Transcript
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Budgeting the Project
DR. ABDUL HADI
2015
Budgets ?
Are plans for allocating organizational resources to project activities• forecasting r equi red r esour ces
• quanti ti es needed
• when needed
• and costs
Budgets help tie project to overall organizational objectives
Budgets can be used as a tool by upper management to monitor and guide
projects.
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Example of Budgeting the Project
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E x a m p l e o f B u d g e t i n g t h e P r o j e c t
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Types of budgeting
There are two common budgeting methods:
1. Top-down Budgeting
Based on collective judgments and experiences of top and middle managers
Overall project cost estimated by estimating the costs of major tasks
A crucial factor for successfully implementing this method for estimating
budgets is the experience and judgement of those involved in producing the
overall budget estimate.
Takes less time
Promotes upper-level commitment
Involves no multilevel participation
Lower management better understands what upper management expects
Presented down the ladder
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Advantages
• accuracy of estimating overall budget
• errors in funding small tasks need not be individually identified
Disadvantages
• Competition for funds among lower-level managers, try to secure adequate
funding for their operations. Unhealthy competition.
• Subordinate managers often feel that they have insufficient budget allocations to
achieve the objectives
Top-Down Budgeting
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2. Bottom-up Budgeting
Work Breakdown Structure (WBS) identifies elemental tasks
• Those responsible for executing these tasks estimate resource
requirements
The resources, such as labors and materials, are converted to cost
This method of budgeting provides the following benefits:
Financial Managers have the ability to centrally review the total
project budget/s
Project Managers have the flexibility to define their project budgets
independently
Takes more time
Involves cross-section of the organisation
Presented up the ladder
Seeks participation at all levels
Encourages commitment to the plan
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B o t t o m - U p B u d g e t i n g
T h e r e s o u r c e s a r e c o n v e r t e d t o c o s t
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How to provide a budget?
Work Element Costing
Determine resource requirements and then costs for each task• fixed costs (e.g., materials)
• labor time and labor rate
• equipment time and equipment rate
• overhead
• general, sales, and administrative (GS&A)
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Work El ement Costing
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The Impact of Budget Cuts
on Type 1 and Type 2 Project Life Cycles
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S-type life cycle:
• Reduce the level of resources ══» a smaller than proportional cut will be made in
project objective or performance
Project safe
J-type life cycle:
• Reduce the level of resources ══» a larger than proportional cut will be made in
project objective or performance
Project in Serious Disaster
The Impact of Budget Cuts
on Type 1 and Type 2 Project Life Cycles
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The Impact of Budget Cuts
on Type 1 and Type 2 Project Life Cycles
Impact:
• The top-down budgeting is probably acceptable for S-type project• For J-type project, it is dangerous for upper management not to accept the
bottom budget estimates
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Activity Budgeting
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Program Budgeting
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Improving Cost Estimates and Forecasts
Improving CostEstimation
Forms
LearningCurves
TrackingSignal
A form for gathering data on project resource needs might include:
• people – managers, technical and non-technical
• money
• materials – facilities, equipment, tools, space, etc.
•
special servicesAnd might identify:
• person to contact
• how many/much needed, when needed
• whether available
1. Forms
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A Form
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2. Learning Curves
r
n nT T
1
where
T n = the time required to complete the n th unit
T 1 = the time required to complete the first unit
r = log(learning rate)/log(2)
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3. Tracking Signals
A tracking signal number can reveal if there is a systematic bias in cost
and other estimates … and whether the bias is positive or negative
By observing their own errors a project manager can learn to make
unbiased estimates
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Other Factors Influencing the Success of a Project
Changes in resource prices
• estimate rate of price change individually for inputs that have
significant impact on costs
Waste and spoilage
Team member turnover costs
Using “mythical man -months”
Organization climate
Just bad luck
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Estimate of Project Cost - Made at Project Start
Three Basic Causes for Change in Projects and Their Budgets
Errors made by cost estimator as to how to achieve tasks. New knowledge about the nature of the performance goal or setting.
A mandate … a new law or standard, etc.
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Additional Topics
1. Handling Changes
Accept a negative change and take a loss on the project (least preferred)
Prepare for change ahead of time … include provisions in the original contract that
allow for renegotiated price and schedule for client-ordered changes in
performance (best practice)
2. Key Elements of Risk Management
Risk management planning
Risk identification Qualitative risk analysis Quantitative risk analysis Risk response planning Risk monitoring and control
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3. Failure Mode and Effect Analysis (FMEA)
List ways project might potentially fail
Evaluate severity (S) of each failure
• “1” represents failure with no effect and “10” represents very severe
and hazardous failure
Estimate likelihood (L) of each failure occurring
• “1” indicating that failure is rather remote and not likely to occur and
“10” indicating that failure is almost certain to occur
Estimate ability to detect each failure (D)
• “1” is used when monitoring and control systems are almost certain to
detect the failure and “10” where it is virtually certain the failure will
not be detected
Calculate Risk Priority Number (RPN)
• Multiply S, L and D together
Sort potential failures by their RPNs
• Consider ways of reducing the risk associated with failures with high
RPNs
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4. Other Approaches to Risk Management
Game theory
• Assume that competitors and the environment are your enemies
• Select a course of action that minimizes the maximum harm
Expected value
• The value of the outcome multiplied by the probability of the
outcome occurring
Simulation
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