Review network diagram

Forward/backward pass

Critical path/activities

Float

Funding a projectCosts estimatesType of costsFinancial reports

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Budgeting: Estimating Costs and Risks

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Key points

Estimates need to be as accurate as possible, otherwise may cause financial constraints

WBS source: Activities need to be as detailed as possible

Procurement/tender rules usually apply Internal financial procedures usually applies (eg.

Reports) You may have to open a project account You may have to have your own project financial

authorization rules Donor may impose their rules on you

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Various methods to fund a project

Gov or company budget: Calculate costs and determine a budget - request for resources

Adjust the project to work within allocated resources Matching funds Share costs between sponsors Grants Sales of products or services Loans Float shares of a company PPP

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Total Project Budget: *Estimate budget is ok but it should be realistic

Source of Funds Project Activities / I tems Amount (USD) GGP (Note: GGP does not f und f or live stock, f ood, medicines, seedlings, unif orm, school f ee, drilling borehole, admin & operational cost)

1. Design extension of building 2. Construction and finishing 3. 4. Total of GGP fund 85,000 USD

Contribution f rom Applicant I n kind contribution

1500 USD

Contribution f rom Community

Donations, in kind contribution f rom construction company

3,000 USD

Contribution f rom Other Donors (name them)

Government support (equipment, desks, offi ce f urniture)

3,000 USD

Total Cost of the Project 95, 500 USD

Cost Estimating

Cost estimating involves developing an approximation or estimate of the costs of the resources needed to complete a project.

The main outputs of the cost estimating process are:– Cost estimates;– Supporting detail; and– A cost management plan

Types of Cost Estimates

Type of Estimate When Done Why Done How Accurate

Rough Order of Magnitude (ROM)

Very early in the project life cycle – 3-5 years

Provides rough “ballpark” of cost for selection decisions

–25%, +75%

Budgetary Early, 1–2 years out Used for more accurate budget plans to be included in Gov/org annual budget.

–10%, +25%

Definitive Later in the project, < 1 year out

Provides details for purchases, estimate actual costs

–5%, +10%

Types of costs:

- Direct costs: Direct costs are those costs directly related to the project, for example, salaries of those fully working on the project, cost of equipment that is used solely for this project, etc...

- Indirect costs: Indirect costs are company costs, for example, rental, phone bill, electricity.

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Fixed costs are those costs that do not change throughout the project:

a contract to purchase concrete from a supplier every two months at a specific price (that doesn't fluctuate).

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- Fixed costs:

Variable costs:

- Variable costs are costs that vary during the project. An example of a variable cost is the salary of a contract resource (the contract resource might want to increase his fees at one point in the project).

Consumables

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Overhead costs:

Costs for products and services for your project that are difficult to subdivide and allocate directly. Examples include employee benefits, office space rent, general supplies, and the costs of furniture, fixtures, and equipment.

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- Sunk costs:

Sunk costs are costs that have already incurred and cannot be recovered. A phone bill from 2 months ago before the project approval is a sunk cost.

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Categories of costs:

Labor: Salaries Materials: Purchases of goods Management/Administration: Costs associated with

administrating the project. Travel: air/sea tickets etc.. Subcontract: consultants, services, etc.. Employee benefits: social security, employer taxes etc. Utilities Rent Equipment

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Key points in estimation:

risk factors: Inflation, deflation, foreign exchange fluctuations, Need to increase/decrease resources

etc..)

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Key points:

Project costs and project budget are different things.

A single person does not create a good budget – involve key people

Until approved, your budget is an estimate

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Insourcing versus outsourcing

Insourcing – Can control quality, time and costs Staff may need to give attention to other work items

Outsourcing – May be cheaper or more expensive Can be more difficult to control quality Requires a strong contract with contingency clauses

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Basic calculations:

Goods and servicesCost per Unit x num of units

Human resources:Cost per hourNumber of hours

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Budgeting

A plan for the costs of project resourcesA budget implies constraintsThus, it implies that managers will not get

everything they want or need

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Budgeting Continued

The budget for an activity also implies management support for that activity

Higher the budget, relative to cost, higher the managerial support

The budget is also a control mechanism– Many organizations have controls in place

that prohibit exceeding the budget– Comparisons are against the budget

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Bidding

On most projects– Material + Labor + Equipment + Capital +

Overhead + Profits = Bid In other words

– Resources + Profits = Bid

Types of estimates

ANALOGOUS ESTIMATING

COMPARE WITH SIMILAR HISTORICAL PROJECT

PARAMETRIC ESTIMATING

UNIT COST AND SCALE UP

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Estimating Project Budgets Continued

Like any forecast, this includes some uncertainty

There is uncertainty regarding usage and price– Especially true for material and labor

The more standardized the project and components, the lower the uncertainty

The more experienced the cost estimator, the lower the uncertainty

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Rules of Thumb

Some estimates are prepared by rules of thumb– Construction cost by square feet– Printing cost by number of pages– Lawn care cost by square feet of lawn

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Estimating Budgets is Difficult

There may not be as much historical data or none at all

Even with similar projects, there may be significant differences

Many people have input to the budget (e.g. Board) – some politics to it

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Estimating Budgets is Difficult Continued

Multiple people have some control over the budget

There is more “flexibility” regarding the estimates of inputs (material and labor)

The accounting system may not be set up to track project data

Usage of labor and material is very lumpy over time

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Types of Budgeting

Top-down Bottom-up Negotiated

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Top-Down Budgeting

Top managers estimate/decide on the overall budget for the project

These trickle down through the organization where the estimates are broken down into greater detail at each lower level

The process continues to the bottom level

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Advantages

Overall project budgets can be set/controlled very accurately– A few elements may have significant error

Management has more control over budgets

Small tasks need not be identified individually

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Disadvantages

More difficult to get buy inLeads to low level competition for larger

shares of budget

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Bottom-Up Budgeting

Project is broken down into work packages

Low level managers price out each work package

Overhead and profits are added to develop the budget

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Advantages

Greater buy in by low level managersMore likely to catch unusual expenses

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Disadvantages

People tend to overstate their budget requirements

Management tends to cut the budget

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An Iterative Budgeting Process–Negotiation-in-Action

Most projects use some combination of top-down and bottom-up budgeting

Both are prepared and comparedAny differences are negotiated

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Project Budget by Task & Month

Table 7-2

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Improving The Process of Cost Estimation

Inputs from a lot of areas are required to estimate a project

May have a professional cost estimator to do the job

Project manager will work closely with cost estimator when planning a project

We are primarily interested in estimating direct costs

Indirect costs are not a major concern

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Problems

Even with careful planning, estimates are wrong

Most firms add 5-10 percent for contingencies

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Learning Curves

Human performance usually improves when a task is repeated

This happens by a fixed percent each time the production doubles

Percentage is called the learning rate

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Other Factors

EscalationWasteBad Luck

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Risk Estimation

Duration of project activities variesAmounts of various resources needed

variesValue of accomplishing a project variesCan reduce but not eliminate ambiguityWant to describe uncertainties in a way

that provides useful insight to their nature

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Applying Risk Analysis

Must make assumptions about probability distributions– Key parameters– Variables

Estimate the risk profiles of the outcomes of the decision

Simulation may be used to have a better picture of risks

Review work WBSCost per activity (labour, materials, etc.)Consolidated costsAdd: risks, contingencies, profits etc.Proposed budget

Provide a rough estimate of your project

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