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BMGMT 3203 - Project Management: Faculty of Business Management & Globalization Tel: 603 8317 8833 (Ext 8407)

This document discusses budgeting and cost estimation for projects. It covers topics such as: - Top-down and bottom-up budgeting approaches - Work element costing to estimate costs for each task - Tracking signals to identify biases in estimates - Risk management techniques like risk identification, analysis, mitigation strategies, and documentation - Failure mode and effect analysis (FMEA) to evaluate risks The goal is to accurately estimate project costs and resources through budgeting and risk analysis to help projects stay on track and meet objectives.

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Muthusamy Senthilkumaar
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41 views

BMGMT 3203 - Project Management: Faculty of Business Management & Globalization Tel: 603 8317 8833 (Ext 8407)

This document discusses budgeting and cost estimation for projects. It covers topics such as: - Top-down and bottom-up budgeting approaches - Work element costing to estimate costs for each task - Tracking signals to identify biases in estimates - Risk management techniques like risk identification, analysis, mitigation strategies, and documentation - Failure mode and effect analysis (FMEA) to evaluate risks The goal is to accurately estimate project costs and resources through budgeting and risk analysis to help projects stay on track and meet objectives.

Uploaded by

Muthusamy Senthilkumaar
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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BMGMT 3203 • Project Management

CHAPTER 4

Budgeting The Project


Faculty of Business Management & Globalization
Tel : 603 8317 8833 (Ext 8407)
Introduction
• Budgets are plans for allocating
organizational resources to project
activities.
– forecasting required resources, quantities
needed, when needed, and costs
• Budgets help tie project to overall
organizational objectives.
• Budgets can be used as tool by upper
management to monitor and guide
projects.
BMGMT 3203 Project Management 2
BMGMT 3203 • Project Management
METHODS OF BUDGETING
CHAPTER 4

Budgeting The Project


Faculty of Business Management & Globalization
Tel : 603 8317 8833 (Ext 8407)
Top-Down Budgeting

• Based on collective judgements and


experiences of top and middle managers.
• Overall project cost estimated by
estimating costs of major tasks
• Advantages
– accuracy of estimating overall budget
– errors in funding small tasks need not be
individually identified
BMGMT 3203 Project Management 4
Bottom-Up Budgeting
• WBS or action plan identifies elemental
tasks
• Those responsible for executing these
tasks estimate resource requirements
• Advantage
– more accurate in the detailed tasks
• Disadvantage
– risk of overlooking tasks
BMGMT 3203 Project Management 5
BMGMT 3203 • Project Management
COST ESTIMATING
CHAPTER 4

Budgeting The Project


Faculty of Business Management & Globalization
Tel : 603 8317 8833 (Ext 8407)
Work Element Costing
• Determine resource requirements and
then costs for each task
– fixed costs (e.g., materials)
– labor time
– labor rate
– equipment time
– equipment rate
– overhead
– GS&A
BMGMT 3203 Project Management 7
The Impact of Budget Cuts

Figure 4-1 Two project life cycles

BMGMT 3203 Project Management 8


Activity Versus Program
Budgeting

• Activity oriented budgets are based on


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

BMGMT 3203 Project Management 9


BMGMT 3203 • Project Management
IMPROVING COST ESTIMATES
CHAPTER 4

Budgeting The Project


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

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

BMGMT 3203 Project Management 11


Tracking Signals

• Used to determine if there is a systematic


bias in cost or other estimates

BMGMT 3203 Project Management 12


Other Factors
• Changes in Resource Prices
– increase all estimates by same percentage
– estimate rate of price change individually
for inputs that have significant impact on
costs
• Waste and Spoilage
• Team Member Turnover
• “Mythical Man-Month”
• Organization Climate
BMGMT 3203 Project Management 13
BMGMT 3203 • Project Management

BUDGET UNCERTAINTY AND


RISK CHAPTER 4
MANAGEMENT

Budgeting The Project


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

Risk management - the art and science


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

7-15
Risk Vs Amount at Stake

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

7-17
Four Stages of Risk
Management

Risk identification

Analysis of probability and consequences

Risk mitigation strategies

Control and documentation


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

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

7-19
Risk Factor Identification

Brainstorming meetings

Expert opinion

Past history

Multiple (team based) assessments


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

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

7-22
Three Basic Causes for
Change in Projects

• Errors made by cost estimator about how


to achieve tasks.
• New knowledge about the nature of the
performance goal or setting.
• A mandate.

BMGMT 3203 Project Management 23


Failure Mode and Effect Analysis
(FMEA)

• List ways project might fail


• Evaluate severity (S) of each failure
• Estimate likelihood (L) of each failure
occurring
• Estimate ability to detect each failure (D)
• Calculate Risk Priority Number (RPN)
• Sort potential failures by their RPNs
BMGMT 3203 Project Management 24
Other Approaches

• Game Theory
• Expected Value
• Simulation

BMGMT 3203 Project Management 25

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