this strategy seeking first the opinion and experience of top management
regarding estimated project costs.

• Bottom Up Budgeting
• - this strategy starts inductively from the work breakdown structures (WBS) to
apply direct and indirect costs.
ADVANTAGES AND DIS
ADVANTAGES OF TOP DOWN
BUDGETING
Advantages
1. Aggregated budget is fairly precise,though
some individual activities are subject to huge
miscalculation.
2. Budgets are steady as a percent of total
allocation and the statistical distribution of
the budget is also constant leading to high
certainty.
3. Small expensive tasks must not be known
early in this process factored into overall
estimate.
Disadvantages
1. Considerable error may be made for low
level tasks.
2. A lower level of budget approval is likely due
to limited participation.
3. It offers like training opportunities in
budgeting for the junior managers
4. Converting long-range budgets into short
range budgets.
5. Problems scheduling projects in a sub
optimal way to meet the strategic goals
6. Outcome of top management’s limited
knowledge on details of project tasks and
activities
ADVANTAGES AND DISADVANTAGES OF BOTTOM UP BUDGETING
• Advantages
• Better motivation owing to ownership of the budget.
• Should contain better information as employees most familiar with the department prepare the budget.
• Enhance managers understanding and commitment.
• Improved communication between departments.
• Senior managers can focus on strategy.
• Aggregate budget is quite accurate , even though some individual activities subject to large error.

• Disadvantages
• 1. Senior managers may dislike loss of control.
• 2. Dysfunctional behavior , budgets may not be in line with corporate objectives as managers do not have strategic perspective and only will focus
on divisional concerns.
• 3. Has decisions from inexperienced managers.
• 4. Budget preparation is sluggish and disputes can occur.
• 5. Budgetary slacks; managers sets targets that are too effortless to attain.
• 6. Fight for funds among lower level managers , attempt to secure sufficient funding for their operations.
• 7. May be the basis for unhealthy competition.
• 8. The process is a zero sum game one perons’ or areas gain is another loss.
• 9. Subordinate managers frequently believe that they have inadequate b33
Budget allocations to reach the objectives
•
WAYS TO IMPROVE THE PROCESS OF COST
ESTIMATION AND BUDGETING

• Estimating is defined as an informed assessment of an

uncertain event. Accurate estimates are the foundation
for effective projects project and planning and
execution . There are many processes that have an been
developed to assist in the estimation process . Without
proper estimating of project duration ,cost, resources,
risks and other parameters, it is impossible to implement
proper alternatives and ultimately make timely and
sound decision.
TWO FUMDAMENTAL WAYS THE RISKS
ASSOCIATED WITH THE CHANCE EVENTS
THAT TAKE PLACE ON EVERY PROJECT
• The most familiar is to create an allowance for contingencies which are usually 5% OR 10%
• Another is when the forecaster chooses “most likely, optimistic, and pessimistic” estimates

• FACTORS THAT MAY POSSIBLE CAUSED INACCURACY

• The project team and organization on estimating and entail the fitting project team members set up the approximate
associated with their scope aspects of the project.
• Contract of expert with experience for scenario
• Include peer reviews and estimates validation into the product life cycle (PCL)
• Integrate risk management and contingency assessment throughout the PCL
• Promote estimate review and validation after each phase of the PCL
• Precise and well timed documentation of change requests
• Do research regarding historical data on the project effort , schedule, cost, risk and resources for lesson learned and make
suitable adjustments . Statistical baselines should be and modify occasionally .
• Use mock ups, trial runs, field studies or other simuations as a direct
• Sufficienlty identify work scope and thruthfully traclk time against each task