BUDGETING CONCEPTS AND TECHNIQUES

There are several ways to develop project cost estimates, and it is important to understand which approach to use for specific projects. Estimates provide the basis for project budgets, which allocate project funds over time.

Cost estimating involves developing an approximation of the costs needed to complete a project. Costs often include salaries, hardware, and software. There are several types of cost estimates:

- A bottom-up estimate is based on estimating individual work items and summing them to get a project total.

- Analogous or top-down estimates use the actual cost of a previous, similar project as the basis for estimating the cost of the current project.

- Parametric modeling uses project characteristics in a mathematical model to estimate project costs.

- A rough order of magnitude (ROM) estimate is prepared early in the life of a project to provide a general idea of what a project will cost. Experts in a field can often create ROM estimates in a short period of time.

There are several techniques for developing standard engineering estimates. Many software development estimates, for example, are based on an estimate of the number of lines of code and a cost per line of code.

Project cost budgeting involves allocating the project cost estimate to individual work items, and they are usually allocated over time, such as months or years. Organizations have their own ways of budgeting. It is important to translate the project cost estimate into an appropriate format for the organization's budget.

It is important to have people who understand the project well help in creating the cost estimates.

It is also important to understand how to translate the cost estimate into the organization's budgeting process.