1. Copyright by John Wiley and Sons, 2006
Budgeting Projects
Text by Stanley E. Portny, Samuel J Mantel, Jack R. Meredith, Scott M. Shaffer, Margaret M. Sutton with Brian Kramer.
PowerPoints by Christine Mooney
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2. Copyright by John Wiley and Sons, 2006
Methods of Budgeting
Project managers must develop budgets in order to obtain the resources needed to accomplish project objectives. A project budget is the financial plan for allocating organization resources to project activities.
A project manager will discover that costs are viewed from differing perspectives, based on someone’s role within the project. An accountant and a controller view things differently than a project manager.
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3. Copyright by John Wiley and Sons, 2006
What is Budgeting
Budgeting is simply the process of forecasting what resources a project will require, what quantities of each resource will be needed, when it is needed and how much it will cost.
There are several methods of budgeting.
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4. Copyright by John Wiley and Sons, 2006
Types of Budgeting
Top-down budgeting – is based on collective judgments and experiences of top and middle managers concerning similar past projects. A benefit of top-down budgeting is that overall costs can be estimated quite accurately.
Bottom-up budgeting – financial estimating process in which a Work Breakdown Structure or action plan identifies elemental tasks, which are then converted to costs and combined to determine an overall direct cost for the project. This type of budgeting can serve as a good managerial training technique.
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5. Copyright by John Wiley and Sons, 2006
Cost Estimating
Project Costs
Definition
Direct Costs
Expenditures for resources that are used solely to perform project activities.
Indirect costs – two subcategories: overhead costs and general/administrative costs
Expenditures that are incurred to support project activities, but that are not tracked individually.
Overhead costs – expenses for resources used to perform project activities
Administrative costs – expenses that keep the organization operational
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6. Examples of Direct & Indirect Costs
Copyright by John Wiley and Sons, 2006
Examples of Direct & Indirect Costs
Direct Costs
Indirect Costs
Labor
Employee Benefits
Materials
Rent
Subcontract
Salaries for staff
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7. Staging Budget Development
Copyright by John Wiley and Sons, 2006
Staging Budget Development
A project manager should develop project budgets in stages:
Action
Definitions
Rough order of magnitude estimate
An initial estimate of costs that’s based on general sense of the type of work the project will likely entail.
Detailed budget estimate
An itemization of the estimated costs for each project activity.
Completed, approved project budget
A detailed project budget that essential people approve and agree to support.
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8. Developing project costs
Copyright by John Wiley and Sons, 2006
Developing project costs
During the define phase, project managers develop detailed budget estimates by using bottom-up and top-down budgeting.
For bottom-up estimates:
Consider each lowest level activity in turn
Estimate the direct costs for materials
Determine the indirect costs that will be added.
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9. Reviewing Budget Estimates
Copyright by John Wiley and Sons, 2006
Reviewing Budget Estimates
Cost Category
Cost
Total
Direct Labor
Project Manager:200 $45/hour
$9,000
Mary:100 $25/hour
$2,500
Total direct labor
$11,500
Other direct costs
$6,900
Materials
$1,000
Travel
$300
Subcontract
$5,000
Total other Direct Costs
$6,300
TOTAL PROJECT COSTS
$24,700
INSERT TABLE 5 -3
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10. Improving Cost Estimates
Copyright by John Wiley and Sons, 2006
Improving Cost Estimates
Project managers use simple forms to estimate costs.
These estimates are then combined in a summary report.
Cost estimates are often inaccurate because of human learning. Each time an individual performs the same task, their output improves, this is called the learning rate, the worker hours per unit decrease by a fixed percentage of their previous value.
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11. Copyright by John Wiley and Sons, 2006
Project Errors
Project managers spend much time estimating – activity costs, among other things. Two types of errors made are:
Random errors – are random when there is a roughly equal chance that estimates are above or below the true value of a variable.
Systematic errors – if either the chance of over or under estimates are not about equal or the size of over or under estimates are not approximately equal, the estimates are said to be biased.
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12. Copyright by John Wiley and Sons, 2006
Other Factors
Studies consistently show that between 60 and 85 percent of projects fail to meet their time, cost and performance objectives. Some of the most common problems are:
Changes in resource prices
Inadequate allowance for waste and spoilage
Inadequate planning to cover personnel costs
Overly optimistic estimates
Plain bad luck
Arbitrary cuts to estimates
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13. Dealing with Budget Uncertainty
Copyright by John Wiley and Sons, 2006
Dealing with Budget Uncertainty
Projects are unique, therefore risk pervades all elements of the project, and particularly the project’s goals of performance, schedule and budget.
The reason for cost uncertainty in projects are varied: prices may increase and new forecasts about project completion.
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14. Identifying & Responding To Change
Copyright by John Wiley and Sons, 2006
Identifying & Responding To Change
Three basic causes create change in projects:
Cost estimator errors – some changes are due to errors the cost estimator made about how to achieve the tasks identified in the project plan.
New learning – changes result because the project team or client learns more about the nature of the performance goal of the project or the setting in which the product is to be used.
Mandated change – A new law is passed, this is change with which a company must comply.
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15. Copyright by John Wiley and Sons, 2006
Revising Budgets
As change impacts a project’s costs, the budget for the remainder of the project will certainly have to be revised. There are several ways to revise a budget.
Both systematic and individual changes in the project should be revised in all ways at once.
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16. Copyright by John Wiley and Sons, 2006
Copyright Notice
© 2008 John Wiley & Sons, Inc.
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