Project Estimates to Budgets

If a project estimate is not the same as a project budget, how do I convert it?

 

Converting an estimate to a budget 

As we described in the previous Issacon #1335

·         An estimate is prepared in the way an estimator goes about his or her business

·         An estimate may or may not include an allowance for "contingencies"

·         A "good" estimate will be targeted

·         At the "most likely cost"

    Whereas

·         A budget needs to be structured

·         To feed into the organization's General Ledger accounts

·         But more importantly, in the way the work will be done

·         With a bottom-line total that is achievable

 

Purpose of a project budget

    To understand the process of conversion

·         You must understand the purpose of a budget

    A project budget

·         Provides a basis for financial approval

·         Once approved it provides

·         A baseline of reference for managing the cost aspect of the project

·         I.e. a constraint to work within

·         And must allow for the risks and uncertainties involved

·         If the project is to be financially viable

 

Project budget structure

·      While the estimate

·         May have some semblance of the work breakdown structure

·      The budget

·         Must be structured according to the WBS

·         And the way the work will be undertaken

·         By direct employment

·         Or by contract

·         And hence the way in which costs will be collected

·         And cover all costs including overheads

 

The process of conversion - 1

·      The degree of uncertainty of each element of the WBS must be understood

·         Either by some form of risk analysis

·         Or at least by applying past experience

·      This does not mean that everything gets inflated

·         But there must be some "elbow room"

·         For the many minor things that will be required

·         And for Murphy's Law surprises

 

The process of conversion - 2

·      The conversion is not straight forward

·         And may not be easy

·         The estimate must be diced and sliced

·         And reassembled the way costs will be collected

    It's a bit like a cake

·         You put it together in layers

·         But you eat it in slices!

 

Allowing for risk

Whether or not a formal risk assessment has been done

·         Some elements will be more risky than others

·         And deserve more elbow room

·         There will be pressures to exceed the original total amount approved

·         Especially if the work is being done by different and competing departments!

 

If management "Squeezes the fat . . ."

      Some managements or clients

·         Approve a lesser budget than even the estimate suggests

    In the belief that

·         They are squeezing out the "fat" in the estimate

·         And hence impose an unrealistic cost target

    The implication is that

·         Either they have no faith in their estimator's work

·         Or they believe in project management miracles

·         Either way, this is a recipe for disaster!

 

My project is just like that . . .

What should I do?

·         Make a reasonable reassessment

·         Which may involve a full re-estimate

·         Based on the premise of the way the work will be done

    If the figures don't match

·         Come clean and make a clear case to management

·         You have nothing to lose

·         And every thing to gain

 

But management will not budge

If management won't budge

·         And will not increase the funding

·         Or abort the project

·         Then be prepared to walk away from it yourself, and tell them so

·         Unless you want to be a politician

·         Or die of a heart attack!

·         Surprising how often that does the trick!