Session 6

7.0 ESTIMATING & BUDGETING

Session Speaker V G S Mani

EMM - MSRSAS

Session Objectives & Topics

At the end of this session the delegate would have understood

Preparing Cost estimates for a project; cost breakdown structure S curve for monitoring projects Assessing progress of projects (cost & time) through earned value concepts Analysis of cost variances and ratios

EMM - MSRSAS

Core Processes-Planning

Scope planning

Activity definition

Activity sequencing Schedule developing Cost Budgeting Project plan development

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Scope definition Activity Duration estimating

Resource planning

Cost estimating

EMM - MSRSAS

Cost Estimating & Pricing Cost Estimating

Developing an approximation of the costs of the resources needed to complete project activities How much it will cost the organisation to provide the product or services

Pricing(a business decision)

How much the organisation will charge for the product or services The estimate is only one factor in the decision

EMM - MSRSAS

Profit Equation

Cost + Profit = Revenue ----- Old Gross profit = Revenue Costs ---- Now Revenue = Sales volume x Selling price Cost = Variable costs + Fixed costs Variable cost = Sales volume x unit Variable cost

EMM - MSRSAS

Cost Vs Price

System driven
PROFIT

Market driven
PRICE

COST

EMM - MSRSAS

Cost Breakdown Structure

Labour: Cost of people employed by the parent company Materials: Incorporated or consumed Plant & equipment: Used but not consumed Sub-contract: As above but provided by outside contractors Management: Directly attributed to project management

EMM - MSRSAS

Cost Breakdown Structure

Overheads & admin: Shared costs & absorption Fees & taxation: Insurance, licenses, finance,, taxation etc. Inflation: Not always included except in fixed price tenders & where differential between cost & revenue inflation expected Contingency: May be added as blanket figure or calculated according to risk
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Versions Of Estimates

Three versions of estimates:

Base line amount communicated to project team Most likely amount project manager expects to spend Budget amount owner is willing to spend

Budget - typically 10 20% higher than base line Most likely half way between

EMM - MSRSAS

Input to Cost Estimating Work Breakdown Structure

Organise cost estimates Ensure all work has been estimated

Resource requirements(type & qty.) Resource rates for each resource

Staff cost per hour, equipment rates per hour etc. Material costs, overhead recovery rate

Activity duration estimates Historical information Cost breakdown structure

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Types of Estimate Proposal - appraise viability to start feasibility study

Accuracy: +/- 30 to 50%, Effort:0.02 to 0.10 % of project cost

Budget appraise viability to start systems design

Accuracy: +/- 20 to 35%, Effort:0.10 to 0.30 % of project cost

Sanction - appraise viability to approve project, obtain funding, allocate resources

Accuracy: +/- 10 to 25%, Effort:0.40 to 0.80 % of project cost

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Types of Estimate

Control measure progress, assign resources

Accuracy: +/- 5 to 15%, Effort:1.0 to 3.0 % of project cost

Tender prepare tender

Accuracy: +/- 2 to 5%, Effort:5.0 to 10.0 % of project cost

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Source of Estimating Data Suppliers quotations Trade literature, technical literature, textbooks Company historical data, standard costs Computer systems Black books Government figures & statistics

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Cost Estimating Methods

Analogous estimating
Using actual costs of similar previous activities A form of Expert Judgment using historical data

Parametric modeling
Using mathematical models to predict costs Computer spreadsheets, specialist packages

Bottom-up estimating
Using cost of individual elements to build up total estimate(industry data base)
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Project Budgeting Project budgeting is the process of conversion of a resource schedule into financial schedule The budget is made at the planning stage of the project, before it starts It identifies departmental responsibilities and inter-company responsibilities

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Types of Project Budget

Short projects may occur within a single time period. The period is often one month. Budget values are for the project duration Small projects may have only a single work package. Budget values for whole project. Most projects have several work packages and extend over several budget periods. Budget values are produced for each package for each period
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Expenditure Profiles Determines when expenditure takes place with in an activity

Uniform
Constant rate of expenditure

Front-end loaded
All or most of cost at start of activity

Rear-end loaded
All or most of cost at finish activity

Variable
Regular(triangular or other distribution) Irregular or intermediate
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Cost Apportioning
Distribution Uniform Uniform Uniform
100% 100% 50% 50% 25% 50% 25%

Variable
Rear-end loaded 0 1

0% 0% 100%

3 4 Periods EMM - MSRSAS

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Cumulative Cost(S) Curve

Cumulative cost

Rs

Period cost

Budgeting & control is carried out an a cumulative cost basis

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Time