Budget effectiveness is one major success criterion to project success. Whether you’re an entrepreneur who runs your own business or you work as part of a larger organization; the basic truth is that you are responsible to your budget and you need to make it work.
Creating a working budget may be a daunting task, especially for new project managers; however, once you have created your first budget, you will have an approach to use and it will become easier for future projects.
There are two main approaches you can take when creating a budget:
Top-down approach: deciding how much the project will cost and dividing the amount between the work packages.
Bottom-up approach: estimating the total cost of the project by costing the lowest-level work packages and rolling up.
Does that sound difficult? I don’t think so!
We all get faced with the choice to chose from the options with varying benefits and disadvantages.
Top-Down Budgeting Approach
The decision is made, often by senior management, about how much the project should cost. This amount is divided between the work packages. Since we don’t guess in PM, you need to explain how you will do the work within the allocated amount of budget on each work package. Validating is best done with Prior experience from other projects.
The advantage of the top-down budgeting approach is that it focuses on achieving the project within the budget allocated and leads to efficiencies and reduction in wasteful practices.
A disadvantage of the top-down budgeting approach is that it assumes that the person creating the budget has enough knowledge and expertise to make a reasonable cost estimate. If they do not, conflict may occur when a person required to execute the project is given an unrealistic budget that is insufficient to deliver the project. There is a risk of deliberately low budgets created with the belief that it will encourage cost savings.
I need cold tea now. See you tomorrow.
Eyitayo Ogunmola, PMP
PM Hub Nigeria