From the course: Project Management Foundations: Budgets

Budget estimating parameters

From the course: Project Management Foundations: Budgets

Budget estimating parameters

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- How accurate is your budget? This is one of the first questions to ask yourself because others using the budget need to know. Let's look at how to answer this question based on actual data. I always recommend supplying a range for your estimate. For example, if I estimate the project will cost $10,000 and take four months to complete, I inform stakeholders that the cost could range from $9,000 to $13,000, or the duration could range from three to five months. But you might ask, how do I know what the range should be? In the early stages of the project, your budget is probably not very accurate. You don't have much information upon which to base your estimate. Your initial estimate is often called your order of magnitude estimate. Typically, for order of magnitude estimates, the actual cost or duration could be 75% higher or 25% less than your estimate. Estimates can be refined when the following information is known or clarified. Scope, requirements, resource requirements and availability, material costs, and the costs to address risks. If you have data from prior projects or your team has experienced working on a similar project, your level of confidence increases. In this scenario, your initial estimate should be more accurate. You could then provide an estimate called a budgetary estimate. This typically has an accuracy range of 25% higher to 15% less. Even if you don't have project prior data to use, as the project progresses, you should be able to provide a budgetary estimate as you learn more about the project. This would include detailed scope requirements, updated materials, and risk mitigation costs. In today's AI assisted world, we can access other information to help accelerate the accuracy of our budgets. Check out the exercise files for a sample prompt to provide additional information to help with your budget accuracy. Your final, most detailed and accurate estimate is called your definitive estimate. This estimate should be based on known project data, actual resource availability, and a detailed design of the proposed solution. The definitive estimate target range is for your actual costs or duration to be 10% higher or 5% less than your estimate. AI derived data can help validate your definitive estimate, compare your definitive estimate to the cost information obtained with the AI prompt in the exercise files. Another vital tip for improving budget accuracy is documenting your assumptions for the estimate. Common assumptions include resources you'll have available, the number of available project work hours per team member, and material costs that haven't been formally quoted. As the project progresses, validate your assumptions and update your estimates. So with this progression of estimates, if I'm asked, how accurate is your budget, I always say it's more accurate every day. As I learn more, it becomes more accurate.

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