Project Management Plan Baselines

Project Management Plan Baselines

[WLOs: 1, 2] [CLOs: 1, 2]

 

 

Prior to beginning work on this assignment,

· Read Chapter 10 from the course textbook, Contemporary Project Management.

· Review Chapters 7 and 8 from the course textbook, Contemporary Project Management

· Download ProjectLibre to your computer:

o Open the web page, ProjectLibre (Links to an external site.).

o Notice the Download button under the heading, ProjectLibre. Select this button.

o Follow the three steps to download ProjectLibre to your computer.
Note: Sometimes you will be asked for information such as your email address. You can ignore or close these pop-ups. You do not need to register to use ProjectLibre.

· Watch the ProjectLibre Demo (Links to an external site.).

In this assignment, you will create a project management plan (PMP) baseline, which includes a scope (including a WBS), a project schedule, and a project budget. This assignment will be divided into four major elements, along with their individual elements.

For your assignment,

· Develop the scope document in MS Word. The scope document should:

o Create a scope description consistent with the authority granted in the project charter.

o List the project deliverables that will enable resolution of the current problems in the current logistics operation.

o Outline the acceptance criteria for each deliverable.

o Establish the project’s limitations or boundaries.

o Summarize the change control process that will be used during the project.

· Create an indented WBS for five to 10 intermediate tasks using ProjectLibre.

o Include within each intermediate task two to three sub tasks. Review the ProjectLibre Demo (Links to an external site.) video for additional help using ProjectLibre.
Note: Save your WBS in ProjectLibre.

· Develop a project schedule using the WBS you have already created as the starting point. This should be completed using ProjectLibre. The project will start February of Year 0, and should finish in December.
Note: Save your project schedule, including the Gantt chart, in ProjectLibre.

The project schedule should:

· Start on February 1st and complete before December 31st of the year you are taking this class. That will be Year 0.

· Identify the precursor activities as necessary.

· Sequence the activities.

· Indicate a single start and end date for each task.

· Create a project budget. You may create the budget in ProjectLibre or in MS Excel.

o If you choose MS Excel:

§ Copy your work in ProjectLibre to MS Excel:

§ Put the cursor in the upper-left box to darken all the columns, use “CTRL C” to copy the ProjectLibre content, and then paste into MS Excel.

§ Add another column for budget. Assign a budget to each task. You have full discretion to develop the budget subject to the following guidelines:

§ The total budget may not exceed $100,000.

§ Each task must be assigned a budget.

o If you choose ProjectLibre:

§ You have full discretion to develop the budget subject to the following guidelines:

§ The total budget may not exceed $100,000.

§ Each task must be assigned a budget.

§ You may submit the project schedule and the resource breakdown structure separately if you choose.

Note: Save all your ProjectLibre work in a PDF. You may also save the project WBS and schedule from ProjectLibre in a PDF file, and save the budget in MS Excel. Save the project schedule and budget in ProjectLibre and MS Excel, as you will use this information for your Week 3 assignment.

For Week 2, submit the scope MS Word document to Waypoint. Additionally, submit the WBS, project schedule, and budget from ProjectLibre in a PDF, or the WBS and Project Schedule from ProjectLibre in a PDF, and the budget in a MS Excel document to Waypoint.

The Project Management Plan Baselines paper

· Must be three to four double-spaced pages in length (not including title and references and appendixes and formatted according to APA Style as outlined in the Ashford Writing Center’s APA Style (Links to an external site.).

· Must include a separate title page with the following:

o Title of paper (this should be titled, Project Management Plan – Scope).

o Student’s name

o Course name and number

o Instructor’s name

o Date submitted

For further assistance with the formatting and the title page, refer to APA Formatting for Word 2013 (Links to an external site.).

· Must utilize academic voice. See the Academic Voice (Links to an external site.) resource for additional guidance.

· Must use at least one credible or industry source; however, it is optional in this assignment to use scholarly or peer-reviewed research in addition to the course text.

o The Scholarly, Peer-Reviewed, and Other Credible Sources (Links to an external site.) table offers additional guidance on appropriate source types. If you have questions about whether a specific source is appropriate for this assignment, please contact your instructor. Your instructor has the final say about the appropriateness of a specific source for a particular assignment.

o To assist you in completing the research required for this assignment, view this Ashford University Library Quick ‘n’ Dirty (Links to an external site.) tutorial, which introduces the Ashford University Library and the research process, and provides some library search tips.

· Must document any information used from sources in APA Style as outlined in the Ashford Writing Center’s APA: Citing Within Your Paper (Links to an external site.).

· Must include a separate references page that is formatted according to APA Style as outlined in the Ashford Writing Center. See the APA: Formatting Your References List (Links to an external site.) resource in the Ashford Writing Center for specifications.

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Chapter 10: Budgeting Projects Chapter Contents Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

Chapter 10 Budgeting Projects

Chapter Introduction

10-1 Plan Cost Management

10-2 Estimate Cost 10-2a Types of Cost

10-2b Accuracy and Timing of Cost Estimates

10-2c Methods of Estimating Costs

10-2d Project Cost Estimating Issues

10-3 Determine Budget 10-3a Aggregating Costs

10-3b Analyzing Reserve Needs

10-3c Determining Cash Flow

10-4 Establishing Cost Control

10-5 Using MS Project for Project Budgets 10-5a Developing a Bottom-Up Project Budget Estimate

10-5b Develop Summary Project Budget

10-6 PMP/CAPM Study Ideas

Chapter Review Summary

Key Terms Consistent with PMI Standards and Guides

Chapter Review Questions

Discussion Questions

PMBOK® Guide Questions

Exercises

Semester Project Instructions

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References

Chapter 10: Budgeting Projects Chapter Contents Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means – graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.

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Chapter 10: Budgeting Projects Chapter Introduction Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

Chapter Introduction

SB7/ Shutterstock.com

Chapter Objectives

After completing this chapter, you should be able to:

Core Objectives

Define project cost terms and tell how each is used in estimating project cost.

Compare and contrast analogous, parametric, and bottom-up methods of estimating cost.

Create a time-phased, bottom-up budget for a project.

Technical Objectives

Show both summary and bottom-up project budget information with cumulative costs using MS Project.

Behavioral Objectives

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PMBOK® Guide

Topics:

Plan Cost Management

Estimate cost

Determine budget

Control cost

Chapter Outputs

Cost Baseline (Aggregated project budget)

Describe issues in project cost estimating and how to deal with each.

I sold escalators and elevators for my first job out of business school. As part of my training, before I was sent to the field, I would look over the estimates made by the sales staff. This served to double-check their math so the company had confidence in their estimates. It also served to teach me many of the little nuances that more experienced estimators used. I had my training manuals, lists of standards, main methods of calculation, and so forth, but learning from others’ experience instead of making all my own mistakes helped.

One of the last parts in my training was to spend eight weeks at the Denver branch to get seasoned a little bit. Construction was booming in Denver during the late 1970s. In fact, some days I needed to bid more than one job. The first part of putting together a bid was to go the office where the requests for proposals, plans, specifications, and the like were stored. Then, armed with that information, I would put together an estimate. Finally, the actual bidding took place—usually over the phone. The problem was that creating a detailed estimate would generally take at least half a day. If that was my only duty (it was not), I would still have had a hard time when multiple jobs were let for bid on the same day. Something had to give.

Every morning around 10 A.M., I met the construction superintendent for coffee. We would discuss each bid that was due. What other job was it like? How was it bigger or smaller than a recently completed job? What features did it include more or less than a previous job? Did we make money on that job? We used these questions to compare an upcoming job to other recently completed jobs. We would also ask, “What do we think our competition will bid?” By the end of the conversation, we had determined our strategy for bidding the job. If we won the bid, we would complete a detailed cost estimate to see if we were close.

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After my training, I was transferred to Kansas City. Kansas City had less construction than Denver. I had enough time to perform detailed cost estimates before I submitted bids. Therefore, we were more certain that if we got the bid, we would have a good chance of making money.

I worked for the same company in both cities. However, we used two very different methods of estimating cost. Both made sense where they were used. In Denver, if we wanted to bid every job (and you cannot win the job if you do not bid on it), we needed a fast method. In Kansas City, we had the time to develop detailed cost estimates, and so we took the time. There are many methods of estimating project costs and each has its place.

Timothy J. Kloppenborg

Chapter 10: Budgeting Projects Chapter Introduction Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

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Chapter 10: Budgeting Projects: 10-1 Plan Cost Management Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-1 Plan Cost Management This chapter starts with estimating project costs. Once the overall cost is estimated, the next step is to develop the budget by aggregating the costs and determining the project’s cash flow needs. Project managers also need to establish a system to report and control project costs. The final section of the chapter deals with how to use Microsoft Project to aid in cost management activities.

Cost and schedule are closely related. Sometimes, the two move in the same direction. The schedule is maintained by the use of resources, and resources expend parts of the budget. For example, when a schedule calls for materials to be delivered, or for workers to perform, money must be available to pay for the materials or workers. Sometimes, they move in opposite directions. For example, if a project needs to be completed earlier than planned, more money probably will need to be found to pay for overtime.

Plan cost management (process to determine how to plan, estimate, and control project costs.) is the process to determine how to plan, estimate, and control project costs. Cost planning entails developing a cost management plan for your project. The cost management plan (a continuous activity which requires reforecasting and refinement of the cost estimates throughout the project.) is “a continuous activity which requires reforecasting and refinement of the cost estimates throughout the project.” The cost management plan defines the cost baseline, modifies it whenever necessary, and uses it for monitoring and controlling costs. On small projects, this can be as simple as ensuring accurate estimates are made, securing the funding, and developing cost reporting procedures to ensure that the money is spent correctly. On large projects, each of these processes can be much more involved; in addition, developing and using accurate cash flow estimates become critical. A project cost management plan includes descriptions, procedures, and responsibilities for the following:

Costs included (such as internal and external, contingency, etc.)

Activity resource estimating

Cost estimating

Cost baseline

Budget determination

Cost control, including metrics, reporting, and change approvals

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A project cost management plan needs to be consistent with the methods of the parent organization. In many organizations, project managers are provided with specific guidance on setting up their cost management plan. The plan provides guidelines to the project manager and other stakeholders to serve several purposes:

First and most fundamentally, it shows how to develop and share relevant, accurate, and timely information on cost that the project manager, sponsor, and other stakeholders can use to make intelligent and ethical decisions.

It provides feedback, thereby showing how the project’s success is linked to the business objectives for which it was undertaken.

It provides information at a detailed level for those who need details and at appropriate summary levels for those who need that.

It helps all project stakeholders focus appropriately on schedule and cost performance.

Chapter 10: Budgeting Projects: 10-1 Plan Cost Management Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means – graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.

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Chapter 10: Budgeting Projects: 10-2 Estimate Cost Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-2 Estimate Cost Estimate cost (process of developing an approximation of monetary resources needed to complete project activities.) is “the process of developing an approximation of monetary resources needed to complete project activities.” Cost estimating is linked closely with scope, schedule, and resource planning. To understand cost implications completely, a project manager needs to understand what the work of the project includes, what schedule demands exist, and what people and other resources can be used. When more of these details are available, the cost estimates can be more precise.

The first principle in dealing with project costs is for the project manager to never lie to himself. Many times, in dealing with project costs, the project manager will need to negotiate with sponsors, customers, and other stakeholders. If he does not understand what the project costs really are, he is just trading meaningless numbers. That is neither an effective nor an ethical method of establishing and committing to sensible budgets.

The second principle in dealing with project costs is for the project manager to never lie to anyone else. Since sponsors, customers, and other stakeholders can often drive hard bargains, it is sometimes tempting to shade the truth to secure necessary funding. This is wrong on two counts: First, it is ethically wrong. Second, as a practical matter, a project manager’s reputation goes a long way for good or for bad. People are more inclined to work with project managers who are viewed as being honest and trustworthy.

To estimate project costs accurately, the project manager must understand the various types of costs, the timing and accuracy of cost estimates, the different methods that can be employed to estimate costs, and a variety of cost-estimating issues.

Chapter 10: Budgeting Projects: 10-2 Estimate Cost Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means – graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.

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Chapter 10: Budgeting Projects: 10-2a Types of Cost Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-2a Types of Cost

Costs can be better understood by considering various types of classifications such as those shown in Exhibit 10.1.

Exhibit 10.1

Comparison of Cost Terms

Fixed Variable

Direct Indirect

Recurring Nonrecurring

Regular Expedited

Internal External

Lease Purchase

Labor Material

Estimate Reserve

Source: Adapted from Kim LaScola Needy and Kimberly Sarnowski, “Keeping the Lid on

Project Costs,” in David I. Cleland, ed., Field Guide to Project Management, 2nd ed. (Hoboken,

NJ: John Wiley & Sons, 2004): 145–147.

Fixed versus Variable Costs

Costs can first be classified as either being fixed or variable. Fixed costs (costs that remain the same regardless of the size or volume of work.) are those that remain the same regardless of the size or volume of work. For example, if you need to buy a computer for your project, the cost is the same regardless of how much you use it. Variable costs (costs that vary directly with the volume of use.) are those that vary directly with the volume of use. For example, if you were building a cement wall, the cost of the cement would vary directly with the size of the wall. To understand the importance of fixed versus variable costs, a project manager ideally structures costs and the impact of changes on those costs. When a project manager understands how big a project is likely to be, she will try to determine how

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to complete all of the project work at the lowest possible cost. On many projects, there are choices of how to perform certain activities. Some of these choices reflect a high-fixed-cost and low-variable-cost alternative such as buying an expensive machine that can make parts with low variable costs versus a more manual process of inexpensive machines but high labor costs. These choices require both some fixed and some variable costs. Ideally, the cost curve for the expected project volume appears as shown in Exhibit 10.2. This reflects the lowest possible total cost at the size the project is expected to be. Unfortunately, problems may occur if the volume of the project work is substantially larger or smaller than first expected. If the volume drops a little bit, the total costs may drop very little. If the volume expands a little, the costs may go up significantly. Therefore, when considering fixed and variable cost choices, it is important to understand the project scope.

Exhibit 10.2

Project Cost and Volume Curve

Direct versus Indirect Costs

A second classification divides project costs into direct and indirect costs. Direct costs (costs that only occur because of the project and are often classified as either direct labor or other direct costs.) are those that only occur because of the project and are often classified as either direct labor or other direct costs. For example, direct labor includes workers who are hired specifically to work on the project and who will be either assigned to a new project or released when the project is complete. Other direct costs may include such items as materials, travel, consultants, subcontracts, purchased parts, and computer time.

Indirect costs (cost that are necessary to keep the organization running, but are not associated with one specific project.) are those that are necessary to keep the organization running, but are not associated with one specific project. The salaries of the company executives and the cost of company buildings, utilities, insurance, and clerical assistance are examples. These costs are allocated among all of the projects and other organizational and internal work that benefit from these resources. The methods of allocating these costs

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have evolved in recent years thanks to activity-based costing, as described in the cost estimating issues section. Exhibit 10.3 shows both direct and indirect costs for a work package.

Exhibit 10.3

Direct and Indirect Costs in a Work Package

PROJECT: ACCOUNTS PAYABLE REFINEMENT

WORK PACKAGE: INSTALL MODULE 1

Description:

Install accounts payable refinement application and related hardware.

Deliverable(s):

Installed and functioning accounts payable module.

Cost Categories Quantity Total

Direct Labor

Programmer 120 hrs @ $ 75/hr 9,000

Systems Analyst 40 hrs @ $ 100/hr 4,000

Systems Architect 20 hrs @ $ 120/hr 2,400

Other Direct

Hardware 20,000

Software 8,400

Consultant Services 12,000

Direct Overhead (.6 * DL) 9,240

Total 65,040

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Source: Kevin P. Grant, University of Texas, San Antonio. Adapted with permission.

Recurring versus Nonrecurring Costs

The third cost comparison is recurring versus nonrecurring costs. Recurring costs (costs that repeat as the project work continues, such as the cost of writing code or laying bricks.) are those that repeat as the project work continues, such as the cost of writing code or laying bricks. Nonrecurring costs (costs that happen only once during a project, such as developing a design that, once approved, guides the project team.) are those that happen only once during a project, such as developing a design that, once approved, guides the project team. Nonrecurring costs tend to occur more often during project planning and closing, while recurring costs tend to occur more often during project execution.

Regular versus Expedited Costs

A fourth cost comparison is regular or expedited. Regular costs are preferred and occur when progress can be made by normal work hours and purchasing agreements. Expedited costs occur when the project must be conducted faster than normal and overtime for workers and/or extra charges for rapid delivery from suppliers are necessary. The comparison of these costs shows why it is vital to understand schedule pressures and resource demands as costs are estimated.

Other Cost Classifications

The next several cost comparisons require little explanation. They are helpful to understand both in structuring the cost estimates and as checklists to help remember items that may be forgotten. One comparison is costs internal to the parent organization versus those external to it. Major external cost items such as equipment can be either leased or purchased. Direct cost items are often employees or materials.

Estimate versus reserve costs form the next comparison. The estimate (a quantified assessment of the likely amount. … It should always include an indication of accuracy) is “a quantified assessment of the likely amount. … It should always include an indication of accuracy.” The reserve (extra money in the project budget to be used if necessary— usually if a risk event occurs.) is extra money in the project budget to be used if necessary— usually if a risk event occurs. Reserves are often classified more specifically as a management reserve or contingency reserve. Management reserve (money assigned to the project for unknown possible costs and money that senior management controls.) is money assigned to the project for unknown possible costs and money that senior management controls. By contrast, contingency reserve (money assigned to the project and allocated for identified risks for which contingent responses are developed.) is money assigned to the project and allocated for identified risks for which contingent responses are developed.

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Just as uncertainly exists when estimating how long an activity will take, there is uncertainty regarding how much an activity will cost. Some activities are easy to estimate with higher levels of accuracy. Other less familiar activities have many uncertainties, and estimating their cost is more like guessing. If one were to estimate conservatively on each uncertain activity, the total estimate for the project would likely be too high to be approved. To overcome this problem, project managers are sometimes encouraged to estimate at least a bit more aggressively. That means some activities will run over their estimates, while others will cost less. Project managers frequently add a contingency reserve to cover the activities that run over their aggressive estimates. In any event, one must remember the two principles of ethical estimating discussed earlier in the chapter (not to lie to yourself and to others).

Chapter 10: Budgeting Projects: 10-2a Types of Cost Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

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Chapter 10: Budgeting Projects: 10-2b Accuracy and Timing of Cost Estimates Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-2b Accuracy and Timing of Cost Estimates

Project managers need to understand when cost estimates should be developed, how accurate they need to be, and how they will be used. During project initiation, many project managers need to develop cost estimates to have their project charters approved. At this point, very little detail is understood regarding the project, so the estimates are only approximate. However, as the scope becomes well defined in the work breakdown structure (WBS), schedules are planned, and specific resources are assigned, the project manager knows much more and can estimate costs associated with each work package more precisely. Many organizations have specific names and guidance for their estimates and these vary widely. Normally, estimates should be documented, and the level of confidence in the estimate should be described. Exhibit 10.4 shows several points regarding different types of project cost estimates.

Exhibit 10.4

Project Cost Estimate Comparisons

Order of Magnitude Estimates

Several things should be noted from these comparisons. First, estimates go by several different names. For example, of magnitude estimates (early estimates that are often created during the project initiating stage when very little information is available about

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the project. Also called as ballpark, conceptual, initial, or level-one estimates.) that are often used to seek initial charter approval are also sometimes called ballpark, conceptual, initial, or level-one estimates. These early estimates are often created during the project initiating stage when very little information is available about the project. At this point, a very rough of magnitude estimate could underestimate the project by as much as 100 percent (that is, the final cost could be double the initial estimate). And it may be the only possible estimate. There is no way to really know how accurate an estimate is until the project has been completed, but with less detailed knowledge concerning the project in the initiating stage, there is likely to be a larger margin of error. Order of magnitude cost estimates and the parallel high-level views in each of the other planning areas can quickly give enough information to approve the project charter and begin to invest time and money into detailed planning.

A concept of progressive elaboration applies here. Progressive elaboration is “Continuously improving and detailing a plan as more detailed and specific information and more accurate estimates become available as the project progresses, thereby producing more accurate and complete plans that result from the successive iterations of the planning process.”

Budget and Definitive Estimates

Once a project plan enters into the more detailed planning stage, it is generally possible to create a more accurate cost estimate. This is the same thought that goes into creating a more detailed project schedule, resource estimates, risk profiles, quality plans, and communications plans. Depending on the complexity and size of their projects and organizational norms, some project managers can proceed directly to definitive cost estimates at this point. Others may still need to look at one or more intermediate levels of detail before they have enough detailed knowledge to create cost estimates with accuracy. At the end of project planning, cost estimates should have a small enough margin of error that they can be used to create a project budget, show cash flow needs, and be used as a basis for controlling the project. Most project organizations prefer an accuracy level of no more than plus or minus 10 to 15 percent, and some require considerably better, such as plus or minus 5 percent.

Agile

On agile projects, project managers may use rolling wave planning to

estimate costs. They do this by creating a definitive estimate for the first iteration of the project (and committing to it) and an of magnitude estimate for the remainder of the project. As the work on the first iteration nears an end, the project manager, equipped with detailed information about scope for the next iteration, then creates a definitive estimate for the second iteration and reevaluates the of magnitude estimate for the remainder of the project. At each stage, the project manager has more information than at the preceding stage and can create more accurate estimates.

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Chapter 10: Budgeting Projects: 10-2b Accuracy and Timing of Cost Estimates Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

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Chapter 10: Budgeting Projects: 10-2c Methods of Estimating Costs Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-2c Methods of Estimating Costs

Many methods can be used for estimating project costs. Most are variations of one of the methods discussed in this section. While these methods can sometimes also be used to estimate project scope or duration, the discussion in this chapter centers on using them to estimate project cost. Exhibit 10.4 indicates that as more details of a project are known as planning progresses, more detailed estimating methods may be used. However, Exhibit 10.5 shows that even at the end of project planning, a project manager may sometimes use a combination of cost estimating methods. If the organization has established accurate analogous and parametric estimating methods and capable estimators, sometimes parts of a project can be estimated by those methods instead of the more detailed (and time- consuming) bottom-up methods. The method chosen for cost estimation should account for the extent of complexity, risk, interdependencies, work force specialization, and site-specific issues of the project.

Exhibit 10.5

Wbs Depicting Estimating Methods

Source: Kevin P. Grant, University of Texas, San Antonio. Adapted with permission.

Analogous Estimating

Analogous estimating (an estimating technique that uses the values of parameters on a scale, such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity from a previous and similar activity or project as the basis for estimating the same parameter or measure for a future activity or project respectively.) is “an estimating

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technique that uses the values of parameters on a scale, such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity from a previous and similar activity or project as the basis for estimating the same parameter or measure for a future activity or project respectively.” Analogous estimating was the technique used in Denver in this chapter’s opening vignette. To create a bid for a project—in this case, the installation of elevators—a similar project was considered as the starting point. Immediately, questions were asked regarding how this job compared in size and complexity with the previous job.

Syda Productions/ Shutterstock.com

Several things need to be in place for analogous estimates to be effective. First, the organization needs to have experience in performing similar projects and know actual costs of each of those projects (not just what they were estimated to cost). Second, the estimator needs to know how and to what extent the proposed project differs from the previous project. Third, the estimator needs to have experience with the methods and processes by which the project will be performed. In the Denver example, sales and construction people jointly discussed how much the project would cost.

Parametric Estimating

Parametric estimating (an estimating technique that uses a statistical relationship between historical data and other variables (e.g., square footage in construction, lines of code in

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software development) to calculate an estimate for …scope, cost, and duration.) is “an estimating technique that uses a statistical relationship between historical data and other variables (e.g., square footage in construction, lines of code in software development) to calculate an estimate for … scope, cost, and duration.” Parametric estimating can be used to determine the impact of key variables on project costs. A bit more information is needed to complete a parametric cost estimate as compared to an analogous estimate. Exhibit 10.5 shows this graphically by suggesting that another level of detail in the WBS might be used. In the chapter opener example of estimating the cost of elevator installation projects, parametric estimates might involve finding a bit more information regarding the project. For example, one might want to know how tall the elevator was, how fast it needed to travel, how large the platform would be, the trim level, the complexity of the controls, and the like. Each of those factors would have an impact on the elevator installation cost. For example, the cost per foot traveled might be calculated (this would cover the cost of providing and installing guide rails, wiring, etc.). Another cost might be associated with speed because faster elevators require bigger motors, more stability, stronger brakes, and so on.

Bottom-Up Estimating

Bottom-up estimating (a method of estimating …what is needed to meet the requirements of each of the lower, more detailed pieces of work, preferably the lowest level of WBS work elements, and these estimates are then aggregated into a total quantity.) is “a method of estimating … what is needed to meet the requirements of each of the lower, more detailed pieces of work, preferably the lowest level of WBS work elements, and these estimates are then aggregated into a total quantity.” For a bottom-up estimate, the WBS needs to be broken down to the most detailed level, and the specifications need to be very clear. In the elevator example, bottom-up estimates were created in Kansas City. Details to be estimated included exactly how many buttons the control panel had, exactly what kind of light fixtures were mounted in the ceiling, what kind of finish was requested, and so on. The cost was estimated for each item. For example, for the process of installing the guide rail, first there was a small amount of time, such as one hour, to set up or get everything in place to do this step. Then, it took a certain fraction of an hour of labor to secure each foot of the rail into position. A material charge was incurred for the guide rails themselves and the fasteners that held them in place. The cost of supervision was charged for the foreperson, who ensured the work was scheduled and performed properly. Finally, overhead costs (indirect costs) were allocated to each dollar of fixed costs.

Bottom-up estimating is the most detailed, time-consuming, and potentially the most accurate way to estimate. Many projects use this method eventually to serve as a basis for estimating cash flow needs and for controlling the project. One important caution on bottom- up estimating is to ensure that every item is included. If a portion of the project is left out, that portion is underestimated by 100 percent! A WBS detailing all deliverables is best suited for bottom-up estimating. Some organizations first create a bottom-up estimate and then compare it to a top-down view to consider adjusting it if the top-down view yields a much higher number. Exhibit 10.6 summarizes differences in cost estimating methods.

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Exhibit 10.6

Cost Estimating Method Comparison

ANALOGOUS PARAMETRIC BOTTOM- UP

Amount of Information Required Least Middle Most

Amount of Time Required Least Middle Most

Accuracy Obtained Lowest Middle Highest

Chapter 10: Budgeting Projects: 10-2c Methods of Estimating Costs Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

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Chapter 10: Budgeting Projects: 10-2d Project Cost Estimating Issues Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-2d Project Cost Estimating Issues

Regardless of what method is used to estimate project costs, several issues need to be considered. Some of these issues are pertinent to all projects; others pertain only to certain projects. These issues are shown in Exhibit 10.7.

Exhibit 10.7

Issues in Project Cost Estimating

Supporting detail Activity-based costing

Causes of variation Life cycle costing

Vendor bid analysis Time value of money

Value engineering International currency fluctuations

Supporting Detail

Supporting detail for project cost estimates includes describing the scope, method used to create the estimate, assumptions, constraints, and range of possible outcomes. The project scope tends to be the least well defined at the project outset and becomes increasingly well defined throughout project planning. Each estimate should state exactly what scope it is based on. Version control is critical for this purpose.

The method used might be analogous, parametric, or bottom-up. The name of the method and exactly how the method is used should be described.

When creating an estimate, many assumptions and constraints are considered. Assumptions should be outlined because two different people coming from two different backgrounds may view a situation differently and assume that two different things will happen. Even if everyone involved with planning a project assumes the same thing, it still may not happen. Assumptions that are not true often cause more work or other problems for a project such as changes in scope, cost, and schedule. As more details are available, a project manager may review assumptions with an eye toward uncovering assumptions that have now proven to be false. When this happens, the project manager can investigate any

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impact this may have on the project budget (and schedule and scope). Examples of assumptions that may arise when estimating the cost of direct labor might include the following:

Workers will be paid at the prevailing wage rate of $14 per hour.

Workers are already familiar in general with the technology being used on the project.

Workers will be paid for 40 hours per week whether there is always that much work for them or not.

Overtime will never be authorized.

The project schedule can be delayed if the only alternative is to pay overtime.

Constraints are also important since they often dictate the methods available for performing the project work. Examples of constraints include:

Only in-house workers will be used.

No extra space will be provided.

No extra budget will be allowed.

The current version of the XYZ software will be incorporated into the design.

The range of possible outcomes should always be stated with a project cost estimate. If the range is not stated, people may lock onto the first number they hear and remember it. If the actual project costs could be 100 percent higher than the of magnitude estimate, the project manager had better state that accuracy level loud and clear, or she may find herself continually explaining why she is grossly over budget. In fact, many estimators resist giving an of magnitude estimate because they fear they will be held to it. A natural tension exists between managers who try to effectively manage their departments by establishing budgets as soon as possible and project managers who try to provide budget estimates as late as possible (once they know more about the project).

Causes of Variation

There are many causes for project costs to vary. On routine projects using proven technology, with fewer uncertainties, and an experienced and well-known project team, the causes may be relatively few and easy to categorize. On other projects where some of these factors are not true, more causes of uncertainty in project costs may exist, and some of those may be from unknown sources. Statisticians classify variation as coming from either normal or special causes, as shown in Exhibit 10.8.

Exhibit 10.8

Normal and Special Cause Variation

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Variation occurs in all work processes. The more routine a process is and the more work is driven by machines, the less variation occurs. Projects, however, tend to have novel work and high human interaction, so there are many opportunities for variation. Normal variation comes from many small causes that are inherent in a work process. For instance, the variation in the productivity of a programmer writing code could be from phone calls, instant messages, and in-person interruptions that occur each day. Special cause variation, on the other hand, is when something out of the ordinary occurs. For example, a lightning strike could cause such a large power surge that it overwhelms the normal protectors and destroys some of the computers. Most causes of variation are of the normal variety, and improving work methods (as discussed in Chapter 12) can help to reduce this type of variation. Special causes, however, are handled more as risks, as discussed in Chapter 11. Both types of variation add to project costs and need to be considered.

Vendor Bid Analysis

On some projects, most or all of the cost is internal to the parent organization. On other projects, a substantial portion of the budget goes to securing services and supplies from vendors and external sources. Vendor bid analysis is used to determine whether the price being asked by the vendors appears to be reasonable. If several vendors compete for the work, it is reasonable to believe that the lowest responsible offer is fair. In the absence of competition, however, other methods may be needed to ensure a fair price. On some items, prices are determined in the marketplace and reported in business papers and websites for anyone to read. On specialized services and products, one often must negotiate with a vendor. In the absence of any other method, for an expensive item, a project manager may need to develop a sound cost estimate. That is, try to determine how much effort the vendor may need to expend, and then add a fair profit margin to arrive at the price you believe the vendor should charge.

Value Engineering

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Value engineering (a formal, structured process to ensure projects meet or exceed cost objectives without compromising quality … divides the total project scope into components, examining each individual component for alternatives that offer benefits.) is “a formal, structured process to ensure projects meet or exceed cost objectives without compromising quality … divides the total project scope into components, examining each individual component for alternatives that offer benefits.” It is aimed at increasing the value or productivity of a work element while minimizing the cost. In other words, it is a ratio of function to the cost associated with the product or service. Value engineering can be a very powerful method of double-checking all of the chosen methods for accomplishing work and the features of the project deliverable. Frequently, stakeholders find that a feature in the specifications costs more than they wish to pay.

In a project to update an older church, the liturgical committee proposed many controls for special lighting that would be used only on special occasions. The general contractor suggested simplifying the controls, while retaining all the new lights, at a savings of $100,000! While the liturgical committee was disappointed, the church council readily agreed. Value engineering is so common in some industries that a separate stage is incorporated late in the project planning to ensure that time is spent for this purpose to reduce project cost and/or time and to improve project quality and/or usefulness.

Activity-Based Costing (ABC)

Another issue project managers need to understand when estimating costs is what type of accounting system the organization employs. Historically, most companies used functional- based accounting systems. When using these systems, overhead (indirect) costs are assigned to a cost pool, which is often allocated to direct costs based on volume. When direct costs were a large percentage of total costs, this made sense. In more contemporary times, indirect costs form a much larger percentage of total costs, so careful allocation of them is necessary both for selecting the projects that truly will contribute the most profit and for ensuring a focus on controlling the highest costs. ABC is another accounting approach, by which indirect costs are allocated to fixed costs based upon four different types of drivers. The cost drivers are number of units produced (frequently, the only method used in functional-based accounting), number of batches run, number of product variations, and amount of facility utilized. ABC requires more involved methods for allocating indirect costs, but yields more accurate cost information. By furnishing more specific information on cost drivers, ABC also helps to support process improvement and justify spending money on expensive equipment. Project managers need to understand how costs are allocated in their organization so they can accurately estimate the amount of indirect costs that will be assigned to their projects.

Life Cycle Costing

Life cycle costing (total costs of both creating the project and of using the result of the project during its useful life.) is another concept project managers need to understand when estimating their project costs. Many project selection decisions are made based upon the total costs of both creating the project and of using the result of the project during its useful

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life. This total cost is called the life cycle cost, in which life cycle denotes the life of the product or deliverable of the project. Many times, trade-off decisions are considered that might involve spending more during the project to create a product that costs less to operate during its useful life. In an age in which environmental concerns are appropriately being considered more heavily, to calculate total life cycle costs, a project manager may also need to consider disposal costs of the product after its useful life is complete. This can entail designing more recyclable parts (even at a higher cost) into the product and adopting sustainable approaches for project execution that would reduce the project cost in the long run.

Time Value of Money and International Currency Fluctuations

When considering future costs and revenues, project managers must know how to calculate the time value of money. One dollar today is presumably worth more than one dollar next year. Discounting the value of future revenue and cost streams enables better project decisions. Often, the finance department at a company tells the project manager what rate to use as a discount factor. The rate depends upon the prevailing inflation rate plus the cost of capital. On international projects, it can also depend upon international currency fluctuations.

Oa Chonhatai/Alamy Stock Photo

Chapter 10: Budgeting Projects: 10-2d Project Cost Estimating Issues Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

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Chapter 10: Budgeting Projects: 10-3 Determine Budget Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-3 Determine Budget Once the project costs have been estimated, it is time to establish the project budget. Determine budget (the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.) is “the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.” To develop the budget, the project manager starts by aggregating all the costs. Once those are totaled, it is time to determine how much money is required for reserve funds. Finally, the project manager must understand cash flow—both in terms of funding and requirements to meet costs for activities on a day-to-day basis.

Chapter 10: Budgeting Projects: 10-3 Determine Budget Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

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Chapter 10: Budgeting Projects: 10-3a Aggregating Costs Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-3a Aggregating Costs

When the entire project costs, both direct and indirect, have been added up, the result is a cost baseline (that part of the project baseline that handles the amount of money the project is predicted to cost and on the other side when that money will be spent. It is an approved budget usually in a time distribution format used to estimate, monitor, and control the overall cost performance of the project.) , which is “that part of the project baseline that handles the amount of money the project is predicted to cost and on the other side when that money will be spent. It is an approved budget usually in a time distribution format used to estimate, monitor, and control the overall cost performance of the project.”

The work packages of a WBS not only take time, but also cost money. The project budget can be aggregated from the work packages. Exhibit 10.9 shows how six work packages appear on a Gantt chart with the cost of each work package listed on a monthly basis. The total cost for the month is shown and the cumulative cost for the project shown below that. Finally, a graph appears at the bottom that shows the cumulative cost of the project at each point in time. This represents the time-phased project budget. This will be used for control purposes as the project progresses. Note the cumulative cost curve approximates an “S” shape with slow expenditures (and progress) early in the project, rapid in the middle, and gradual late in the project. This is normal as projects often require much planning during the early phases of a project and have fewer activities to finish at the end.

Exhibit 10.9

Aggregation of Project Budget

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Source: Kevin P. Grant, University of Texas, San Antonio. Adapted with permission.

Chapter 10: Budgeting Projects: 10-3a Aggregating Costs Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

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Chapter 10: Budgeting Projects: 10-3b Analyzing Reserve Needs Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-3b Analyzing Reserve Needs

Another view of project cost variation is to consider how well it is understood and how each type is handled. This is displayed in Exhibit 10.10.

Exhibit 10.10

Estimating Costs of Project Variation

HOW VARIATION IS UNDERSTOOD

KNOWN KNOWNS

KNOWN UNKNOWNS

UNKNOWN UNKNOWNS

How It Is Discovered

Scope definition Create WBS

Risk identification Situation occurs

Stage When It Is Usually Uncovered

Initiating or planning

Initiating or planning

Executing

Method of Estimating Costs

Estimate directly Contingency reserves

Management reserves

Variation in project costs (and schedules) can be partially explained by the presence of certain events associated with a project. These events are classified as known knowns, known unknowns, or unknown unknowns, depending on the extent to which they are understood and predicted. Known knowns are discovered during planning and can be estimated directly. An example could be that when a construction crew takes soil samples, they discover that extra pilings are required to stabilize the new building, and they add the cost into the project estimate to cover that expense.

Known unknowns are events discovered during risk identification that may or may not occur. An example could be snowstorms that cause traffic problems for three days at a critical time, preventing workers from getting to their jobs. In the next chapter on risk, methods for calculating costs associated with known unknowns are discussed. They will appear as contingency reserves.

Finally, sometimes things happen that are totally unexpected and can cause an increase in cost and/or schedule. For example, a very dependable supplier goes out of business

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perhaps due to the sudden death of the owner. These unknown unknowns (commonly called unk unks) also need to be covered in the project budget. The money used to cover them is frequently called management reserve and is usually authorized by company executives.

The amount placed into contingency reserve is calculated during risk analysis. The amount placed into management reserve is determined by how much uncertainty management feels exists in the project. Typical ranges are from 5 percent of project costs for well-understood, routine projects to 30 percent or more of project costs for poorly understood, unusual projects. These costs are not to be used to overcome poor estimating or project execution.

Once the cost baseline is determined along with both contingency and management reserves, it is time to determine if sufficient funds are available. On many potential projects, a funding limit exists. The project sponsor for internal projects and the customer for external projects need to be very clear if the necessary funds exceed the limit of what is available. If enough funds are not available, this is the time to look hard at all the estimates, schedule, and scope to determine what changes need to be made before the project management plan is accepted. It does no good for anyone to deliberately start a project with insufficient funds.

Chapter 10: Budgeting Projects: 10-3b Analyzing Reserve Needs Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

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Chapter 10: Budgeting Projects: 10-3c Determining Cash Flow Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-3c Determining Cash Flow

Projects require cash to make progress with the work. Suppliers and workers need to be paid in a timely fashion. A common difficulty is that the project’s customer may not pay for the work until it is completed—often months after project bills were supposed to be paid. Therefore, the timing of cash inflow and outflow for a project is just as important as the amount of money required.

Just as the demands on individual workers can be applied to individual activities in the project schedule to determine where overloads may occur, expenses can be applied to individual activities in the schedule to see when cash is needed. Revenue can also be tracked to interim deliverables in the project schedule to show when revenue can be expected. If a project is internal to a company, the timing of cash availability is also important to understand. While workers may work every day and suppliers may deliver frequently, cash may be supplied through organizational budgets only on a periodic basis. A project manager needs to ensure that the cumulative amount of cash coming into the project either from internal budgeting or from customer payments meets or exceeds the demands for paying cash out. This cash flow is shown in Exhibit 10.11 where incoming cash is in large increments, yet outgoing cash is almost continuous. The cumulative revenue at project completion minus the cumulative cost at project completion equals the profit (or surplus) generated by the project.

Exhibit 10.11

Project Cumulative Cash and Revenue

Chapter 10: Budgeting Projects: 10-3c Determining Cash Flow Book Title: Contemporary Project Management

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Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

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Chapter 10: Budgeting Projects: 10-4 Establishing Cost Control Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-4 Establishing Cost Control The approved project budget with contingency reserves (and any amount of management reserve that has already been approved) serves as a baseline for project control. The budget shows both how much progress is expected and how much funding is required at each point in time. These are used for establishing project control. Control cost (process of monitoring the project costs and managing changes to the cost baseline.) is the process of monitoring the project costs and managing changes to the cost baseline. Cost control is discussed in Chapter 14.

When establishing cost control, a typical measuring point is a milestone. Major milestones are often identified in the milestone schedule in the project charter, and additional milestones may be identified while developing the project schedule. Project managers can use the cash flow projections they have made to determine how much funding they expect to need to reach each milestone. This can then be used for determining how well the project is progressing. The sponsor and project manager often jointly determine how many milestones to use. They would like to have enough milestones to keep track of progress, but not so many that they become an administrative burden. Microsoft Project and other software can be used to automate the cost reporting.

Chapter 10: Budgeting Projects: 10-4 Establishing Cost Control Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means – graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.

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Chapter 10: Budgeting Projects: 10-5 Using MS Project for Project Budgets Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-5 Using MS Project for Project Budgets MS Project supports both bottom-up and summary level cost modeling. Bottom-up cost modeling is primarily based on the cost of each resource assignment to WBS tasks. Assignment costs can be seen in the related task’s Cost field (when shown) in the Gantt chart and other views. Task costs are summarized at the parent WBS levels (summary tasks).

Summary costs allow the project manager to make a “summary level” estimate of the cost of the project. Often when the complete details of later stages of the project are not known, placeholder or “dummy” tasks are added to the schedule and costs are estimated. Using summary cost estimates, a projected duration and cost estimate of the entire project can be provided to project stakeholders.

The following examples will continue to use the Suburban Park Homes project from previous chapters’ examples.

Chapter 10: Budgeting Projects: 10-5 Using MS Project for Project Budgets Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

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Chapter 10: Budgeting Projects: 10-5a Developing a Bottom-Up Project Budget Estimate Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-5a Developing a Bottom-Up Project Budget Estimate

To develop a bottom-up project budget estimate, a project manager needs to understand the assignment and task costs for each task of the project. MS Project allows the user to view costs from different perspectives in to better understand where costs are coming from and which tasks are cost centers for the project. We will now look at assignment and task costs in more detail.

Assignment Costs

The following data are used to compute each assignment’s cost value:

Assignment work hours (calculated when the work assignment is made)

Resource standard rate

Resource overtime rate (only if modeling overtime)

An assignment cost value is the total number of assignment hours multiplied by the standard rate (cost) of that resource (e.g., $50 an hour). Each resource has a standard rate; some may have an overtime rate as well. Cost rates can be assigned when defining the resource in the Resource Sheet (View Tab>>Resources Sheet), as described in Chapter 9, or assigned later when costs are known. Exhibit 10.12 shows the Resource Sheet with standard rates assigned to the project resources.

Exhibit 10.12

Assign Cost Rates

A screenshot depicts the resources sheet to assign cost rates. The columns (with a drop-down) included in the sheet are labeled as Resource Name, Type, Material, Initials, Group, Max, Std.Rate, Ovt.Rate, Cost/Use, Accrue At, Base. The text pointing the column labeled as Std.Rate reads as Standard Rate (Cost) Assignment. The text pointing the column labeled as Ovt.Rate reads as Overtime Rate (Cost) Assignment. The data presented in the sheet is as follows: Row 1: Resource Name: Bruce; Type: Work; Initials: BF; Max: 75%; Std Rate: $55.00/hr; Ovt Rate: $0.00/hr; Cost/Use: $0.00; Accrue At: Prorated; Base: Standard. Row 2: Resource Name: Jack; Type: Work; Initials: JC; Max: 25%; Std Rate: $50.00/hr; Ovt Rate: $0.00/hr; Cost/Use: $0.00; Accrue At: Prorated; Base: Standard. Row 3: Resource Name: Brady; Type: Work; Initials: BD; Max: 75%; Std Rate: $40.00/hr; Ovt Rate: $0.00/hr; Cost/Use: $0.00; Accrue At: Prorated; Base: Standard. Row 4: Resource Name: Anniston; Type: Work; Initials: AC; Max: 50%; Std Rate: $40.00/hr; Ovt Rate: $0.00/hr; Cost/Use: $0.00; Accrue At: Prorated; Base: Standard. Row 5: Resource Name: Judah; Type: Work; Initials: JS; Max: 50%; Std Rate: $35 00/hr; Ovt Rate: $0 00/hr; Cost/Use: $0 00; Accrue At: Prorated; Base: Standard

Source: Microsoft product screenshots reprinted with permission from Microsoft Corporation.

Task Costs

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$35.00/hr; Ovt Rate: $0.00/hr; Cost/Use: $0.00; Accrue At: Prorated; Base: Standard. Row 6: Resource Name: Liam; Type: Work; Initials: LF; Max: 25%; Std Rate: $50.00/hr; Ovt Rate: $0.00/hr; Cost/Use: $0.00; Accrue At: Prorated; Base: Standard. Row 7: Resource Name: Oliver; Type: Work; Initials: OL; Max: 50%; Std Rate: $25.00/hr; Ovt Rate: $0.00/hr; Cost/Use: $0.00; Accrue At: Prorated; Base: Standard. Row 8: Resource Name: Plumbers; Type: Work; Initials: P; Max: 300%; Std Rate: $30.00/hr; Ovt Rate: $0.00/hr; Cost/Use: $0.00; Accrue At: Prorated; Base: Standard. The rows with resource names Bruce, Jack, Liam, and Oliver with Over allocator indicator are highlighted in red.

The task cost value is the sum of all assignment cost values, plus any task’s fixed cost value (e.g., a building permit). Exhibit 10.13 displays the Task Usage View in the top pane (with the Cost column inserted) and the Task Form View in the lower pane. To generate this view:

1. Click the Task Tab>>View Group>> click Task Usage

2. Click the View Tab>>Split View Group>> click Details>> choose Task Form

3. Right-click in the form in the lower pane and choose “Work”

4. In the upper pane, right-click the Start column header >>Insert Column>> type “Cost”

5. Your screen should now look like Exhibit 10.13 (with adjustment of view dividers)

Exhibit 10.13

Task Usage View with Resource Work Form

A screenshot depicts the task usage view with resource work form. The top section of the window shows the Task usage with columns labeled as Task name, Work, Duration, and Cost. The tasks that are listed in bold under Task name are labeled as Summary Tasks. The tasks listed under the summary tasks and are indented to right are labeled as Subtasks. The resources for the tasks listed under the subtasks are labeled as Resource Assignments. The cost indicated corresponding to the summary tasks is labeled as Summary Task Cost and the cost indicated corresponding to the resources is labeled as Task Cost. To the right of the table is a calendar indicating the work hours allotment for each task per day. The Task form is shown below the task usage sheet. The fields indicated in the task form are Name Duration, Effort driven, manually scheduled, start, finish, task type, and % complete. The Next button is selected. The table below the fields includes eight columns labeled as ID, Resource Name, Units, Work, Ovt.Work, Baseline Work, Act.work, and Rem.Work. The data presented in the table is as follows: ID: 1; Resource Name: Bruce; Units: 75%; Work: 24h; Ovt.Work: 0h; Baseline Work: 0h; Act.Work: 0h; Rem.Work: 24 h. ID: 2; Resource Name: Jack; Units: 25%; Work: 8h; Ovt.Work: 0h; Baseline Work: 0h; Act.Work: 0h; Rem.Work: 8h.

Source: Microsoft product screenshots reprinted with permission from Microsoft Corporation.

In Exhibit 10.13, rows 1, 5, 9, and 12 are summary tasks; rows 2, 3, 4, 6, 7, 8, 10, and 11 are subtasks. The unnumbered rows are resource assignments. Two resources are assigned to the task “Remove Trees” (Row 6). Bruce is assigned to work 24 hours on the task, and Jack is assigned eight hours. Reviewing the Resource Sheet reveals their standard cost rates are $55 and $50 per hour, respectively. Their individual costs to the task are calculated in the cost column cells at $1,320 and $400. Since they are the only two resources assigned to the task “Remove Trees,” summing the two values provides the total cost of the task. Therefore, the task of removing the trees from the lot will cost the project $1,720 as calculated , and shown in the summary row’s Cost column cell. The assignment Units and Work values for the “Remove Trees” task are shown in the Task Form View in the lower pane.

View Costs from a Different Perspective

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The preceding discussion has been from the view of the WBS, or task perspective. Cost data may also be viewed from a resource perspective using the Resource Usage View. In this view, assignment costs are summarized at the resource level (as seen in Exhibit 10.14). To activate this view:

1. Click the View Tab>>Split View>> uncheck Details

2. Click the View Tab>>Resource Views Group>>Resource Usage

3. Insert a Cost column in the left pane (if one is not already showing)

4. In the right pane, right-click >> choose Cost

a. Work is the default view in the Details column; this adds Cost to Details

Exhibit 10.14

Resource Usage View

A screenshot depicts the resource usage view. The columns indicated in the resource usage view are Resource Name, Max Units, Work, and Cost. The first row with resource name Unassigned is marked with text that reads, Tasks with no assigned resources. The text pointing the unassigned resource with triangle marked in gray reads, Unassigned Resource (no show/hide triangle). The items listed under the resource name are labeled as Task Name. The text pointing the resource name with task names listed reads, Assigned Resource. To the right of the Resource, usage table is the column labeled as Details followed by a calendar giving details of work and cost per month for each resource. The text pointing the Details column reads, Work/Cost Details Column. Each row of the details column is with two sub-rows labeled as Work and cost. The details rows for the resources Bruce, Jack, Brandy, Anniston, Judah, Liam, Oliver, and Plumber are highlighted.

Source: Microsoft product screenshots reprinted with permission from Microsoft Corporation.

In Exhibit 10.14, the most indented rows are tasks. The “Unassigned” set represents tasks with no assigned resources. If a resource has no show/hide control, then it has not been assigned.

Chapter 10: Budgeting Projects: 10-5a Developing a Bottom-Up Project Budget Estimate Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means – graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.

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Chapter 10: Budgeting Projects: 10-5b Develop Summary Project Budget Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-5b Develop Summary Project Budget

Once duration and costs have been determined for project tasks, a simple summation of all summary row durations and costs gives the project manager an overall estimate of the project’s total duration and cost. However, as discussed earlier, details of later project phases may not be completely identified in earlier stages of the project. In other words, there may be tasks later in the project whose details cannot be known early in the project.

Regardless of project unknowns, stakeholders will want ongoing estimates of the completion date and cost of the project. One way the project manager can manage these unknowns and still provide estimates is to add “dummy tasks” under any summary task where there is not enough information to plan in detail. A dummy task is simply a placeholder for future project work. When creating a dummy task, the project manager estimates both duration and cost of the task. This estimate becomes part of the overall project summary cost and duration estimate. As details of later project phases emerge, dummy tasks can be replaced with actual task data. Each update further sharpens overall project duration and cost estimates.

A dummy task example can be seen in Exhibit 10.15. The “County clearance & Certificate of Occupancy” summary row has the dummy task “Codes rework” added. Since the project manager cannot know if rework on the house will be necessary due to a failed codes inspection (the inspection will happen after the project is almost completed), codes rework makes for a useful dummy task. No resources are assigned to the task yet, but a cost and duration estimate are assigned, allowing the project manager to factor this task into project estimates. Dummy tasks should not be carelessly added to the project since they affect project timelines and cost estimates. With experience and good planning, the project manager can judiciously add dummy tasks that will serve both the project and the stakeholders.

Exhibit 10.15

Dummy Activity for Late Phase

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Source: Microsoft product screenshots reprinted with permission from Microsoft Corporation.

Agile

Agile projects commonly use dummy tasks to summarize the work for

future project iterations that have not yet been defined. Since the number of workers is often known and the length of the iteration is known, the amount of cost can usually be established. However, the exact task activities are only determined during iteration planning.

Chapter 10: Budgeting Projects: 10-5b Develop Summary Project Budget Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means – graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.

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Chapter 10: Budgeting Projects: 10-6 PMP/CAPM Study Ideas Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

10-6 PMP/CAPM Study Ideas Whether you are sitting for your CAPM or PMP exam, you are likely to see at least a couple questions pertaining to methods of cost estimating. Be able to identify parametric, analogous, and bottom-up estimating by description or via an example. Make sure you know the relative benefits and weaknesses of using each.

While budgeting occurs in countless domains, budgeting for projects is different in several ways from budgeting for ongoing operations. Specifically, you will need to familiarize yourself with the “S curve” of project expenditures and predict and answer questions about cash-flow problems that may result. Also, make sure you know the difference between contingency and management reserves and who controls each.

Chapter 10: Budgeting Projects: 10-6 PMP/CAPM Study Ideas Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means – graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.

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Chapter 10: Budgeting Projects Chapter Review Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

Chapter Review

Summary

The cost management plan outlines how to structure and control project costs. On a small project, it can be very simple. On a large, complex project, it may need more structure. It guides the project manager during the project.

Cost estimating can be challenging because some activities may have a great deal of variation. Many methods are available to assist in cost estimating. Use a simple method if it will suffice, and use more rigorous methods, if necessary. Generally as project planning identifies more specifics, more detailed and accurate cost estimates can be made.

Cost budgeting includes aggregating individual costs, analyzing needs for cost reserves where uncertainty exists, and determining cash inflow and outflow. Establishing cost controls includes establishing cost reporting systems. MS Project can assist in developing either bottom-up project budgets or summary project budgets.

Chapter 10: Budgeting Projects Chapter Review Book Title: Contemporary Project Management Printed By: Washburn Kelly ([email protected]) © 2019 Cengage Learning, Cengage Learning

© 2020 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means – graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.

10-0 Budgeting Projects
10-0a Chapter Introduction
10-1 Plan Cost Management
10-2 Estimate Cost
10-2a Types of Cost
10-2b Accuracy and Timing of Cost Estimates
10-2c Methods of Estimating Costs
10-2d Project Cost Estimating Issues
10-3 Determine Budget
10-3a Aggregating Costs
10-3b Analyzing Reserve Needs
10-3c Determining Cash Flow
10-4 Establishing Cost Control
10-5 Using MS Project for Project Budgets
10-5a Developing a Bottom-Up Project Budget Estimate
10-5b Develop Summary Project Budget
10-6 PMP and CAPM Study Ideas
10-7 Summary

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