7. budgeting additional.pdf

8/18/2019 7. budgeting additional.pdf

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Budgeting the Project

DR. ABDUL HADI

2015

Budgets ?

Are plans for allocating organizational resources to project activities• forecasting r equi red r esour ces

• quanti ti es needed

• when needed

• and costs

Budgets help tie project to overall organizational objectives

Budgets can be used as a tool by upper management to monitor and guide

projects.


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Example of Budgeting the Project


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E x a m p l e o f B u d g e t i n g t h e P r o j e c t


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Types of budgeting

There are two common budgeting methods:

1. Top-down Budgeting

Based on collective judgments and experiences of top and middle managers

Overall project cost estimated by estimating the costs of major tasks

A crucial factor for successfully implementing this method for estimating

budgets is the experience and judgement of those involved in producing the

overall budget estimate.

Takes less time

Promotes upper-level commitment

Involves no multilevel participation

Lower management better understands what upper management expects

Presented down the ladder


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Advantages

• accuracy of estimating overall budget

• errors in funding small tasks need not be individually identified

Disadvantages

• Competition for funds among lower-level managers, try to secure adequate

funding for their operations. Unhealthy competition.

• Subordinate managers often feel that they have insufficient budget allocations to

achieve the objectives

Top-Down Budgeting


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2. Bottom-up Budgeting

Work Breakdown Structure (WBS) identifies elemental tasks

• Those responsible for executing these tasks estimate resource

requirements

The resources, such as labors and materials, are converted to cost

This method of budgeting provides the following benefits:

Financial Managers have the ability to centrally review the total

project budget/s

Project Managers have the flexibility to define their project budgets

independently

Takes more time

Involves cross-section of the organisation

Presented up the ladder

Seeks participation at all levels

Encourages commitment to the plan


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B o t t o m - U p B u d g e t i n g

T h e r e s o u r c e s a r e c o n v e r t e d t o c o s t


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How to provide a budget?

Work Element Costing

Determine resource requirements and then costs for each task• fixed costs (e.g., materials)

• labor time and labor rate

• equipment time and equipment rate

• overhead

• general, sales, and administrative (GS&A)


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Work El ement Costing


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The Impact of Budget Cuts

on Type 1 and Type 2 Project Life Cycles


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S-type life cycle:

• Reduce the level of resources ══» a smaller than proportional cut will be made in

project objective or performance

Project safe

J-type life cycle:

• Reduce the level of resources ══» a larger than proportional cut will be made in

project objective or performance

Project in Serious Disaster




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Impact:

• The top-down budgeting is probably acceptable for S-type project• For J-type project, it is dangerous for upper management not to accept the

bottom budget estimates


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Activity Budgeting


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Program Budgeting


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Improving Cost Estimates and Forecasts

Improving CostEstimation

Forms

LearningCurves

TrackingSignal

A form for gathering data on project resource needs might include:

• people – managers, technical and non-technical

• money

• materials – facilities, equipment, tools, space, etc.

•

special servicesAnd might identify:

• person to contact

• how many/much needed, when needed

• whether available

1. Forms


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A Form


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2. Learning Curves

r

n nT T

1

where

T n = the time required to complete the n th unit

T 1 = the time required to complete the first unit

r = log(learning rate)/log(2)


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3. Tracking Signals

A tracking signal number can reveal if there is a systematic bias in cost

and other estimates … and whether the bias is positive or negative

By observing their own errors a project manager can learn to make

unbiased estimates


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Other Factors Influencing the Success of a Project

Changes in resource prices

• estimate rate of price change individually for inputs that have

significant impact on costs

Waste and spoilage

Team member turnover costs

Using “mythical man -months”

Organization climate

Just bad luck


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Estimate of Project Cost - Made at Project Start

Three Basic Causes for Change in Projects and Their Budgets

Errors made by cost estimator as to how to achieve tasks. New knowledge about the nature of the performance goal or setting.

A mandate … a new law or standard, etc.


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Additional Topics

1. Handling Changes

Accept a negative change and take a loss on the project (least preferred)

Prepare for change ahead of time … include provisions in the original contract that

allow for renegotiated price and schedule for client-ordered changes in

performance (best practice)

2. Key Elements of Risk Management

Risk management planning

Risk identification Qualitative risk analysis Quantitative risk analysis Risk response planning Risk monitoring and control


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3. Failure Mode and Effect Analysis (FMEA)

List ways project might potentially fail

Evaluate severity (S) of each failure

• “1” represents failure with no effect and “10” represents very severe

and hazardous failure

Estimate likelihood (L) of each failure occurring

• “1” indicating that failure is rather remote and not likely to occur and

“10” indicating that failure is almost certain to occur

Estimate ability to detect each failure (D)

• “1” is used when monitoring and control systems are almost certain to

detect the failure and “10” where it is virtually certain the failure will

not be detected

Calculate Risk Priority Number (RPN)

• Multiply S, L and D together

Sort potential failures by their RPNs

• Consider ways of reducing the risk associated with failures with high

RPNs


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4. Other Approaches to Risk Management

Game theory

• Assume that competitors and the environment are your enemies

• Select a course of action that minimizes the maximum harm

Expected value

• The value of the outcome multiplied by the probability of the

outcome occurring

Simulation

7. budgeting additional.pdf

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