ENGINEERING PROJECT

MANAGEMENT
DAF - 211

Dr. Khin Marlar Maung

Professor
Department of Commerce
Meiktila University of Economics
Meredith, J. R., Shafer, S. M., &
Mantel, S. J. Jr. (2017). Project
Management in Practice (6th
ed.). John Wiley & Sons, Inc.
 Chapter 4
Budgeting the Project
Introduction
 Once the budget is developed, it acts as a tool for
upper management to monitor and guide the
project.
 Appropriate data must be collected and accurately

reported in a timely manner or the value of the

budget to identify current financial problems or
anticipate upcoming ones will be lost.
 This collection and reporting system must be as

carefully designed as the initial project plans

because late reporting, inaccurate reporting, or
reporting to the wrong person will negate the
main purpose of the budget.
4.1 Methods of Budgeting
 Budgeting is simply the process of
forecasting what resources the project will
require, what quantities of each will be
needed, when they will be needed, and how
much they will cost.
 Most businesses and professions employ
experienced estimators who can forecast
resource usage with amazingly small errors.
Top-Down Budgeting
 The top‐down approach to budgeting is
based on the collective judgments and
experiences of top and middle managers
concerning similar past projects.
 These managers estimate the overall project

cost by estimating the costs of the major

tasks, which estimates are then given to the
next lower level of managers to split up
among the tasks under their control, and so
on, until all the work is budgeted.
Top-Down Budgeting
 The advantage of this approach is that overall
budget costs can be estimated with fair accuracy,
though individual elements may be in substantial
error.
 Another advantage is that errors in funding small

tasks need not be individually identified because

the overall budget allows for such exceptions.
 Similarly, the good chance that some small but

important task was overlooked does not usually

cause a serious budgetary problem.
 The experience and judgment of top management

are presumed to include all such elements in the

overall estimate
Bottom-Up Budgeting
 In bottom‐up budgeting, the WBS identifies the
elemental tasks, whose resource requirements are
estimated by those responsible for executing them
(e.g., programmer‐hours in a software project).
 This can result in much more accurate estimates, but it

often does not do so for reasons.

 The resources, such as labor and materials, are then

converted to costs and aggregated to different levels of

the project, eventually resulting in an overall direct cost
for the project.
 The PM then adds, according to organizational policy,

indirect costs such as general and administrative, a

reserve for contingencies, and a profit figure to arrive
at a final project budget.
Bottom-Up Budgeting
 Bottom‐up budgets are usually more accurate
in the detailed tasks, but risk the chance of
overlooking some small but costly tasks.
 Such an approach, however, is common in

organizations with a participative

management philosophy and leads to better
morale, greater acceptance of the resulting
budget, and heightened commitment by the
project team.
Work Breakdown Structure (WBS)
Work Breakdown Structure (WBS)
4.2 Cost Estimating
Work Element Costing
 The task of building a budget is relatively

straightforward but tedious. Each work

element is evaluated for its resource
requirements, and its costs are then
determined.
4.2 Cost Estimating
 Direct material cost
 Direct labor cost
 Overhead cost
4.2 Cost Estimating
 For example, suppose a certain task is
expected to require 16 hours of labor at $10
per hour, and the required materials cost
$235. In addition, the organization charges
overhead for the use of utilities, indirect
labor, and so forth at a rate of 50 percent of
direct labor. Then, the total task cost will be

$235 + [(16hr * $10/hr) * 1.5] = $475

Activity versus Program Budgeting
 Traditional organizational budgets are typically
activity oriented and based on historical data
accumulated through an activity‐based
accounting system.
 Individual expenses are classified and assigned

to basic budget lines such as phone, materials,

fixed personnel types (salaried, exempt, etc.), or
to production centers or processes.
 These lines are then aggregated and reported by

organizational units such as departments or

divisions.
Activity versus Program Budgeting
 Table4-3 Typical Monthly Budget for a Real
Estate Project (pg. 118)
4.3 IMPROVING COST ESTIMATES
4.4 BUDGET UNCERTAINTY AND
PROJECT RISK MANAGEMENT
Budget uncertainty
 Perceptually, the PM sees the uncertainty of

the budget like the shaded portion of Figure

4-3, where the actual project costs may be
either higher or lower than the estimates the
PM has derived.
Three Causes for Change
 There are three basic causes for change in
projects and their budgets and/or schedules.
Some changes are due to errors the cost
estimator made about how to achieve the
tasks identified in the project plan. Such
changes are due to technological uncertainty:
a building’s foundation must be reinforced
due to a fault in the ground that wasn’t
identified beforehand; a new innovation allows
a project task to be completed easier than was
anticipated, and so on.
Three Causes for Change
 The third source of change is the mandate: A
new law is passed, a trade association sets a
new standard, a governmental regulatory
agency adopts a new policy. These changes
alter the previous “rules of conduct” under
which the project had been operating, usually
to the detriment of the budget.
Three Causes for Change
 Other changes result because the project team
or client learns more about the nature of the
scope of the project or the setting in which it
is to be used. This derives from an increase in
the team’s or client’s knowledge or
sophistication about the project deliverables.
The medical team plans to use a device in the
field as well as in the hospital. The chemists
find another application of the granulated bed
process if it is altered to include additional
minerals.
Project Budgeting in Practice
 To determine a project budget, the project manager
(PM) starts with the project plan or WBS to
determine the various steps required in the project,
the resource needs, labor hours, and associated
costs.
 This cost estimate, plus a “contingency” of up to 25

percent added to either the labor hours or total

cost, is then used as the project budget for both
obtaining approval for the project and as a
placeholder in the department’s budget so the
funds will be encumbered and unavailable for other
purposes.
Project Budgeting in Practice
 However, top management is also responsible for
constructing a budget for the company and may
have also calculated some cost for this project, or
the department that will be funding it.
 In the process, they will be using their own

methods, such as the budget or cost of a previous

but similar project, the amount of money the
department was budgeted for last year, the
amount of monies available for them to spend, the
amount the project manager or department spent
last year, gut‐feel, and other such approaches.
Thank you.