4-1 Chapter 4 Budgeting the Project

4-2 Introduction 4 Budgets are plans for allocating organizational resources to project activities. –forecasting required resources, quantities needed, when needed, and costs 4 Budgets help tie project to overall organizational objectives. 4 Budgets can be used as tool by upper management to monitor and guide projects.

4-3 METHODS OF BUDGETING

4-4 Top-Down Budgeting 4 Based on collective judgements and experiences of top and middle managers. 4 Overall project cost estimated by estimating costs of major tasks 4 Advantages –accuracy of estimating overall budget –errors in funding small tasks need not be individually identified

4-5 Bottom-Up Budgeting 4 WBS or action plan identifies elemental tasks 4 Those responsible for executing these tasks estimate resource requirements 4 Advantage –more accurate in the detailed tasks 4 Disadvantage –risk of overlooking tasks

4-6 COST ESTIMATING

4-7 Work Element Costing 4 Determine resource requirements and then costs for each task –fixed costs (e.g., materials) –labor time –labor rate –equipment time –equipment rate –overhead –GS&A

4-8 The Impact of Budget Cuts Figure 4-1 Two project life cycles

4-9 Activity Versus Program Budgeting 4 Activity oriented budgets are based on historical data accumulated through an activity-based accounting system. –expenses assigned to basic budget lines 4 With program budgets, each project has its own budget. –expenses by task and time period are shown

4-10 IMPROVING COST ESTIMATES

4-11 Learning Curves 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)

4-12 Tracking Signals 4 Used to determine if there is a systematic bias in cost or other estimates

4-13 Other Factors 4 Changes in Resource Prices –increase all estimates by same percentage –estimate rate of price change individually for inputs that have significant impact on costs 4 Waste and Spoilage 4 Team Member Turnover 4 “Mythical Man-Month” 4 Organization Climate

4-14 BUDGET UNCERTAINTY AND RISK MANAGEMENT

4-15 Figure 4-4 Estimate of Project Cost: Estimate Made at Project Start

4-16 Three Basic Causes for Change in Projects 4 Errors made by cost estimator about how to achieve tasks. 4 New knowledge about the nature of the performance goal or setting. 4 A mandate.

4-17 Risk Management 4 Risk Management Planning 4 Risk Identification 4 Qualitative Risk Analysis 4 Risk Response Planning 4 Risk Monitoring and Control

4-18 Failure Mode and Effect Analysis (FMEA) 4 List ways project might fail 4 Evaluate severity (S) of each failure 4 Estimate likelihood (L) of each failure occurring 4 Estimate ability to detect each failure (D) 4 Calculate Risk Priority Number (RPN) 4 Sort potential failures by their RPNs