In Chapter 4: Budgeting the Project

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In Chapter 4 Budgeting the Project

• Budgeting the process of forecasting what
  resources the project will require.
• Cost estimating process evaluating each work
  element for its resource requirement and then
  determining its costs
• Formalization of the process using forms and
  other simple procedures to improve the process of
  cost estimating.
• Learning Curves and Tracking Signals
  quantitative tools for improving cost
  estimations.
• Projects are unique risk pervades all elements
  of the project, and particularly performance,
  schedule, and budget.
• PM should identify which risks will be prepared
  for and which will be ignored and simply
  accepted.
• PMs can estimate the risk by using probabilities
  and simulation

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Budgeting the Project

• Budgets are plans for allocating organizational
  resources to project activities.
• Forecasting required resources, quantities,
  timing, and costs
• Budgets tie project to overall organizational
  objectives.
• Are used as tool by upper management to monitor
  and guide projects.
• Two methods of budgeting top-down and bottom-up

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Top-Down Budgeting

• Senior management decides how much they think the
  project should cost. That becomes the total
  project budget. The budget is then divided among
  the activities.
• Advantages
• More accurate in estimating the overall budget
• Inexpensive
• Disadvantages
• Project team feel that they are not trusted,
  empowered.
• May include significant errors for low-level
  tasks
• Competition among functional managers to get a
  larger piece.

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Bottom-Up Budgeting

• Cost are estimates by those responsible for each
  task. Estimates are rolled up for all activities
  to get the total project budget.
• Advantage
• More accurate in the detailed tasks
• Disadvantage
• Risk of overlooking small-but-high-cost tasks
• Time consuming
• In a hybrid budgeting, top management indicates a
  budget constraint, while project managers use a
  bottom-up approach to estimate individual costs

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Activity Costs

• Time and cost of activities should be estimates
  by the same approach, either top-down or
  bottom-up (or somewhere in between).
• Determine resource requirements and then costs
  for each task.
• Material quantity and rate
• Human Resources time and rate
• Capital Resources time and rate
• Overhead, GSA (General, Sales, and
  Administration)
• Both activity induced and time induced costs

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S-shaped and J-shaped Project Life Cycles
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Project Life Cycle Curve

• S-shaped with a somewhat reduced level of
  resources, a smaller than proportional cut will
  be made in the projects objectives or
  performance.
• The top-down budgeting process is more acceptable
• J-shaped a larger than proportional budget cut
  will be made in the projects performance.
• It is dangerous for upper management not to
  accept the bottom-up budget estimates

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Activity vs. Program Budgeting

• Activity budgets
• based on data of traditional accounting system.
• types of expenditures - phone, labor, equipment,
  .
• Program budgets
• based on the task or job that uses resources of
  all types to accomplish that task.
• types of tasks- task A, task B, Task C.
• each project has its own budget, thereby allowing
  aggregation across projects.

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Learning Curves and Forecasting

• PMs should thoroughly understand the
  organizations accounting system.
• Techniques such as learning curves and
  forecasting could lead to better estimates.
• Learning Curves Ch4 part B
• Forecasting System Ch4 part C

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Factors Influencing Cost Estimations

• Changes in resource prices
• increase all estimates by same percentage
• estimate rate of price change individually for
  inputs that have significant impact on costs
• Overlooking allowance for waste and spoilage
• Project team member turnover Mythical man-month
  effect

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Basic Causes for Change in Budgets

• Errors made by cost estimator as to how to
  achieve tasks
• Due to technological/procedural uncertainty
• New knowledge about the expected performance
• Due to increase in knowledge about the project
  deliverables
• A mandate a new law or standard, etc.
• Usually detrimental to the budget

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Estimate of Project Cost-Made at Project Start
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Estimate of Project Cost-Made at Intermediate
Points
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Risk Management Planning

• Risk Identification
• Risk Analysis Evaluating the seriousness
  (magnitude) of risk and likelihood (probability)
• Qualitative
• Quantitative
• Risk Response Planning
• Risk Monitoring and Control

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Failure Mode and Effect Analysis (FMEA)

• A structured approach to help identify,
  prioritize, and manage risk
• List ways project might fail
• Evaluate severity (S) of each failure
• Estimate likelihood (L) of each failure occurring
• Estimate ability to detect each failure (D)
• Calculate Risk Priority Number (RPN)
• Sort potential failures by their RPNs

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Other Approaches to Risk Management

• Game Theory
• The decision maker takes a pessimistic mind-set
  and selects a course of action that minimizes the
  maximum harm (the minimax solution) any outcome
  can render regardless of the probabilities
• Expected Value
• The value of an outcome multiplied by the
  probability of that outcome occurring
• Simulation
• Use standard deviation to quantify the amount of
  risk associated with a given project
• Use frequency charts to calculate the probability
  for any number of scenarios

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Risk Response Planning

• Contingency Plan
• Includes who is in charge, what resources are
  available to the person in charge, and in what
  manner
• Logic Chart
• Shows the flow of activities once a backup plan
  is initiated
• Critical steps that will need to be accomplished
  in a crisis
• Time independent and illustrate the many tasks as
  well as dependencies and interdependencies that
  emerge out of the initial response steps

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Assignments

• Review Questions 2,5, 6
• Discussion Questions 7,9,10
• Incidents for Discussion None
• Problems 13, 14 (MAD instead of MAR),15, 16, 17
• Cases 2