Problem
sweety09
Chapter10-BudgetingProjects.pptxCONTEMPORARY PROJECT MANAGEMENT, 4E
Timothy J. Kloppenborg
Vittal Anantatmula
Kathryn N. Wells
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
‹#›
Budgeting Projects
Chapter 10
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
‹#›
Chapter 10 Core Objectives:
Define project cost terms & tell how each is used in estimating project cost.
Compare and contrast analogous, parametric, & bottom-up methods of estimating cost.
Create a time-phased, bottom-up budget for a project.
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
3
Chapter 10 Technical Objectives:
Show both summary & bottom-up project budget information with cumulative costs, using MS Project 2016.
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 10 Behavioral Objectives:
Describe issues in project cost estimating and how to deal with each.
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Methods of Estimating Costs
Timothy J. Kloppenborg
“I worked for the same company in both cities…. Both [methods] made sense where they were used. In Denver, if we wanted to bid every job (and you cannot win the job if you do not bid on it), we needed a fast method. In Kansas City, we had the time to develop detailed cost estimates, and so we took the time. There are many methods of estimating project costs and each has its place.”
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
6
Plan Cost Management
Involves developing a cost management plan for a project
Cost & schedule are closely related
Plan cost management – the process to determine how to plan, estimate, & control project costs.
Cost management plan – a living, evolving plan that involves forecasting & refining cost estimates throughout the life of the project.
Costs included
Activity resource estimating
Cost estimating
Budget determination
Cost control
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Purposes of Cost Management Plan
Way to develop & share relevant, accurate and timely info for decision making
Provides feedback, linking project to business objectives
Provides detail & summary information
Helps project stakeholders focus on schedule & cost performance
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Estimate Cost
Linked to scope, schedule, & resource planning
Never lie to yourself or anyone else
You must understand what project costs really are
Avoid shading the truth to secure necessary funding
Cost estimating – “the process of developing an approximation of monetary resources needed to complete project activities.” ~Practice Standard for Project Estimating (PMI)
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Estimate Cost
Types of costs
Timing & accuracy of cost estimates
Methods used to estimate costs
Cost estimating issues
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Types of Costs
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Fixed vs. Variable Cost
Fixed costs remain the same
Variable costs vary directly with volume of use
Cost curve reflects as low a total cost as possible at current project size
Fixed & variable costs involve consideration of project scope
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Project cost and volume curve
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Direct vs. Indirect Costs
Direct costs only occur because of project
Direct labor
Other direct costs – material, travel, consultants, subcontracts, purchased parts, computer time
Indirect costs - not associated with one specific project
Salaries, buildings, utilities, insurance…
Costs are allocated across projects
PM needs to understand how these costs are allocated
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Direct Versus Indirect Costs
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Recurring vs. Nonrecurring Costs
Recurring costs repeat as project work continues
i.e. Cost of writing code or laying bricks
Occur most during project execution
Nonrecurring costs happen only once during a project
Design development
Generally occur during project planning & closing
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Regular vs. Expedited Costs
Regular costs preferred
Expedited costs occur when the project must be sped up
Overtime, expedited shipping, etc.
Vital to understand schedule pressures & resource demands when estimating costs
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Other Cost Classifications
Project estimates need to be aggressive
But add a reserve to cover activities that run over estimates
Estimate – “a quantified assessment of the likely amount…It should always include an indication of accuracy.” ~Practice Standard for Project Estimating (PMI)
Reserve – extra money in project budget to be used if necessary—usually if a risk event occurs…classified as either management reserve or contingency reserve.
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Two types of Reserve Costs
Management reserve – money assigned to the project for unknown possible costs & money that senior management controls.
Contingency reserve – money assigned to the project & allocated for identified risks for which contingency responses are developed.
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Accuracy & Timing of Cost Estimates
When should cost estimates be developed?
How accurate do cost estimates need to be?
How will cost estimates be used?
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Different Cost Estimates
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Order of Magnitude Estimates
Created when limited project detail is available
Enough information for “go” or “no go” decision (screen out impractical projects)
Ball park
Conceptual
Initial
Level one
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Budget and Definitive Estimates
More accurate cost estimates at each project stage
After planning stage, cost estimates should be good enough to use for budgeting
Rolling wave planning
Definitive estimate for the 1st stage
Order of magnitude for the remainder
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Methods of estimating costs
Analogous estimating
Parametric estimating
Bottom-up estimating
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Methods of Estimating Costs
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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 – “an estimating technique that uses the values of parameters on a scale, such as scope, cost, budget, & duration or measures of scale such as size, weight, & complexity from a previous and similar activity or project as the basis for estimating the same parameter or measure for a future activity or project respectively.” ~Practice Standard for Project Estimating (PMI)
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Parametric Estimating
Involves finding more information regarding the project
Relies on statistical relationships
Parametric estimating – “an estimating technique that uses a statistical relationship between historical data and other variables (e.g., square footage in construction, lines of code in software development) to calculate an estimate for….scope, cost, & duration.”
~Practice Standard for Project Estimating (PMI)
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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 …what is needed to meet the requirements of each of the lower, more detailed pieces of work, preferably the lowest level of WBS work elements, and these estimates are then aggregated into a total quality.” ~Practice Standard for Project Estimating (PMI)
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cost Estimating Method Comparison
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Project Cost Estimating Issues
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Supporting Detail
Scope
Estimating Method(s) used
Assumptions
Constraints
Range of possible outcomes
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Direct Labor Assumptions
Examples:
Workers will be paid $14 per hour
Workers already familiar in general with technology being used on project
Workers paid for 40 hours/week, whether there is that much work for them or not
Overtime will never be authorized
Project schedule can be delayed if the only alternative is to pay overtime.
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Supporting Detail - Constraints
Examples:
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
Constraints often dictate methods available for performing the work
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Causes of Variation
Understanding types of variation helps explain & reduce it.
Statisticians classify variation as coming from either normal or special causes
Phone calls
Instant messages
In-person interruptions
Lightning strikes
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Normal and Special Cause Variation
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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”
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Value Engineering
Double-checking all chosen methods
A separate stage may be incorporated late in project planning to ensure time is spent on value engineering
Value engineering – a formal process of dividing total project scope into pieces and examining each for alternatives that may offer benefits in order to meet or exceed overall project objectives without making quality tradeoffs
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Activity-Based Costing (ABC)
More modern method for allocating indirect costs
Yields more accurate cost information
Cost Drivers:
Number of units produced
Number of batches run
Number of product variations
Amount of facility utilized
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Life Cycle Costing
Total costs of creating and using the project’s results during its useful life
Consider disposal costs of product after its useful life is complete
Becoming more and more common, as environmental concerns grow
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Time Value of Money
Discount value of future revenue & cost streams
Discount future dollars by appropriate factor
Finance department may provide appropriate rate
Rate depends on inflation rate plus cost of capital
For global projects, plan for international currency fluctuations
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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.”~Practice Standard for Project Estimating (PMI)
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Aggregating Costs
Direct and indirect costs add up to the cost baseline
Cost performance baseline – the approved version of the project budget, including how much money is expected to be spent and when; the cost baseline will be compared to actual project results for monitoring and controlling purposes.
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Aggregating Costs
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Breakout Session!
Complete Exercise 10.2 or 10.3 at the end of this chapter, using Exhibit 10.9 as a reference. Complete the following steps, in order:
Construct a project schedule with a network
Show the schedule on a Gantt chart, front-loaded
Delay a task if there is a conflict
Identify the cost per time period for that worker
Show cumulative costs for that worker & how they grow through the project
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Analyzing Reserve Needs
Known knowns—definite; estimate directly
Known unknowns—may/may not occur; covered by contingency reserves
Unknown unknowns (unk unks)—totally unexpected occurrences; covered by management reserve, which is authorized by company executives
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Analyzing Reserve Needs
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Analyzing Reserve Needs
Contingency reserve (calculated during risk analysis)
Management reserve ($ amount based on degree of uncertainty)
Cost baseline +
Contingency reserve +
Management reserve
= Sufficient funds?
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Determining Cash Flow
Expenses applied to individual activities
Revenue tracked for availability
Cash inflow may occur in increments, while expenses are incurred continuously & un-evenly
Cumulative cash >/= demands?
PROFIT = REVENUE - COST
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Project Cumulative Cash and Revenue
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Establishing Cost Control
Budget baseline for project control
Milestones good measuring points
Cash flow projections expected funding needed to reach each milestone
Control cost – the process of monitoring project costs & managing changes to the cost baseline
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Using MS Project for Project Budgets
Develop Bottom-Up Project Budget
Assignment costs
Task costs
View Costs from a different perspective
Develop Summary Project Budget
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Assignment Costs
Required data:
Assignment work hours
Resource Standard Rate
Resource Overtime Rate
COST = HOURS * STANDARD RATE
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Task Costs
Task cost =
assignment cost + task fixed cost
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
View Costs from a different perspective
To activate Resource Usage View:
View Tab>>Split View>> Uncheck Details
View Tab>>Resource Views Group>>Resource Usage
Insert a Cost column in left pane
In right pane, right-click >>choose Cost
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
View costs from a different perspective
Resource Usage view—assignment costs are summarized at the resource level
“Unassigned” set represents activities with no assigned resources.
Resources with no show/hide control have no assignments
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Develop Summary Project Budget
Add a dummy activity under each phase summary
Estimate phase duration & phase cost
Duration estimate dummy activity’s duration field
Cost estimate dummy activity’s Cost field
Remove each dummy activity when detail is added
Use dummy activity to summarize work for future iterations
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Dummy Activity for Late Phase
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Summary
Cost management plan outlines how to structure & 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 & outflow.
Establishing cost controls includes establishing cost reporting systems.
MS Project can assist in developing bottom-up project budgets or summary project budgets.
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Value of Budget Optimization
A three-year capital project portfolio is developed for implementation & 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 portfolio
A computer-based mathematical algorithm is used to optimize all possible spending portfolios to maximize value and minimize risk at specified budget levels
PM IN ACTION
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Value of Budget Optimization Benefits
Budget strategy understood & communicated
Budget optimized
Consistent organizational strategy ensured
Risk thresholds & tolerance understood
Planning horizon & purchasing power expanded
Project dynamics accounted for
PM IN ACTION
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
PMBOK Exams
Be able to identify parametric, analogous, & bottom-up estimating by description or via example. Make sure you know the relative benefits & weaknesses of using each.
Budgeting for projects is different in several ways from budgeting for ongoing operations. Familiarize yourself with the “S curve” of project expenditures & predict and answer questions about cash-flow problems that may result.
Know the difference between contingency & management reserves, as well as who controls each.
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Casa de Paz Development Project
Some donations are arriving, but more are needed.
The amount needed to start depends on which building is purchased.
Securing enough funds to hire a part-time project coordinator would help reduce overloads placed on volunteers discussed in last chapter.
© 2019 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
