Cost and Value Management in Projects, 2nd Edition

Chapter 4Project Budgeting

Learning Objectives

After completing this lesson, you should be able to:

• Outline the various issues related to project budgeting.
• Describe the key features in developing a project budget.
• Describe the top-down and bottom-up approaches to project budgeting.
• Discuss the activity-based costing method in developing a project budget.
• Explain why time-based budgeting is essential for cost control.
• Explain the need for contingency funding in project budgets, and its various aspects.
• Demonstrate the impact on the project budget when the project schedule is crashed.

In the previous chapter, we examined the various concepts, approaches, and problems related to cost estimation. Here, we discuss project budgeting, which is inextricably linked with estimation in that both processes deal with the cost of completing an activity, work package, or project. Once cost estimates are approved, they become project budgets. The various organizational units are then required to complete the work within the constraints imposed by the budget. Essentially, a budget is a plan that allocate resources with an agreed-upon, contracted amount of what work should cost.

Budgets serve a vital role in the management of projects. They function as a control mechanism that sets the standard against which future expenditures will be monitored. With timely data collection and reporting, they enable the project team to identify and report current problems, and to anticipate future ones. ...