Project Budgeting: Definition & Techniques

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• 0:04 What Is Project Budgeting?
• 0:44 Analogous Estimating
• 1:50 Parametric Estimating
• 2:28 Top-Down Estimating
• 3:39 Bottom-Up Estimating
• 4:32 Lesson Summary
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Lesson Transcript
Instructor: Mike Miller
Have you ever wondered how a project manager develops a budget? There are a few types of estimating techniques that a project manager can use to develop a budget, and we'll discuss four of them in this lesson.

What Is Project Budgeting?

Project budgeting is determining the total amount of money that is allocated for the project to use. The project budget has been estimated by the project manager and/or the project management team. The budget is an estimate of all the costs that should be required to complete the project. We use the words 'should be' because if a project is poorly estimated, then the project will require more costs.

There are four ways for the project manager to estimate the project's budget. The four estimating techniques that a project manager can use are analogous, parametric, top-down, and bottom-up. We'll discuss each of these techniques and look at an example of each one in use to see how they all work.

Analogous Estimating

Analogous estimating is based off an analogy, or a similar project to the project that you and your team are undertaking. This type of estimating can be used when there's limited information on the upcoming project and a fast estimate is needed. The project manager will look at another project of similar scope and schedule and then modify the new project budget for any differences in scope, schedule, quality, or fiscal years. This isn't as accurate a method of estimating as some of the others.

Let's say that Dave is the project manager for a drone company. He's just started at the company and has been handed a project to produce a new quadcopter drone. The project offer needs to be turned in by the end of the week, and Dave has never run a project for a quadcopter. Dave looks through project files and finds a double copter project that looks similar in scope, schedule, and quality. There are a few differences in the quality requirements. Dave takes the information to his product manager and discusses it with him. The product manager agrees that the two projects are similar enough in nature, and the budget can be updated for the additional costs. Dave makes the changes, and the project is awarded.

Parametric Estimating

Parametric estimating is an estimating technique that determines the cost of a unit and duration and then scales the result based on how many are needed. Steve is the project manager for a rum distillery. Steve has been assigned the task of determining a budget for 1000 gallons of premium rum. Steve knows that his still can hold 2000 gallons of wash and that after 10 hours of distilling, he will have about 250 gallons of premium rum. So Steve takes 1000 gallons needed and divides by 250 gallons per run and determines he will need to distill four times. Steve then takes the cost of one run and multiplies by four and gets the total cost.

Top-Down Estimating

Top-down estimating is an estimating approach that begins with the final product and then works backwards to break the activities down into smaller and smaller activities. This type of estimating works incredibly well when the project manager has a big picture mentality and can see the vision of the project coming together. The most prolific benefit of this type of estimating is that major tasks are identified quickly and then as the project develops will be refined by the team. The largest negative to this type of estimating is that details can be overlooked. This can also be considered a type of analogous estimating, in that the project manager will use scalability when determining a project budget.

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