Project Management Fundamentals

The Project Management Fundamentals course will provide you with the skills and knowledge to successfully create and manage a project, from project initiation to close out and evaluation.

Module 1: Project Planning and Initiation - Lesson 3: Project Cost Management

Chapter 2: How to set up a budget for your project

Setting a budget

When initiating a project, it is difficult to define exactly how much the project will cost. Setting a budget can be a daunting task, especially since Project Managers are held accountable for their budget estimates. As such, the ability to create an accurate budget is an essential skill for a Project Manager.

There are two different cost types that Project Managers need to be aware of when creating budgets, these are Direct Costs such as Labour (people), raw materials, travel costs, licence fees etc., and Indirect Costs such as Office space and equipment, telephone charges, etc.

It is also important to add a contingency, or buffer, to projects, to cover risk. This is usually a percentage of the total project cost and time, which can be used for unforeseen events/expenses.

The two main approaches for creating a budget

The two main approaches used when creating a budget are:

  1. The Top-down approach: Deciding how much the project will cost and dividing the amount between the work packages. The Top-down approach is generally taken by Senior Management, and focuses on achieving the project within the allocated budget.
  2. The Bottom-up approach: Estimating the total cost of the project by costing the lowest-level work packages and rolling up. The Bottom-up approach is generally taken by a team, involving the budget holder, and identifies the tasks and activities, and associated costs, required to complete the project.


There are also other techniques used to create a budget, which we will explain in the next chapter.

Which of the following statements is applicable to the Top-down approach for creating a budget?

  • Estimating the cost of the project by costing the lowest-level work packages and rolling up.
  • The team identifies the tasks and activities, and associated costs, required to complete the project.
  • Deciding how much the project will cost and dividing the amount between the work packages.
  • The Top-down approach for creating a budget only includes Direct costs.
Select the correct answer from the available options.