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Budgeting
Projects
Chapter 10
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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Types of Costs
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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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
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
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 reserves to cover activities that may be under estimated
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.
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)
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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
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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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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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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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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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Aggregating Costs
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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
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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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