Written by: John Datuin

Project budgeting and cost forecasting are two related but distinct concepts in the realm of project management and financial planning. While both involve estimating and predicting project costs, they differ in their scope, purpose, and timing. Here’s a comparison and contrast between project budgeting and cost forecasting:

1. Scope

Project budgeting typically involves creating a comprehensive plan that outlines the expected costs for a project, including all anticipated expenses and resources required. It covers the entire project lifecycle and is usually prepared at the beginning of the project or during the project initiation phase. On the other hand, cost forecasting is an ongoing process that involves updating and revising the estimated costs throughout the project’s progress based on actual costs incurred, changes in scope, and other factors. It focuses on predicting the future costs of the project as it progresses.

2. Purpose

The purpose of project budgeting is to establish a financial baseline for the project and allocate resources accordingly. It provides a framework for financial planning, cost control, and financial accountability. Budgets are typically used for obtaining project funding approvals, setting financial targets, and monitoring project performance against planned costs. Cost forecasting, on the other hand, aims to refine and adjust the original budget based on the actual progress of the project and changing circumstances. It helps in identifying potential deviations from the budget and taking corrective actions in a timely manner.

3. Timing

Budgeting is typically done at the beginning of a project or during project initiation, before the project activities start. It involves estimating costs based on the available project information, historical data, and other estimation techniques. Cost forecasting, on the other hand, is an ongoing process that takes place during the project execution phase and continues until the project is completed. It involves updating and revising the budgeted costs based on actual costs incurred, progress, and changes in scope or resources.

4. Flexibility

Budgets are usually fixed and represent the approved financial plan for the project. They may require formal approvals for any changes or modifications. On the other hand, cost forecasting allows for flexibility and adjustments in the estimated costs as the project progresses. It provides an opportunity to revise the original budget based on the actual performance of the project, changing requirements, and unforeseen circumstances.

5. Focus

Budgeting focuses on the overall financial plan for the project, including all anticipated costs, resources, and funding sources. It provides a holistic view of the project’s financial health and helps in managing financial risks. Cost forecasting, on the other hand, focuses on predicting the future costs based on the actual performance and progress of the project. It provides insights into the projected costs and helps in identifying any deviations from the original budget.

6. Phasing

Budgeting is normally done on an overall and annual basis. Cost forecasting, on the other hand, is normally monthly. Most organizations would forecast on a monthly basis for one or two years, and thereafter on an annual basis.

7. Level of Detail

Budgeting is normally done for the whole project, or for the highest-level work breakdown structure (WBS) elements. Cost forecasting, on the other hand, is frequently done of the lower-level WBS elements, and sometimes done at a cost element (eg external services) level of detail.

8. Reporting and Versions

Project reporting would typically include both budget and forecast amounts. The Budget is typically not versioned, but adjustments are tracked via Supplements and Returns. Cost forecasting, on the other hand, is normally done by version. Organizations will frequently persist the monthly reforecasts for version comparison. Project forecasts provide the most reliable indicator of planned capital expenditure as they incorporate actual costs, commitments and latest expenditure estimates.

9. Control

Budgets impose strict financial limits to expenditure at a summary WBS level per year. Procurement controls would typically prevent expenditure commitments that exceed these budget constraints. Cost forecasts serve as a more granular expenditure plan. Expenditure variances on a monthly basis are expected, and trigger the redetermination of updated future expenditure.

In summary, project budgeting and cost forecasting are both important tools in project management for estimating and predicting project costs. While budgeting sets the initial financial plan for the project, cost forecasting provides ongoing updates and adjustments to the estimated costs based on actual performance. Both are essential for effective financial planning, cost control, and project management.