1. Review network diagram Forward/backward pass Critical path/activities Float Funding a project Costs estimates Type of costs Financial reports 7-1

2. Budgeting: Estimating Costs and Risks 7-2

3. Key points Estimates need to be as accurate as possible, otherwise may cause financial constraints WBS source: Activities need to be as detailed as possible Procurement/tender rules usually apply Internal financial procedures usually applies (eg. Reports) You may have to open a project account You may have to have your own project financial authorization rules Donor may impose their rules on you 7-3

4. Various methods to fund a project Gov or company budget: Calculate costs and determine a budget - request for resources Adjust the project to work within allocated resources Matching funds Share costs between sponsors Grants Sales of products or services Loans Float shares of a company PPP 7-4

5. 7-5

6. Cost Estimating Cost estimating involves developing an approximation or estimate of the costs of the resources needed to complete a project. The main outputs of the cost estimating process are: – Cost estimates; – Supporting detail; and – A cost management plan

7. Types of Cost Estimates

8. Types of costs: - Direct costs: Direct costs are those costs directly related to the project, for example, salaries of those fully working on the project, cost of equipment that is used solely for this project, etc... - Indirect costs: Indirect costs are company costs, for example, rental, phone bill, electricity. 7-8

9. Fixed costs are those costs that do not change throughout the project: a contract to purchase concrete from a supplier every two months at a specific price (that doesn't fluctuate). 7-9 - Fixed costs:

10. Variable costs: - Variable costs are costs that vary during the project. An example of a variable cost is the salary of a contract resource (the contract resource might want to increase his fees at one point in the project). Consumables 7-10

11. Overhead costs: Costs for products and services for your project that are difficult to subdivide and allocate directly. Examples include employee benefits, office space rent, general supplies, and the costs of furniture, fixtures, and equipment. 7-11

12. - Sunk costs: Sunk costs are costs that have already incurred and cannot be recovered. A phone bill from 2 months ago before the project approval is a sunk cost. 7-12

13. Categories of costs: Labor: Salaries Materials: Purchases of goods Management/Administration: Costs associated with administrating the project. Travel: air/sea tickets etc.. Subcontract: consultants, services, etc.. Employee benefits: social security, employer taxes etc. Utilities Rent Equipment 7-13

14. Key points in estimation: risk factors: Inflation, deflation, foreign exchange fluctuations, Need to increase/decrease resources etc..) 7-14

15. Key points: Project costs and project budget are different things. A single person does not create a good budget – involve key people Until approved, your budget is an estimate 7-15

16. Insourcing versus outsourcing Insourcing – Can control quality, time and costs Staff may need to give attention to other work items Outsourcing – May be cheaper or more expensive Can be more difficult to control quality Requires a strong contract with contingency clauses 7-16

17. Basic calculations: Goods and services Cost per Unit x num of units Human resources: Cost per hour Number of hours 7-17

18. 7-18 Budgeting A plan for the costs of project resources A budget implies constraints Thus, it implies that managers will not get everything they want or need

19. 7-19 Budgeting Continued The budget for an activity also implies management support for that activity Higher the budget, relative to cost, higher the managerial support The budget is also a control mechanism – Many organizations have controls in place that prohibit exceeding the budget – Comparisons are against the budget

20. 7-20 Bidding On most projects – Material + Labor + Equipment + Capital + Overhead + Profits = Bid In other words – Resources + Profits = Bid

21. Types of estimates ANALOGOUS ESTIMATING COMPARE WITH SIMILAR HISTORICAL PROJECT PARAMETRIC ESTIMATING UNIT COST AND SCALE UP 7-21

22. 7-22 Estimating Project Budgets Continued Like any forecast, this includes some uncertainty There is uncertainty regarding usage and price – Especially true for material and labor The more standardized the project and components, the lower the uncertainty The more experienced the cost estimator, the lower the uncertainty

23. 7-23 Rules of Thumb Some estimates are prepared by rules of thumb – Construction cost by square feet – Printing cost by number of pages – Lawn care cost by square feet of lawn

24. 7-24 Estimating Budgets is Difficult There may not be as much historical data or none at all Even with similar projects, there may be significant differences Many people have input to the budget (e.g. Board) – some politics to it

25. 7-25 Estimating Budgets is Difficult Continued Multiple people have some control over the budget There is more “flexibility” regarding the estimates of inputs (material and labor) The accounting system may not be set up to track project data Usage of labor and material is very lumpy over time

26. 7-26 Types of Budgeting Top-down Bottom-up Negotiated

27. 7-27 Top-Down Budgeting Top managers estimate/decide on the overall budget for the project These trickle down through the organization where the estimates are broken down into greater detail at each lower level The process continues to the bottom level

28. 7-28 Advantages Overall project budgets can be set/controlled very accurately – A few elements may have significant error Management has more control over budgets Small tasks need not be identified individually

29. 7-29 Disadvantages More difficult to get buy in Leads to low level competition for larger shares of budget

30. 7-30 Bottom-Up Budgeting Project is broken down into work packages Low level managers price out each work package Overhead and profits are added to develop the budget

31. 7-31 Advantages Greater buy in by low level managers More likely to catch unusual expenses

32. 7-32 Disadvantages People tend to overstate their budget requirements Management tends to cut the budget

33. 7-33 An Iterative Budgeting Process– Negotiation-in-Action Most projects use some combination of top-down and bottom-up budgeting Both are prepared and compared Any differences are negotiated

34. 7-34

35. 7-35 Project Budget by Task & Month Table 7-2

36. 7-36 Improving The Process of Cost Estimation Inputs from a lot of areas are required to estimate a project May have a professional cost estimator to do the job Project manager will work closely with cost estimator when planning a project We are primarily interested in estimating direct costs Indirect costs are not a major concern

37. 7-37 Problems Even with careful planning, estimates are wrong Most firms add 5-10 percent for contingencies

38. 7-38 Learning Curves Human performance usually improves when a task is repeated This happens by a fixed percent each time the production doubles Percentage is called the learning rate

39. 7-39 Other Factors Escalation Waste Bad Luck

40. 7-40 Risk Estimation Duration of project activities varies Amounts of various resources needed varies Value of accomplishing a project varies Can reduce but not eliminate ambiguity Want to describe uncertainties in a way that provides useful insight to their nature

41. 7-41 Applying Risk Analysis Must make assumptions about probability distributions – Key parameters – Variables Estimate the risk profiles of the outcomes of the decision Simulation may be used to have a better picture of risks

42. Review work WBS Cost per activity (labour, materials, etc.) Consolidated costs Add: risks, contingencies, profits etc. Proposed budget Provide a rough estimate of your project 7-42