Introduction

In the previous lesson, we examined the various problems, concepts and approaches to cost estimation. In this lesson, we will learn about project budgeting--an activity that is inextricably linked with cost estimation. While both cost estimation and budgeting deal with the cost of completing an activity or a work package or a project, estimates precede budgeting. Once the cost estimates, after several revisions, are approved, then it becomes a budget. The various organizational units are then required to complete the work within the constraints imposed by the budget. Essentially, a budget is a plan for allocating resources with an agreed-upon contracted amount of what the work should cost. A budget is much more than a plan; it is also a control mechanism. It serves as the standard against which future expenditures will be monitored for control purposes. Budgets serve a vital role in the process of management, and this particularly true in the management of projects. The budgeting process must relate resource use with the achievement of corporate goals. Otherwise, it has no value as a planning and control mechanism. Timely data collection and reporting are keys to effective budgeting; otherwise, the budgeting process is a wasted exercise as it is not possible to identify and report current problems or to anticipate future problems. The difference between a project budget and a typical fiscal operating budget is that a project covers in the entire duration of the project, whereas the latter covers a time duration of a year. In this lesson, we will examine the various aspects and approaches to project budgeting, including time-phased project budgeting.

Lesson 5 Objectives

After completing this lesson you should be able to:

• Understand the various issues related to project budgeting
• Learn about the top-down and bottom-up approaches to project budgeting
• Learn about the Activity Based Costing method in developing a project budget
• Understand the need and the various aspects of contingency funding in project budgets
• Understand the impact on the project budget when the project is crashed

Road Map

Note: The purpose of the Lesson Road Map is to give you an idea of what will be expected of you for each lesson. You will be directed to specific tasks as you proceed through the lesson. Each activity in the To Do section will be identified as individual (I), team (T), graded (G), or ungraded (U).

To Read:

• Chapter 4: Project Budgeting
• Lesson 5 Commentary

To Do:

There will be an online discussion for this lesson. Please see the Lesson 5 Online Discussion Set-2 for discussion questions (Note: This link will open in a new browser window). (I, G) 

In this lesson, you will complete the following assignments which are team-based and graded (T, G). When you have completed these, please submit them to the Lesson 5 Drop Box. (Note: This link will open in a new browser window) Team assignments should be submitted by one member of the team on the team's behalf. Team assignments should be identified by team name as well as the names of all team members.

1. Discuss the various aspects of top-down and bottom-up budgeting and the advantages and disadvantages of each of these approaches to developing a project budget.
2. What is the need for creating time-phased budgets in projects?  What are their major strengths?
3. Discuss the three primary reasons for applying contingency funds to projects
4. Discuss the impact of project crashing on project budgets