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Budget Methods and Evaluation

Budget Methods and Evaluation

Author: Jeff Carroll

Differentiate between the types of methods used to develop a project budget.

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Source: Image of abacus, Public Domain, Images by Video Scribe, License held by Jeff Carroll.

Video Transcription

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Hi, I'm Jeff. And in this lesson, we'll discuss methods to create project budgets. And then how to evaluate budgets for accuracy. So let's get started.

There are a number of methods that can be used either separately or in combination to develop a budget. One method is actual budgeting. In this method, only real cost to a project are included. The actual true costs based on effort and resources are used and there is no consideration for overhead costs or any change in the real costs.

Another method is roll-up or bottom-up budgeting. Costs are calculated for the lowest level of a project schedule, including cost for all project activities. The sum of these costs will be the budget.

The comparison budgeting method uses analogous estimating. That's when past project budgets are used to estimate the current projects budget. This method is often used to quickly estimate the cost of a project before any scope or schedule work has been completed.

In addition to these budget estimating methods, a project manager might use reserve or contingency estimating to calculate the amount of money a project budget might increase over the project's life cycle. For example, if the organization has closely tracked previous projects and finds that estimates are generally 10% lower than the actual efforts spent to complete the work, a reserve budget estimate might add 10% to the budget for each project.

Using a reserve helps control budget overages by allocating the money up front. Once a budget has been estimated, it's the project manager's responsibility to document the budget so that the information can be communicated to stakeholders and team members. However, before submitting the budget, it should be evaluated for accuracy.

Imagine that a project budget has been created for a website development project. It might look like this. The budget could contain the subtotals for each significant phase. In addition, the cost for the management staff would be included. If development software is needed by the project, that would also be included. And a contingency of 12% could be added to account for possible cost and schedule overruns.

Before finalizing this budget and seeking approval for the money, a project manager should ask these questions-- have the scope and the schedule been reviewed for real costs? And have they been added to the budget? Does the budget reflect the cost of people resources? And does the budget reflect the cost of non-people resources?

Does the budget include any reserves in the event the project runs over cost? And have the team members been consulted about the effort and budget estimates? Only after these questions have been answered positively, will a budget be considered realistic and ready for approval.

OK, nicely done. In this lesson, you learned the various methods that can be used to create a project budget. And you learned how to evaluate a budget once it had been created. Thanks for listening. And have a great day.

Terms to Know
Actual Budgeting

A project budgeting technique that uses only real costs to determine a project budget

Analogous Estimating

A budgeting technique that uses budgeting information from prior projects to determine a budget for a current project

Reserve Estimating

A budgeting technique that identifies money that should be added to a project budget to manage potential project overages