Cost Estimating and Budgeting MT 246 Module 12

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Cost Estimating and Budgeting MT 246 - Module 12
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Last Lecture

• PERT
• CPM
• Resource Allocation G
• GERT
• Homework Assignment Due March 27th

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Cost Estimation and Budgeting

• Previous Lectures Lightly Discussed types of
  Business Expenses
• Direct
• Indirect/Overhead
• General and Administrative
• Need to Expand on Business Process
• Need to discuss how estimates and budgets are
  calculated
• This Lecture Completes the Planning

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Estimates versus Budgets Summary

• Estimating Process
• takes place at proposal time
• time phasing and bottom line totals
• direct labor
• direct material
• Overhead, G A, and Profit applied to totals
• final iteration at negotiation of contract
• Budgeting Process
• estimates at time of contract signature become
  budget for remainder of program
• updated and reforecast throughout life of contract

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Cost Estimating

• Initial Cost Estimate
• Underestimates are Initially a Big Problem
• Contract Buy-in
• Risky
• Unethical
• Relatively Commonplace
• Cost Estimates Become Budgets

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Cost Escalation

• Actual Cost overruns the Estimate
• Reasons
• Uncertainty and Lack of Accurate Information
• Changes in Design or Requirements
• Economic and Social Variable in the Environment
• Work Inefficiency, Poor Communication, and Lack
  of Control
• Ego Involvement of the Estimator
• Kind of Contract

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Uncertainty and Lack of Accurate Information

• Clearest, Most Specific Project Objectives
• Phased Project Planning
• Contingency Fund or Budget Reserve

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Changes in Design or Requirements

• Discretionary, Nonessential Changes to System
  Requirements and Plans
• Change Clause always Increased Cost
• Change Control manages the Change
• Configuration Management is the Paper Trail

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Economic and Social Factors

• Forces Beyond Your Control
• Labor Strikes
• Legal Action
• Trade Embargoes
• Material Shortages
• Inflation
• Not Controllable
• Manageable

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Inefficiency, Poor Communication, and Lack of
Control

• Management Does Have Influence Over
• Poor Management
• Lack of Supervision
• Weak Planning
• Control
• Good Management can Communicate and Control

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Ego Involvement of the Estimator

• Usually Overly Optimistic
• Project People Should not do the Final Estimate
• Provide Initial Estimates
• Professional Estimator
• Should not report to PM
• Take Inputs from Project

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Type of Contract

• FP Contract gives the Contractor Incentive to
  Control Costs
• CP Contracts only Slight Incentive to Control
  Costs
• Incentive Contacts encourage Cost Control and
  Motivation to reduce Escalation

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Time Cost Uncertainty
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Cost Estimating Process

• Work Tasks and Costs
• Expert Opinion
• Analogy Estimate
• Obtained from Similar Projects
• Parametric Estimate
• Scale Cost up or Down
• Engineering Estimate
• Bottoms Up
• Standards Manuals

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The Estimating Process
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Cost Estimating Process (Continued)

• Contingency Amounts
• 1. Contingency is Added to Each Activity
• Rolled-up for Base Estimate
• 2. PM ads a Project Contingency
• For Unknown Unknowns
• Rolled-up Again for Final Cost Estimate i.e.,
• Becomes Most Likely Cost
• 3. Corporation Adds Overrun Allowance
• Controlled by Corporate Management

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Cost Estimating Process (Continued)

• Estimates from
• Project Bottoms up
• Corporate Top Down
• Corporate Across-the-Board Cut
• Poor Practice
• Penalizes Task Managers
• Padding Estimates
• Final Should be a Compromise

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Elements of Budgets and Estimates

• Direct Labor Expense
• Direct Non-Labor Expense
• Overhead Expense
• General and Administrative Expense
• Profit
• Total Billing

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Direct Non-Labor Expense

• Subcontractor
• Consultants, Computer Time (Support)
• Travel, Telephone,
• Material Costs (Direct Materials)
• Waste and Spoilage
• Freight (OH on Materials)
• Purchased Parts

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How a Overhead Rates are Calculated

• Accounting Methodology
• Varies from Company to Company
• Does not include Wheat Tax
• Does include Cost of Doing Business

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Typical Cost Report
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Overhead Expense General and Administrative
Expense

• Cost of Doing Business
• Building Rents
• Utilities
• Clerical Assistance
• Insurance
• Equipment
• Rolled-up over the Entire Company and Computed as
  a Percentage

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Overhead Expense (Continued)

• In a Project Organization Corporate OH can be
  Calculated as
• Direct OH
• Traceable to Project
• Indirect OH
• Not Traceable to Project

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General and Administrative Expense

• Taxes
• Financing (Cost of Money)
• Penalty and Warranty Costs
• Accounting and Legal
• Proposal Expenses
• Marketing
• Salaries and Expenses for Corporate Management
• Employee Fringe Packages

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General and Administrative Expense (Continued)

• Allocated across All Projects
• Indirect Cost Practices are not Uniform Across
  Industry
• Clients want to Know
• DL Intensive
• NDL Intensive

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Indirect Cost Apportionment
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Profit and Total Billing

• Profit
• Agreed-to-Fixed Fee
• Percentage of Total Expenses
• Total Billing
• Sum of Total Expense plus Fee

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Project Cost Accounting (PCAS) Project
Management Information System(PMIS)

• PCAS
• Computes Estimates
• Stores and Process Budgets (Time Phased/Proj
  Plan))
• Tracks Costs
• PMIS
• Project Planning
• Control
• Reporting
• Plus all of PCAS

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Elements of PCAS
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Budgeting Using Cost Accounts

• Cost Accounts Work Packages/TP Budget
• Work Description
• Time Schedule
• Responsibility
• Resources
• Time-Phased Budget

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Cost Accounts for ROSEBUD
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Cost Summaries

• PCAS will generate Cost Summaries
• Cost Accounts can be Vertical(WBS) or Horizontal
  (Functional)
• Deviations from Budget easily Managed

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ROSEBUD Cost Account Information by Project and
Organization
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Cost Analysis with ES and LS

• Cost Schedule Created by Adding Costs of
  Activities for ES and LS of LOGON Project
• Forecast Project Costs for any week in Project

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ES Network for LOGON Project
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Weekly and Cumulative Expenses (Early Start)
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LS Network for LOGON Project
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ES vs LS Cash Requirements
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Late Start Effect on Project Net Worth

• Time Value of Money
• Delay produces lower net present Value
• Should Project always be Delayed
• Certainty of Work (Risk)
• RD never
• Completion Payments

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Material Expenditures

• Cost Schedules and Forecasts used to estimate
  Cash Requirements
• When Needed, payment made before delivery,
  expense precedes cost of materials
• Payment delayed, expense follows when the
  material is needed

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Material Expenses Budgeted Vs Actual
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Cash Flow

• Cash In vs Cash Out
• Income (Client) vs Expenses of the Project
• PM must do Cash Flow Forecast
• Funding Plan for Working Capital

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Balancing Project Income and Expenditures
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Next Lecture

• Chapter 10 Nicholas Managing Risk in Projects
• Read Chapter 10 Nicholas
• Problems to work (Not a HW Assignment) Chapter 9
  9.2, 9.4, 9.11, 9.12, 9.17, 9.18, 9.23, 9.26