PROJECT BUDGETING

Crashing The Project: Budget Effects

 Project acceleration, or ‘‘crashing,’’ involves shortening
activity duration times by adding resources and incurring
additional direct costs, both of which have a direct and
significant impact on the project budget.
 To illustrate this point, Figure 1 reproduces a typical time–cost
curve that highlights the relationship between accelerating a
project and its budget implications.
It is clear, from this figure,
that there is an inverse
relationship between the cost
of crashing and the time
saved in accelerating an
activity’s schedule
 Crashing The Project: Budget Effects
 Before making a decision to crash project activities,
project managers need to make a careful examination
of the project budget. This will help them to determine
1. Which activities are the most likely candidates to be
crashed?
2. The additional costs related to the decision to crash
these activities
3. The impact on the overall budget, including a
comparison to the time gained from the decision to
crash activities
 Crashing The Project: Budget Effects
 The important points regarding decision-making in project
crashing are as follows:
 To shorten project duration, at least one of the activities to
be crashed must be on the critical path.
 The activity to be crashed first is the one that has lowest
marginal cost of crashing, compared to the other activities
on the critical path.
 Crashing can occur multiple times, and the process can
eventually lead to multiple critical paths. In such cases, the
activities to be crashed are chosen from each of the critical
paths that have the lowest marginal cost of crashing.
 In addition to the direct costs, it is also necessary when
crashing a project to account for indirect costs such as
overhead expenses and liquidated damages.
 Numerical
Table below illustrates a simple project with eight activities. The table
identifies the normal duration and associated cost for each of the
activities. Further, it estimates how much each of these activities could be
shortened, as well as the associated costs of crashing them.

The first decision relates to the candidates for crashing. To shorten

project duration, at least one of the activities to be crashed must be
on the critical path. Let’s assume that critical path activities are A,
C, D, and H. What will be the crashed (extra) cost and reduced
duration of these activities?
 Crash costs of critical activities
Activity Crash Cost Time Saving
A $2000 3
C $1500 3
D $3000 5
H $3000 3
 Please note that every time we determine to crash a project activity,
it is necessary to reexamine the project master schedule for its effect
on the overall project and other noncritical paths.
 This is because the decision to crash some activities can sometimes
have the effect of raising other activities to the critical path.
 In the above example, if activity C (of 12 days’ duration) were
crashed, the project schedule would need to be reexamined to
determine if saving three days on this activity would lengthen a
noncritical path.
 The next decision to be made is whether to crash multiple times, because
each attempt often leads to different choices for the best activity to be
crashed. It is also necessary to account for indirect costs, such as
overhead expenses and liquidated damages.
Project Duration Direct Liquidated Overhead cost Total
(in Days) Costs Damages Penalty (200/day) Costs

Original estimate. 57 $32000 $7000

C 54 4000
A 51 1000
H 48 0
 In terms of overhead, suppose a project is being charged a fixed rate of
$200 per day. Let us further assume that a series of penalties, including
liquidated damages, is due to kick in if the project is not completed
within 50 days.
 For example, if the results of the original estimate of a project schedule
57 days (the combination of the durations of activities A, C, D, and H),
the first crash decision shrank the schedule to a 54-day baseline at a cost
of $1,500. Make a graphical representation plotting costs vs. duration
 The next decision to be made is whether to crash multiple times,
because each attempt often leads to different choices for the best
activity to be crashed. It is also necessary to account for indirect
costs, such as overhead expenses and liquidated damages.

Project Direct Liquidated Overhead cost Total

Duration (in Costs Damages (200 per day Costs
Days) Penalty
57 O.E. $32000 $7000 $11400 $50400
54 33500 4000 10800 48300
51 35500 1000 10200 46700
 It 48 38500 0 9600 48100
is possible to repeat this process—identifying the lengths of
critical-path activities, weighing cost trade-off decisions, and
continuing to shrink the durations of project activities—until
there are no more to crash. - Those activities that do remain do
not affect the critical path, and, therefore, cannot impact the
project’s final expected duration.
Budgetary costs of crashing a project

Direct costs are shown with a downward slope, reflecting the fact that costs will rapidly
ramp up as the schedule shrinks (the time–cost trade-off effect). However, if we also
allow liquidated damage penalties to emerge after the 50-day schedule deadline, we see
that the project team is facing a choice of paying extra money for a crashed schedule at
the front end, versus paying out extra penalties for delivering the project delivery past
the scheduled delivery date. The goal here is to minimize total project cost, represented
as a balancing act between competing cost drivers—crashing costs and the cost of
liquidated damages.
Numerical :

The network and durations given below shows the normal schedule for
a project. You can decrease (crash) the durations at an additional
expense. The Table given below summarizes the time-cost information
for the activities. The owner wants you to you to finish the project in
120 days. Find the minimum possible cost for the project if you want to
finish it on 120 days. (Assume that for each activity there is a single
linear, continuous function between the crash duration and normal
duration points). The activities on the critical path is B-C-D-E
ACTIVITY BASED BUDGETING
Definition of Activity Based Budgeting System
Activity based budgeting is an approach to the budgeting process
that focuses on identifying the costs of activities that take place
in every area of an organization, and determining how those
activities relate to one another.
The data regarding those activities and how they relate to one
another is used to establish goals that allow the organization to
move forward.
Activity based budgeting is more concerned with what is being
done within the organization, how those actions or activities
work together, and then allocating funds to each activity based
on how much it will cost to successfully complete those activities.
 Features and Advantages of an ABB System
 More realistic - involves looking inward at activities and costs rather
than basing the budget on line items;
 Creates financial forecasts that are more accurate;
 Prompts the organization to make the most efficient use of its
resources;
 Minimizes wasteful spending within an organization - the analysis of
each activity and its contribution to the ongoing success of the
organization means that any activities that do not appear to relate to
other activities within the organization structure may in fact be
unnecessary;
 Changes the way in which costs are counted;
 It is easier to align with the organization’s Strategic Plan
 Provides more flexibility in reallocation of funds than with line
budgeting systems
 It helps in setting performance targets and hence suitable for
monitoring
Understanding the concept

How costs can be estimated for each activity in

the construction using activity-based budgeting?
In a real-world scenario, you would need more
detailed information and possibly additional
activities to create a comprehensive budget.
The key is to break down the project into specific
activities, estimate the resources required for
each activity, and calculate the corresponding
costs.
 Understanding the Concept
Let's consider a simplified scenario for constructing a building with three major
activities: Excavation, Framing, and Finishing.
1. Excavation Activity:
1. Excavation Volume: 500 cubic meters
2. Excavation Cost per cubic meter: $10
2. Framing Activity:
1. Number of Frames: 10
2. Framing Cost per frame: $2000
3. Finishing Activity:
1. Square footage to be finished: 1000 sq. ft.
2. Finishing Cost per sq. ft.: $15

Total Budget = Total Excavation Cost + Total Framing Cost+ Total Finishing
Cost
Understanding the concept

 Let's consider a simplified scenario for constructing a building with three major activities:
Excavation, Framing, and Finishing.
1. Excavation Activity:
1. Excavation Volume: 500 cubic meters
2. Excavation Cost per cubic meter: $10
3. Total Excavation Cost = Excavation Volume * Excavation Cost per cubic meter
Total Excavation Cost = 500 * $10 = $5000
2. Framing Activity:
1. Number of Frames: 10
2. Framing Cost per frame: $2000
3. Total Framing Cost = Number of Frames * Framing Cost per frame
Total Framing Cost = 10 * $2000 = $20,000
3. Finishing Activity:
1. Square footage to be finished: 1000 sq. ft.
2. Finishing Cost per sq. ft.: $15
3. Total Finishing Cost = Square footage * Finishing Cost per sq. ft.
Total Finishing Cost = 1000 * $15 = $15,000
 Total Budget = Total Excavation Cost + Total Framing Cost+ Total Finishing Cost
= $5000 + $20,000 + $15,000 = $40,000
To sum up….
 Along with project cost estimation, project budgeting provides
the basis for establishing sound project control and
profitability.
 To create an accurate budget for a project, we need to
understand the difference between top-down and bottom-up
budgeting, including their advantages and disadvantages.
 Finally, the budget baseline must work in relation to the project
schedule. This necessitates the creation of a time-phased
budget that recognizes the sequencing of project activities and
allows the project team to identify their budget, including
assessing its status on an ongoing basis.
 When properly managed, the budget, along with the schedule,
offers the project team the opportunity to apply maximum
control over the project.