Cost Estimation and Budgeting
You may be delivering a professional services project for a B2B customer or a new product development project. It might be an internal project to improve the productivity of a functional area through an automation tool.
Let us face it.
Irrespective of the nature of your project, businesses and their leaders are judged by their impact to the top line (revenue) and the bottom line (profit) Cost Estimation and Budgeting in Project Management turns out to be either your weakest link or the strongest one – to profitability.
What does Cost Estimation and Budgeting entail in Project Management?
The objective of Cost Estimation is to understand all the resources and the associated costs needed to deliver the project satisfactorily. Budgeting assigns a constraint in terms of the total amount that the project could spend. It is interesting to observe that Cost Estimation is performed by the project management team while the Budget is decided by the Project Sponsor or a Senior Manager.
The implication of Cost Estimation and Budgeting in Project Management varies with the type of project undertaken. Let us get a bit deeper with this.
On professional services projects or any external customer projects, teams want to ensure that their costs represent value for money for their customers. Customers realize that every penny saved is a penny earned! While it may be tempting to ‘go easy’ during estimations, remember that your competitors are not sitting and fiddling their thumbs! Your senior management and your teams need to review every hour of effort as well as every resource estimated. There are innumerable cases where companies have lost projects by a whisker!
Let us now consider the relevance of Cost Estimation and Budgeting while working on New Product Development projects.
Look at the various products around us – mobile phones, televisions, laptops, water purifiers, washing machines, bikes, cars, drugs (the good ones ????), packed foods, beverages, and many others.
There is a large market segment that is price sensitive. A minor price increase does not bode well for their companies. A classic example is a pack of Parle-G biscuits, which continues to sell at INR 5!
How do organizations operating in a product business sustain?
The answer lies in the way cost estimation and budgeting are performed as part of project management. The products indicated above have a variety of costs to be considered and include raw materials, human resources, vendor supplies/services, tools & equipment, utilities (power, water, air conditioning, heating, etc.), overheads (support staff, senior management, etc.), and other costs. In addition, product teams also need to forecast revenue.
It may be worth highlighting that the cost estimation and revenue forecasting spans multiple years!
Senior managers review the product viability across its life span by considering financial parameters such as Payback Period, Return on Investment, Net Present Value, and others.
If you observe closely, the viability of any product rests on the accuracy of cost estimation and budgeting performed initially. Teams also need to consider the moves of their competitors. This is where Value Analysis and Value Engineering in cost estimation and budgeting takes an important turn.
Let us now turn to other internal initiatives that could improve the productivity or efficiency of a functional area through tool development, process automation, or a six sigma project. In this case, multiple teams try to identify areas of improvement and recommend solutions. The proposed solution must provide details of cost estimation and budgeting required before approving the project. Teams must provide granular levels of detail about different resources and the costs involved. If the benefit of the proposed project is less than the costs incurred, management would see no reason to approve them. It is imperative that all such ‘project requests’ are backed up not just by cost estimates but also their bases.
One thing is clear – irrespective of the industry, cost estimation and budgeting in project management are of supreme importance unless the project involved is about regulatory compliance.
As the size, complexity, and value of the project increases, leaders expect granular details behind the estimate – assumptions made, constraints considered, risks foreseen, market dynamics, economic growth, competition, inflation, foreign exchange fluctuations, and other factors. Many a time, feasibility analysis, cost estimations, and revenue projections may be represented graphically to senior management for swift decision-making.
In an organization context, performing cost estimation and budgeting in project management is a highly collaborative exercise involving multiple perspectives from diverse functional disciplines. At the same time, such an exercise must be completed efficiently to stay competitive.
Most teams continue to rely on a Spreadsheet-based approach to cost estimation and budgeting. Some companies prefer to use standalone applications that are akin to ‘advanced calculators.’
Cost estimation and budgeting are not a one-time activity but are monitored closely throughout the project management cycle. There are numerous occasions when projects are cancelled as they no longer have a justifiable ‘business case.’ Leaders continue to review the basis of estimates of cost and forecast revenue. To top it, they must collaborate with diverse stakeholders.
Enterprises worth their salt do not risk such business decisions on Spreadsheets.
TouchBase is designed to manage the end-to-end cycle of project cost management backed by detailed and extensive project documentation and stakeholder collaboration. In addition, TouchBase integrates impeccably with ERPs, CRMs, and Accounting applications.
Are you keen to transform the Cost Estimation and Budgeting in Project Management for your enterprise?
TouchBase is calling!