Budgeting, Estimation & Project Cost Management

Lecture # 6
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 Project Cost Management

Project Cost Management includes

the processes involved in estimating,
budgeting, and controlling costs so
that the project can be completed
within the approved budget.

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3
 TYPES OF COST
 Direct costs are costs that can be directly related to
producing the products and services of the project (such as
materials, labor, and equipment expenses)
 Indirect costs These costs are not directly linked to your
project but are the cost of doing business overall. Examples
are office administration cost, office space rental and so on.
 Fixed Cost is cost that stay constant throughout the project
lifecycle
 Variable Cost is a cost that change during the project life-
cycle.
 Sunk cost Sunk costs are costs that a company has spent
previously.; when deciding what projects to invest in or
continue, you should not include sunk costs in Estimates.
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 Types of Estimates

Historical project cost is not broken down and aggregated cost is

adjusted for inflation and other factors.

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Types of Estimates

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Types of Estimates

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Types of Estimates

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 Types of Estimates
 Definitive Estimate: The definitive estimate, or
grassroots build up estimate, is prepared from well-
defined engineering data including (as a minimum)
vendor quotes, fairly complete plans, specifications,
unit prices, and estimate to complete. The definitive
estimate, also referred to as detailed estimating, has an
accuracy of -5/ to +10% percent.

 Example: Consider a large-scale renewable energy

project where the Detailed Estimate includes not only
the cost of materials like solar panels and turbines but
also the costs associated with land acquisition, permits,
and long-term maintenance.

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 The Budgeting Process
Planning is about making decisions with the following
objectives:
• Define what will be performed (Statement of Work)
• Determine how the work will be structured and
tracked (Work Breakdown Structure)
• Assign Responsibility for elements of work
(Organizational Breakdown Structure)
• Schedule the authorized work in a manner which
describes the sequence of work and identifies
significant task interdependencies required to meet
the requirements of the program
• Now is Budgeting.
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 Establish the Schedule Baseline
 Establishing the WBS is the first step in defining the
project and in establishing the baseline.

NUST Project Work Breakdown Structure

Nust Project X
1.0

Design Procurement Construction Project Mgmt

1.1 1.2 1.3 1.4

Prelim Title I Design Final Design

Design 1.1.1 1.1.2 1.1.3

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 Establish the Schedule Baseline
Nust Proejct X

1.0

Design Procurement Construction Project Mgmt

1.1 1.2 1.3 1.4

Prelim Design
1.1.1
Title I Design
1.1.2
Final Design
1.1.3 Based on the Project Scope and
available resources, the work activities
in the WBS are scheduled to establish
the Schedule Baseline.
Schedule Baseline
Preliminary Design 1.1.1 Jan Feb Mar Apr May

1.1.1.1 Define Specifications & Req.

1.1.1.2 Develop Preliminary Design

1.1.1.3 Review Preliminary Design

1.1.1.4 Incorporate Comments

1.1.1.5 Preliminary Design Complete

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 Establish the Cost Baseline
ACME Project X

1.0

Design Procurement Construction Project Mgmt

1.1 1.2 1.3 1.4

Prelim Design
1.1.1
Title I Design
1.1.2
Final Design
1.1.3 Based on the Project Scope and available
resources, the project budget is allocated
across the scheduled activities and across
time. The time phased allocation of resources,
establishes the Cost Baseline. Notice in the
Cost Baseline
chart the time phased hours associated with
each task.
Preliminary Design 1.1.1 Hours Jan Feb Mar Apr May

1.1.1.1 Define Specifications & Req. 1,500 1,000

1.1.1.2 Develop Preliminary Design 2,000 2,000

1.1.1.3 Review Preliminary Design 500 500

1.1.1.4 Incorporate Comments 320 320

1.1.1.5 Preliminary Design Complete 1,000

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 Integrated Scope, Schedule and Cost
Nust Project X

1.0

Design Procurement Construction Project Mgmt

1.1 1.2 1.3 1.4

Prelim Design
1.1.1
Title I Design
1.1.2
Final Design
1.1.3 The allocation of resources across the schedule for
each element of the project’s scope is what creates
the project’s integrated baseline. As the chart shows
below , each task has an associated schedule and
time phased cost.
Integrated Cost/Schedule Baseline
Preliminary Design 1.1.1 Hours Jan Feb Mar Apr May

1.1.1.1 Define Specifications & Req.

1,500 1,000

1.1.1.2 Develop Preliminary Design

2,000 2,000

1.1.1.3 Review Preliminary Design

500 500

1.1.1.4 Incorporate Comments

320 320

1.1.1.5 Preliminary Design Complete

1,000
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 Elements of a Contract Baseline
The contract baseline is comprised of eight key
elements:
• Total Contract Price • Performance Measurement Baseline (PMB)
• Total Contract Cost • Management Reserve (MR)
• Profit / Fee • Distributed Budgets
• Contract Budget Base (CBB) • Undistributed Budgets (UB)

The relationship between these eight elements is depicted below.

Total Contract Price

Total Contract Cost Profit/Fee

Contract Budget Base (CBB)

Performance Measurement Baseline (PMB) Management Reserve (MR)

Distributed Budgets Undistributed Budget (UB)

Control Accounts

Work Packages

Planning Packages 15
 Total Contract Price

Total Contract Price is the total negotiated contract cost

plus profit/fee.
Total Contract Price

Total Contract Cost Profit/Fee

Contract Budget Base (CBB)

Performance Measurement Baseline (PMB) Management Reserve (MR)

Distributed Budgets Undistributed Budget (UB)

Control Accounts

Work Packages

Planning Packages

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 Total Contract Cost
Total Contract Cost is the total negotiated contract cost
without profit/fee.
Total Contract Price

Total Contract Cost Profit/Fee

Contract Budget Base (CBB)

Performance Measurement Baseline (PMB) Management Reserve (MR)

Distributed Budgets Undistributed Budget (UB)

Control Accounts

Work Packages

Planning Packages

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 Profit/Fee
Profit/Fee is the estimated profit or fee realized by executing
the contract or project. Profit/Fee is not part of the Contract
Budget Base (CBB).

Total Contract Price

Total Contract Cost Profit/Fee

Contract Budget Base (CBB)

Performance Measurement Baseline (PMB) Management Reserve (MR)

Distributed Budgets Undistributed Budget (UB)

Control Accounts

Work Packages

Planning Packages

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 Contract Budget Base
The Contract Budget Base (CBB) represents the total
budget for all authorized contractual work, minus
Profit/Fee. The CBB can only be modified when duly
authorized changes to the contract are received. CBB is
always calculated as follows:
Current Estimated cost of additional
negotiated + authorized un-priced work = CBB
contract cost (yet to be negotiated)

Total Contract Price

Total Contract Cost Profit/Fee

Contract Budget Base (CBB)

Performance Measurement Baseline (PMB) Management Reserve (MR)

Distributed Budgets Undistributed Budget (UB)

Control Accounts

Work Packages

Planning Packages 19
 Performance Measurement Baseline (PMB)
The Performance Measurement Baseline (PMB) is the time-phased budget
plan against which contract performance is measured. It includes all
allocated or Distributed Budgets plus the Undistributed Budget. PMB does
not include Management Reserve.

PMB = Sum of Control Accounts

PMB = Distributed Budgets + Undistributed Budgets
PMB = Contract Base Budget – Management Reserve
Total Contract Price

Total Contract Cost Profit/Fee

Contract Budget Base (CBB)

Performance Measurement Baseline (PMB) Management Reserve (MR)

Distributed Budgets Undistributed Budget (UB)

Control Accounts

Work Packages

Planning Packages
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 Management Reserve
Once the CBB is established, the Program Manager establishes a
Management Reserve (MR) prior to distributing budgets to the
performing organizations. The purpose of MR is to have a budget
for the Program Manager to allocate for unforeseen problems.

MR is not part of the Performance Measurement Baseline

because it is held at the program level only. Transactions into
and out of MR are approved by the Project Manager.
Total Contract Price

Total Contract Cost Profit/Fee

Contract Budget Base (CBB)

Performance Measurement Baseline (PMB) Management Reserve (MR)

Distributed Budgets Undistributed Budget (UB)

Control Accounts

Work Packages

Planning Packages

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 Distributed Budgets
Distributed Budgets reflect the contractually authorized
efforts allocated to the WBS elements.
Distributed Budgets include budgets assigned to control
accounts during baseline establishment as well as work
packages and planning packages.
Distributed Budgets = Budgets assigned to Control Accounts
Total Contract Price

Total Contract Cost Profit/Fee

Contract Budget Base (CBB)

Performance Measurement Baseline (PMB) Management Reserve (MR)

Distributed Budgets Undistributed Budget (UB)

Control Accounts

Work Packages

Planning Packages

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 Undistributed Budget
Undistributed budget (UB) applies to contractually authorized efforts not yet
allocated to WBS elements. The UB consists of a budget for authorized
changes for which there has not been adequate time to plan the change at the
control account level. Undistributed budget is an element of the Performance
Measurement Baseline, but it is not time-phased.
Every effort should be taken to distribute budgets in a timely manner and to
minimize undistributed budgets. Undistributed budgets are controlled by the
Project Manager.
Total Contract Price

Total Contract Cost Profit/Fee

Contract Budget Base (CBB)

Performance Measurement Baseline (PMB) Management Reserve (MR)

Distributed Budgets Undistributed Budget (UB)

Control Accounts

Work Packages

Planning Packages
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 NUST House Cost Proposal Development
 So far in the NUST House Building project, we have:
 Defined what will be performed (Statement of Work)
 Determined how will it be tracked (Work Breakdown
Structure)
 Now we have to:
 Determine the Proposed Total Cost and Price
 Assign Labor, Material, ODC, and Subcontractor
Resources to the Work Elements.
 Apply Burdens and Fee to derive the Total Cost and Price.

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 NUST House Cost Proposal Development
NUST House Work Breakdown Structure is shown here.

NUST
1

House Building
Project
1.1

Concrete Framing Plumbing Electrical Interior Roofing

1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 1.1.6

Frame Exterior Install Water

Pour Foundation Install Wiring Install Drywall Install Felt
Walls Lines
1.1.1.1 1.1.4.1 1.1.5.1 1.1.6.1
1.1.2.1 1.1.3.1

Frame Interior Install Outlets/

Install Patio Install Gas Lines Install Carpets Install Shingles
Walls Switches
1.1.1.2 1.1.3.2 1.1.5.2 1.1.6.2
1.1.2.2 1.1.4.2

Install Roofing Install B/K

Stairway Install Fixtures Install Painting Install Vents
Trusses Fixtures
1.1.1.3 1.1.4.3 1.1.5.3 1.1.6.3
1.1.2.3 1.1.3.3
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 NUST House Cost Proposal Development
 Below is an example of how we developed the Price for the
WBS 1.1.1.2 to Install Patio.

 We assigned resources to this task, and based on the Labor

Hours, Material, and ODC Dollars, burdened by all the
indirect rates, a Total Price of $11,574 has been estimated to
complete this task.

 This process is used to price each WBS element. On the

next page is the completed price for the NUST House.
WBS 1.1.1.2 Install Patio

RES CODE Hours Rate/Hour Prime Overhead G&A COM Fee Total Price
Carpenter 40 $ 25.00 $ 1,000 $ 1,666 $ 422 $ 2 $ 618 $ 3,707
Drywall 40 $ 15.00 $ 600 $ 1,000 $ 253 $ 1 $ 371 $ 2,224
ELEC 4 $ 40.00 $ 160 $ 267 $ 67 $ 0 $ 99 $ 593
ENGE 20 $ 30.36 $ 607 $ 825 $ 226 $ 1 $ 332 $ 1,991
Material 0 $ 2,000 $ 109 $ - $ 1 $ 422 $ 2,531
Other 0 $ 500 $ 27 $ - $ 0 $ - $ 527
Total 104 $ 4,867 $ 3,894 $ 968 $ 5 $ 1,840 $ 11,574
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 NUST House Cost Proposal Development
The proposed resources for the entire project have been priced
as described on the previous page. The following chart reflects
the Total Price for each WBS of the NUST Housing Building
project.
NUST
1
$231,894 Total Proposed Price = $231,894

House Building
Project 1.1
$231,894

Concrete 1.1.1 Framing 1.1.2 Plumbing 1.1.3 Electrical 1.1.4 Interior 1.1.5 Roofing 1.1.6
$59,094 $57,905 $25,018 $61,826 $20,447 $7,605

Pour Foundation Frame Exterior Install Water Install Wiring Install Drywall
Install Felt 1.1.6.1
1.1.1.1 Walls 1.1.2.1 Lines 1.1.3.1 1.1.4.1 1.1.5.1
$3,259
$28,452 $22,026 $8,257 $24,642 $9,312

Install Patio Frame Interior Install Gas Lines Install Outlets/ Install Carpets Install Shingles
1.1.1.2 Walls 1.1.2.2 1.1.3.2 Switches 1.1.4.2 1.1.5.2 1.1.6.2
$11,574 $14,699 $8,339 $12,353 $2,500 $3,259

Install Roofing Install B/K Install Fixtures Install Painting Install Vents
Stairway 1.1.1.3
Trusses 1.1.2.3 Fixtures 1.1.3.3 1.1.4.3 1.1.5.3 1.1.6.3
$19,067
$21,180 $8,421 $24,831 $8,635 $1,086

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 NUST House Cost Proposal Development
The proposed price is $231,894; however, the buyer of the NUST
house can only afford to pay $220,000. The NUST has agreed to
build the NUST house for $219,999, but some revisions had to be
made to the plans to utilize less expensive materials.
The following summary reflects the negotiated cost and price to
build the NUST House.

Negotiated NUST House Cost and Price

Total Cost Fee Total Price

$183,852 $36,147 $219,999

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 NUST House Cost Proposal Negotiations
The following summary reflects the negotiated price by WBS to build
the NUST House.
NUST
1
$219,999

Total Negotiated Price = $219,999

House Building
Project 1.1
$219,999

Concrete 1.1.1 Framing 1.1.2 Plumbing 1.1.3 Electrical 1.1.4 Interior 1.1.5 Roofing 1.1.6
$47,200 $57,905 $25,018 $61,826 $20,447 $7,605

Pour Foundation Frame Exterior Install Water Install Wiring Install Drywall
Install Felt 1.1.6.1
1.1.1.1 Walls 1.1.2.1 Lines 1.1.3.1 1.1.4.1 1.1.5.1
$3,259
$20,523 $22,026 $8,257 $24,642 $9,312

Install Patio Frame Interior Install Gas Lines Install Outlets/ Install Carpets Install Shingles
1.1.1.2 Walls 1.1.2.2 1.1.3.2 Switches 1.1.4.2 1.1.5.2 1.1.6.2
$10,781 $14,699 $8,339 $12,353 $2,500 $3,259

Install Roofing Install B/K Install Fixtures Install Painting Install Vents
Stairway 1.1.1.3
Trusses 1.1.2.3 Fixtures 1.1.3.3 1.1.4.3 1.1.5.3 1.1.6.3
$15,895
$21,180 $8,421 $24,831 $8,635 $1,086

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 The Budgeting Process
Now that we have a negotiated contract, we can establish the Contract
Budget Base.

The Awarded Amount to the NUST is $219,999. This includes

Profit/Fee. The Negotiated Total Cost, without Profit/Fee, for the NUST
House equals $183,852. This will be the basis for developing the
Contract Budget Baseline (CBB).
Total Contract Price
$219,999

Total Contract Cost Profit/Fee

$183,852 $36,147

Contract Budget Base (CBB)

$183,852

Performance Measurement Baseline (PMB) Management Reserve (MR)

Distributed Budgets Undistributed Budget (UB)

Control Accounts

Work Packages

Planning Packages
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 The Budgeting Process
After the Contract Budget Base has been established, the
Management Reserve is established by the Project Manager.
In the case of the NUST House, the Project Manager has decided to
establish a Management Reserve amount equal to 10% of the
Contract Budget Base. This equates to $18,385. The Performance
Measurement Baseline, which equals the CBB – MR, will be
established at $165,467.

All of the PMB will be distributed, therefore Distributed Budgets

will equal $165,467, and Undistributed Budget will remain zero.
Total Contract Price
$219,999

Total Contract Cost Profit/Fee

$183,852 $36,147

Contract Budget Base (CBB)

$183,852

Performance Measurement Baseline (PMB) Management Reserve (MR)

$165,467 $18,385

Distributed Budgets Undistributed Budget (UB)

$165,467 $0

Control Accounts

Work Packages

Planning Packages 31
 The Budgeting Process
Now that the Management Reserve has been
established by the Project Manager, target budgets are
developed and distributed to the Control Account
Managers.
Establishing the target budgets will often be
accomplished through a joint effort by the Project
Manager & Project Team.
Total Contract Price
$219,999

Total Contract Cost Profit/Fee

$183,852 $36,147

Contract Budget Base (CBB)

$183,852

Performance Measurement Baseline (PMB) Management Reserve (MR)

$165,467 $18,385

Distributed Budgets Undistributed Budget (UB)

$165,467 $0

Control Accounts

Work Packages

Planning Packages
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 The Budgeting Process
When detailed planning reveals the target budget
established for the control account is unrealistic (too
high or low), the CAM & Project Manager participate
jointly to determine appropriate adjustments. In some
cases, this may require the use of MR.

Once the budgets have been allocated to the Control

Accounts, the Control Account budgets are further
subdivided into work packages and planning packages.

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 The Budgeting Process
Here’s the distributed budget for the entire NUST WBS.
Remember, this does not include Profit/Fee, or
Management Reserve.
NUST
1
$165,467

Distributed Budget = $165,467

Control Accounts House Building
Project 1.1
$165,467

Concrete 1.1.1 Framing 1.1.2 Plumbing 1.1.3 Electrical 1.1.4 Interior 1.1.5 Roofing 1.1.6
$35,482 $43,432 $18,765 $46,373 $15,711 $5,704

Pour Foundation Frame Exterior Install Water Install Wiring Install Drywall
Install Felt 1.1.6.1
1.1.1.1 Walls 1.1.2.1 Lines 1.1.3.1 1.1.4.1 1.1.5.1
$2,445
$15,394 $16,521 $6,194 $18,483 $6,984

Install Patio Frame Interior Install Gas Lines Install Outlets/ Install Carpets Install Shingles
1.1.1.2 Walls 1.1.2.2 1.1.3.2 Switches 1.1.4.2 1.1.5.2 1.1.6.2
$8,166 $11,025 $6,255 $9,265 $2,250 $2,445

Install Roofing Install B/K Install Fixtures Install Painting Install Vents
Stairway 1.1.1.3
Trusses 1.1.2.3 Fixtures 1.1.3.3 1.1.4.3 1.1.5.3 1.1.6.3
$11,922
$15,887 $6,317 $18,625 $6,477 $815

Work Packages
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 Schedule and Cost Baseline
Below is the time-phased budget for the NUST House
Building Project. This profile represents the cost and
schedule baseline in Total Dollars.

Total $165,467 $38,269 $73,412 $49,130 $4,656

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 Cost Control

 Project cost control includes:

 Monitoring cost performance.

 Ensuring that only appropriate project changes are

included in a revised cost baseline.

 Informing project stakeholders of authorized

changes to the project that will affect costs.

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 End Note

“Well Started is Half Done”

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THANK YOU!

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