What is project budget estimating?

The term budget signifies a plan over the long run, generally, a year that covers the financial expenses and revenues of any organization. This budget plan is known to estimate the growth and success of any organization. Civil engineering companies utilize project budgets for estimating project costs, construction costs, and other direct and indirect costs related to the project being undertaken. Project budget is a detailed statistical tool primarily used by project managers to estimate the overall project cost. The project budget is in the form of a document that includes all the costs which are incurred during the project undertaking and after the completion of the project. Large commercial projects have the project budget estimate in the form of large detailed pieces of documents which include every cost estimate regarding man and materials. Labor costs, material procurement costs, construction costs, and operational costs are some of the costs that are incurred during the project execution and planning phase.

Project planning and budget are very important and crucial as they initiate funds and keep the funds flowing smoothly through the construction project. Here in this article, a brief outline has been provided regarding project budget estimation and its related concepts.

Steps for a successful project budget creation

Many parameters are considered for creating a successful budget plan for the project being undertaken. Some of the parameters such as direct and indirect costs, fixed and variable costs, labor and materials costs, equipment costs, license costs, and so on.

Some of the important steps followed for creating a good project are outlined below.

Forecasting and historical data

A look at the cost and resources incurred during the completion of similar projects helps get an idea of the cost data, and work breakdown structure, which can be followed to execute the present project. Using an efficient forecasting technique such as exponential smoothing or weighted moving average can give a better project cost estimation and aid in successful project cost estimates.

Learning from finished projects

By looking at the finished projects and performing a detailed estimate of cost data and budgets, help in determining the bottlenecks. These bottlenecks can be altered by filling the voids to perform efficient project budget planning for the existing project.

Expert consultation

Consulting seniors and mentors are necessary, as they can give an in-depth insight regarding in and out of the project budget creation. They provide knowledge regarding optimized project estimating techniques with methodologies that result in accurate estimates.

Baseline and re-baseline the project

The budget that has been created acts as the flowchart of the project. Every decision regarding the project execution, dispatches, and release of orders is based on the project baseline. The created project should be checked and addressed frequently and multiple times to add or remove elements that are not fit as per cost estimates and project estimate planning.

Cost estimation techniques

The department of project management rules out various cost estimates associated with the project execution within the project completion timeline. High-level cost estimates are undertaken during the initial announcement of the project. Once the project is approved and ready to go, different cost estimation techniques are applied to determine the internal costs associated with the project. In this section, some of the techniques to estimate costs are outlined. These techniques are used to accurately determine different costs hidden within a project.

A handwritten document indicating the cost incurred during a site work
CC BY-SA 3.0 | Image credits: https://en.wikipedia.org | Gshills

Analogous estimating technique

Through analogous estimating techniques, the work of the project manager is to determine project costs by referring to completed projects in the past. This technique utilizes past data and expertise of the project managers to arrive at a particular judgment. This technique to estimate the budget has its limitations. As no two projects are the same, this technique can only be used during the early phases of the project execution, as initial project approaches are common. This technique is to be only used when less information is available regarding the project.

Three-point estimating

An optimistic estimate, pessimistic estimate, and most likely estimate are the three project estimates which are identified by the project manager. An optimistic estimate refers to the estimate where the work is done and funds are used most efficiently. A pessimistic estimate refers to the successful execution of work with the least effective utilization of funds. Where the third estimate refers to the estimate, that falls somewhere in the middle of the two estimates.

Parametric estimating

Parametric estimating is generally used in construction projects to determine construction costs. In this estimating technique, historical data and statistical data are used as resources for project cost estimates. This technique of cost estimate targets in determining the accurate unit cost associated with a project.

Bottom-up estimating

Here, the project manager establishes the cost estimate of a particular project by breaking down the project into smaller fragments. The manager then performs an accurate cost estimate of these smaller fragments individually. If work in an organization requires an operation to be performed in different departments, the overall project cost is broken down regarding works to be performed in each department, with respective resources and materials costs.

The contingency budget plan

The contingency budget plan focuses on risk management rather than the regular budget plan that is intended for the long run for successful project execution. The contingency budget plan targets the possible risks and hazards that might lead to the significant failure of the project. For instance, unavailability of workers, resources, natural disasters, price hikes, shortage of machinery, and so on, fall under the risk factors that an organization can undergo during its operation or in the long run. Under such circumstances, a proper contingency plan may save a company from catastrophic failures.

Context and Applications

This topic finds its extensive existence in many undergraduate and postgraduate degree curriculums like

  • Bachelors in Mechanical Engineering
  • Bachelors in Civil Engineering
  • Bachelors in Economics
  • Masters in Business Administration in Finance

Practice Problems

1. Which of the following cost estimating techniques uses three cost estimates?

  1. Three-point estimating
  2. Analogous estimating
  3. Parametric estimating
  4. Optimistic estimation

Answer: Option a

Explanation: The three-point estimating technique makes use of three cost estimates.

2. What is meant by baseline and re-baseline?

  1. Updating the project budget document
  2. Review the project budget and add or remove materials to suit the cost demand
  3. Cost forecasting
  4. Both a and b

Answer: Option b

Explanation: Baseline and re-baseline refer to the addition and removal of materials to suit the cost demand.

3. Which of the following best relates contingency budget plan?

  1. A plan to meet human demands
  2. A plant to take into consideration the risks associated with a project
  3. A plan to forecast the future cost to be incurred with the project
  4. None of these

Answer: Option b

Explanation: The contingency budget plan takes into consideration the risk which could be associated with a project in the future.

4. Which of the following cost estimating techniques breaks the project into smaller fragments?

  1. Analogous technique
  2. Parametric technique
  3. Pessimistic technique
  4. Bottom-up technique

Answer: Option d

Explanation: The bottom-up estimating technique breaks the project into smaller fragments.

5. Which of the following best explains the pessimistic estimate?

  1. When work is done but the funds are least effectively utilized.
  2. When both work and funds are effectively utilized.
  3. When the funds are effectively utilized but the work is less effectively executed.
  4. When both funds and work are not up to the mark as decided.

Answer: Option a

Explanation: Pessimistic estimates refers to the complete completion of work but less effectively utilizing the funds.

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