Professional Documents
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Lesson 4 Specialization
Lesson 4 Specialization
LESSON 4
PROJECT BUDGETS
The project budget is a detailed estimate of all the costs required to
complete project tasks. It is much more detailed than the high-level budget
developed in the Initiate Stage. The typical budget specifies costs for staf
labor, materials procurement, ongoing operating costs and other direct costs
such as travel or training.
The detailed budget provides the project sponsor with a best estimate
of how much the project will cost. The detail budget helps manage
expectations and gives the project sponsor information to develop a
cost/benefit for the project.
Your projects budget includes both direct and indirect costs.
Direct costs include the following:
Overhead costs: Costs for products and services for your project that
are difficult to subdivide and allocate directly. Examples include employee
benefits, office space rent, general supplies, and the costs of furniture,
fixtures, and equipment.
You need an office to work on your project activities, and office space
costs money. However, your organization has an annual lease for office
space, the space has many individual offices and work areas, and people
work on numerous projects throughout the year. Because you have no
clear records that specify the dollar amount of the total rent thats just for
the time you spend in your office working on just this projects activities,
your office space is treated as an indirect project cost.
Labor: Salaries for you and other team members for the hours you
work on the brochure
Materials: The special paper stock for the brochure
Travel: The costs for driving to investigate firms that may design your
brochure cover
Rent: The cost of the office space you use when youre developing the
copy for the brochure
Equipment: The computer you use to compose the copy for the
brochure
between the production team and client. So he/she must have a fair
knowledge of the industry they are in so that they are capable of
understanding and discussing the problems with either party. The ability to
adapt to the various internal procedures of the contracting party, and to form
close links with the nominated representatives, is essential in ensuring that
the key issues of cost, time, quality and above all, client satisfaction, can be
realized.
The term and title 'project manager' has come to be used generically
to describe anyone given responsibility to complete a project. However, it is
more properly used to describe a person with full responsibility and the same
level of authority required to complete a project. If a person does not have
high levels of both responsibility and authority then they are better described
as a project administrator, coordinator, facilitator or expeditor.
Some types of project managers
Managing communication
B. PROJECT SPONSOR
Executive sponsor (sometimes called project sponsor or
responsible owner) is a role in project management, usually the
member of the project board and often the chair. The project sponsor
a senior executive in a corporation (often at or just below board level)
responsible to the business for the success of the project.
senior
senior
will be
who is
Provides assurance
The governance activities that take place between the sponsor and the
project manager are:
Provides resources
Engenders trust
Manages relationships
Engages stakeholders
Due to the problem solving needs of the role the executive sponsor
often needs to be able to exert pressure within the organization to overcome
resistance to the project. For this reason a successful sponsor will ideally be
2
DEVELOPMENT OF PROJECT ESTIMATES FOR BUDGETING
The preparation of estimates, assessing risk, and assigning
contingency for budgeting is one of the most difficult tasks in project
management because it must be done before the work is started. It is a
process that involves a series of successive approximations beginning with
the owners feasibility study and continuing through design development and
construction.
The preparation of cost estimates for budgeting is important to
each party because the decision to proceed, at each phase in the project, is
based on the estimated cost that was determined in the preceding phase.
The owners organization must determine a realistic maximum cost of the
entire project, which includes the cost of design and construction. The
designers organization must determine the cost of the performing design
tasks and producing the contract documents. It must also determine the
probable cost of construction as a part of the design process. The
construction contractors organization must determine the cost of all
material, labor, and equipment to build the project on the job-site.
Each contractor on a project must develop a base estimate, consider
risk, and assign contingency for the work they will be performing on a
project. Since the owners organization has overall project funding
responsibility, the owners management must consider both the contractors
and owners estimate in order to determine the overall budget for the
project.
Project estimating and budgeting begins with feasibility of the study of
needs, priorities and scope. A special efort should ____________ in the
development of a project to define the scope as detailed ______as possible.
The control of project to define the scope growth and cost overruns can be
greatly enhanced if the owner obtains the early advice and expertise of
experienced design and construction professionals, who have the knowledge
of construction costs. All parties must realize that the estimated cost, at any
time, is based upon the amount of information that is known about the
project when the estimate was prepared. Too often this concept is not fully
recognizes. A project manager can play an important role as mediator in
the early staged of the development of a project by testing, scrutinizing,
and identifying the variances that should be applied to an estimate.
The owners organization must prepare estimates to determine
the overall project budget, which includes the approved cost for
design and construction. If the scope is not well defined or the owners
organization does not have the expertise to perform such an estimate, the
owner can enlist a designer to perform these services on a cost-reimbursable
basis. Because this budget is prepared prior to any detailed design work, it
should include reasonable amount of contingency funds to allow some
flexibility in decision making during design development.
The designers organization must prepare a budget based on the
estimated costs to provide design services. In addition, as a part of the
design process the designer must prepare the estimated construction costs
of the various design alternatives that are being evaluated to meet the
owners needs for the project. This is necessary before completion of the
contract documents. It is the designers responsibility to keep design costs
and estimated construction costs within the owners overall approved project
budget. This requires extensive cooperation and involvement with the owner
because the scope must somethings to meet the owners needs. This design
costs and estimated construction and costs within the owners overall
approved budget, or the budget must be readjusted to meet the owners
needs. This decision must be made by the owners organization.
The construction contractors organization must prepare a bid that is
submitted to the owner, based on the estimated costs to build the project in
accordance with the contract documents. For competitive-bid projects, the
contractor is not obligated to a cost that is within the owners approved
budget because this information is usually not known to the contractor. For
negotiated cost-reimbursable projects the contractors organization works
closely with the owner to determine construction alternatives with costs that
are within the owners overall approved budget.
3
LEVEL OF ACCURACY
Analogous Estimating
Analogous estimates are a great technique for early project
estimation providing there is sufficient historical data for which assumptions
of similarity in size and complexity can be derived.
For example, the project may be to implement a CRM system into an 80
person national company. Knowledge of past projects of similar complexity
have taken 5 months to complete for a 40 person company.
With this information you might infer that the complexity is similar but the
scale of the project is double and an Analogous project estimation would
suggest this could take 10 months.
As with most project estimation techniques, each have their own
advantages and limitations, some key considerations for Analogous project
estimating are:
How does the project difer from that of the historical data?
What adjustment can be made to the formula for those diferences?
How accurate is the historical data
Is the data source internal or external to the organization
What external factors have not been accounted for
Can the estimate be verified by an external expert
Analogous estimates ofer a low level of accuracy at a low cost
Parametric Estimating
Parametric project estimation is similar to analogous estimating but
provides an increased level of accuracy due to the statistical nature of the
estimating technique. This estimating technique is often based on average
known rates, such as square meter age for construction or software lines of
code for software projects etc.
For example if a typical residential house usually costs around $1,000
per square meter, a 400 square meter house can be estimated to cost
around $400,000.
Estimating a software project that is expected to have around 20,000
lines of code and the cost per line of code is $3. We can estimate that the
project is likely to cost $60,000.
This project estimation technique is highly dependent on the quality of the
data source and the knowledge of the project specifics, some key
considerations are:
Bottom-Up Estimating
Three-Point Estimates
The three-point estimate is one of my favorite project estimation
techniques because it can not only greatly increase the project estimates,
but its approach also makes it easier for other experts to provide input.
The three-point estimate, also known as the PERT technique, provides a
range of project estimates and calculates the weighted average of that
range. In order to use the PERT project estimation technique, we provide 3
data points, the best case, most likely case and the worst case:
1.
2.
3.
4.
5.
Reserve Analysis
Finally, once the project estimation has been completed and the
project has a defined budget, it is important to provide for the level of
uncertainty.
As with any estimate, it is just that, an estimate. It should not be
expected to be 100% accurate and only required to be as accurate as the
rough order of magnitude that was used, i.e. 15% for the known
components.
4
OWNERS ESTIMATE FOR BUDGETING
Every project must be shown as economically feasible before it is
approved by the owners management. Economic feasibility is determined by
an economic analysis for projects in the private sector or by a benefit/cost
ratio for projects in the government sector. An economic analysis can be
performed once an owners estimate has been prepares.
Estimating costs during the inception of a project by the owner, prior to
any design, is difficult because only limited detailed information is known
about the project. However, this cost estimate is important because it is used
to set the maximum project budget that will be approved for design and
construction. At this stage of project development the only known
information is the number of units or size of the project, such as number of
square feet of building area, number of cars in a parking garage, number of
miles of 345-kilovolt (kV) transmission line, or number of barrels of crude oil
processed per day. At some point in time an estimate has to be frozen and
converted to a project budget.
Preparation of the owners estimate requires knowledge and experience of
the work required to complete the project. Cost information from
professionals who are preparation of the owners budget is usually derived
from one of two sources:
several
For buildings, public works, and heavy construction projects, the Means
Cost Guide is commonly used. The Richardsons manual for construction
estimating is common reference for petrochemical and processing projects.
These pricing manuals provide costs per unit for various types of projects,
such as cost per square foot of building area for offices, warehouses, and
maintenance buildings. The costs are derived from previous projects that
have been completed a numerous geographic locations.
Office buildings
Low
Median
High
$/SF
$/SF
$/SF
Foundation
Floors on grade
Superstructure
Roofing
Exterior walls
Partitions
Wall finishes
Floor finishes
Ceiling finishes
Conveying
systems
Specialties
Fixed equipment
HVAC
Plumbing
Electrical
Total $/SF
3.95
3.10
14.90
0.20
4.90
4.35
2.35
2.05
1.55
5.55
0.65
1.05
8.85
3.50
4.60
$61.5
5
4.00
3.15
16.90
0.25
9.75
5.30
3.75
3.90
2.60
6.70
0.80
2.80
9.50
3.80
4.75
$78.10
4.80
3.90
20.25
0.30
13.00
7.05
5.00
5.15
3.75
8.25
2.65
3.75
12.20
4.85
6.25
$101.1
5
Component
Secondary Schools
Low
Median
High
$/SF
$/SF
$/SF
Low
$/SF
0.90
3.95
10.95
2.40
2.80
2.60
0.75
2.40
2.05
1.15
1.10
1.15
3.10
4.45
4.20
$43.9
5
Low
$/SF
Motels
Media
High
n
$/SF
$/SF
1.40
1.60
5.00
5.40
13.30
21.70
3.40
3.45
4.45
5.55
3.65
5.25
2.60
2.75
3.55
4.55
4.60
4.90
1.80
2.35
1.35
4.00
1.65
1.95
5.55
6.25
5.40
6.15
7.45
8.20
$65.15 $84.05
Hospitals
Media
High
n
$/SF
$/SF
Foundation
1.35
1.85
2.70
4.35
4.90
6.65
Floors on grade
3.85
4.40
6.00
0.30
0.40
0.60
Superstructure
10.95
12.30
17.25
17.05
18.55
25.50
Roofing
1.70
2.05
2.45
3.25
3.70
5.20
Exterior walls
3.75
5.55
8.00
16.00
18.55
25.10
Partitions
5.90
6.55
8.50
7.20
11.00
24.70
Wall finishes
3.05
3.40
5.15
6.75
7.95
11.10
Floor finishes
3.10
3.95
5.25
2.60
2.75
4.00
Ceiling finishes
3.20
3.65
4.65
2.15
2.20
3.55
Conveying
0.00
0.00
0.00
12.95
13.00
19.55
systems
1.70
1.90
2.60
3.10
3.25
4.60
Specialties
2.85
3.35
6.00
5.20
5.25
7.65
Fixed equipment
9.05
10.45
14.45
21.65
25.50
38.05
HVAC
5.05
6.00
9.20
9.10
10.65
16.45
Plumbing
10.25
12.00
16.50
13.45
17.50
24.40
$69.5 $77.40 $108.7 $125.1 $145.0 $215.1
Electrical
5
0
0
5
0
Total $/SF
It shows the low, average, and high cost per square foot, based on the
level of quality. The budget for a proposed project can be calculated by
multiplying the cost per square foot by the total square feet in the project.
The cost of land, permits, and design fees should be added to the calculated
cost of construction. A reasonable percentage multiplier should also be
applied for contingency since the design is not prepared for the project
during the owners budgeting process. Adjustments for time and location
should also be made.
The other source of cost information is company records from previous
projects. Although the total cost of previously completed projects will vary
between projects, unit costs can be calculated to forecasting future projects.
The term of weighting is commonly used to refer to the procedure of
analyzing historical cost data to determine a unit cost for forecasting future
project costs. A unit cost should be developed that emphasizes the average
value, yet accounts for extreme maximum and minimum values.
Full details of the assets to be financed and how liquid those assets
are.
Rate of conversion to cash-liquidity (i.e. how easily can the various
assets be converted to cash?).
Project's funding potential and repayment terms.
Sensitivity in the repayments capability to the following factors:
Time delays.
Mild slowing of sales.
Acute reduction/slowing of sales.
Small increase in cost.
Large increase in cost.
Adverse economic conditions.
In 1983 the first generation of the Computer Model for Feasibility Analysis
and Reporting (COMFAR), a computation tool for financial analysis of
investments, was released. Since then, this UNIDO software has been
developed further, to also support the economic appraisal of projects. The
Computer Model for Feasibility Analysis and Reporting (COMFAR III Expert) is
intended as an aid in the analysis of investment projects. The main module
of the program accepts financial and economic data, produces financial and
economic statements and graphical displays and calculates measures of
performance. Supplementary modules assist in the analytical process. Costbenefit and value-added methods of economic analysis developed by UNIDO
6
Design budgets
The design organization has a difficult ask of estimating the cost of
providing design services and /or producing contract documents for the
project before the design and construction phases begin. For many projects
the magnitude of work that is required by the designer cannot be fully
anticipated, because design is a creative process that involves the evaluation
of numerous alternative. The evaluation of design alternatives is necessary
part of the design process required to select the best design that satisfies
the owners need for the project.
Compensation for design services is usually by one of the following
methods:
Lump-sum
Salary cost times a multiplier
Cost plus a fixed payment or percent of construction.
The method that is used depends on the accuracy of the scope definition
that is provided to the design organization.
For projects that have a well-defined scope with no unusual features, and
are similar to projects that a designer has handled in the past, a lump-sum
design contract is commonly used. Preparation of the design budget can be
developed by defining tasks, and grouping of tasks, in a work breakdown
structures.