Course: Project Management Chapter: 7 (Cost Estimation)
Budget
Mesbaul Khair ID: 3-11-21-082
A budget is a plan for allocating resources. Thus, the act of budgeting is the allocation of scarce resources to the various endeavors of an organization. The outcomes of the allocation process often do not satisfy managers of the organization who must live and work under budget constraints. The budget is not simply one facet of a plan, nor is it merely an expression of organizational policy; it is also a control mechanism. The budget serves as a standard for comparison, a baseline from which to measure the difference between the actual and planned uses of resources. Budgets play an important role in the entire process of management. It is clear that budgeting procedures must associate resource use with the achievement of organizational goals or the planning/control process becomes useless. If budgets are not tied to achievement, management may ignore situations where funds are being spent far in advance of accomplishment but are within budget when viewed by time period.
Estimate
1. Estimate is what resources are required. 2. Outcomes of the resources. 3. Timeframe of utilization of those resources. 4. Cost frame of acquiring of those resources. There must be ideas of inflation, if the project is a multi-year process. If there are pricelist or catalog, then it is easy to start a project. If there is no catalog, then we use these methods: 1. Method is appreciation of the project. Making budget for a project is difficult for the organization because organization has a history but project has no history. Project is unique, so it is difficult to budgeting. 2. If the project is multi-year project, it is difficult to budgeting because of the change of product, high prices of product etc.
Types of Budget
1. Top-Down Budgeting: This strategy is based on collecting the judgments and experiences of top and middle managers and available past data concerning similar activities. These managers estimate overall project cost as well as the costs of the major subprojects that comprise it. These cost estimates are then given to lower-level managers, who are expected to continue the breakdown into budget estimates for the specic tasks and work packages that comprise the subprojects. The advantage of this top-down process is that aggregate budgets can often be developed quite accurately, though a few individual elements may be signicantly in error. Not only are budget categories stable as a percent of the total budget, the statistical distribution of each category is also stable, making for high predictability. 2. Bottom-Up Budgeting: In this method, elemental tasks, their schedules and their individual budgets are constructed by following the WBS. The people doing the work are consulted regarding times and budgets for the tasks to ensure the best level of accuracy. Initially, estimates are made in terms of resources, such as labor hours and materials. Standard analytic tools such as learning curve analysis and work sampling are employed where appropriate to improve the estimates. The advantages of the bottom-up process are those generally associated with participative management. Individuals closer to the work are apt to have a more accurate idea of resource requirements than their superiors or others not personally involved. In addition, the direct involvement of low-level managers in budget preparation increases the likelihood that they will accept the result with a minimum of grumbling.
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Improving the Process of Cost Estimation
1. Should have professional estimator. 2. Project manager should make the WBS 3. There must be proper coordination between professional estimator and project manager. 4. There must be a method which dont give concrete value, give a range. 5. Have to collect information in systematic way. 6. Project manager assign an overhead cost. It adds by arbitrary cost. 7. The professional estimator should think about inflation. 8. There is an allowance for wastage when estimation.
Two Causes of Why Cost Estimation Do Not Work
1. When we prepare budget, we think only about tangible think. For intangible think, it cannot work. 2. If the people change, the budget can fail.
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