MGT 5113, Project Management, Chapter 5

budget-development activities phases:

1. Conceive phase 2. Define phase 3. Start phase 4. Perform phase 5. Close phase

bottom-up budget estimates steps

1. Consider each lowest-level activity in turn. 2. Determine direct labor costs for each activity by multiplying the number of hours each person will work on the activity by the person's hourly salary. 3. Estimate the direct costs for materials, equipment, travel, contractual services, and other resources for each activity. 4. Determine the indirect costs that will be allocated to each activity. Estimate indirect costs as a fraction of the planned direct labor costs for the activity.

Project Management Budget developing stages

1. Rough order-of-magnitude (ROM) estimate: 2. Detailed budget estimate: 3. Completed, approved project budget:

Change of Control Procedure

A statement within a project contract that allows for renegotiation of price and schedule for client-ordered changes in performance.

Direct costs

Are expenditures for resources that are used solely to perform project activities. Include salaries paid to the people who work on the project; materials, supplies, and equipment bought for the project; travel to perform project work; and subcontracts for services performed for the project.

Unexpected contingency

Budget allowance for surprising, unplanned incidents.

Systematic errors.

If the chance of either over- or underestimates is not about equal or the size of over- or underestimates is not approximately equal, the estimates are said to be biased. Errors caused by bias do not cancel out.

Biased

In estimating, when either the chance of over- or underestimates is not about equal or the size of over- or underestimates is not approximately equal.

Reasons for cost uncertainty in projects

Prices might escalate, different resources might be required, the project might take a different amount of time than expected thereby impacting overhead and indirect costs, and so on.

Budget

The financial plans for allocating organization resources to project activities.

management reserve,

a designated amount of time and money to account for parts of the project that cannot be predicted, such as major disruptions in the project caused by serious weather conditions or an accident.

Completed, approved project budget:

a detailed project budget that essential people approve and agree to support.

change control procedure,

a statement that allows for renegotiation of price and schedule for client-ordered changes in performance.

Rough order-of-magnitude (ROM) estimate:

an initial estimate of costs that's based on a general sense of the type of work the project will likely entail. This estimate is also known as a ballpark estimate.

Detailed budget estimate:

an itemization of the estimated costs for each project activity. Project managers prepare this estimate by developing a detailed Work Breakdown Structure and estimating the costs associated with all lowest-level activities.

Indirect costs

are expenditures that are incurred to support project activities but that aren't tracked individually. Indirect costs fall into two subcategories: ▲ Overhead costs: ▲ General and administrative costs:

tracking signal

can reveal whether estimates have a systematic bias in cost and other estimates and whether the bias is positive or negative.

Conceive phase:

develop a rough order-of-magnitude estimate. Rather than an actual estimate of costs, this estimate often represents an amount that can't be exceeded if a project is to have an acceptable return for the investment.

Define phase:

develop detailed budget estimates during the definition phase, after specifying the required project activities. Project managers should get their detailed budgets approved before leaving this phase.

Overhead costs:

expenditures for resources used to perform project activities but which are difficult to subdivide and allocate directly. Examples include employee benefits, office space rent, supplies, and the rental or purchase of furniture, fixtures, or equipment used to support work on the project.

General and administrative costs:

expenditures that keep the organization operational (if the organization didn't exist, the project can't happen). Examples include salaries of finance department employees and top management, as well as fees for accounting and legal services.

60 and 85 percent of projects

fail to meet their time, cost, and/or performance objectives.

Close phase:

identify situations that could require changes to the approved project budget. Obtain approved, revised budget, as needed.

Top-down budgeting

is based on the collective judgments and experiences of top and middle managers concerning similar past projects. These managers estimate the overall project cost by estimating the costs of the major tasks.

Budgeting

is simply the process of forecasting what resources a project will require, what quantities of each resource will be needed, when the resource will be needed, and how much it will cost.

learning rate

is typically between 70 and 95 percent.

Perform phase:

monitor project activities and related occurrences throughout the phases to determine when budget revisions are necessary. Develop budget revisions and get them approved as soon as possible.

Controllers view of accounting

perceive an expense when the check for the invoice is mailed. They are concerned with managing an organization's cash flow.

project managers view of accounting

recognize a cost after a commitment is made to pay someone for resources or services,

Accountants view of accoounting

recognize an expense when an invoice is received and the cost is actually incurred—not, as most people believe, when the invoice is paid.

Start phase:

review approved budgets in the start phase while identifying the people who will be working on the project and start to develop formal agreements for the use of equipment, facilities, vendors, and other resources. Get any required budget changes approved before moving to the next phase.

bottom-up budgeting,

the Work Breakdown Structure or action plan identifies the elemental tasks, whose resource requirements are estimated by those responsible for executing them. These resources, such as labor and materials, are then converted to costs and combined to determine an overall direct cost for the project

Random errors.

there is a roughly equal chance that estimates are above or below the true value of a variable and the average size of the error is approximately equal for over- and underestimates. They cancel out, which means that if we add them up the sum will approach zero.

Bottom-up budgeting benefits:

▲ Bottom-up budgets typically result in more accurate estimates (although they run the risk of overlooking some small but costly tasks). ▲ When combined with a participative management philosophy, bottom-up budgets can lead to better morale, greater acceptance of the resulting budget, and heightened commitment by the project team. ▲ Bottom-up budgeting can serve as a good managerial training technique for aspiring project and general managers.

Estimating Problems

▲ Changes in resource prices. ▲ Not factoring in adequate allowances for waste and spoilage in estimated costs. ▲ Not adding an allowance for increased personnel costs due to loss and replacement of skilled project team members. ▲ Overly optimistic estimates. ▲ Organizational climate factors. ▲ Plain bad luck. ▲ Arbitrary cuts to estimates.

Causes fro change in projects

▲ Cost estimator errors. ▲ New learning. ▲ Mandated change.

Budgets take into account the following types of costs:

▲ Direct costs ▲ Indirect costs

indirect Costs include:

▲ Employee benefits: ▲ Rent: ▲ Equipment: ▲ Management and administrative salaries:

Direct Costs include:

▲ Labor: ▲ Materials: ▲ Travel: ▲ Subcontract:

top-down budgeting advantages

▲ Overall budget costs can be estimated quite accurately, though individual elements might be in substantial error. ▲ Errors in funding small tasks need not be individually identified because the overall budget allows for exceptions. ▲ Small but important tasks (which are sometimes unintentionally overlooked during the planning stages) do not usually cause serious budgetary problems.

costs can be viewed from three different perspectives:

▲ Project managers ▲ accountants ▲ Controllers

estimating a project's costs is important to project managers for several reasons:

▲ Project managers can assess anticipated benefits, with respect to anticipated costs, to see whether the project makes sense. ▲ Project managers can see whether they can get the funds necessary to support the project. ▲ Project managers can establish criteria as they monitor ongoing performance to help ensure they have sufficient funds to complete the project.

estimating a project's costs reasons

▲ Project managers can assess anticipated benefits, with respect to anticipated costs, to see whether the project makes sense. ▲ Project managers can see whether they can get the funds necessary to support the project. ▲ Project managers can establish criteria as they monitor ongoing performance to help ensure they have sufficient funds to complete the project.

Two types of errors in estimating.

▲ Random errors. ▲ Systematic errors.