Saturday 10 August 2019

WBS: Budgeting

Once all activities are listed with their Duration & Effort estimates, the budget can be composed, the budget is the cost element of the triple constraint. Costs are allocated to the activity level, all costs including personnel, assets, subscriptions etc need to be allocated to get the most accurate estimate per activity as possible. even the estimate cost of contingencies is included in the estimating of activities.

since each activity is tied to it's precursor and successor; work packages are comprised of activities and deliverables are made up of work packages; with all this information we can track how much each deliverable will cost and when it will be delivered. The WBS and activity list are used to manage the triple constrained, the budget scope and schedule are managed together, the WBS and activity list documents are the corner stone of the project plan.

there are multiple ways to estimate to cost of activities

  • Bottom-up estimating: estimates are done from the bottom of the WBS, starting with estimating how much each activity will cost adding those values up to figure out the cost of a work package, etc up to the project
  • Top-down estimating: involves estimating how much a work package will cost, then dividing that estimate up among the activities, this can start at the project, deliverable or work package level.

there are pro's and con's of each

Top-down Estimating 
The advantage of top-down estimating is that it can be done fairly simply and quickly however it is not as accurate as bottom up estimating techniques, it is best used for the project selection or developing a project charter, some techniques are:

  • Pragmatic estimating: leverage historical data, for example a company can use data from previous projects similar in scope to estimate the cost of new projects. it leverages the cost per unit times how many units needed paradigm. 
  • Analogous estimating: leverages historical data, if a company completed a similar project, but twice the size you could argue that the new project will be similar in costs just divided by two.
  • Group Decision making: involves leveraging experts, each expert would create their own estimate for the project, deliverables, work packages and activities, then in an iterative fashion the experts discuss and narrow down to the best estimate.
  • Software estimating: leverages historical data with statistical analyses and various algorithms to help estimate as well as define odds of success vs failure. 

Bottom-up Estimating
The advantage of bottom-up estimating is that it's much more accurate however it's also far more difficult and involved, it requires granular analyses of each activity by experts then all costs for all activities are aggregated to come up with a project estimate.

it is recommended to use both a top-down and bottom-up estimation to get a more accurate understanding of the project cost. typically when project selection is done and the charter is written a top-down approach is used, then when in the planning phase it's normal to use the bottom-up approach to get a more accurate depiction on budget needed. if there's a discrepancy then it becomes a negotiation between the PM, sponsor and senior management of whether to decrease scope, increase budget or some combination of the two.