Project budgeting is a capital management function of business. Managers create budgets to ensure that projects have a financial road map through the development of the project. Budgets can take several weeks to complete depending on the size of the project. Companies must also decide on which budget technique or tool works best for calculating the financial needs of the project. Common budget techniques include the analogous technique, top-down method, bottom-down method and parametric estimating. Each budget tool has different advantages for the project management process.
The analogous budget tool uses the actual costs from a previous project to estimate the budget for a current project. This method can be used for multiple projects, as long as they are similar in nature. Companies with repeated projects that have the same goals and objectives can usually use the analogous budget tool with decent success. Analogous budgeting is also less costly than other budgeting tools or methods. Unfortunately, companies with diverse projects may find the analogous method less accurate and unreliable for estimating costs.
The top-down budget method looks at the total project budget and estimates costs for each process in the project. This method looks at each activity needed to complete the project or the number of outputs from the project when estimating costs. Companies may use a fixed dollar amount for the project budget and assign a portion of this amount to each process in the budget. Managers may decide to cut activities if the budget is unable to cover the cost of all project activities.
The bottom-up budget tool uses the costs of all economic resources or inputs used in a project to determine the total project budget. This method is a variable budgeting method since the cost of inputs can vary depending on the availability or quality of the inputs. Companies may also use operational manager or employee advice when planning project budgets under this method. These individuals typically have a good understanding of the inputs and production methods used for completing various projects.
Parametric-estimate budgets use standardized mathematical calculations or parameters for determining the cost of a project budget. This budget tool may be based on cost-accounting information such as process costing tools or cost allocation methods that attribute business costs to goods and services. This information is used in parametric budgeting by taking the specific cost information and multiplying it by the number of processes or activities used to complete projects. This cost-accounting information may also be customized or re-calculated for the specific project budget at hand.