Initiating The Project-10

Assigned Readings:

Chapter 10:  Budgeting Projects.

This chapter deals with various issues and techniques involved in estimating project costs and establishing project budgets. After completing this chapter, each student should be able to perform the following:

Core Objectives:

  1. Define project cost terms and tell how each is used in estimating project cost.
  2. Compare and contrast analogous, parametric, and bottom-up methods of estimating cost.
  3. Create a time-phased, bottom-up budget for a project.

Technical Objectives:

  1. Show both summary and bottom-up project budget information with cumulative costs using MS Project.

Behavioral Objectives:

  1. Describe issues in project cost estimating and how to deal with each.

Reflection and Discussion Forum

Reflect on the assigned readings for the week. Identify what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding. 

Also, provide a graduate-level response to each of the following questions:

  1. You are the project manager in charge of construction of a new school building.  Give one possible example each of a known known, known unknown, and unknown unknown you might encounter.
  2. Give an example of how a project manager could run into problems with cash flow, even when he is within budget on the overall project.

[Your post should be based upon the assigned reading for the week, so the textbook should be a source listed in your reference section and cited within the body of the text. Other sources are not required but feel free to use them if they aid in your discussion].

 [Your post should be at least 500+ words and in APA format (including Times New Roman with font size 12 and double spaced). Post the actual body of your paper in the discussion thread then attach a Word version of the paper for APA review]

[Your posting should be completed by Thursday at 11:59 p.m. EST.]

CONTEMPORARY PROJECT MANAGEMENT, 4E

Timothy J. Kloppenborg

Vittal Anantatmula

Kathryn N. Wells

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‹#›

Budgeting Projects

Chapter 10

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‹#›

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.

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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.”

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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

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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

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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)

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Estimate Cost

Types of costs

Timing & accuracy of cost estimates

Methods used to estimate costs

Cost estimating issues

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Types of Costs

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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

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Project cost and volume curve

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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

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Direct Versus Indirect Costs

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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

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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

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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.

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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.

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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?

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Different Cost Estimates

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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

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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

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Methods of estimating costs

Analogous estimating

Parametric estimating

Bottom-up estimating

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Methods of Estimating Costs

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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)

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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)

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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)

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Cost Estimating Method Comparison

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Project Cost Estimating Issues

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Supporting Detail

Scope

Estimating Method(s) used

Assumptions

Constraints

Range of possible outcomes

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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.

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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

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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

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Normal and Special Cause Variation

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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”

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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

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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

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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

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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

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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)

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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.

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Aggregating Costs

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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

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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

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Analyzing Reserve Needs

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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?

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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

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Project Cumulative Cash and Revenue

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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

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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

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Assignment Costs

Required data:

Assignment work hours

Resource Standard Rate

Resource Overtime Rate

COST = HOURS * STANDARD RATE

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Task Costs

Task cost =

assignment cost + task fixed cost

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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

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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

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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

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Dummy Activity for Late Phase

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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.

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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

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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

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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.

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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.

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