Why can't you use an estimate as a budget?

Estimates & Budgets

What are estimates & budgets

Before we start this topic, let's be clear

· When we speak of an estimate

· We mean a project estimate

· And, when we speak of a budget here

· We mean a project budget

· And none of them are the same!

Estimate and Project Cost Estimate

An estimate (generic) may simply be defined as

· The prediction of a quantitative result

A project cost estimate is

· A quantitative assessment of the cost of all resources required to complete part or all of a project

· Arrived at by a variety of estimating means and techniques

· Including consideration of probability

· And educated guesses!

Budget and Project Budget

A budget

· When unqualified

· Should be used to signify a fiscal budget

· A fiscal budget is a corporate finance tool

· To allot funds for specified intentions

· Over a consistent period for accounting purposes

· Usually a period of one year

· A project budget is

· The amount and distribution of money allocated to a project

· For the duration of a particular phase or phases

A project budget is special

· A project budget

· Is required for controlling project costs

· It represents the approved reference baseline

· Must be structured

· In the same way as costs will be collected

· To facilitate the all-important control comparison

· For example

· An estimate unit rate may include labor and materials

· While the costs of each will be collected separately

Project cost estimate goal

· The project cost estimating goal should be

· To reflect the most likely cost

· Of the identified scope of work

· And hence

· Avoid unwarranted detail

· Arrive at the value by the most expedient means

· Follow physical delineations

· E.g. component, system or element

· Provide separate allowances for some items

· E.g. Prudent contingent variations, undefined work, and so on

Project budget goal

The project budget goal should be to

· Provide separate line-item entries

· As achievable targets

· Where cost control can be exercised by project management

· With reasonable flexibility

· This line-item display will be highly dependent upon the procurement strategy

· I.e. the estimate items will be aggregated differently if the work is done in-house

· Compared to work that is contracted out

Proper budget preparation - 1

A properly prepared project budget will

· Include a description of the project or phase scope

· Summarize in a preamble, the philosophy, assumptions and parameters used in its preparation

· Including the procurement strategy

· Be presented in exactly the same way as costs are expected to be recorded

· First by major deliverable, system or component

· Then by internal payroll costs, material and equipment

· Or by contractor, supplier or department

Proper budget preparation - 2

A good budget breakdown will

· Keep management overheads, indirect on-costs, quality assurance/control, insurance and interest charges and allowances, etc

· All as separate line items

· And group all items

· According to the project's procurement strategy

· Or regroup if it is changed

Project control budget

At the time of presentation for appropriation

· The project budget may not be all that detailed

· Some additional "breaking down" may be necessary

· As required for control purposes

If this is the case

· It is vital that this process is carefully conducted

· And all "adjustments" are properly documented

· For later audit, if required

· And for final cost reconciliation and learning

Cost Management