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Lecture Project management: A managerial approach – Chapter 7: Budgeting: estimating costs and risks

In chapter 7, we will see that the distinction between these types of life cycles plays a critical role in developing budgets and schedules for projects. It is not necessary for the PM to estimate the precise shape of the life-cycle curve, but the PM must know which type of project life cycle applies to the project at hand. | Chapter 7 Budgeting: Estimating Costs and Risks 7- Budgeting A plan for the costs of project resources A budget implies constraints Thus, it implies that managers will not get everything they want or need 7- Budgeting Continued The budget for an activity also implies management support for that activity Higher the budget, relative to cost, higher the managerial support The budget is also a control mechanism Many organizations have controls in place that prohibit exceeding the budget Comparisons are against the budget 7- Estimating Project Budgets On most projects Material + Labor + Equipment + Capital + Overhead + Profits = Bid In other words Resources + Profits = Bid So we are left with the task of forecasting resources 7- Estimating Project Budgets Continued Like any forecast, this includes some uncertainty There is uncertainty regarding usage and price Especially true for material and labor The more standardized the project and components, the lower the . | Chapter 7 Budgeting: Estimating Costs and Risks 7- Budgeting A plan for the costs of project resources A budget implies constraints Thus, it implies that managers will not get everything they want or need 7- Budgeting Continued The budget for an activity also implies management support for that activity Higher the budget, relative to cost, higher the managerial support The budget is also a control mechanism Many organizations have controls in place that prohibit exceeding the budget Comparisons are against the budget 7- Estimating Project Budgets On most projects Material + Labor + Equipment + Capital + Overhead + Profits = Bid In other words Resources + Profits = Bid So we are left with the task of forecasting resources 7- Estimating Project Budgets Continued Like any forecast, this includes some uncertainty There is uncertainty regarding usage and price Especially true for material and labor The more standardized the project and components, the lower the uncertainty The more experienced the cost estimator, the lower the uncertainty 7- Rules of Thumb Some estimates are prepared by rules of thumb Construction cost by square feet Printing cost by number of pages Lawn care cost by square feet of lawn These rules of thumb may be adjusted for special conditions However, this is still easier than starting the estimate from scratch Budgeting Concepts Tradition Life cycle costing Actual costs and earned value analysis Tracing expenses to specific tasks 7- 7- Estimating Budgets is Difficult There may not be as much historical data or none at all Even with similar projects, there may be significant differences Many people have input to the budget 7- Estimating Budgets is Difficult Continued Multiple people have some control over the budget There is more “flexibility” regarding the estimates of inputs (material and labor) The accounting system may not be set up to track project data Usage of labor and material is very lumpy over time .