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Project Budgeting: and Cost Estimation by
Project Budgeting: and Cost Estimation by
• Budgets and Cost estimations are work in progress and should contain
room for change.
COST ESTIMATION AND BUDGET
IN PROJECT MANAGEMENT
• “THE MORE PRECISE THE ESTIMATE OF THE PROJECT COST IS…THE BETTER
COMPETENT THE PROJECT MANAGER HANDLES THE PROJECT’S BUDGET”.
THREE REASONS WHY ESTIMATING
PROJECTS COST IS IMPORTANT
• It makes possible the project manager to consider probable
benefits against estimated costs to see whether the project
is logical
EXPEDITED COSTS
are those unplanned costs acquired accelerate the completion of the
project. Among these costs are overtime , hiring additional temporary
workers , contracting with external source for support , incurring high costs for
transportation as well as logistics for materials deliveries.
FACTORS INFLUENCING THE
QUALITY OF ESTIMATES
• PAST EXPERIENCE OR HISTORICAL DATA
- similar past projects can be utilized as reference or a template for the current
projects estimates in terms of time and costs if there are only minor variations .
The current projects estimates should make small adjustments reflecting those
differences. This would aid projects managers in developing , schedules and
estimating costs faster with little possible deviations in the future.
• PROJECT UNIQUENESS
- the uniqueness of a project makes it more challenging for the project
manager to have a precise and actual estimation.
• PROJECT DURATION
- Vagueness in project estimates are likely to amplify with the
extent of the projects
• PEOPLE
people factor can also introduce errors in estimation of time
and costs . The knowledge and skill of task estimators , well
matched of their skills with the task requirements , the
competence of the project members in working jointly as an
efficient team , the turnover rate, and dedication are all vital
human factors that seriously have pressure on project
estimates.
PLANNING RANGE
the quality of estimates declines as the planning possibility of future
events raises.
Estimates made at the initiation phase of the project are normally
50% percent from the actual.
Estimates during the planning phase are budget estimates which are
in the range of 10% to 25% from actual estimated value . At the
planning or early execution phase od the project , estimates
become more perfect and would be in the range of 10 % form the
actual.
ORGANIZATIONAL STRUCTURE
This influence costs and time estimates . In the projectized form, the
team is entirely committed on the project and is working full time
which makes work delivery faster at an additional cost. Conversely in
the Matrix form, the personnel are common across the several
projects, saving cost but demanding more time to synchronize
among all the projects activities .
• PADDING ESTIMATES
in roder to reduce the risk of being late and most people
when asked to estimate an activity tend to add little padding .
The project schedule or budget becomes unbelievable and
unrealistic if all estimates are padded.
PARAMETRIC ESTIMATING
this estimating technique that uses a statistical relationship between historical
data and other variables (Exammple: square footage construction or lines of
code in software development ) to calculate an estimate for activity factors like
scope, cost, budget, and duration costs for project completion
METHOD OF ESTIMATING COST
TABLE .17 SAMPLE PROJECT ESTIMATE
WBS RESOURCE DIRECT INDIRECT RESERVE ESTIMATE METHOD Add. Range Confidence
ASSUMPTION
No. COSTS COSTS Info. Level
3.1.1 Jr. 40 hrs @ Php 0 Php Php Parametric Must obtain N/A Php 8
Programmer Php 20,75 20.75 1050.75 functional 1200
for 40 hours =Php manger -
1,030 approval to Php
assign to Jr. 1075
Programmer
3.1.1 Network 10 hrs @ Php 0 Php Php 322.80 Parametric Must obtain N/A Php 7
Specialist for Php 26.90 53.80 functional 300
10 hours = Php 269 manger -
approval to Php
assign to 350
Network
Specialist
3.1.1 Lease 12 hrs @ Php 0 Php 504 Parametric Assume tet Lease Php 9
Network Test Php 42 equipment form 500
Equipment = will be test -
Php 504 available Supply Php
510
• BOTTOM UP ESTIMATING
• Lack of definition
• - poor initial scope of development results in poorly defined
features, goals and purpose of the project.
• SPECIFICATION CHANGES
- many projects cannot avoid midcourse specification changes. A lot of
projects overrun their initials costs estimates due to serious changes to scope or
project specification. This situation makes the initial cost estimates basically
meaningless and useless.
• EXTERNAL FACTORS
- In most cases inflation and other economic impacts can cause a project to
overrun its estimates seriously.
Project Phase (A) (B) (C) (D) (E) (F) (G) (H) (I) (J)
Percent Est. Average Est. cost Forecasted Forecasted Forecasted Forecasted Forecasted Forecasted
Duartion Hours Rate (BxC) Hours Hours Hours Costs Costs Costs
(low) (high) (high) (high)
Execution
Note This is a Parametric Estimating worksheet designed to give an intermediate level estimate of costs
and hours, plus or minus 30 %
CREATING A PROJECT
BUDGET
• The are two ways of gathering to obtain input data for the budget which are
top down budgeting and bottom up budgeting.
• Bottom Up Budgeting
• - this strategy starts inductively from the work breakdown structures (WBS) to
apply direct and indirect costs.
ADVANTAGES AND DIS
ADVANTAGES OF TOP DOWN
BUDGETING
Advantages Disadvantages
1. Aggregated budget is fairly precise,though 1. Considerable error may be made for low
some individual activities are subject to huge level tasks.
miscalculation. 2. A lower level of budget approval is likely due
to limited participation.
2. Budgets are steady as a percent of total 3. It offers like training opportunities in
allocation and the statistical distribution of budgeting for the junior managers
the budget is also constant leading to high 4. Converting long-range budgets into short
certainty. range budgets.
5. Problems scheduling projects in a sub
3. Small expensive tasks must not be known optimal way to meet the strategic goals
early in this process factored into overall 6. Outcome of top management’s limited
estimate. knowledge on details of project tasks and
activities
ADVANTAGES AND DISADVANTAGES OF BOTTOM UP BUDGETING
• Advantages
• Better motivation owing to ownership of the budget.
• Should contain better information as employees most familiar with the department prepare the budget.
• Enhance managers understanding and commitment.
• Improved communication between departments.
• Senior managers can focus on strategy.
• Aggregate budget is quite accurate , even though some individual activities subject to large error.
• Disadvantages
• 1. Senior managers may dislike loss of control.
• 2. Dysfunctional behavior , budgets may not be in line with corporate objectives as managers do not have strategic perspective and only will focus
on divisional concerns.
• 3. Has decisions from inexperienced managers.
• 4. Budget preparation is sluggish and disputes can occur.
• 5. Budgetary slacks; managers sets targets that are too effortless to attain.
• 6. Fight for funds among lower level managers , attempt to secure sufficient funding for their operations.
• 7. May be the basis for unhealthy competition.
• 8. The process is a zero sum game one perons’ or areas gain is another loss.
• 9. Subordinate managers frequently believe that they have inadequate b33
Budget allocations to reach the objectives
•
WAYS TO IMPROVE THE PROCESS OF COST
ESTIMATION AND BUDGETING