Question

If a firm uses a budgeting program for its projects, is an activity budget not needed? If it is, then of what value is the program budget?

Answer 1

Activity budgeting is required to budget the project on the basis of task or activity.

Program budgeting is required to aggregate the income or expenditure at the project level.

The primary objective of program budgeting/top-down budgeting is to provide accurate aggregate budget as budget at individual level might not be accurate.

Budgeting is a very crucial part of any project management. Before the project is kicked off, a project sponsor and the financial support have to be clearly identified. A project can follow any methodology of implementation like waterfall or agile but budgeting is equally vital in both the methodologies. There are two major ways in which a project is budgeted. They are:
• Top Down Approach
• Bottom Up Approach

In the top down approach, the higher management develops a budget which is divided internally across various domains in the project. There is a fixed budget which has to be followed and the activities and improvements should have high ROI. Every activity which is being designed such as change of application system, consultant onboarding or outsourcing the work have to be taken considering the financial constraints. In case, the project requirements require pricing then the project budget is changed and increased. In the bottom up approach, every activity within the project and its associated costing are calculated and the summation of the same is considered as the project cost. It still has to be within the defined limits that the project sponsor provides. One major difference between both the approaches are the involvement of project sponsors and the project managers in the financial decision making. In the top down approach, the project managers do not have an active saying in the project budgeting while in bottom up approach the do.

If in case, the program uses a top down approach, the project sponsors would already have a ballpark figure identified for the project along with an additional buffer in case the costing is more than the forecasted prices. Typically, in most multinational companies, a budget is approved in a top down approach when the program manager presents the idea for kick starting the project. Once the project starts, the first activity for the project management team is to identify the actual costs that are involved in the project. All the project leads and managers would have to detail out the plans and give an approximate project estimate to the higher management. The costs are then compared with the ROI they provide. If the justification provided by the Project teams are valid, then projects budget is increased. Else, project sponsor would ask the team to reconsider the approach and complete the deployment within the fixed budgets.