review network diagram forward/backward pass critical path/activities float funding a project costs...
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Review network diagram
Forward/backward pass
Critical path/activities
Float
Funding a projectCosts estimatesType of costsFinancial reports
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Key points
Estimates need to be as accurate as possible, otherwise may cause financial constraints
WBS source: Activities need to be as detailed as possible
Procurement/tender rules usually apply Internal financial procedures usually applies (eg.
Reports) You may have to open a project account You may have to have your own project financial
authorization rules Donor may impose their rules on you
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Various methods to fund a project
Gov or company budget: Calculate costs and determine a budget - request for resources
Adjust the project to work within allocated resources Matching funds Share costs between sponsors Grants Sales of products or services Loans Float shares of a company PPP
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Total Project Budget: *Estimate budget is ok but it should be realistic
Source of Funds Project Activities / I tems Amount (USD) GGP (Note: GGP does not f und f or live stock, f ood, medicines, seedlings, unif orm, school f ee, drilling borehole, admin & operational cost)
1. Design extension of building 2. Construction and finishing 3. 4. Total of GGP fund 85,000 USD
Contribution f rom Applicant I n kind contribution
1500 USD
Contribution f rom Community
Donations, in kind contribution f rom construction company
3,000 USD
Contribution f rom Other Donors (name them)
Government support (equipment, desks, offi ce f urniture)
3,000 USD
Total Cost of the Project 95, 500 USD
Cost Estimating
Cost estimating involves developing an approximation or estimate of the costs of the resources needed to complete a project.
The main outputs of the cost estimating process are:– Cost estimates;– Supporting detail; and– A cost management plan
Types of Cost Estimates
Type of Estimate When Done Why Done How Accurate
Rough Order of Magnitude (ROM)
Very early in the project life cycle – 3-5 years
Provides rough “ballpark” of cost for selection decisions
–25%, +75%
Budgetary Early, 1–2 years out Used for more accurate budget plans to be included in Gov/org annual budget.
–10%, +25%
Definitive Later in the project, < 1 year out
Provides details for purchases, estimate actual costs
–5%, +10%
Types of costs:
- Direct costs: Direct costs are those costs directly related to the project, for example, salaries of those fully working on the project, cost of equipment that is used solely for this project, etc...
- Indirect costs: Indirect costs are company costs, for example, rental, phone bill, electricity.
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Fixed costs are those costs that do not change throughout the project:
a contract to purchase concrete from a supplier every two months at a specific price (that doesn't fluctuate).
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- Fixed costs:
Variable costs:
- Variable costs are costs that vary during the project. An example of a variable cost is the salary of a contract resource (the contract resource might want to increase his fees at one point in the project).
Consumables
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Overhead costs:
Costs for products and services for your project that are difficult to subdivide and allocate directly. Examples include employee benefits, office space rent, general supplies, and the costs of furniture, fixtures, and equipment.
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- Sunk costs:
Sunk costs are costs that have already incurred and cannot be recovered. A phone bill from 2 months ago before the project approval is a sunk cost.
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Categories of costs:
Labor: Salaries Materials: Purchases of goods Management/Administration: Costs associated with
administrating the project. Travel: air/sea tickets etc.. Subcontract: consultants, services, etc.. Employee benefits: social security, employer taxes etc. Utilities Rent Equipment
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Key points in estimation:
risk factors: Inflation, deflation, foreign exchange fluctuations, Need to increase/decrease resources
etc..)
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Key points:
Project costs and project budget are different things.
A single person does not create a good budget – involve key people
Until approved, your budget is an estimate
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Insourcing versus outsourcing
Insourcing – Can control quality, time and costs Staff may need to give attention to other work items
Outsourcing – May be cheaper or more expensive Can be more difficult to control quality Requires a strong contract with contingency clauses
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Basic calculations:
Goods and servicesCost per Unit x num of units
Human resources:Cost per hourNumber of hours
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Budgeting
A plan for the costs of project resourcesA budget implies constraintsThus, it implies that managers will not get
everything they want or need
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Budgeting Continued
The budget for an activity also implies management support for that activity
Higher the budget, relative to cost, higher the managerial support
The budget is also a control mechanism– Many organizations have controls in place
that prohibit exceeding the budget– Comparisons are against the budget
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Bidding
On most projects– Material + Labor + Equipment + Capital +
Overhead + Profits = Bid In other words
– Resources + Profits = Bid
Types of estimates
ANALOGOUS ESTIMATING
COMPARE WITH SIMILAR HISTORICAL PROJECT
PARAMETRIC ESTIMATING
UNIT COST AND SCALE UP
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Estimating Project Budgets Continued
Like any forecast, this includes some uncertainty
There is uncertainty regarding usage and price– Especially true for material and labor
The more standardized the project and components, the lower the uncertainty
The more experienced the cost estimator, the lower the uncertainty
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Rules of Thumb
Some estimates are prepared by rules of thumb– Construction cost by square feet– Printing cost by number of pages– Lawn care cost by square feet of lawn
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Estimating Budgets is Difficult
There may not be as much historical data or none at all
Even with similar projects, there may be significant differences
Many people have input to the budget (e.g. Board) – some politics to it
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Estimating Budgets is Difficult Continued
Multiple people have some control over the budget
There is more “flexibility” regarding the estimates of inputs (material and labor)
The accounting system may not be set up to track project data
Usage of labor and material is very lumpy over time
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Top-Down Budgeting
Top managers estimate/decide on the overall budget for the project
These trickle down through the organization where the estimates are broken down into greater detail at each lower level
The process continues to the bottom level
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Advantages
Overall project budgets can be set/controlled very accurately– A few elements may have significant error
Management has more control over budgets
Small tasks need not be identified individually
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Disadvantages
More difficult to get buy inLeads to low level competition for larger
shares of budget
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Bottom-Up Budgeting
Project is broken down into work packages
Low level managers price out each work package
Overhead and profits are added to develop the budget
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Disadvantages
People tend to overstate their budget requirements
Management tends to cut the budget
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An Iterative Budgeting Process–Negotiation-in-Action
Most projects use some combination of top-down and bottom-up budgeting
Both are prepared and comparedAny differences are negotiated
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Improving The Process of Cost Estimation
Inputs from a lot of areas are required to estimate a project
May have a professional cost estimator to do the job
Project manager will work closely with cost estimator when planning a project
We are primarily interested in estimating direct costs
Indirect costs are not a major concern
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Problems
Even with careful planning, estimates are wrong
Most firms add 5-10 percent for contingencies
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Learning Curves
Human performance usually improves when a task is repeated
This happens by a fixed percent each time the production doubles
Percentage is called the learning rate
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Risk Estimation
Duration of project activities variesAmounts of various resources needed
variesValue of accomplishing a project variesCan reduce but not eliminate ambiguityWant to describe uncertainties in a way
that provides useful insight to their nature
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Applying Risk Analysis
Must make assumptions about probability distributions– Key parameters– Variables
Estimate the risk profiles of the outcomes of the decision
Simulation may be used to have a better picture of risks
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