9.1 Where did the Number Come From?

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The following lists the most common budgetary processes:

Some projects are driven by a need or goal mandated from the top, or by the environment itself. The family of Y2K projects comes quickly to mind as a good example of this class of initiatives. In such cases, budgets are "allocated" from a somewhat cursory estimate. With this process, in essence, the corporation is saying "we will not spend more than $X."
There is the historical precedent model. On more than one occasion, when I have asked how the number was derived, the response was "the last time we did this, it cost $Y. Adjusting for inflation, less a 20 percent savings on cheaper technology, leads us to 118 percent times $Y." Of course, the historical value of Y may be no more valid than the adjustment factors applied against it, in this case 118 percent. Project accounting is suspect because of the way "scope creep," contingency, beneficiary supplied funding, and other factors may, or may not, have been recorded as linked to the original project.
A task force or consultancy may have done a bottom-up, piece-by-piece estimate, based on assumptions made about the design and the implementation strategy.
Industry benchmarks can be used to approximate a budget. If a benchmark, for instance, suggests that the average cost to upgrade a network server to the latest version of your favorite operating system is $7,500 including labor, and you have to upgrade 250 servers, then the derived budget is $1.875 million.
It is common practice to add a premium for contingency expenditures. I have seen the factor used range from 5 percent of total estimated cost on huge projects to an uplift of 10 or 15 percent on smaller initiatives.

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