Project Budgeting: Top-Down & Bottom-Up Approaches, Cost Estimation, Risk Management, Slides of Production and Operations Management

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Chapter 4

Budgeting the Project

Introduction

• Budgets are plans for allocating organizational resources to project activities. - forecasting required resources, quantities needed, when needed, and costs
• Budgets help tie project to overall organizational objectives.
• Budgets can be used as tool by upper management to monitor and guide projects.

Top-Down Budgeting

• Based on collective judgements and experiences of top and middle managers.
• Overall project cost estimated by estimating costs of major tasks
• Advantages
  • accuracy of estimating overall budget
  • errors in funding small tasks need not be individually identified

Bottom-Up Budgeting

• WBS or action plan identifies elemental tasks
• Those responsible for executing these tasks estimate resource requirements
• Advantage
  • more accurate in the detailed tasks
• Disadvantage
  • risk of overlooking tasks

Work Element Costing

• Determine resource requirements and then costs for each task - fixed costs (e.g., materials) - labor time - labor rate - equipment time - equipment rate - overhead - GS&A

The Impact of Budget Cuts

Figure 4-1 Two project life cycles

IMPROVING COST ESTIMATES

Learning Curves

r

Tn = T 1 n

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)

Other Factors

• Changes in Resource Prices
  • increase all estimates by same percentage
  • estimate rate of price change individually for inputs that have significant impact on costs
• Waste and Spoilage
• Team Member Turnover
• “Mythical Man-Month”
• Organization Climate

BUDGET UNCERTAINTY AND RISK

MANAGEMENT

Three Basic Causes for Change in Projects

• Errors made by cost estimator about how to achieve tasks.
• New knowledge about the nature of the performance goal or setting.
• A mandate.

Risk Management

• Risk Management Planning
• Risk Identification
• Qualitative Risk Analysis
• Risk Response Planning
• Risk Monitoring and Control