Project Management

Word Document

Subject: Project cost estimation, budgeting & cash flows

Names of Group members:

Nilay Shah

Sharad Tiwari

Mayur Kakkad

Nishant Agrawal

Amit Sharma

Submitted to,

Prof. Deepak Jakate

Introduction

Project Definition:
 Why, What, How?
How does a project get started?

How do you know what it is supposed to achieve?

How do you know what approach is required?

How do you know that it is a good idea in the first place?

How will you know if you succeeded?

Business needs Project definition Project execution

Before you can effectively manage a project, there needs to be a shared

understanding of that project - its purpose, objectives, scope, sponsorship, funding
and mandate. Some people would define the project as not existing until it has an
adequate definition. In the real world, projects often need to get moving while at
least some of these questions remain imperfectly answered.

Project Management:
“The art of directing and coordinating human and material resources throughout the
life of a project by using modern management techniques to achieve predetermined
objectives of scope, quality, time and cost, and participant satisfaction”.

Project management is the discipline of planning, organizing, securing and

managing resources to bring about the successful completion of specific project
goals and objectives. It is sometimes conflated with program management, however
technically that is actually a higher level construction: a group of related and
somehow interdependent engineering projects.

A project is a temporary endeavor, having a defined beginning and end (usually

constrained by date, but can be by funding or deliverables), undertaken to meet
unique goals and objectives, usually to bring about beneficial change or added
value. The temporary nature of projects stands in contrast to business as usual (or
operations), which are repetitive, permanent or semi-permanent functional work to
produce products or services. In practice, the management of these two systems is
often found to be quite different, and as such requires the development of distinct
technical skills and the adoption of separate management.

The primary challenge of project management is to achieve all of the engineering

project goals and objectives while honoring the preconceived project constraints.
Typical constraints are scope, time, and budget. The secondary—and more
ambitious—challenge is to optimize the allocation and integration of inputs
necessary to meet pre-defined objectives.

Project Cost Management:

How do we know what a project will cost? We really don't, until the project is
complete. We can't know the final project cost until the project is complete because
we can't accurately predict the future.

Project cost management (PCM) is a method which uses technology to

measure cost and productivity through the full life cycle of enterprise level projects.
PCM encompasses several specific functions of project management that include
estimating, job controls, field data collection, scheduling, accounting and design.

Beginning with estimating, a vital tool in PCM, actual historical data is used to
accurately plan all aspects of the project. As the project continues, job control uses
data from the estimate with the information reported from the field to measure the
cost and production in the project. From project initiation to completion, project cost
management has an objective to simplify and cheapen the project experience.

Cost Estimating :
PURPOSE
This document describes the methodology for establishing cost estimates for
projects

managed by LBNL in a manner that is compliant with the standards for

implementation of

appropriate Project Management controls and Earned Value Management.

SCOPE
Cost estimates, including Estimate to Complete (ETC), are prepared in a clear,
consistent,

comprehensive format that facilitates review of details and assumptions throughout

the cost

estimation process. Activities to be estimated are identified in sufficient detail to

support the

cost estimate methodology used.

The objectives of the cost estimating process are to: support the establishment of
the Performance Measurement Baseline (PMB); serve as the basis for change
control; and

Support the establishment of the ETC. Project cost estimates shall be traceable to
documented sources and based on accepted methodologies.
PROCEDURE
Estimate Preparation and Review

The estimate preparation phase begins with the issuance of guidance and
instructions from

the Project Manager and encompasses those activities that translate technical
design and

fabrication into detailed labor and procurement elements (organized by Work

Breakdown

Structure (WBS)) and identified costs.

Labor rate tables, indirect costs, and escalation rates will be provided by Project
Controls to

assist Control Account Managers (CAMs) in budget development. The Project

Manager

will review this information and approve all budget plans prior to implementation.

Escalation should generally be based on rates provided by the Department of

Energy (DOE)

as published in the LBNL Forward Pricing Sheet (aka CFO Rate Book). If work is
being

executed by collaborator or subcontractor in another geographic area where the

escalation

rates are different, rates for those areas should be used in lieu of the LBNL rates.
Judgment

should be used to verify the appropriateness of the published rate in light of current
market

conditions. Documentation of the rates used and the basis should be maintained.

The resulting cost estimate should be analyzed for appropriate time-phasing with
budget

authority and budget outlay, consistent with the project appropriation profile, as
directed by

the Funding Agency.

Preparation of Detailed Estimate

CAMs shall be responsible for preparing or obtaining cost estimates for Work
Packages and
Planning Packages. The CAMs will forward copies of the estimates to Project
Controls for

validation.

Cost Estimate Methodology

The result of the project cost estimate process shall be the CAMs most current,
detailed cost

estimate, commensurate with design maturity. The CAM will use one of the
approved

methodologies:

A description of these methodologies is provided in the Appendix. CAMs should use

Categories 1, 2, 3, and 7 when possible, especially for high-cost items, as this will
provide

maximum estimate support. The CAMs’ basis for all estimates will be documented
for each

project and retained by the Project Manager, with a copy provided to Project
Controls. The

documentation includes files to support project cost estimates (such as books,

vendor

quotes, engineering notes, memos, records of conversations with vendors,

drawings, code

output) with appropriate safeguards for proprietary information provided.

Cost estimates are developed for each WBS element at the Work Package level or
lower as

deemed necessary by the CAMs. They shall be broken down by project phase,
institution,

and labor discipline as appropriate. Items and activities in the estimate shall be of
sufficient

detail to support interpretation by independent reviewers.

When the project includes collaborating institutions, estimates prepared by non-

LBNL

CAMs shall use equivalent methodologies.

Documentation
The Project Manager shall control supporting documentation and ensure that it is
retained

by WBS element. The Project Manager shall forward copies of the documentation to
Project

Controls. Proper care shall be given to protect business-confidential and proprietary

information from unauthorized disclosure.

Documents and records generated as a result of implementing this procedure shall

be

generated in a manner suitable for reproduction and signed and dated at the time
of

completion or approval. Official signed documents shall be retained by the Project

Manager, with copies to Project Controls. Documents, records, and work papers
shall

include but not be limited to the following:

Estimate spreadsheets.

Work papers, including vendor quotes, telephone records, material take-offs, basis

notes, calculations, etc.

Analysis, such as contingencies, escalation application, and quantity discounts.

Estimating codes, such as labor disciplines and phase codes.

Application rates and associated application methodology.

Project Budgeting
Introduction
A robust project budget enables you to make key decisions regarding the
constraints with which you need to complete the project. For example, the project
budget will help you determine the scope items that should be included and which
items should be removed. Alternatively, if the key constraint is to complete a
project before a specified date, then the project budget will help you determine the
degree of schedule crashing permitted so that you can deliver the project on-time.

The project budget is created after the Estimate Costs process. The cost estimates
from this process are directly fed into the creation of the project budget. In the
PMBOK version 4, the project budget is part of the Determine Budget process. There
are several techniques used to determine the project budget:

o Cost Aggregation

o Reserve Analysis

o Historical Data

o Funding Limit Reconciliation

Cost Aggregation
Cost aggregation requires you to aggregate costs from an activity level to the work
package level. This is because costs are measured, managed and controlled at the
work package level during the project life-cycle. The final sum of the cost estimates
are applied to the cost baseline (a tool project managers use to monitor and control
project expenditures).

Reserve Analysis
To protect the project from cost overruns, most projects have a buffer. This buffer is
called a Contingency or Management Reserve. The degree of protection provided is
proportional to the risk foreseen in the project and the norms within your
organization. The buffer is part of the project budget, but not the cost baseline. No
amount of buffer can protect the project, if you don't follow the golden rules of
managing risks

Historical Data
Historical data from a closed project can be used to determine the estimates for the
new project. For example, if your organization has developed a block of apartments,
you could use the same estimates for the development of another block of
apartments. This is similar to analogous (parametric) estimation and is dependent
on the similarities between the two projects.

Funding Limit Reconciliation

Many organizations have limited funding for projects, which affects the project cash
flow. The funding may be based on a fiscal year or a quarter. Either way, your
project budget must adhere to the constraints imposed by the funding limit.
For example, suppose you have outsourced a part of a project and the vendor
delivers and invoices you in the first quarter. However, the invoice and consequent
payment was planned for in the second quarter. In this case, as a Project Manager
you wouldn’t have the funds to pay the vendor in the first

quarter.

You will use funding limit reconciliation to avoid large variations in the expenditure
of project funds. Funding Limit Reconciliation may lead to revisions in the schedule
and resource allocation. Therefore, the project budget directly impacts not only the
cost, but also the schedule and scope of work that will be completed.

Best Practice: Instead of committing to a budget for the entire project, commit to
the budget for each release. In addition, watch out for scope creep during project
execution. Otherwise, you will surely run out funds.

Cash Flow Forecasting

Cash Flow forecasts help you to build a model of the way in which cash moves
within a project or organization. They help you to predict whether the sales or
income you forecast will cover the costs of operation. They also allow you to
analyze whether a project will be sufficiently profitable to justify the effort put into
it.

Cash flow forecasts can also be useful for analyzing your own personal finances.
This is useful when you are about to make difficult financial decisions.

By carrying out a Cash Flow forecast on a spreadsheet package you can investigate
the impact of changing factors within the forecast. If you have structured the
spreadsheet correctly then you will be able to see, more or less instantly, the effect
that changes will have.

Normally we structure Cash Flow Forecasts in a standard way. This is explained

below. Other sorts of forecasting can be carried out with spreadsheets. A good way
of structuring these is to firstly analyse the system being forecasted with a system
diagram. This system diagram will show the relationships between factors. You can
then quantify these relationships, and build a model based on them. The structure
of the model will depend on the system being modeled.
How to Use the Tool:

We structure the Cash Flow Forecast as a table. On the table we have columns for
each period (normally a month) within the forecast. Rows show individual cash
movements such as sales of a product, sales costs, and particular expenses.

We create the table for the forecast in three stages. Refer to the example in Figure
1 (below) as we run through the stages:

Stage 1. Set Up Column Headings:

Decide the period of time over which you want to run your forecast, and the length
of the periods within it. Typically the forecast will run over 1-2 years, with the
periods as months.

Head up one column with the title 'Cash Movement'. Then enter the periods of the
forecast as the next column headings.

This will give you column headings of, for example, Cash Movement, January,
February, March, April.. etc.

Stage 2. Set Up Row Titles:

We organize rows into three main groups:

Income:

These rows show income expected during the period. Set up a separate row for
each source of income. Examples might be:

 Sales of ABC product

 Sales of BCD service

 Investment income

Where costs of operation are directly dependent on the amount sold, you may
decide to deduct the direct cost of the sales made within this group of rows. Put in a
subtotal at the bottom of the group.

Outgoings:

These rows show all of your costs, itemized by the type of cost. Examples might be:

 Staff salaries

 Payroll taxes
  Stationery

 Telephones

Set up a subtotal at the bottom of this group.

Totals:

The next row shows the total of the income rows minus the total of the out-going
rows for the month. This shows you your profit or loss for the month.

Underneath this, put in a running total. In this row add your profit or loss for the
period to the previous running total. This shows your financial position at the end of
the period.

3. Estimate values:

By now you should have a table marked out with column headings and row titles.
Now fill in the values of the cells on your table. An easy way of doing this is to fill in
the first column, and then use the spreadsheet 'Fill. Right' function to copy values
across. Then adjust values in the other columns appropriately.

When you are entering projections for sales for a new business, bear in mind you
will not sell much until your customers have seen mention of your business several
times (often 6 or 7 times). Your estimates for sales will be much more reliable if you
base them either on previous years' revenues, on trial marketing, or on good quality
market research.

When you are entering values for costs, try, where possible, to base projections on
costs from previous years. If this is not possible, base your estimates on real prices
quoted. This keeps your estimates as realistic as possible.

4. Calculate!
On most modern spreadsheet packages this will happen automatically, providing
you have set up totals correctly as described in section 2. As you enter and change
the values of cells within the spreadsheet, you should see that the period totals and
running totals change appropriately.

Cash Flow Forecasting is a relatively simple technique for checking the viability of a
project. Cost/Benefit Analysis is another. These are good techniques for decisions
involving relatively small amounts of money. Where large sums are involved (for
example, in financial market transactions), project evaluation can become an
extremely complex and sophisticated art, which uses more formal techniques. The
fundamentals of this are explained in Principles of Corporate Finance by Richard
Brealey and Stewart Myers – this is something of an authority on the subject. The
book is reviewed at the top of our right hand side bar.

Example:
A motor home enthusiast has decided that he wants to set up a motor home
hire company. He has researched the costs of set up, and estimated the
number of weeks of hire he can sell during the year.

Note that he has been quite optimistic in hoping to sell all the weeks of
holiday available during the high season of July and August. He will charge
the same price as his competitors for a holiday.