7 Project Budgeting

7/31/2019 7 Project Budgeting

1/19

EMM - MSRSAS 1

Session 6

7.0 ESTIMATING & BUDGETING

Session Speaker

V G S Mani


2/19

EMM - MSRSAS 2

Session Objectives & Topics

At the end of this session the delegate would have

understood

Preparing Cost estimates for a project; costbreakdown structure

S curve for monitoring projects

Assessing progress of projects (cost & time) through

earned value concepts Analysis of cost variances and ratios


3/19

EMM - MSRSAS 3

Core Processes-Planning

Scope

planning

Scope

definition

Activity

definition

Activity

sequencing

Resource

planning

Cost

estimating

Scheduledeveloping

Cost

Budgeting

Project plan

development

Activity

Duration

estimating


4/19

EMM - MSRSAS 4

Cost Estimating & Pricing

Cost Estimating

Developing an approximation of the costs of the resources

needed to complete project activities

How much it will cost the organisation to provide the productor services

Pricing(a business decision)

How much the organisation will charge for the product or

services

The estimate is only one factor in the decision


5/19

EMM - MSRSAS 5

Profit Equation

Cost + Profit = Revenue ----- Old

Gross profit = RevenueCosts ---- Now

Revenue = Sales volume x Selling price

Cost = Variable costs + Fixed costs

Variable cost = Sales volume x unit Variablecost


6/19

EMM - MSRSAS 6

Cost Vs Price

System driven Market driven

COST PROFIT PRICE


7/19

EMM - MSRSAS 7

Cost Breakdown Structure

Labour: Cost of people employed by the parent

company

Materials: Incorporated or consumed Plant & equipment: Used but not consumed

Sub-contract: As above but provided by outside

contractors

Management: Directly attributed to project management


8/19

EMM - MSRSAS 8

Cost Breakdown Structure

Overheads & admin: Shared costs & absorption

Fees & taxation: Insurance, licenses, finance,,

taxation etc. Inflation: Not always included except in fixed

price tenders & where differential between cost &

revenue inflation expected

Contingency: May be added as blanket figure or

calculated according to risk


9/19

EMM - MSRSAS 9

Versions Of Estimates

Three versions of estimates:

Base lineamount communicated to project team

Most likelyamount project manager expects to spend Budgetamount owner is willing to spend

Budget - typically 1020% higher than base line

Most likelyhalf way between


10/19

EMM - MSRSAS 10

Input to Cost Estimating

Work Breakdown Structure

Organise cost estimates

Ensure all work has been estimated

Resource requirements(type & qty.) Resource rates for each resource

Staff cost per hour, equipment rates per hour etc.

Material costs, overhead recovery rate

Activity duration estimates

Historical information

Cost breakdown structure


11/19

EMM - MSRSAS 11

Types of Estimate

Proposal - appraise viability to start feasibility study

Accuracy: +/- 30 to 50%, Effort:0.02 to 0.10 % of project cost

Budgetappraise viability to start systems design


Sanction - appraise viability to approve project, obtain

funding, allocate resources



12/19

EMM - MSRSAS 12

Types of Estimate

Controlmeasure progress, assign resources

Accuracy: +/- 5 to 15%, Effort:1.0 to 3.0 % of project

cost Tenderprepare tender

Accuracy: +/- 2 to 5%, Effort:5.0 to 10.0 % of project

cost


13/19

EMM - MSRSAS 13

Source of Estimating Data

Suppliers quotations

Trade literature, technical literature, textbooks

Company historical data, standard costs

Computer systems

Black books

Government figures & statistics


14/19

EMM - MSRSAS 14

Cost Estimating Methods

Analogous estimating

Using actual costs of similar previous activities

A form of Expert Judgment using historical data Parametric modeling

Using mathematical models to predict costs

Computer spreadsheets, specialist packages

Bottom-up estimating

Using cost of individual elements to build up total

estimate(industry data base)


15/19


16/19

EMM - MSRSAS 16

Types of Project Budget

Short projects may occur within a single time

period. The period is often one month. Budget

values are for the project duration Small projects may have only a single work

package. Budget values for whole project.

Most projects have several work packages and

extend over several budget periods. Budget values

are produced for each package for each period


17/19

EMM - MSRSAS 17

Expenditure Profiles

Determines when expenditure takes place with in an

activity

Uniform

Constant rate of expenditure Front-end loaded

All or most of cost at start of activity

Rear-end loaded

All or most of cost at finish activity Variable

Regular(triangular or other distribution)

Irregular or intermediate


18/19

EMM - MSRSAS 18

Cost Apportioning

Distribution

1 2 3 4 5 6

25% 50% 25%

0

Uniform

Uniform

Uniform

Variable

Rear-end

loaded

Periods

100%

100%

50% 50%

0% 0% 100%


19/19

EMM - MSRSAS 19

Cumulative Cost(S) Curve

Time

RsPeriod cost

Cumulative cost

Budgeting & control is carried out an a cumulative cost basis

7 Project Budgeting

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