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Budgeting
Projects
Chapter 10

Purposes of Cost Management Plan

Way to develop & share relevant, accurate and timely info for decision making

Provides feedback, linking project to business objectives

Provides detail & summary information

Helps project stakeholders focus on schedule & cost performance

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Types of Costs

Fixed vs. Variable Cost

Fixed costs remain the same

Variable costs vary directly with volume of use
Cost curve reflects as low a total cost as possible at current project size
Fixed & variable costs involve consideration of project scope

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Direct vs. Indirect Costs

Direct costs only occur because of project

Direct labor
Other direct costs – material, travel, consultants, subcontracts,
purchased parts, computer time
Indirect costs - not associated with one specific project
Salaries, buildings, utilities, insurance…
Costs are allocated across projects
PM needs to understand how these costs are allocated

Direct Versus Indirect Costs

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Recurring vs. Nonrecurring Costs

Recurring costs repeat as project work continues

i.e. Cost of writing code or laying bricks
Occur most during project execution
Nonrecurring costs happen only once during a project
Design development
Generally occur during project planning & closing

Regular vs. Expedited Costs

Regular costs preferred

Expedited costs occur when the project must be sped up

Overtime, expedited shipping, etc.

Vital to understand schedule pressures & resource demands when estimating costs

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Other Cost Classifications

Project estimates need to be aggressive

But add reserves to cover activities that may be under estimated
Management Reserve - money assigned to the project for unknown possible costs &
money that senior management controls.
Contingency Reserve - money assigned to the project & allocated for identified risks for
which contingency responses are developed.

Different Cost Estimates

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Order of Magnitude Estimates

Created when limited project detail is available

Enough information for “go” or “no go” decision (screen out impractical projects)

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Budget and Definitive Estimates

More accurate cost estimates at each project stage

After planning stage, cost estimates should be good enough to use for
budgeting

Rolling wave planning

Definitive estimate for the 1st stage
Order of magnitude for the remainder

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Methods of estimating costs

Analogous estimating
Parametric estimating
Bottom-up estimating

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Methods of Estimating Costs

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Analogous Estimating

A similar project a starting point

Experience performing similar projects
Actual costs of similar projects
Knowledge of how project differs
Experience with methods used to perform the project

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Parametric Estimating

Involves finding more information regarding the project

Relies on statistical relationships

Parametric estimating – “an estimating technique that uses a

statistical relationship between historical data and other
variables (e.g., square footage in construction, lines of code in
software development) to calculate an estimate for….scope,
cost, & duration.”
~Practice Standard for Project Estimating (PMI)

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Bottom-Up Estimating

Most detailed – specifications need to be very clear

Time consuming
Most accurate form of estimating
Ensure every item is included

Bottom-up estimating – “method of estimating …what is needed

to meet the requirements of each of the lower, more detailed
pieces of work, preferably the lowest level of WBS work
elements, and these estimates are then aggregated into a total
quality.” ~Practice Standard for Project Estimating (PMI)

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Direct Labor Assumptions

Examples:
Workers will be paid $14 per hour
Workers already familiar in general with technology being used on project
Workers paid for 40 hours/week, whether there is that much work for them or not
Overtime will never be authorized
Project schedule can be delayed if the only alternative is to pay overtime.

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Vendor Bid Analysis

Use to determine whether price is reasonable

Assume the lowest responsible offer is fair
Prices may be determined in the marketplace
Develop a “should cost estimate”

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Life Cycle Costing

Total costs of creating and using the project’s results during its useful life

Consider disposal costs of product after its useful life is complete

Becoming more and more common, as environmental concerns grow

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Aggregating Costs

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Project Cumulative Cash and Revenue

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Establishing Cost Control

Budget  baseline for project control

Milestones  good measuring points
Cash flow projections  expected funding needed to reach each milestone

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Summary

Cost management plan outlines how to structure & control project costs
Cost estimating can be challenging because of activity variation
Many methods are available to assist in cost estimating.
Cost budgeting
Aggregating individual costs
Analyzing needs for cost reserves
Determining cash inflow & outflow.
Establishing cost controls includes establishing cost reporting systems.
MS Project can assist in developing bottom-up project budgets or summary project budgets.

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