BottomUp Budgeting

In this method, elemental tasks, their schedules, and their individual budgets are constructed, again following the WBS. The people doing the work are consulted regarding times and budgets for the tasks to ensure the best level of accuracy. Initially, estimates are made in terms of resources, such as labor hours and materials. These are later converted to dollar equivalents. Standard analytic tools such as learning curve analysis (discussed in the next section) and work sampling are employed where appropriate to improve the estimates. Differences of opinion are resolved by the usual discussions between senior and junior managers. If necessary, the project manager and the functional manager(s) may enter the discussion in order to ensure the accuracy of the estimates. The resulting task budgets are aggregated to give the total direct costs of the project. The PM adds such indirect costs as general and administrative (G & A), a project reserve for contingencies, and a profit figure to arrive at the final project budget.

Bottom-up budgets should be, and usually are, more accurate in the detailed tasks, but it is critical that all elements be included. It is far more difficult to develop a complete list of tasks when constructing that list from the bottom up than from the top down. Just as the top-down method may lead to budgetary game play-

ing, the bottom-up process has its unique managerial budget games. For example, individuals overstate their resource needs because they suspect that higher management will probably cut all budgets by some percentage. Their suspicion is, of course, quite justified, as Gagnon ¡15, 16| and others have shown. Managers who - are particularly persuasive sometimes win, but those who are consistently honest and have high credibility win more often.

The advantages of the bottom-up process are those generally associated with participative management. Individuals closer to the work are apt to have a more accurate idea of resource requirements than their superiors or others not personally involved. In addition, the direct involvement of low-level managers in budget preparation increases the likelihood that they will accept the result with a minimum of grumbling. Involvement also is a good managerial training technique, giving junior managers valuable experience in budget preparation as well as the knowledge of the operations required to generate a budget.

While top-down budgeting is common, true bottom-up budgets are rare. Senior managers see the bottom-up process as risky. They tend not to be particularly trusting of ambitious subordinates who may overstate resource requirements in an attempt to ensure success and build empires. Besides, as senior managers note with some justification, the budget is the most important tool for control of the organization. They are understandably reluctant to hand over that control to subordinates whose experience and motives are questionable. This attitude is carried to an extreme in one large corporation that conducts several dozen projects simultaneously, each of which may last five to eight years and cost in excess of $1 million. Project managers do not participate in the budgeting process in this company, nor do they have access to project budgets during their tenure as PMs. (In the past few years, the firm has decided to give PMs access to project budgets but they are still not allowed to participate in the budgetary process.)

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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