In Chapter 4: Budgeting the Project Budgeting: the process of forecasting what resources the project will require. Cost estimating process: evaluating each work element for its resource requirement and then determining its costs Formalization of the process: using forms and other simple procedures to improve the process of cost estimating. Learning Curves and Tracking Signals: quantitative tools for improving cost estimations. Projects are unique: risk pervades all elements of the project, and particularly performance, schedule, and budget. PM should identify which risks will be prepared for and which will be ignored and simply accepted. PMs can estimate the risk by using probabilities and simulation 5/27/2016Ardavan Asef-Vaziri4-1

Budgeting the Project  Budgets are plans for allocating organizational resources to project activities.  Forecasting required resources, quantities, timing, and costs  Budgets tie project to overall organizational objectives.  Are used as tool by upper management to monitor and guide projects.  Two methods of budgeting; top-down and bottom-up 5/27/2016Ardavan Asef-Vaziri4-2

Top-Down Budgeting  Senior management decides how much they think the project should cost. That becomes the total project budget. The budget is then divided among the activities.  Advantages  More accurate in estimating the overall budget  Inexpensive  Disadvantages  Project team feel that they are not trusted, empowered.  May include significant errors for low-level tasks  Competition among functional managers to get a larger piece. 5/27/2016Ardavan Asef-Vaziri4-3

Bottom-Up Budgeting  Cost are estimates by those responsible for each task. Estimates are rolled up for all activities to get the total project budget.  Advantage  More accurate in the detailed tasks  Disadvantage  Risk of overlooking small-but-high-cost tasks  Time consuming In a hybrid budgeting, top management indicates a budget constraint, while project managers use a bottom-up approach to estimate individual costs 5/27/2016Ardavan Asef-Vaziri4-4

Activity Costs  Time and cost of activities should be estimates by the same approach, either top-down or bottom-up (or somewhere in between).  Determine resource requirements and then costs for each task.  Material quantity and rate  Human Resources time and rate  Capital Resources time and rate  Overhead, GS&A (General, Sales, and Administration)  Both activity induced and time induced costs 5/27/2016Ardavan Asef-Vaziri4-5

S-shaped and J-shaped Project Life Cycles 5/27/2016Ardavan Asef-Vaziri4-6

Project Life Cycle Curve  S-shaped: with a somewhat reduced level of resources, a smaller than proportional cut will be made in the project’s objectives or performance.  The top-down budgeting process is more acceptable  J-shaped: a larger than proportional budget cut will be made in the project’s performance.  It is dangerous for upper management not to accept the bottom-up budget estimates 5/27/2016Ardavan Asef-Vaziri4-7

Activity vs. Program Budgeting  Activity budgets  based on data of traditional accounting system.  types of expenditures - phone, labor, equipment, ….  Program budgets  based on the task or job that uses resources of all types to accomplish that task.  types of tasks- task A, task B, Task C….  each project has its own budget, thereby allowing aggregation across projects. 5/27/2016Ardavan Asef-Vaziri4-8

Learning Curves and Forecasting PMs should thoroughly understand the organization’s accounting system. Techniques such as learning curves and forecasting could lead to better estimates.  Learning Curves: Ch4 part B  Forecasting System: Ch4 part C 5/27/2016Ardavan Asef-Vaziri4-9

Factors Influencing Cost Estimations  Changes in resource prices increase all estimates by same percentage estimate rate of price change individually for inputs that have significant impact on costs  Overlooking allowance for waste and spoilage  Project team member turnover: Mythical man- month effect 5/27/2016Ardavan Asef-Vaziri4-10

Basic Causes for Change in Budgets  Errors made by cost estimator as to how to achieve tasks  Due to technological/procedural uncertainty  New knowledge about the expected performance  Due to increase in knowledge about the project deliverables  A mandate … a new law or standard, etc.  Usually detrimental to the budget 5/27/2016Ardavan Asef-Vaziri4-11

Estimate of Project Cost- Made at Project Start 5/27/2016Ardavan Asef-Vaziri4-12

Estimate of Project Cost- Made at Intermediate Points 5/27/2016Ardavan Asef-Vaziri4-13

Risk Management Planning  Risk Identification  Risk Analysis: Evaluating the seriousness (magnitude) of risk and likelihood (probability)  Qualitative  Quantitative  Risk Response Planning  Risk Monitoring and Control 5/27/2016Ardavan Asef-Vaziri4-14

Failure Mode and Effect Analysis (FMEA) A structured approach to help identify, prioritize, and manage risk 1.List ways project might fail 2.Evaluate severity (S) of each failure 3.Estimate likelihood (L) of each failure occurring 4.Estimate ability to detect each failure (D) 5.Calculate Risk Priority Number (RPN) 6.Sort potential failures by their RPNs 5/27/2016Ardavan Asef-Vaziri4-15

Other Approaches to Risk Management  Game Theory  The decision maker takes a pessimistic mind-set and selects a course of action that minimizes the maximum harm (the minimax solution) any outcome can render regardless of the probabilities  Expected Value  The value of an outcome multiplied by the probability of that outcome occurring  Simulation  Use standard deviation to quantify the amount of risk associated with a given project  Use frequency charts to calculate the probability for any number of scenarios 5/27/2016Ardavan Asef-Vaziri4-16

Risk Response Planning  Contingency Plan  Includes who is in charge, what resources are available to the person in charge, and in what manner  Logic Chart  Shows the flow of activities once a backup plan is initiated  Critical steps that will need to be accomplished in a crisis  Time independent and illustrate the many tasks as well as dependencies and interdependencies that emerge out of the initial response steps 5/27/2016Ardavan Asef-Vaziri4-17

Assignments Review Questions: 2,5, 6 Discussion Questions: 7,9,10 Incidents for Discussion: None Problems: 13, 14 (MAD instead of MAR),15, 16, 17 Cases: 2