Top-down budgeting: Indirect cost?



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    Kun Liu

    Hi Girem,

    This is a very interesting question and I want to share my understanding as follow:

    I think you are refering to Table 10.6 in AHPP(page 625) for the top-down budgeting. 

    First of all, the formula you refering is a little bit wrong, the correct one should be:

    • Net Service Revenue(NSR) = Gross fee - Consultant fees 
    • Project Labor Budget = NSR - Contingency - Non-Reimbursable expense

    If you look at the Table 10.9(page 626), the hourly rate for the labor budget is the billing rate.

    The billing rate = Hourly Salaries x Net Multiplier

    And the billing rate include:

    • Direct Labor (Salary) Expense
    • Indirect Expenses
    • Profit

    To answer your question, my understanding is that the project labor budget include the indirect expense.

    Please also refer to Table 7.11(page 440) and Table 7.12(page 442).



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    Michael Ermann

    "Top-down" vs “Bottom-up” project budgeting

    Top-down budgeting

    • Start at the "top" with the gross fee the owner will pay your firm
    • Subtract expenses (pay mechanical engineer, pay for travel to the site) to see what is left for design time
    • Less accurate, you need more experience to estimate them properly, but faster to calculate and therefore better for smaller jobs
    • Example:

    Bottom-up budgeting

    • Start at the bottom with each person who will be working on the project, their hourly rate, and the number of hours you estimate they'll need to work. Each task is tallied upwards
    • Time consuming, but more accurate
    • Good for multi-faceted, large projects
    • Project cost = Sum(Hours/Task * Dollars/Hour)
    • Example:

    In these examples, for the same project, the RFP suggests that you will have a (top-down calculated) half-million dollars to design the project. . . but your bottom-up estimate, based on what you thought it would take to design the project, came in at over two million dollars! Talk to the client about renegotiating the architect's fee or do not respond to this RFP because you will lose a lot of money if you take this project on.

    *For the most accurate budgeting numbers, do both top-down and bottom-up estimates and use those to determine upper and lower limits. --Michael Ermann, Amber Book Creator

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