Project

managing,
Scheduling and
Jobsite
Planning II
Module 3: Develop
Project Budget
1
Project Managing, Scheduling and Jobsite Planning II

Module 2 Review

Submittals

Product Data

Shop Drawings

Samples

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Review
• Submittals include:
– Shop drawings
– Material data
– Samples
• Submittal process:
– Very important
• Directly relates to quality, schedule, and overall project success

MODULE 3- Develop Project Budget Copyright © 2017 Cengage Learning Mincks, Johnson- 4th edition 3
Project Managing, Scheduling and Jobsite Planning II

Figure 4-3 – The submittal

Process in Construction

MODULE 3- Develop Project Budget Copyright © 2017 Cengage Learning Mincks, Johnson- 4th edition 4
Project Managing, Scheduling and Jobsite Planning II

Module 3 Agenda

Cost Management

Cost Estimating & Budgeting

Project Budget Components

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Project Cost Management Overview

• Project Cost Management includes the processes involved in
planning, estimating, budgeting, financing, funding, managing,
and controlling costs so that the project can be completed within
the approved budget.

Plan Cost Estimate Determine

Control Costs
Management Costs Budget

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PMBOK-Figure 7-1:Project
Cost Management Overview

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Project Cost Management Overview

Plan Cost Management
• is the process that establishes the policies, procedures and documentation
for managing costs
Estimate Costs
• The process of developing an approximation of the monetary resources
needed to complete project activities.
Determine Budget
• The process of aggregating the estimated costs of individual activities or
work packages to establish an authorized cost baseline.
Control Costs
• The process of monitoring the status of the project to update the project
costs and managing changes to the cost baseline.

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Cost Basics

Direct Costs: Readily identified costs incurred directly by the project

Indirect Costs: Cost of doing business allocated to the project by the organization

Fixed Costs: Constant costs regardless of the size of the project

Sunk Costs: Costs already expended that cannot be recovered

Variable Costs: Costs related to specific project parameters and vary with the size of
the project

Opportunity Costs: Not a true cost, difficult to confirm but represent foregone
benefits associated with choosing a particular alternative

Capital Costs: Costs related to depreciable capital expenditures in projects

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Cost Estimates

Cost estimates are a prediction that is based on the information known at a given
point in time.

Cost estimates include the identification and consideration of costing alternatives to
initiate and complete the project. Cost tradeoffs and risks should be considered, such
as make versus buy, buy versus lease, and the sharing of resources in order to achieve
optimal costs for the project.

Cost estimates are generally expressed in units of some currency (i.e., dollars, euros,
yen, etc.), although in some instances other units of measure, such as staff hours or
staff days, are used to facilitate comparisons by eliminating the effects of currency
fluctuations.

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Cost Estimates

Cost estimates should be reviewed and refined during the course of the project to
reflect additional detail as it becomes available and assumptions are tested.

The accuracy of a project estimate will increase as the project progresses through the
project life cycle.

For example, a project in the initiation phase may have a rough order of magnitude
(ROM) estimate in the range of -25% to +75%. Later in the project, as more
information is known, definitive estimates could narrow the range of accuracy to -5%
to +10%. In some organizations, there are guidelines for when such refinements can be
made and the degree of confidence or accuracy that is expected.

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Cost Estimates

Costs are estimated for all resources that will be charged to the project. This includes,
but is not limited to, labor, materials, equipment, services, and facilities, as well as
special categories such as an inflation allowance, cost of financing, or contingency
costs.

A cost estimate is a quantitative assessment of the likely costs for resources required
to complete the activity. Cost estimates may be presented at the activity level or in
summary form.

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Cost Estimates
Analogous Estimating

Also known as Top Down Estimating

Develops cost estimates in comparison to total costs for similar projects

• Advantages
– Fast, logical, and inexpensive
– Information is usually readily available
– Based on lessons learned from real projects
• Disadvantages
– Lack of similar projects in some sectors
– Lack of reliable information if record documentation of other projects is
not available

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Cost Estimates
Parametric Estimating

Parametric modeling: uses project characteristics (parameters) in a
mathematical model to estimate project costs

Use statistical or logical methods and rates derived from similar projects

Example: Prime Location Corporate Headquarters

– 20 Floor with an average floor space of 5000 Sq Meters. Average cost is
$2000/ sq. m
– Total projected cost $200 Million

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Cost Estimates
Bottom-Up Estimating

Also Known Detailed Estimating

involves estimating individual work items or activities and summing them

to get a project total

requires detailed measurement of all components (e.g. quantity
surveying)

uses established rates for each part, based on industry standards, known
labour input, and supplier costs

possible only when the design and specifications are complete

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Cost Estimates

Construction Project Estimating?

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Types of estimates: Construction Projects

Detailed Estimate

Preliminary Estimate

Conceptual Estimate

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Estimating Methods: Construction Projects

Detailed

Assembly

Square foot

Parametric

Model

Project Comparison

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Estimating Methods: Construction Projects

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Difference between Cost estimating &

Cost budgeting?

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Determine Budget: Inputs

Cost Management Plan

Scope Baseline: Scope Statement, WBS, and WBS Dictionary

Activity Cost Estimates

Basis of Estimates: supporting details for the cost estimates

Project Schedule: which includes the planned start and finish dates for the project activities, milestones,
etc.

Resource Calendars: which determine which resources are assigned to the project and when.

Risk Register: how to aggregate the risk response costs

Agreements: agreement information and costs related to products and services

Organizational Process Assets

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Determine Budget: Tools & Techniques

Cost Aggregation: Cost estimates are aggregated by Work Packages, and further
“rolled up” to higher levels, e.g. control accounts.

Reserve Analysis: contingency reserves, vs. management reserves

Expert Judgment: judgment provided by professional institutions, consultants, and

stakeholder

Historical Relationships: mathematical models created as a result of parametric and
analogous estimates

Funding Limit Reconciliation: expenditure of funds should be reconciled with the
funding limits and committed funds

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Determine Budget: Outputs

Cost Performance Baseline: the S curve. Is an authorized time-phased
budget at completion (BAC) used to measure, monitor, and control overall
cost performance on the project.

Project Funding Requirements: total funding, and periodic funding
requirements. Funding happens incrementally.

Project Documents Updates

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Reserve Analysis
• Cost estimates may include contingency reserves (sometimes called
contingency allowances) to account for cost uncertainty.
• Contingency reserves are the budget within the cost baseline that is
allocated for identified risks, which are accepted and for which contingent
or mitigating responses are developed.
• Contingency reserves are often viewed as the part of the budget intended
to address the “known-unknowns” that can affect a project.
• For example, rework for some project deliverables could be anticipated,
while the amount of this rework is unknown. Contingency reserves may be
estimated to account for this unknown amount of rework.
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Reserve Analysis
• Contingency reserves can provide for a specific activity, for the whole
project, or both.
• The contingency reserve may be a percentage of the estimated cost, a
fixed number, or may be developed by using quantitative analysis
methods.
• As more precise information about the project becomes available, the
contingency reserve may be used, reduced, or eliminated. Contingency
should be clearly identified in cost documentation.
• Contingency reserves are part of the cost baseline and the overall funding
requirements for the project.
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Reserve Analysis
• Estimates may also be produced for the amount of management reserve
to be funded for the project. Management reserves are an amount of the
project budget withheld for management control purposes and are
reserved for unforeseen work that is within scope of the project.
• Management reserves are intended to address the “unknown unknowns”
that can affect a project.
• The management reserve is not included in the cost baseline but is part of
the overall project budget and funding requirements.
• When an amount of management reserves is used to fund unforeseen
work, the amount of management reserve used is added to the cost
baseline, thus requiring an approved change to the cost baseline.
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Project Budget Components

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Project Managing, Scheduling and Jobsite Planning II

Project Budget Components

• Activity cost estimates for the various project activities along with any
contingency reserves for these activities are aggregated into their
associated work package costs.
• The work package cost estimates, along with any contingency reserves
estimated for the work packages, are aggregated into control accounts.
• The summation of the control accounts make up the cost baseline. Since
the cost estimates that make up the cost baseline are directly tied to the
schedule activities, this enables a time-phased view of the cost baseline,
which is typically displayed in the form of an S-curve.

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Cost Baseline & Project Budget

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Cost Baseline & Project Budget

• Management reserves are added to the cost baseline to produce the project
budget.
• As changes warranting the use of management reserves arise, the change
control process is used to obtain approval to move the applicable
management reserve funds into the cost baseline.
• Total funding requirements and periodic funding requirements (e.g., quarterly,
annually) are derived from the cost baseline. The cost baseline will include
projected expenditures plus anticipated liabilities. Funding often occurs in
incremental amounts that are not continuous, and may not be evenly
distributed. The total funds required are those included in the cost baseline,
plus management reserves, if any. Funding requirements may include the
source(s) of the funding.
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Project Managing, Scheduling and Jobsite Planning II

Project
Budget
Cost
Baseline
Cost
Estimate

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Cost Contingency Cost

Estimate Reserve Baseline

Management Project
Cost Baseline
Reserve Budget

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Review

Project Budget components?

Budgeting and Cost estimating?

Contingency and Management Reserves?

Cost baseline and contract/project budget?

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Topic for Oral Presentation

Explain the budget components of a typical construction project/

Develop project budget in a sample construction project

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Next Module

Develop Project Schedule

Introduction to Cost Control

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Project Managing, Scheduling and Jobsite Planning II

Thank you for your Attention

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