Budgeting a project is extremely important. It can be argued as one of the most important aspects of a project. De Waal (2005) states, “Traditionally, budgeting is considered to be one of the most important management tools to steer the organisation, evaluate its performance and motivate its people” (p. 56). Budgeting can make or break a project and can be extremely difficult. There are several approaches to budgeting a project. Project managers must consider several aspects of the project before selecting a budgeting process. The two main processes are top-down and bottom-up budgeting. Top-down budgeting involves upper management providing an estimated overall budget based on past experiences. In contrast, bottom-up involves sub-tasks of the project being identified and budgeted first. Both processes can be useful depending on the type of project.
When budgeting a project, a commonly used process is top-down budgeting. Top-down budgeting involves passing the budget down the chain to be further broken down into sub parts. The highest management makes judgments based on past experiences from similar projects. The upper management estimates the cost of the project and the sub-projects. The budget is continuously passed down to lower-management down to the lowest level of the organization (Meredith, Mantel, & Shafer, 2015). Top-down budgeting is useful if tasks and activities of the project are unknown. For example, if an executive of a company decides to host an annual sales-meeting the organization might use top-down budgeting. If upper management is unsure of the subtasks of the meeting, top-down budgeting might be ideal. Since the meeting is annual the upper management can estimate costs based on prior years. One advantage of top-down budgeting is small costs do not need to be identified in the budget (Meredith, Mantel, & Shafer, 2015). When there is uncertainty of small tasks top-down budgeting might be considered. Another advantage of top-down budgeting is that agreeable budgets can typically be estimated easily. The downside is certain elements might be miscalculated (Meredith, Mantel, & Shafer, 2015). Top-down budgeting is ideal for projects with unknown subtasks however, it is not as accurate is bottom-up budgeting.
Unlike top-down budgeting, bottom-up does not start with upper management and work its way down. Bottom-up budgeting is the opposite. Tasks, schedules, and individual budgets are considered first. Estimates are then based off resources which is then turned into the dollar amount. Throughout the bottom-up budgeting process, the people involved within the project are consulted to confirm the budget is enough to cover the sub-project (Meredith, Mantel, & Shafer, 2015). Bottom-up budgeting is an extremely organized process. Since each element of the project is considered it is more accurate than top-down budgeting. There is less room for error when using this process. For example, the reserve is included within the budgeting process. The reserve includes a budget for unknown complications along the way (Meredith, Mantel, & Shafer, 2015). The reserve is like a safety net. It is there to protect incase of a fall. Bottom-up budgeting is beneficial because it considers all elements of the project and includes a safety net.
Compare and Contrast
Top-down and bottom up budgeting differ in several aspects. For example, top-down relies on upper-management to estimate the overall cost unlike bottom-up which relies on the sub-tasks. When a project’s tasks are defined then bottom-up scheduling is ideal. For instance, if a company decides to build a new office location than bottom-up scheduling might be ideal. Since the project involves several sub-tasks that can mostly be defined such as constructing the floor, walls, windows, and electric the organization should use bottom-up budgeting. If a company is budgeting a project with several unknown subtasks than top-down budgeting might be ideal. Top-down budgeting might be ideal if the upper management has a strong experience to rely on. If a company has an annual project such as a sales meeting or company outing, they can use the past to estimate the project. It is important to remember with top-down budgeting that with the advantages lessen with more sub-projects or tasks (Kim and Chung-Keun, 2006). Top-down budgeting is truly ideal only for projects that do not have several sub-tasks.
In conclusion, it is very important for companies to use a budgeting process to receive a more accurate estimate. Top-down budgeting relies heavily on experience, upper management’s opinion, and does not focus on the sub-tasks. In contrast, bottom-up budgeting starts by defining the tasks and consulting how much each aspect of the project will cost. Overall, top-down budgeting is more common because it is less intensive but bottom-up budgeting is more effective because it considers several aspects.