The 3 Stages of a Project Budget
Organization decision-makers would love to have a detailed and accurate budget on hand whenever someone proposed a project so they could assess its relative benefits to the organization and decide whether they have sufficient funds to support it. Unfortunately, you can’t prepare such an estimate until you develop a clear understanding of the work and resources the project will require.
In reality, decisions of whether to go forward with a project and how to undertake it must be made before people can prepare highly accurate budgets. You can develop and refine your project budget in the following stages to provide the best information possible to support important project decisions:
- Rough order-of-magnitude estimate: This stage is an initial estimate of costs based on a general sense of the project work. You make this estimate without detailed data. Depending on the nature of the project, the final budget may wind up 100 percent (or more!) higher than this initial estimate.
Prepare a rough order-of-magnitude estimate by considering the costs of similar projects (or similar activities that will be part of your project) that have already been done, applicable cost and productivity ratios (such as the number of assemblies that can be produced per hour), and other methods of approximation.
This estimate sometimes expresses what someone wants to spend rather than what the project will really cost. You typically don’t detail this estimate by lowest-level project activity because you prepare it in a short amount of time before you’ve identified the project activities.
Whether or not people acknowledge it, initial budget estimates in annual plans and long-range plans are typically rough order-of-magnitude estimates. As such, these estimates may change significantly as the planners define the project in greater detail.
- Detailed budget estimate: This stage entails an itemization of the estimated costs for each project activity. You prepare this estimate by developing a detailed WBS and estimating the costs of all lowest-level work packages.
- Completed, approved project budget: This final stage is a detailed project budget that essential people approve and agree to support.