You are on page 1of 55

Timothy J.

Kloppenborg

CONTEMPORARY
PROJECT
MANAGEMENT, 3E

© 2015 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.
Budgeting Projects
Chapter 9

Phase: Selecting Initialing Planning Executing Closing Realizing

Approval: Selection Charter Kickoff Project Administrative Benefits


To Proceed Result Closure Realized

© 2015 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.
After completing this chapter…
y Define project cost terms and tell how each is
used in estimating project cost.
y Compare and contrast analogous, parametric,
and bottom-up methods of estimating cost.
y Describe issues in project cost estimating and
how to deal with each.
y Create a time-phased bottom-up budget for a
project.
y Show summary and bottom-up project budget
information with cumulative costs using MS
Project.
© 2015 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.
Plan Cost Management
Plan cost management – “the process that establishes the
policies, procedures, and documentation for planning, managing,
expending, and controlling project costs.” PMBOK® Guide

y Involves developing a cost management plan


for a project
Cost management plan – “a component of the project
plan that describes how costs will be planned, structured,
and controlled.” PMBOK® Guide

Activity
Costs Cost Budget Cost
resource
included estimating determination control
estimating

© 2015 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.
Purposes of the Cost
Management Plan
y How to develop and share relevant, accurate
and timely information for decision making
y Provides feedback linking the project to
business objectives
y Provides detail and summary information
y Helps project stakeholders focus on schedule,
performance, and cost.

© 2015 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.
Estimate Cost
y Linked to scope, schedule, and resource
planning
y Never lie to yourself
◦ You must understand what the project costs
really are
y Never lie to anyone else
◦ Avoid shading the truth to secure necessary
funding
Cost estimating – “the process of developing an
approximation of the cost of the resources needed to
complete project activities.” PMBOK® Guide

© 2015 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.
Estimate Cost
y Types of costs
y Timing and accuracy of cost estimates
y Cost estimating issues
y Methods used to estimate costs

© 2015 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.
Types of Costs

© 2015 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.
Fixed vs. Variable Cost
y Fixed costs remain the same
y Variable costs vary directly with volume of use
y Cost curve reflects as low a total cost as
possible at the current project size
y Fixed and variable costs involve consideration
of the project scope

© 2015 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.
Direct vs. Indirect Costs
y Direct costs only occur because of the project
◦ Direct labor
◦ Other direct costs – material, travel, consultants,
subcontracts, purchased parts, computer time
y Indirect costs - not associated with one specific
project
◦ Salaries, buildings, utilities, insurance…
◦ Costs are allocated across projects

© 2015 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.
Direct Versus Indirect Costs

© 2015 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.
Recurring vs. Nonrecurring
Costs
y Recurring costs repeat as the project work
continues
◦ Cost of writing code; laying bricks
◦ Occur during project execution
y Nonrecurring costs happen only once during a
project
◦ Design development
◦ Occur during project planning and closing

© 2015 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.
Regular vs. Expedited Costs
y Regular costs occur when progress can be
made by normal work hours and purchasing
agreements
◦ - the preferred cost
y Expedited costs occur when the project must
be conducted faster than normal
◦ Overtime and extra charge apply

© 2015 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.
Estimate vs. Reserve Costs
y Project estimates need to be aggressive
y Add a reserve to cover activities that run over
aggressive estimates
Estimate – “a quantified assessment of the likely
amount…It should always include an indication of
accuracy.” PMBOK® Guide

Reserve – “a provision in the project management plan to


mitigate cost and/or schedule risk. Often used with a modifier
(e.g. management reserve, contingency reserve) to provide
further detail on what types of risk are meant to be mitigated.”
PMBOK® Guide
© 2015 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.
Estimate vs. Reserve Costs

Management reserve – “an amount of the project


budget withheld for Management control purposes …
for unforeseen work that is within the scope.” PMBOK®
Guide

Contingency reserve – “a provision in the project budget


within the cost baseline that is allocated for identified risks
that are accepted and for which contingent or mitigating
responses are developed.” PMBOK® Guide

© 2015 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.
Accuracy and Timing of Cost
Estimates
How accurate
When should do cost
cost estimates
estimates be need to be?
developed?

How will cost


estimates be
used?

© 2015 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.
Different Cost Estimates

© 2015 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.
Order of Magnitude Estimates
y Created when limited project detail is
available

y Enough information for “go” or “no go”


decision

Level one
Initial
Conceptual
Ball park

© 2015 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.
Budget and Definitive
Estimates
y More accurate cost estimates at each stage

y Rolling wave planning


◦ Definitive estimate for the 1st stage
◦ Order of magnitude for the remainder
Stage 1 Stage 2

Order of Order of
Magnitude Magnitude
Definitive Definitive

© 2015 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.
Methods of estimating costs
y Analogous estimating

y Parametric estimating

y Bottom-up estimating

© 2015 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.
Methods of Estimating Costs

© 2015 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.
Analogous Estimating
y A similar project Æ a starting point

y Experience performing similar projects

y Actual costs of similar projects

y Knowledge of how project differs

y Experience with methods used to perform


the project

Analogous estimating – “a technique for estimating the


duration or cost of an activity or a project using historical data
from a similar project.” PMBOK® Guide

© 2015 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.
Parametric Estimating
y Involves finding more information regarding the
project

Parametric estimating – “an estimating


technique in which an algorithm is used to
calculate cost or Duration based on historical
data and project parameters.” PMBOK® Guide

© 2015 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.
Bottom-Up Estimating
y Most detailed – specifications need to be
very clear

y Time consuming

y Most accurate form of estimating

y Ensure every item is included

Bottom-up estimating – “method of estimating project


duration or cost by aggregating the estimates of the lower-
level components of the WBS.” PMBOK® Guide

© 2015 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.
Cost Estimating Method
Comparison

© 2015 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.
Project Cost Estimating Issues

© 2015 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.
Supporting Detail
y Scope y Version control is
y Method used critical
y Assumptions y Different
y Constraints assumptions by
different people
y Range of possible
outcomes y Untrue assumptions
cause more work

© 2015 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.
Direct Labor Assumptions
y Workers will be paid at the prevailing wage
rate of $14 per hour

y Workers are already familiar in general with the


technology being used on the project

y Workers will be paid for 40 hours per week


whether there is always that much work for
them or not

y Overtime will never be authorized

y The project schedule can be delayed if the only


alternative is to pay overtime.
© 2015 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.
Supporting Detail - Constraints
y Only in-house workers will be used

y No extra space will be provided

y No extra budget will be allowed

y The current version of the XYZ software will


be incorporated into the design.

Constraints often dictate methods available


for performing the work

© 2015 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.
Causes of Variation
y Statisticians classify variation as coming from
either normal or special causes

Phone calls

Instant Lightning
messages strikes

In-person
interruptions

© 2015 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.
Normal and Special Cause
Variation

© 2015 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.
Vendor Bid Analysis
y Use to determine whether price is reasonable

y Assume the lowest responsible offer is fair

y Prices may be determined in the marketplace

y Develop a “should cost estimate”

© 2015 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.
Value Engineering
y Double-checking all of the chosen methods

y A separate stage may be incorporated late in


the project planning to ensure time is spent on
value engineering

Value engineering – “an approach used to optimize project life


cycle costs, save time, increase profits, improve quality, expand
market share, solve problems, and/or use resources more
effectively.” PMBOK® Guide

© 2015 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.
Activity-Based Costing (ABC)
y More involved methods for allocating indirect
costs

y Yields more accurate cost information

y Cost Drivers:

Number of Amount of facility


batches run utilized
Number of
Number of units product
produced variations

© 2015 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.
Life Cycle Costing
y The total costs of creating and using the
project during its useful life

y Consider disposition costs of the product after


its useful life is complete

© 2015 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.
Time Value of Money
y Discount the value of future revenue and cost
streams

y Discount future dollars by the appropriate


factor

y The finance department may provide the


appropriate rate

y The rate depends on inflation rate plus the cost


of capital

© 2015 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.
Determine Budget
y Aggregating costs

y Analyzing reserve needs

y Determining cash flow

Determine budget – “the process of aggregating the estimated


costs of individual activities or work packages to establish an
authorized cost baseline.” PMBOK® Guide

© 2015 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.
Aggregating Costs
y Direct and indirect costs add up to the cost
baseline

Cost performance baseline – “the approved version of


the time-phased project budget, excluding any
management reserves, which can be changed only
through formal change control procedures and is used as
a basis for comparing actual results.” PMBOK® Guide

© 2015 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.
Aggregation of Project Budget

© 2015 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.
Analyzing Reserve Needs

© 2015 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.
Analyzing Reserve Needs
y Known knowns (planning) can be estimated
directly
y Known unknowns (risk identification) may/may
not occur
y Unknown unknowns (unk unks) totally
unexpected occurrences
◦ Management reserve – authorized by company
executives

© 2015 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.
Analyzing Reserve Needs
y Contingency reserve (risk analysis)
y Management reserve (uncertainty)

Cost Contingency Management


baseline + reserve + reserve =

Sufficient
funds?

© 2015 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.
Determining Cash Flow
y Expenses are applied to individual activities
y Revenue tracked for availability
y Cash from organization budgets on a periodic
basis
y Cumulative cash >= demands?

© 2015 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.
Project Cumulative Cash and
Revenue

© 2015 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.
Establishing Cost Control
y Budget Æ baseline for project control
y Milestones Æ measuring point
◦ Milestone schedule - project charter
◦ Identified in constructing the project schedule
y Cash flow projections Æ expected funding

Control cost – “the process of monitoring the status of the


project to update the project costs and managing changes to
the cost baseline.” PMBOK® Guide

© 2015 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.
Using MS Project for Project
Budgets
y Develop Bottom-Up Project Budget
◦ Assignment costs
◦ Activity costs
◦ Project total costs
◦ Perspectives to view costs
y Develop Summary Project Budget

© 2015 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.
Assignment Costs
y Required data
◦ Assignment work hours
◦ Resource Standard Rate
◦ Resource Overtime Rate

© 2015 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.
Activity Costs

© 2015 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.
Task Usage View with
Resource Work Form
1. On the Task tab, View
group, enter Task Usage.
2. On the View tab, Split
View group, click Details.
3. On the View tab, Split
View group, enter Task
Form (if not already
displayed.)
4. Right click in the form in
the lower page and enter
“Work.”
5. In the upper pane, expose
the Start column and right
click in the Start column
header to add a column.
Enter “Cost” when
prompted.
© 2015 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.
Various Perspectives
y Resource Usage view
◦ Assignment costs are summarized at the
resource level

© 2015 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.
Resource Usage View
“Unassigned” set
represents
activities with no
assigned
resources.

Resources with
no show/hide
control have no
assignments

© 2015 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.
Develop Summary Project
Budget
y Add a dummy activity under each phase
summary
y Estimate phase duration and the phase cost
y Duration estimate Ædummy activity’s duration
field
y Cost estimate Ædummy activity’s Cost field
y Remove each dummy activity when detail is
added

© 2015 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.
Dummy Activity for Late
Phase
Use dummy activity to summarize
work for future iterations

© 2015 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.
Summary
y The cost management plan outlines how to
structure and control project costs
y Cost estimating can be challenging because of
activity variation
y Many methods are available to assist in cost
estimating.
y Cost budgeting
◦ Aggregating individual costs
◦ Analyzing needs for cost reserves
◦ Determining cash inflow and outflow.
© 2015 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.
Summary
y Establishing cost controls includes
establishing cost reporting systems.
y MS Project can assist in developing either
bottom-up project budgets or summary project
budgets.

© 2015 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.