BMGMT 3203 • Project Management

CHAPTER 4

Budgeting The Project

Faculty of Business Management & Globalization
Tel : 603 8317 8833 (Ext 8407)
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.
BMGMT 3203 Project Management 2
 BMGMT 3203 • Project Management
METHODS OF BUDGETING
CHAPTER 4

Budgeting The Project

Faculty of Business Management & Globalization
Tel : 603 8317 8833 (Ext 8407)
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
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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
BMGMT 3203 Project Management 5
BMGMT 3203 • Project Management
COST ESTIMATING
CHAPTER 4

Budgeting The Project

Faculty of Business Management & Globalization
Tel : 603 8317 8833 (Ext 8407)
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
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The Impact of Budget Cuts

Figure 4-1 Two project life cycles

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Activity Versus Program
Budgeting

• Activity oriented budgets are based on

historical data accumulated through an
activity-based accounting system.
– expenses assigned to basic budget lines
• With program budgets, each project has
its own budget.
– expenses by task and time period are shown

BMGMT 3203 Project Management 9

 BMGMT 3203 • Project Management
IMPROVING COST ESTIMATES
CHAPTER 4

Budgeting The Project

Faculty of Business Management & Globalization
Tel : 603 8317 8833 (Ext 8407)
Learning Curves

where
Tn = the time required to complete the nth unit
T1 = the time required to complete the first unit
r = log(learning rate)/log(2)

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Tracking Signals

• Used to determine if there is a systematic

bias in cost or other estimates

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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
BMGMT 3203 Project Management 13
 BMGMT 3203 • Project Management

BUDGET UNCERTAINTY AND

RISK CHAPTER 4
MANAGEMENT

Budgeting The Project

Faculty of Business Management & Globalization
Tel : 603 8317 8833 (Ext 8407)
Risk

Risk management - the art and science

of identifying, analyzing, and
responding to risk factors throughout the
life of a project and in the best interest
of its objectives.
Project risk – any possible event that can
negatively affect the viability of a project

7-15
Risk Vs Amount at Stake

7-16
 Process of Risk Management
• What is likely to happen?
• What can be done?
• What are the warning signs?
• What are the likely outcomes?
Project Risk = (Probability of Event)(Consequences of Event)

7-17
Four Stages of Risk
Management

Risk identification

Analysis of probability and consequences

Risk mitigation strategies

Control and documentation

7-18
 Risk Clusters
• Financial • Commercial
• Technical • Execution
• Contractual/Legal

• Common Types
– Absenteeism – Skills unavailable
– Resignation – Ineffective Training
– Staff pulled away – Specs incomplete
– Time overruns – Change orders

7-19
Risk Factor Identification

Brainstorming meetings

Expert opinion

Past history

Multiple (team based) assessments

7-20
Risk Management Assessment Matrix
Consequences
Low Low High
Likelihood
High

7-21
Risk Mitigation Strategies
• Accept
• Minimize
• Share
• Transfer
• Contingency Reserves
– Task contingency
– Managerial contingency
• Mentoring
• Cross training

7-22
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.

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Failure Mode and Effect Analysis
(FMEA)

• 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

• Game Theory
• Expected Value
• Simulation

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