As a technology manager in the IT department (or any tech manager), you’re going to be given technology projects to manage and implement. A major part of your job will be researching, estimating, and justifying the purchase of technology for your organization. However, you’ll rarely be the one to approve the budget.
Instead, you’re in charge of informing the budget. The first obstacle to budgeting is understanding a key difference in how to estimate the cost of a project during the planning process.
People use budgeting and project cost estimating interchangeably all the time – people have the same thought in mind when thinking of one or the other. However, the two are really each a different side of the same coin. They are very related, but there are subtle differences between a project budget and a project cost estimate.
Cost estimating is the process of quantifying every resource that is going to be required to complete a project. Resources means everything – labor, materials, land (in the case of construction), and everything else that needs to be paid for in terms of the project. The cost estimate is a list and quantification of all of those with a dollar amount attached to it. At the end of the process you have a single dollar amount that represents the roll up of everything that you’ve qualified.
Budgeting relies on that estimate. You have to have an idea of what the cost will be before you set out to do your budgeting. Budgeting is the process of identifying not the amounts, but the sources of the funds to be used to cover the cost estimate.
Think of buying a car. The cost estimate is like the sticker price on the window of the car. Budget is the exercise the buyer will go through to determine where the money will come from – who is pitching in, how much they’re pitching in, what accounts the money will come from, and so forth. Finally, how much they’re willing to pay.
It’s important to make sure that your budget and your estimate are in alignment. It takes a lot of work to make sure that happens. You need to know you’ve identified the source of the funds that will cover the estimate, or (if there aren’t enough funds) figure out what you need to revise to bring the estimate underneath the budget.
In the best-case scenario, the estimate comes before the budget. The sequence would be:
- Scope is prepared
- Schedule is prepared
- Cost Estimate built
- Budget determined
If you think about it, how could anyone complete an estimate if they didn’t know what they were trying to buy? If you don’t have a scope you can’t build an estimate. Everything is built on scope, and in an ideal world follows that logic.
The schedule will give you a time frame. If the stakeholder wants something done on an accelerated timeframe, that will have a huge impact on the estimate and therefore the budget. You might have to pay extra for faster shipping, or pay overtime labor to get things done more quickly. On the flipside, if the client has a long timeframe – a year or more, or perhaps they don’t want the project started for another year or more – then that will affect the estimate as well. Labor, materials, land, or anything else could cost different prices years down the road, and that means new variables in the cost estimate.
Unfortunately, it’s hardly ever a best-case scenario. There are occasions when an executive will come to you, give you an assignment, explain what the budget is, and you’ll need to work backwards to make it work. There are many other variations as well – you might get a project that is partially budgeted, scoped, or scheduled and have to fill in the rest yourself. Depending on what you’re given, you might choose a different technique to determine the cost estimate and, ultimately, the final budget.
For more information on how to create a cost estimate and get budget approved for technology projects, click here.
Credit to Robert Marshall, PMP and Adjunct Professor, for providing information for this article. Listen to his My TechDecisions Podcast appearances here.
Thank you very much!! It is very helping and clarified! God bless you!