Budgeting Projects

Budgeting Projects

Plan cost management – “the process that establishes the policies,
procedures, and documentation for planning, managing, expending,
and controlling project costs.” PMBOK® Guide


Cost management plan – “a component of the project
plan planned structured
that describes how costs will be planned, structured,
and controlled.” PMBOK® Guide

Costs included

Activities resources estimating

Cost estimating

Budget determination

Cost control

Purposes of the Cost
Management Plan

• How to develop and share relevant, accurate and timely information for decision making
• Provides feedback linking the project to business objectives
•  Provides detail and summary information
•  Helps project stakeholders focus on schedule performance and cos

Estimate Cost

Cost estimating - “the process of developing an approximation of the cost of the resources needed to complete project activities ”.

Types of costs	Timing and accuracy of cost estimates
Methods used to estimate costs	Cost estimating issues

Types of Costs

Fixed vs. Variable Cost

Project cost and volume
curve

Direct vs. Indirect Costs

Direct Versus Indirect Costs

Recurring vs. Nonrecurring
Costs

 Recurring costs repeat as the project

work continues

◦ Cost of writing code; laying bricks

◦ Occur during project execution

 Nonrecurring costs happen only once

during a project

◦ Design development

◦ Occur during project planning and closing

Regular vs. Expedited Costs

 Regular costs occur when progress

can be made by normal work hours

and purchasing agreements

◦ - the preferred cost

 Expedited costs occur when the

project must be conducted faster than

normal

◦ Overtime and extra charge apply

Estimate vs. Reserve Costs

 Project estimates need to be

aggressive

 Add a reserve to cover activities that

run over aggressive estimates

Estimate – “a quantified assessment of the likely amount…It should

always include an indication of accuracy.”

Reserve – “a provision in the project management plan to

mitigate and/or risk cost schedule risk. Often used with a modifier

(e.g. management reserve, contingency reserve) to provide

further detail on what types of risk are meant to be mitigated.

Management reserve – “an amount of the project budget withheld

for Management control purposes … for unforeseen work that is within the scope.” PMBOK® Guide

Contingency reserve – “a provision in the project budget within the cost baseline that is allocated for identified risks that are accepted and for which contingent or mitigating responses are developed.

Accuracy and Timing of Cost
Estimates

Order of Magnitude Estimates

Created when limited project detail is available

 Enough information for “go” or “no

go” decision

Budget and Definitive
Estimates

 More accurate cost estimates at

each stage

 Rolling wave planning

◦ Definitive estimate for the 1st stage

◦ Order of magnitude for the remainder

Methods of estimating costs

 Analogous estimating

 Parametric estimating

 Bottom-up estimating

Analogous Estimating

 A similar project --->a starting point

 Experience performing similar

projects

 Actual costs of similar projects

 Knowledge of how project differs

 Experience with methods used to

perform the project

Analogous estimating – “a technique for estimating the duration or cost of an activity or a project using historical data from a similar project.

Parametric Estimating

Involves finding more information

regarding the project

Parametric estimating – “an estimating technique in

which an algorithm is used to calculate cost or

Duration based on historical data and project

parameters.

Bottom-Up Estimating

 Most detailed – specifications need to

be very clear

 Time consuming

 Most accurate form of estimating

 Ensure every item is included

Bottom-up estimating - “method of estimating project

duration or cost by aggregating the estimates of the lower-level

components of the WBS.” 

Cost Estimating Method
Comparison

Project Cost Estimating Issues

Supporting Detail

 Scope

 Method used

 Version control is critical

 Assumptions

 Constraints

 Different assumptions by different people

 Range of possible outcomes 

 Untrue assumptions cause more work

Direct Labor Assumptions

 Workers will be paid at the prevailing wage

rate of $14 per hour

 Workers are already familiar in general

with the technology being used on the

project

 Workers will be paid for 40 hours per week

whether there is always that much work for

them or not

 Overtime will never be authorized

 The project schedule can be delayed if the only alternative is to pay overtime.

Supporting Detail - Constraints

 Only in-house workers will be used

 No extra space will be provided

 No extra budget will be allowed

 The current version of the XYZ software will be incorporated into the design.

Causes of Variation

Statisticians classify variation as

coming from either normal or special

causes

Phone calls

Instant messages

Lightning strikes

In-person interruptions

Normal and Special Cause
Variation

Vendor Bid Analysis

 Use to determine whether price is

reasonable

 Assume the lowest responsible offer is

fair

 Prices may be determined in the

marketplace

 Develop a “should cost estimate”

Value Engineering

 Double-checking all of the chosen

methods

 A separate stage may be incorporated

late in the project planning to ensure

time is spent on value engineering

Value engineering – “an approach used to optimize project life

cycle costs, save time, increase profits, improve quality, expand

market share solve problems and/or use resources more effectively."

Activity-Based Costing (ABC)

 More involved methods for allocating

indirect costs

 Yields more accurate cost information

 Cost Drivers:

Number of

units produced

Number of

product

variations

Number of batches run

Amount of

facility utilized

Life Cycle Costing

 The total costs of creating and using

the project during its useful life

 Consider disposition costs of the

product after its useful life is complete

Time Value of Money

 Discount the value of future revenue

and cost streams

 Discount future dollars by the

appropriate factor

 The finance department may provide

the appropriate rate

 The rate depends on inflation rate plus

the cost of capital

Determine Budget

 Aggregating costs

 Analyzing reserve needs

 Determining cash flow

Determine budget – “the process of aggregating the estimated

costs of individual activities or work packages to establish an

authorized cost baseline.”

Aggregating Costs

 Direct and indirect costs add up to the

cost baseline

Cost performance baseline – “the approved version of

the time-phased project budget, excluding any

management reserves, which can be changed only

through formal change control procedures and is used as

a basis for comparing actual results.”

Aggregation of Project Budget

Analyzing Reserve Needs

 Contingency reserve (risk analysis)

 Management reserve (uncertainty)

Determining Cash Flow

 Expenses are applied to individual

activities

 Revenue tracked for availability

 Cash from organization budgets on a

periodic basis

 Cumulative cash >= demands?

Project Cumulative Cash and

Revenue

Establishing Cost Control

 Budget  baseline for project control

 Milestones  measuring point

◦ Milestone schedule - project charter

◦ Identified in constructing the project

schedule

 Cash flow projections  expected funding

Control cost – “the process of monitoring the status of
the project to update the project costs and managing
changes to the cost baseline.”

Using MS Project for Project
Budgets

 Develop Bottom-Up Project Budget
◦ Assignment costs
◦ Activity costs
◦ Project total costs
◦ Perspectives to view costs
 Develop Summary Project Budget

Assignment Costs

 Required data
◦ Assignment work hours
◦ Resource Standard Rate
◦ Resource Overtime Rate

Activity Costs

Task Usage View with
Resource Work Form

Various Perspectives

 Resource Usage view
◦ Assignment costs are summarized at the
resource level

Resource Usage View

Develop Summary Project

Budget

 Add a dummy activity under each phase
summary
 Estimate phase duration and the phase
cost
 Duration estimate dummy activity’s
duration field
 Cost estimate dummy activity’s Cost field
 Remove each dummy activity when detail
is added

Dummy Activity for Late

Phase

Summary

 The cost management plan outlines
how to structure and control project
costs
 Cost estimating can be challenging
because of activity variation
 Many methods are available to assist
in cost estimating.


 Cost budgeting
◦ Aggregating individual costs
◦ Analyzing needs for cost reserves
◦ Determining cash inflow and outflow.
 Establishing cost controls includes
establishing cost reporting systems.
 MS Project can assist in developing
either bottom-up project budgets or
summary project budgets.

The Value of Budget
Optimization

 A three PM IN ACTION
three-year capital project portfolio is
developed for implementation and
budgeted.


 Budgeting process conducted year round to balance multiple competing
objectives

 Utility adopted a project portfolio
optimization process to create,
analyze. refine the budget for the refine the budget for the portfolio.

 The electric utility adopted a project
portfolio optimization process
 A computer-based mathematical
algorithm is used to optimize all
possible spending portfolios to
maximize value and minimize risk at
specified budget levels

The Value of Budget Optimization
Benefits