Budgeting and Cost Estimation

Budgets defined Two major approaches

Pros and Cons

Behavioral issues Financial issues

Projects Make the Best of Scarce Resources

Developing a Project Budget

Three

major elements

What ? How much ? When ?

NASAs Pathfinder Rover: Mars on a Shoestring

Why is budgeting for Projects Tougher?

Projects are unique Little history Projects can last for years

Potential Project Life Cycles, Figures 7-1 and 72

Two Major Approaches to Budgeting

Top-Down Bottom-Up Each has advantages . . . And disadvantages as well

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Top-Down Budgeting

Based on judgment and history History includes actual costs Start at the top, and allocate down

Pros and Cons of TopDown Budgeting

Pros
Quick Fairly Accurate

Cons
Limited buy-in Senior biased Data misleading
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Bottom-Up Budgeting

Starts at the bottom Costs are aggregated Overhead added in

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A Format for Gathering Data on Project Resource Needs, Figure 73

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Pros and Cons of BottomUp Budgeting

Pros
accurate in detail Participative Resolved Differences

Cons
Overlooking errors Time-consuming Padded estimates
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Behavioral Issues in Budgeting

Different perspectives, Bottom Line: Systems can be gamed So know what the games are . . .

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Financial Issues Worth Considering: Inflation

Inflation can distort estimates in different ways

Actual costs from the past will be less than comparables for today the older the data, the greater the disparity Long-duration projects can create special problems

Six percent inflation doubles cost in just 12 years . . . . . . And 6% is low in much of the world

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Financial Issues Worth Considering: Learning Rate

As output doubles, labor hours per unit decrease by a fixed percentage For example, the first unit of output takes 1,000 hours, and the learning rate is 80%
Unit 1 2 4 8 Labor hours reqd for that unit 1000 800 640 512
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Effects of Ignoring the Learning Curve, Figure 74

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Reading: Three Perceptions of Project Cost

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From: Three Perceptions of Project Cost (Figure 2)

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From: Three Perceptions of Project Cost (Figure 3)

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Cost is not a four letter word!

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