KMBNOM04 Project & Sourcing Management

Unit 4

Definition and Characteristics of Project

Project is a great opportunity for organizations and individuals to achieve their business and non-
business objectives more efficiently through implementing change. Projects help us make desired
changes in an organized manner and with reduced probability of failure.

A Project is a temporary, unique and progressive attempt or endeavor made to produce some
kind of a tangible or intangible result (a unique product, service, benefit, competitive advantage,
etc.). It usually includes a series of interrelated tasks that are planned for execution over a fixed
period of time and within certain requirements and limitations such as cost, quality, performance,
others.

Projects differ from other types of work (e.g. process, task, procedure). Meanwhile, in the
broadest sense a project is defined as a specific, finite activity that produces an observable and
measurable result under certain preset requirements.

Projects differ from other types of work (e.g. process, task, procedure). Meanwhile, in the
broadest sense a project is defined as a specific, finite activity that produces an observable and
measurable result under certain preset requirements.

Characteristics of a Project

(a) Project has a owner, who, in the private sector, can be an individual or a company etc., in the
public sector, a government undertaking or a joint sector organization, representing a partnership
between public and private sector.

(b) Project has a set objective to achieve within a distinct time, cost and technical performance.

(c) Project is planned, managed and controlled by an assigned team the project team planted
within the owner’s organization to achieve the objectives as per specifications.

(d) Project, in general, is an outcome in response to environments economies and opportunities.

As an example, we find that considering the changing pattern of modern living the domestic
appliances small e.g. grinders, mixers etc., and large, e.g. refrigerators, washing machines etc.
are on ever-increasing demand. This generates responses to avail opportunity to produce such
appliances.

(e) Project is an undertaking involving future activities for completion of the project within
estimates and involves complex budgeting procedure with a mission.
(f) Implementation of the project involves a co-ordination of works/supervisions by project
team/manager.

(g) Project involves activities to be carried out in future. As such, it has some inherent risk and,
in reality, the process of implementation may necessitate certain changes in the plan subject to
limitations and concurrence of the project owner.

(h) Project involves high-skilled forecasting with sound basis for such forecasting.

(i) Projects have a start and an end a characteristic of a life cycle. The organization of project
changes as it passes through this cycle the activities starting from—conception stage, mounting
up to the peak during implementation and, then, back to zero level on completion and delivery of
the project.

Types of Project

1. Construction Projects

The project produces an artifact. The value generated by the project is embedded in the artifact.
The artifacts may be a complex system with human and mechanical components.

Examples:

 Warship

 Jubilee line extension

 Millennium dome

 Customer call centre

 Method guidebook

 IT system

2. Research Projects

The project produces knowledge. The knowledge may be formally represented as models,
patterns or patents. Or the knowledge may be embedded in a working process or artifact.

Examples:

 Business modelling

 Developing a model of the UK economy

 Developing a new species of wheat

  Developing novel approaches to project management.

 Military intelligence/ code breaking.

 The analysis, testing, QA or evaluation portions of a larger project.

3. Reengineering Projects

The project produces a desired change in some system or process.

Examples:

 Taking sterling into the Euro

 Renumbering the UK telephone system

 Implementing PRINCE project management practices into a large organization.

 Designing and installing an Intranet.

4. Procurement Projects

The project produces a business relationship contractually based with a selected supplier for a
defined product or service based on a fixed specification and/or a defined specification process

Examples:

 Outsourcing a specific construction or research project

 Outsourcing a complete business function (such as IT).

 Imposing new rules and measures on a regulated industry.

5. Business Implementation Projects

The project produces an operationally effective process. The value generated by the project is
embedded in the process.

 Developing a new business process to repackage and exploit existing assets.

 Installing e-commerce

Some projects are difficult to classify under this scheme.

(i) National symbolic programmes

 Putting a man on the moon by the end of the decade

 Mitterand’s Grandes Projects

  New Labour

(ii) Large medical programmes

 Creating an artificial heart

 Mass inoculation programmes

(iii) Other hybrid or interdisciplinary projects

 Pilot projects

 Moving offices

Project Lifecycle, Phases

Project Lifecycle refers to the series of phases that a project goes through from its
initiation to its closure. It provides a framework for managing the progression of a
project, ensuring systematic and orderly achievement of objectives. The lifecycle
typically includes four main phases: Initiation, where the project is defined and its
feasibility is evaluated; Planning, involving detailed mapping of steps, resources,
timeframes, and budgets; Execution, where the plans are put into action and the project
deliverables are created; and Closure, marking the completion of the project, including
the handover of deliverables, release of project resources, and assessment of lessons
learned. Each phase has distinct objectives, tasks, and processes, guiding the project team
in achieving specific milestones and ultimately, the project goals. Managing these phases
effectively is crucial for the successful completion of a project, ensuring it meets its
scope, time, and cost constraints.
 Phases of Project Lifecycle:

1. Initiation

This phase marks the beginning of the project. It involves identifying a need, problem, or
opportunity and evaluating the feasibility of addressing it through a project. Key
activities include defining the project at a high level, identifying key stakeholders, and
securing initial approval or funding. The main deliverable from this phase is usually a
Project Charter, which formally authorizes the existence of the project.

2. Planning

Planning is a critical phase where the project plan is developed in detail. This plan
becomes the roadmap for how the project will be executed, monitored, and controlled.
Activities include defining project objectives, developing a detailed work breakdown
structure (WBS), scheduling, budgeting, identifying resources, setting quality standards,
and planning for risks. Comprehensive planning sets the foundation for project success.

3. Execution

During the execution phase, the project plan is put into action. This phase focuses on
coordinating people and resources to carry out the project plan. Activities include
executing the tasks defined in the project plan, procuring resources, developing the team,
 and managing stakeholder engagement. Execution is often the longest phase of the
project lifecycle and involves significant monitoring and controlling activities to stay on
track.

4. Monitoring and Controlling

While this phase occurs concurrently with the Execution phase, it’s distinct in its focus.
Monitoring and controlling involve tracking the project’s progress and performance to
ensure it aligns with the project management plan. Key activities include quality control,
tracking and reporting project progress, managing changes through change control
processes, and ensuring project objectives are met. This phase is crucial for identifying
and addressing issues that may impact the project timeline, budget, or quality.

5. Closure

The closure phase marks the completion of the project. Activities in this phase include
finalizing all project activities, ensuring all contracted work is completed, obtaining
acceptance of the project deliverables from stakeholders, releasing project resources, and
formally closing the project. A key deliverable is the project closure report, which
documents project performance, lessons learned, and provides a record of variances
between the planned and actual project performance. Closure is an essential phase for
wrapping up the project systematically and learning from the project experience to
improve future projects.

Concepts of Deliverables

The term deliverables is a project management term that’s traditionally used to describe
the quantifiable goods or services that must be provided upon the completion of a project.
Deliverables can be tangible or intangible in nature. For example, in a project focusing on
upgrading a firm’s technology, a deliverable may refer to the acquisition of a dozen new
computers.

On the other hand, for a software project, a deliverable might allude to the
implementation of a computer program aimed at improving a company’s accounts
receivable computational efficiency.

Deliverables:

In addition to computer equipment and software programs, a deliverable may refer to in-
person or online training programs, as well as design samples for products in the process
of being developed. In many cases, deliverables are accompanied by instruction manuals.

Documentation
 Deliverables are usually contractually obligated requirements, detailed in agreements
drawn up between two related parties within a company, or between a client and an
outside consultant or developer. The documentation precisely articulates the description
of a deliverable, as well as the delivery timeline and payment terms.

Milestones

Many large projects include milestones, which are interim goals and targets that must be
achieved by stipulated points in time. A milestone may refer to a portion of the
deliverable due, or it may merely refer to a detailed progress report, describing the
current status of a project.

Film Deliverables

In film production, deliverables refer to the range of audio, visual, and paperwork files
that producers must furnish to distributors. Audio and visual materials generally include
stereo and Dolby 5.1 sound mixes, music and sound effects on separate files, as well as
the full movie in a specified format.

Paperwork deliverables include signed and executed licensing agreements for all music,
errors, and omissions reports, performance releases for all on-screen talent, a list of the
credit block that will appear in all artwork and advertising, as well as location, artwork,
and logo legal releases. Films deliverables also pertain to elements that are ancillary to
the movies themselves. These items include the trailer, TV spots, publicity stills
photographed on set, and other legal work.

 The word “deliverables” is a project management term describing the quantifiable goods
or services that must be provided upon the completion of a project.

 Deliverables can be tangible in nature, such as the acquisition of a dozen new computers,
or they can be intangible, like the implementation of a computer program aimed at
improving a company’s accounts receivable computational efficiency.

 A deliverable may refer to in-person or online training programs, as well as design

samples for products in the process of being developed.

 In many cases, deliverables are accompanied by instruction manuals.

 In film production, deliverables refer to the range of audio, visual, and paperwork files
that producers must furnish to distributors.

The project management process

The project management process refers to the steps involved in managing a project from start to
finish. While different organizations may use different terminology, there are typically five or six
key process groups in the project management process:

Initiating: In this process group, the project is identified, defined, and authorized. The project
team is assembled, and the initial requirements and objectives are established.

Planning: In this process group, the project plan is developed, including the project scope,
schedule, budget, and resources. The project team also identifies risks and develops a risk
management plan.

Executing: In this process group, the project plan is put into action. The project team carries out
the activities defined in the project plan and works towards achieving the project objectives.

Monitoring and Controlling: In this process group, progress is monitored against the project
plan, and adjustments are made as needed to keep the project on track. Issues and risks are
managed, and the project team reports on progress to stakeholders.

Closing: In this process group, the project is completed, and the deliverables are handed over to
the stakeholders. The project team reviews the project outcomes and documents lessons learned.

Characteristics of Project Team

On this type of team, there is usually a strong trust bond, people work cooperatively together to
reach the common project goals, and often the project is even more successful than the project
manager and customer could have imagined.

These types of teams generally have some key characteristics in common that help make them
the effective, high-performing teams that they are

Clearly defined goals

Clearly defined goals are essential so that everyone understands the purpose and vision of the
team. It’s surprising to learn sometimes how many people do not know the reason they are doing
the tasks that make up their jobs, much less what their team is doing. Everyone must be pulling
in the same direction and be aware of the end goals. Clear goals help team members understand
where the team is going. Clear goals help a team know when it has been successful by defining
exactly what the team is doing and what it wants to accomplish. This makes it easier for
members to work together – and more likely to be successful.

Clear goals create ownership. Team members are more likely to “own” goals and work toward
them if they have been involved in establishing them as a team. In addition, ownership is longer
lasting if members perceive that other team members support the same efforts. Clear goals foster
team unity, whereas unclear goals foster confusion – or sometimes individualism. If team
members don’t agree on the meaning of the team goals, they will work alone to accomplish their
individual interpretations of the goals. They may also protect their own goals, even at the
expense of the team.

Clearly defined roles

If the team’s roles are clearly defined, all team members know what their jobs are, but defining
roles goes beyond that. It means that we recognize individuals’ talent and tap into the expertise
of each member – both job-related and innate skills each person brings to the team, such as
organization, creative, or team-building skills. Clearly defined roles help team members
understand why they are on a team. When the members experience conflict, it may be related to
their roles. Team members often can manage this conflict by identifying, clarifying, and agreeing
on their individual responsibilities so that they all gain a clear understanding of how they will
accomplish the team’s goals. Once team members are comfortable with their primary roles on
the team, they can identify the roles they play during team meetings. There are two kinds of roles
that are essential in team meetings.

Open and clear communication

The importance of open and clear communication cannot be stressed enough. This is probably
the most important characteristic for high-performance teams. Many different problems that arise
on projects can often be can be traced back to poor communication or lack of communication
skills, such as listening well or providing constructive feedback. Enough books have been
written about communication to fill a library. And I’ve personally written several articles on this
subject alone for this site over the past few months.

Excellent communication is the key to keeping a team informed, focused, and moving forward.
Team members must feel free to express their thoughts and opinions at any time. Yet, even as
they are expressing themselves, they must make certain they are doing so in a clear and concise
manner. Unfortunately, most of us are not very good listeners. Most of us could improve our
communication if we just started to listen better—to listen with an open mind, to hear the entire
message before forming conclusions, and to work toward a mutual understanding with the
speaker.

Effective decision making

Decision making is effective when the team is aware of and uses many methods to arrive at
decisions. A consensus is often touted as the best way to make decisions—and it is an excellent
method and probably not used often enough. But the team should also use majority rule, expert
decision, authority rule with discussion, and other methods. The team members should discuss
the method they want to use and should use tools to assist them, such as force-field analysis,
pair-wise ranking matrices, or some of the multi-voting techniques.
Effective decision making is essential to a team’s progress; ideally, teams that are asked to solve
problems should also have the power and authority to implement solutions. They must have a
grasp of various decision-making methods, their advantages and disadvantages, and when and
how to use each. Teams that choose the right decision-making methods at the right time will not
only save time, but they will also most often make the best decisions. This completes the four
basic foundation characteristics: clear goals, defined roles, open and clear communication, and
effective decision making.

Balanced participation

If communication is the most important team characteristic, participation is the second most
important. Without participation, you don’t have a team; you have a group of bodies. Balanced
participation ensures that everyone on the team is fully involved. It does not mean that if you
have five people each is speaking 20 percent of the time. Talking is not necessarily a measure of
participation. We all know people who talk a lot and say nothing. It does mean that each
individual is contributing when it’s appropriate. The more a team involves all of its members in
its activities, the more likely that team is to experience a high level of commitment and synergy.

Leader’s behavior

A leader’s behavior comes as much from attitude as from anything. Leaders who are effective in
obtaining participation see their roles as being a coach and mentor, not the expert in the situation.
Leaders will get more participation from team members if they can admit to needing help, not
power. Leaders should also specify the kind of participation they want right from the start.

Participants’ expectations

Participants must volunteer information willingly rather than force someone to drag it out of
them. They should encourage others’ participation as well by asking a question of others,
especially those who have been quiet for a while.

Participants can assist the leader by suggesting techniques that encourage everyone to speak, for
example, a round robin. To conduct a round robin, someone directs all members to state their
opinions or ideas about the topic under discussion. Members go around the group, in order, and
one person at a time says what’s on his or her mind. During this time, no one else in the group
can disagree, ask questions, or discuss how the idea might work or not work, be good or not
good.

Only after everyone has had an opportunity to hear others and to be heard him- or herself, a
discussion occurs. This discussion may focus on pros and cons, on clarifying, on similarities and
differences, or on trying to reach consensus.

Valued diversity
Valued diversity is at the heart of building a team. Thus, the box is at the center of the model. It
means, put simply, that team members are valued for the unique contributions that they bring to
the team.

Diversity goes far beyond gender and race. It also includes how people think, what experience
they bring, and their styles. The diversity of thinking, ideas, methods, experiences, and opinions
helps to create a high-performing team.

Managed Conflict

Conflict is essential to a team’s creativity and productivity. Because most people dislike conflict,
they often assume that effective teams do not have it. In fact, both effective and ineffective teams
experience conflict. The difference is that effective teams manage it constructively. In fact,
effective teams see conflict as positive.

Managed conflict ensures that problems are not swept under the rug. It means that the team has
discussed members’ points of view about an issue and has come to see well-managed conflict as
a healthy way to bring out new ideas and to solve whatever seems to be unsolvable. Here are
some benefits of healthy conflict:

 Conflict forces a team to find productive ways to communicate differences, seek common
goals, and gain consensus;

 Conflict encourages a team to look at all points of view, then adopt the best ideas from
each;

 Conflict increases creativity by forcing the team to look beyond current assumptions and
parameters.

Positive team atmosphere

To be truly successful, a team must have a climate of trust and openness, that is, a positive
atmosphere. A positive atmosphere indicates that members of the team are committed and
involved. It means that people are comfortable enough with one another to be creative, take risks,
and make mistakes. It also means that you may hear plenty of laughter, and research shows that
people who are enjoying themselves are more productive than those who dislike what they are
doing.

Cooperative relationships

Directly related to having a positive atmosphere are cooperative relationships. Team members
know that they need one another’s skills, knowledge, and expertise to produce something
together that they could not do as well alone. There is a sense of belonging and a willingness to
make things work for the good of the whole team. The atmosphere is informal, comfortable, and
relaxed. Team members are allowed to be themselves. They are involved and interested.
Cooperative relationships are the hallmark of top-performing teams. These top teams
demonstrate not only cooperative relationships between team members but also cooperative
working relationships elsewhere in the organization.

Participative Leadership

The participative leadership block is not at the top of the model because it is the most important.

It is at the top because it is the only block that can be removed without disturbing the rest.

Participative leadership means that leaders share the responsibility and the glory, are supportive
and fair, create a climate of trust and openness, and are good coaches and teachers.

In general, it means that leaders are good role models and that the leadership shifts at various
times.

In the most productive teams, it is difficult to identify a leader during a casual observation.

In conclusion, a high-performing team can accomplish more together than all the individuals can
apart.

Roles of project team

The project team consists of individuals who are responsible for executing specific tasks and
achieving project objectives. The roles and responsibilities of the project team members may
vary depending on the type and scope of the project, but typically include:

Project Manager: The project manager is responsible for overall project management, including
planning, execution, monitoring, controlling, and closing of the project. The project manager
also manages stakeholder relationships and communication.

Team Members: Team members are responsible for carrying out specific tasks and activities
that contribute to the overall project objectives. They may be responsible for tasks such as
planning, design, development, testing, or implementation.

Subject Matter Experts: Subject matter experts bring specialized knowledge and skills to the
project team. They may be responsible for providing input on technical, legal, financial, or other
aspects of the project.

Stakeholders: Stakeholders are individuals or groups that have an interest in the project and may
be affected by its outcomes. The project team must communicate with stakeholders to manage
expectations and ensure that their needs are being met.

Sponsors: Sponsors are individuals or groups that provide funding or other resources for the
project. The project team must work closely with sponsors to ensure that the project stays within
budget and meets sponsor expectations.
Vendors/Suppliers: Vendors and suppliers are external entities that provide goods or services to
the project. The project team must manage relationships with vendors and suppliers to ensure
that they deliver what is needed, when it is needed, and at the expected level of quality.

Characteristics of Project Leader

The terms project manager and project leader get used interchangeably all the time, and yet there
are a couple important differences that can be derived from the respective terms themselves.
Managers manage. Leaders lead. What this means in practice is that project leaders are
responsible for establishing direction, communicating their vision to management and the
workforce, and forging teams that are capable of delivering high-performance. In contrast,
project managers focus primarily on short-term goals and are responsible for solving short-term
problems.

The project manager implements the project and solves roadblocks as they emerge. Noting that
difference, it is easy to argue that project leaders have the most difficult job of all in regard to the
implementation of major change initiatives.

After all, project leaders liaise between management and the workforce, and are directly
responsible for ensuring the inspired execution of the agreed upon strategy. Here are the five
characteristics of highly effective project leaders.

1. They are strong communicators

Project leaders need to be particularly strong communicators as they must eventually provide
feedback to the management and facilitate the continual improvement efforts of the men and
women working under them.

2. They are trustworthy

Whether project leaders come from inside or outside the organization, they must have the
continued support and trust of the board of directors and management. Without this,
micromanagement and inefficiencies are bound to occur over the course of a major
transformation.

3. They understand people

While the project leader doesn’t necessarily need to be a “people person”, he or she does need to
have a strong sense of where the aptitudes and abilities of the team members lie. Putting together
a team twith complimentary strengths and weaknesses helps to ensure the eventual success of the
chosen project.

4. They can see the overall Performance

Being able to take the long-term view is a critical characteristic of project leadership and project
leaders need to be able to see the whole as it is in order to make connections that the individual
team members cannot see due to their limited scope in the overall project.

5. They can see the all level of efforts

While taking the holistic view is critical for project leaders, they need to be able to communicate
on a detailed level about all aspects of the project to any level of seniority. Possessing long-term
vision will prove insufficient when it comes to managing people and their individual roles within
the larger project.

Project Costing: Fundamental Components of Project Cost

The project cost is a cost required to procure all the needed products, services and
resources to deliver the project successfully.

Example: In an example of a construction project, the cost estimation starts from land
acquisition cost, construction cost, materials cost, administration cost, labor cost and
other direct and indirect costs.

Cost management is concerned with the process of finding the right project and carrying
out the project the right way. It includes activities such as planning, estimating,
budgeting, financing, funding, managing, controlling, and benchmarking costs so that the
project can be completed within time and the approved budget and the project
performance could be improved in time.
Step 1: Resource planning

Resource planning is the process of ascertaining future resource requirements for an

organization or a scope of work. This involves the evaluation and planning of the use of
the physical, human, financial, and informational resources required to complete work
activities and their tasks. Most activities involve using people to perform work. Some
activities involve materials and consumables. Other tasks involve creating an asset using
mainly information inputs (e.g., engineering or software design). Usually, people use
tools such as equipment to help them. In some cases, automated tools may perform the
work with little or no human effort.

Resource planning begins in the scope and execution plan development process during
which the work breakdown structure, organizational breakdown structure (OBS), work
packages, and execution strategy are developed. The OBS establishes categories of labor
resources or responsibilities; this categorization facilitates resource planning because all
resources are someone’s responsibility as reflected in the OBS.

Resource estimating (usually a part of cost estimating) determines the activity’s resource
quantities needed (hours, tools, materials, etc.) while schedule planning and development
determines the work activities be performed. Resource planning then takes the estimated
resource quantities, evaluates resource availability and limitations considering project
circumstances, and then optimizes how the available resources (which are often limited)
will be used in the activities over time. The optimization is performed in an iterative
manner using the duration estimating and resource allocation steps of the schedule
planning and development process.
Step 2: Cost estimating

Cost estimating is the predictive process used to quantify, cost, and price the resources
required by the scope of an investment option, activity, or project. It involves the
application of techniques that convert quantified technical and programmatic information
about an asset or project into finance and resource information. The outputs of estimating
are used primarily as inputs for business planning, cost analysis, and decisions or for
project cost and schedule control processes.

The cost estimating process is generally applied during each phase of the asset or project
life cycle as the asset or project scope is defined, modified, and refined. As the level of
scope definition increases, the estimating methods used become more definitive and
produce estimates with increasingly narrow probabilistic cost distributions.

Cost estimating could be performed by dedicated software systems like Cleopatra

Enterprise cost estimating and project cost databases like CESK that are created and
maintained to support the various types of estimates that need to be prepared during the
life cycle of the asset or project.

Step 3: Cost budgeting

Budgeting is a sub-process within estimating used for allocating the estimated cost of
resources into cost accounts against which cost performance will be measured and
assessed. This forms the baseline for cost control. Cost accounts used from the chart of
accounts must also support the cost accounting process. Budgets are often time-phased in
accordance with the schedule or to address budget and cash flow constraints.

Step 4: Cost control

Cost control is concerned with measuring variances from the cost baseline and taking
effective corrective action to achieve minimum costs. Procedures are applied to monitor
expenditures and performance against the progress of a project. All changes to the cost
baseline need to be recorded and the expected final total costs are continuously
forecasted. When actual cost information becomes available an important part of cost
control is to explain what is causing the variance from the cost baseline. Based on this
analysis corrective action might be required to avoid cost overruns.

Below figure is a process map for project performance measurement. This process should
be run in a continuous improvement cycle until project completion:

The process for performance assessment starts with planning and having the right tools in
place. Dedicated cost control software tools can be valuable to define cost control
procedures, track and approve changes and apply analysis. Furthermore, reporting can be
enhanced and simplified which makes it easier to inform all stakeholders involved in the
project.

Cleopatra Cost Control helps you achieve

 Project cost control and always tracing back cost components to its original budget.

 Scope change management. Estimate costs and add it to your project controls document.

 Project completed? The feedback process will be in place. Send the actuals to your cost
models to increase their accuracy and quality for future estimating. Where most tools are
limited to either being cost estimating software or a cost control tool, Cleopatra
Enterprise is both.

Bonus Step: Benchmarking

As a bonus step, it is wise to add Benchmarking to the project cost management process.

Benchmarking helps close the loop between project A and project B. The knowledge
from project A (referring to the running and executed projects) are analyzed and the
feedback is reflected in project B (the next projects). That’s how an improvement cycle is
created to increase project performance. Benchmarking is widely used by technical
industries to improve the performance of the projects. Software systems such as
Cleopatra project benchmarking aid estimators and project controllers in answering the
complex question: How to use project big data to execute projects within time and
budget?

The goal of project benchmarking is to store data from executed and running projects to
extract valuable project metrics and to benchmark current estimates. Performing
statistical analysis on historical data can result in valuable information on relationships
between variables, which can be used to set up a reliable cost knowledgebase or calibrate
existing ones.
 It is important to note that project benchmarking does not only include the comparison
between projects, as it is also interesting to compare revisions within a project.

What you can achieve with Cleopatra Benchmarking

 Collect historical project data that can provide valuable analysis and project comparison
to make critical business decisions.

 Benchmark your estimates against your previous projects and improve your cost estimate
significantly.

 Extract metrics across projects to enhance future cost estimating accuracy.

 Develop meaningful and interactive reports.

 Export & Import data easily from Excel.

Types of Cost

1. Direct Cost

A direct cost is a price that can be directly tied to the production of specific goods or
services. A direct cost can be traced to the cost object, which can be a service, product, or
department. Direct and indirect costs are the two major types of expenses or costs that
companies can incur. Direct costs are often variable costs, meaning they fluctuate with
production levels such as inventory. However, some costs, such as indirect costs are more
difficult to assign to a specific product. Examples of indirect costs include depreciation
and administrative expenses.

Direct Costs Examples: Any cost that’s involved in producing a good, even if it’s only a
portion of the cost that’s allocated to the production facility, are included as direct costs.
Some examples of direct costs are listed below:

 Direct labor

 Direct materials

 Manufacturing supplies

 Wages for the production staff

 Fuel or power consumption

Because direct costs can be specifically traced to a product, direct costs do not need to be
allocated to a product, department, or other cost objects. Direct costs usually benefit only
 one cost object. Items that are not direct costs are pooled and allocated based on cost
drivers.

2. Indirect cost

Indirect Costs are costs that are not directly accountable to a cost object (such as a
particular project, facility, function or product). Indirect costs may be either fixed or
variable. Indirect costs include administration, personnel and security costs. These are
those costs which are not directly related to production. Some indirect costs may be
overhead. But some overhead costs can be directly attributed to a project and are direct
costs.

There are two types of indirect costs. One are the fixed indirect costs which contains
activities or costs that are fixed for a particular project or company like transportation of
labor to the working site, building temporary roads, etc. The other are recurring indirect
costs which contains activities that repeat for a particular company like maintenance of
records or payment of salaries.

3. Recurring Cost

A Recurring Cost is a regularly occurring cost or estimated cost which is documented

with one record—a Recurring Cost record—that describes the income or expense and its
pattern (how often it occurs, the rate at which it increases or decreases, the time period
during which the cost applies, and so forth). Recurring costs are stored in the Recurring
Costs table

Recurring Costs provide a means of quickly modeling the major components of your
finances. You first establish a series of recurring costs to represent such items as tax
expenses, estimated maintenance costs, and monthly income from leases. Once you enter
this information, you can use these costs to generate Cost, Cash Flow, and Base Rent
reports.

Recurring Cost Examples

Use recurring costs to:

 Record fixed expenses and income, or costs that change at a fixed rate – For costs that are
fairly static, enter one Recurring Cost record describing the cost, rather than create
individual Scheduled Cost records for each time you encounter this cost. For example,
enter one Recurring Cost record describing your monthly rent for a year rather than enter
12 Scheduled Cost records for each rent bill. For costs that change at a fixed rate,
complete the Yearly Factor field of the Recurring Costs table.
 Record estimates of your expenses and income – Rather than enter the exact amount of
each monthly utility bill as a Scheduled Cost, enter a monthly estimate with a Recurring
Cost record by completing the Period field with “Month”, the Amount-Expense with an
estimate of the monthly bill, and the Start Date field. Since utilities are ongoing costs do
not complete the End Date field.

 Model seasonal costs – If you incur landscaping costs only between April and September,
create a Recurring Cost record for landscaping with a Seasonal Start Date of April 01 and
a Seasonal End Date of September 01 (the year value is ignored). The system will only
consider this recurring cost during the specified time frame.

4. Non- Recurring Cost

Unusual charge, expense, or loss that is unlikely to occur again in the normal course of a
business. Non recurring costs include write offs such as design, development, and
investment costs, and fire or theft losses, lawsuit payments, losses on sale of assets, and
moving expenses. Also called extraordinary cost.

5. Fixed Cost

A fixed cost is a cost that does not change with an increase or decrease in the amount of
goods or services produced or sold. Fixed costs are expenses that have to be paid by a
company, independent of any specific business activities. In general, companies can have
two types of costs, fixed costs or variable costs, which together result in their total costs.
Shutdown points tend to be applied to reduce fixed costs.

6. Variable Cost

A variable cost is a corporate expense that changes in proportion to production output.

Variable costs increase or decrease depending on a company’s production volume; they
rise as production increases and fall as production decreases. Examples of variable costs
include the costs of raw materials and packaging.

 A variable cost is a corporate expense that changes in proportion with production output.

 Variable costs are dependent on production output.

 A variable cost can increase or decrease depending on several factors, as opposed to a

fixed cost which is one-time or constant.

The total expenses incurred by any business consist of fixed costs and variable costs.
Fixed costs are expenses that remain the same regardless of production output. Whether a
firm makes sales or not, it must pay its fixed costs, as these costs are independent of
output.
 Examples of fixed costs are rent, employee salaries, insurance, and office supplies. A
company must still pay its rent for the space it occupies to run its business operations
irrespective of the volume of product manufactured and sold. Although fixed costs can
change over a period of time, the change will not be related to production.

Variable costs, on the other hand, are dependent on production output. The variable cost
of production is a constant amount per unit produced. As the volume of production and
output increases, variable costs will also increase.

Conversely, when fewer products are produced, the variable costs associated with
production will consequently decrease. Examples of variable costs are sales commissions,
direct labor costs, cost of raw materials used in production, and utility costs. The total
variable cost is simply the quantity of output multiplied by the variable cost per unit of
output.

There is also a category of costs that falls in between, known as semi-variable costs (also
known as semi-fixed costs or mixed costs). These are costs composed of a mixture of
both fixed and variable components. Costs are fixed for a set level of production or
consumption and become variable after this production level is exceeded. If no
production occurs, a fixed cost is often still incurred.

7. Normal Cost

Normal costing is cost allocation method that assigns costs to products based on the
materials, labor, and overhead used to produce them. In other words, it’s a way to find the
price of an item that is being produced using three different cost factors (which make up
the product cost).

The product costs that make up normal costing are actual materials, actual direct costs
and manufacturing overhead. The materials and direct costs are the true costs that are
associated with producing the item such as raw materials (the materials that make up the
product) and labor.

8. Expedite Cost

“Expedite Fees” are fees added to another fee, often a fee for service, to ensure that the
service provided will be expedited, meaning that it will be provided sooner than the same
service would be provided without such a fee.

Project Financing and Budgeting

Developing the project budget is a process for allocating administered and departmental
funds necessary to build a financial foundation for producing stated project deliverables.
When we talk about the project budget and financial resources we mean the solid
 framework that helps project managers to deal with the “on budget” part of the project
implementation process. This framework involves cost planning and control.

For successful delivery of the project product, the project manager should effectively
estimate costs, track expenditure over time and adequately react to situations when the
financial resources are over-spent or under-spent, or there are opportunities for savings in
the project budget.

A Project Budget is the total amount of authorized financial resources allocated for the
particular purpose(s) of the sponsored project for a specific period of time. It is the
primary financial document that constitutes the necessary funds for implementing the
project and producing the deliverables. The project budget gives a detailed statement of
all the direct and overhead costs required to carry out the project goals and objectives.

A project budget template should be designed and managed under supervision and
control of the project manager. Also the customer and sponsor should be involved in
allocating and managing financial resources. Project budget management is a set of
activities for estimating the necessary amount of financial resources for the project,
controlling project costs within the approved budget and delivering the expected project
goals.

Steps of the Budgeting Process

As an independent process, project budget management includes a series of steps to

define and produce a budget sheet. The key steps include:

 Development: estimating a necessary amount of financial resources and creating a project

budget sheet.

 Use: utilizing the authorized financial resources and executing the budget.

 Measurement: viewing cost performance and controlling the budget.

 Updating: viewing changes to the cost baseline and making updates to the project budget
sheet.

1: Budget Development

The first step of the project budget management process involves the project manager in
developing cost estimates and identifying the total amount of money resources necessary
for implementation of all the tasks and activities defined and stated in the WBS and the
Schedule.

Budget development should cover both capital and operating expenses to ensure
successful project completion. The project manager needs to define funding requirements
and then send a formal request to the sponsor who reviews the requirements and make a
package decision on providing the necessary money and financial resources. The sponsor
can use the initiation documents (like Feasibility Study, Business Case and Project
Charter) to make that decision.

Such estimation methods as expert judgment, cost baseline measurement and cost
aggregation can be used for developing a project budget sheet. The project manager in
cooperation with the key stakeholders can use a combination of the methods to estimate a
necessary amount of financial resources and develop a project budget template.

2: Budget Use

The second step in project budget management is to allocate the identified financial
resources and start executing the budget. The project manager should control and keep
track of the budgeted resources in order to make sure that every scheduled task or activity
is performed with necessary funding and that there is no lack of money for the
implementation of the entire project.

The greatest way to track and control budget use is to develop an investment plan. This
formal document includes justifications and approvals for the acquisition of necessary
procurement items and services required in support of the project. An investment plan
describes the acquisition process with reference to the feasibility study (often in larger
projects a feasibility study template serves as a foundation for developing a project
investment plan).

The project manager needs to send an investment approval request form to the
stakeholders and wait for their approval/rejection. In case the plan is approved, the
manager uses it to control the budget execution. In case the document is rejected, the
project manager should receive stakeholder suggestions and make necessary amendments
to the plan template. Then the process may repeat until the plan is approved.

3: Budget Measurement

The third step in managing the project budget refers to taking actions necessary for
providing appropriate cost performance. The manager needs to use work performance
data (like status of the deliverables, cost-schedule estimates), the funding requirements
request and the cost performance baseline to check the budget appropriateness.

By conducting variance analysis, performance reviews and forecasting, the project

manager can compare the current cost performance against the planned amount of
financed resources stated in the project budget template. In case of any gaps or deviations
it is necessary to make formal change requests and modify the budget accordingly.
 The project manager can develop corrective actions and send suggestions for approval to
the key stakeholders. The further budget control and measurement should be done with
the necessary evaluations and approvals.

4: Budget Updating

Once all the changes have been approved by the key stakeholders, the project manager
can proceed with updating the budget sheet and make changes to the existing breakdown
structure of financial resources. This will be the forth step of project budget management.

Cost estimates, resource activity estimates, the cost performance baseline and the cost
management plan should be updated in accordance with the approved changes.

Sources of Finance, Classification of Source of Finance

Finance refers to the management of money, including its creation, investment, and
allocation across various entities like individuals, businesses, and governments. It
encompasses activities such as borrowing, lending, saving, investing, and budgeting,
aimed at optimizing the use of financial resources. The field of finance is broadly divided
into personal finance, corporate finance, and public finance. Personal finance involves
managing individual or family financial activities, including savings, investments, and
retirement planning. Corporate finance focuses on funding sources, capital structuring,
and investment decisions within companies. Public finance deals with government
revenues, expenditures, and adjustments through policies to influence the economy.
Understanding finance is crucial for making informed decisions that ensure financial
stability and growth across different scales and sectors of the economy.

Sources of Finance:

Sources of finance refer to the different ways in which an individual, business, or

organization can obtain funding to start, run, or expand operations. These sources are
broadly classified into two categories: internal sources and external sources.

Internal Sources of Finance

 Retained Earnings:

Profits that are not distributed as dividends but are reinvested in the business.

 Personal Savings:

For sole proprietors or partners, using personal funds to finance the business.

 Asset Sale:

Selling off unused or underutilized assets to raise funds.

 External Sources of Finance

External sources are further divided into debt financing and equity financing.

Debt Financing

 Bank Loans:

Borrowing a specific amount from a bank to be repaid with interest over a fixed period.

 Overdrafts:

An agreement with the bank allowing a business to withdraw more money than it has in
its account up to an agreed limit.

 Bonds:

Issuing debt securities to investors, who lend money to the entity in return for periodic
interest payments and the repayment of principal at maturity.

 Trade Credit:

Getting goods and services from suppliers on credit, payable at a later date.

 Leasing:

Paying for the use of equipment or premises over a period, instead of buying them
outright.

Equity Financing

 Issuing Shares (Stocks):

Selling ownership stakes in the company to raise funds. This is more common in
corporations.

 Venture Capital:

Investment from firms or individuals in start-up or early-stage companies with high

growth potential in exchange for equity.

 Angel Investors:

Wealthy individuals who provide capital to startups for ownership equity or convertible
debt.

 Crowd funding:
 Raising small amounts of money from a large number of people, typically via the
Internet.

 Government Grants and Subsidies:

Funds provided by the government or public bodies to support businesses, often with
specific conditions or objectives.

Hybrid Instruments

Hybrid instruments combine elements of both debt and equity financing. Examples:

 Convertible Bonds:

Debt securities that can be converted into a predetermined number of the company’s
shares.

 Preference Shares:

Shares that provide a fixed dividend before any dividends are paid to ordinary
shareholders and typically have no voting rights.

Choosing the Right Source of Finance

Choice among these various sources depends on several factors including the amount
required, the purpose of the funding, the cost of finance, the level of control or ownership
the owners wish to retain, and the financial condition and creditworthiness of the
individual or business. Each source has its advantages and disadvantages, and often a mix
of sources is used to meet the needs of the business while balancing risk and control.

Classification of Source of Finance:

Sources of finance available to businesses and organizations can be classified based on

various criteria, such as the period of financing, ownership and control, and source of
generation.

Based on the Period of Financing

 Short-term Finance:

Typically, this is for a period of less than one year. It is used to address immediate
financial needs or working capital requirements. Examples include trade credit, bank
overdrafts, and short-term loans.

 Medium-term Finance:
 This type of finance is usually required for a period ranging from one to five years. It is
often used for purchasing equipment or funding expansion projects. Examples are
medium-term bank loans, leasing, and hire purchase.

 Long-term Finance:

Designed for a period exceeding five years, long-term finance is used for significant
investments like acquiring new buildings, long-term projects, or extensive expansion
plans. Sources include long-term loans, bonds, equity shares, and retained earnings.

Based on Ownership and Control

 Equity Finance:

Involves raising money by issuing shares of the company. Equity financing can dilute
ownership but doesn’t require repayment like loans. Shareholders may have some control
over the business depending on their shareholding.

 Debt Finance:

Refers to borrowing money that must be repaid over time with interest. Debt financing
includes loans, bonds, and debentures. It doesn’t dilute ownership, but companies are
legally obliged to repay the debt, affecting cash flow.

Based on Source of Generation

 Internal Sources:

These are funds generated within the business from operations or through internal
mechanisms like retained earnings or the sale of assets.

 External Sources:

Involve funds sourced from outside the business, including bank loans, public deposits,
venture capital, angel investors, government grants, and crowdfunding.

Additional Classifications

 Asset-Based Finance:

Loans or finance obtained by pledging assets. The finance amount is typically a

percentage of the asset’s value. Examples include factoring and invoice discounting.
 Hybrid Instruments:

These combine features of both debt and equity financing, offering flexibility in terms of
control, ownership, and financial obligations. Examples include convertible bonds and
preference shares.

Top Down Budgeting

Top-down budgeting is a crucial method of preparing a budget for an organization or a

company. Under this method, the senior management prepares a high-level budget on the
basis of the company’s objectives. The top management then allocates the amounts for
the individual departments, who use those numbers to prepare their own budget.

For the top-down budget, the top management uses past experiences and the current
market scenario, including margin pressure, competition, tax legislation, macroeconomic
conditions and more.

Also, the management uses past years budget and financial statements as a reference for
making an allocation to various departments. Additionally, senior management may also
use input from lower-level managers. For instance, if any department accounted for 20%
of the overall expenditure last year, then this year it would be allocated 20% of the funds.
Any adjustments to these numbers will be based on the input from the managers or the
current market scenario.

Process of TOP-DOWN BUDGETING

The top-level management will meet to decide on the targets for sales, expenses, and
profits. Next, the finance department will allocate these targets to other business
departments. After this, each department prepares its own budget.

Each department will then come up with a detailed budget, indicating how it will hit the
revenue target and at what cost. For instance, the number of products they will sell, how
much staff they will need, and more.

All such detailed budgets from the individual departments are then sent back to the
finance department. The finance department then approves them if they are in-line with
the overall objectives of the company. The finance department may also ask for some
revisions if they believe the department’s budget is deviating from the set goals.
 After the finance department finalizes all the things, the budgets are put in the system.
Going forward, monthly reports are generated to compare the actual results from the
planned ones.

Advantages

 Such type of budget focuses on the overall growth of the organization.

 It makes departments aware of what the top management expects from them.

 It is a quick way of preparing a budget and helps to overcome interdepartmental issues.

 Saves time for lower management as well. Rather than preparing the budget from scratch,
each department gets a set goal. This saves both time and resources.

 Under top-down budgeting, management creates only one budget, rather than allowing
the department to create their own budget and combine them later. Hence, it is a less
tedious approach.

Disadvantages

 Since managers are not part of the budget-making process, they may not feel much
motivation to ensure their success.

 Since senior managers are not much aware of the day-to-day operations of the
departments, they may set unrealistic targets. This results in lower-level managers finding
it difficult to meet the set numbers.

 Such type of budgeting may often lead to over or under allocation of resources.

Bottom Up Budgeting
 Bottom up budgeting is a type of budgeting that attempts to determine the underlying
costs for each individual department or segment of an organization and then total up each
department. This type of budgeting works in contrast to top down budgeting. Here are a
few things to consider about bottom up budgeting and how it works.

Start Small

 This process starts out small by looking at the individual components and costs of
projects. In order to do this type of budgeting, you will need to start out by identifying all
of the projects that you plan on completing as a business. Once you identify the project,
you need to figure out what steps you will be taking to complete that project. At that
point, you have to figure out the costs for each step of the project and total them up.

Work Your Way up

  After you have come up with a realistic cost estimate of each project, you need to total up
all the projects together. During this process, you need to work your way up from one
level to the next. For example, you may start out with a project budget for each week.
Then total although the to come up with a project budget for each month. You will then
total the projects for each month together to come up with an annual budget.

Manager Budgets

 With this type of budgeting, you will also rely on managers to help out in the budgeting
process. You need each manager to come up with a realistic budget for all of the projects
that they will be taking on. You will then get the information from each manager and
total it up in order to come up with a budget for the company as a whole. When it comes
to estimating the number of man-hours that will be necessary to complete a particular
project, a manager should convert that figure to cash. This will ensure that there is
enough money budgeted for payroll as well.

Advantage of Bottom up Budgeting

 One of the primary advantages of bottom-up budgeting is that it is traditionally very

accurate. As long as everyone takes care to look at every last detail of a project, it will
generally come out with an accurate estimate of costs. This type of budgeting also tends
to improve the morale of the employees because most of them will be involved with the
budgeting process. Every department will be expected to pitch in to come up with the
new budget.

Disadvantage of Bottom up Budgeting

 One of the disadvantages of this strategy is that it can sometimes lead to over budgeting.
Every department wants to make sure that they have enough money for the things that
they want to do over the course of the year. Because of this, some managers might add a
little bit of extra money into the budget so that it will be padded. If this happens often
enough, it can throw the whole budget off.

Introduction to Activity Based Costing

ABC costing focuses on identifying activities, or production processes, that are used to process
a job. These individual activities are grouped together with similar processes into a cost pool that
relates to single activity cost driver.

The cost pools are then analyzed and assigned a predetermined overhead rate that will eventually
be assigned to individual jobs and products.
As you can see, this is a multi-step process, but activity-based costing is a much more accurate
way of assigning indirect costs. It’s difficult to determine how much electricity or heat one
department or job uses over another without some type of methodical allocation process.

Activity based costing has grown in importance in recent decades because:-

(1) Manufacturing overhead costs have increased significantly,

(2) The manufacturing overhead costs no longer correlate with the productive machine hours or
direct labor hours,

(3) The diversity of products and the diversity in customers’ demands have grown, and

(4) Some products are produced in large batches, while others are produced in small batches.

Let’s take a look at an example

Example

Activity based costing helps allocate overhead expenses to jobs and products based on the
amount of the activities required to produce the product instead of simply estimating how much
each job uses.

Properly assigning indirect costs is extremely important for management, especially in the case
of downsizing or outsourcing. Profitable departments can be assigned too much indirect cost
causing them to appear unprofitable on paper. Based an evaluation management can choice to
discontinue the operations and close a profitable branch because the costs were properly
distributed.

To compound the problems, once the profitable branch is closed the only remaining branches are
the unprofitable ones. By shutting down the only profitable department, the company may not be
able to cover its fixed costs.
The same scenario is true for outsourcing. Management may estimate outsourcing to be a
cheaper option because costs have not been allocated properly. In fact, outsourcing might
actually be more expensive.