We were sitting at the table in the conference room, discussing how we’ll implement the new cost tracking features in AceProject. And I realized the difference between budget and estimate was not clear at all to everyone sitting at that table.
What’s the difference, anyway?
Budget is defined as:
- A sum of money allocated for a particular purpose
An estimate is defined as:
- An approximate calculation of quantity or degree or worth; “an estimate of what it would cost.”
A budget is often something that is decided before estimating how much something will cost. The organization decides how much they can invest in the project, then they decide on the scope of the project, and finally the project team estimates how much it will really cost to do the project. When the estimate is higher than the budget, the fun begins.
Here’s an example:
- I want to buy a new car. I know I can afford to pay 15 000$ for the car. That’s my budget.
- I go to the car dealer and I pick the car I want, with all the options I want on it. The salesperson tells me that car would cost 25 000$. That’s the estimate.
- Now I have two choices: change my budget or choose different options on my new car to reduce the estimate so it fits my budget.
Why do you need an estimate if you already have a budget?
Sometimes budgets are not realistic. Sometimes, the technical complexity of a project can be underestimated at the initiating stage. If we take the budget and run with it, we may end up with no money left half-way through the project.
Why do you need a budget is you already have an estimate?
Estimates can change. A budget can work as a limit or a threshold that raises flags when there are overruns. Also, once the estimates are done, good project managers will add reserves to address risks or unplanned work.
Why compare the two?
Usually, a preliminary budget is decided at the project initiating stage. Then, during the planning phase, once the scope is approved and the estimates are done, this budget is adjusted. As the project goes forward, estimates may change. For example, there may be some work missing in the work breakdown structure. Or there may be unforeseen complexities in the project. Comparing the new estimate with the budget helps keep costs in control so as not to exceed the budget.