Yesterday Eyitayo took us through the basics of budgeting and How to create an effective budget whether you’re an entrpreneur or work as an employee. He also discussed the top-buttom approach where the project cost is pre-determined and budget elements are allocated based on this. Today we move to the second part which is the Buttom-Up approach in project Budgeting.
Bottom-Up Budgeting Approach
The team that makes the budget often involving the final budget holder, identify the tasks and activities needed to complete the project. The project is based on the lowest-level work packages and rolled up to arrive at the total project cost. The direct and indirect costs are calculated for each work package.
The advantage of the bottom-up budgeting approach is its accuracy (as long as you have not missed any task or activity). Its a good way to build up commitment and consensus. This approach is sometimes called participative budgeting for this reason.
A disadvantage of the bottom-up budgeting approach is the difficulty in getting a full list of tasks and activities needed to complete the project.
Different Cost Types
There are two cost types that concern project managers when they create budgets: direct and indirect costs.
While direct costs are attributed to the project and charged to the project on an item-by-item basis, Indirect Costs are for items that benefit more than one project, and only a proportion of their total cost is charged to the project. So let’s say, for the Brazil 2014 world cup, the cost of building the stadium is an indirect cost because after the competition, the stadium remains and the fee paid to the referee for each game is a direct cost..
You may also add a certain amount to cover the identified uncertainties- that is known as contingencies. I must shout that padding is unprofessional in Project management. Your contingencies are calculated per analyzed risk and not just fixed up by feelings of insecurity. ?
Your budget will be made up of direct and indirect costs, with a small amount assigned for contingency reserve.
I will share 5 major estimating techniques with you tomorrow. ?
Keep adopting best practices.. ?
Eyitayo Ogunmola, PMP
PM Coach, ?
PM Hub Nigeria