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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 Project Cost Management Processes

 Estimate Costs: The process of developing an

approximation of the monetary resources needed to
complete project activities.

 Determine Budget: The process of aggregating the

estimated costs of individual activities or work packages to
establish an authorized cost baseline.

 Control Costs: The process of monitoring the status of the

project to update the project budget and managing changes
to the cost baseline.
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 Basic Principles of Cost Management
 Tangible costs or benefits are those costs or benefits that
an organization can easily measure in monetary terms like
in Rs. / $.
 Intangible costs or benefits are costs or benefits that are
difficult to measure in monetary terms.
 Direct costs are costs that can be directly related to
producing the products and services of the project.
 Indirect costs are costs that are not directly related to the
products or services of the project, but are indirectly related
to performing the project.
 Sunk cost is money that has been spent in the past; when
deciding what projects to invest in or continue, you should
not include sunk costs in Estimates.
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 Basic Principles of Cost Management
 Learning curve theory states that when many items are
produced repetitively, the unit cost of those items decreases in a
regular pattern as more units are produced. Learning Curve
Theory is based on the concept that the more an individual
repeats a process or activity, the more adept they become at that
activity. This translates to lower input costs and higher overall
output.
 Reserves are dollars / Rupees included in a cost estimate to
mitigate cost risk by allowing for future situations that are
difficult to predict.
 Contingency reserves allow for future situations that may be
partially planned for (sometimes called known unknowns) and
are included in the project cost baseline.
 Management reserves allow for future situations that are
unpredictable (sometimes called unknown unknowns).

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 Basic Principles of Cost Management
 Analogous Estimating: A cost-estimating technique that
uses the actual cost of a previous, similar project as the
basis for estimating the cost of the current project; also
called top-down estimate.
 Bottom-up Estimating: A cost estimating technique
based on estimating individual work items and summing
them to get a project total.
 Project Baseline: The original project plan plus approved
changes.
 Cash Flow Analysis: A method for determining the
estimated annual costs and benefits for a project.
 Cost Baseline: A time-phased budget that project
managers use to measure and monitor cost
performance. 6
 Basic Principles of Cost Management
 Cost management plan: A document that describes how
cost variances will be managed on the project.
 Life Cycle Costing Considers the total cost of
ownership, or development plus support costs, for a
project.
 Cost Overrun: The additional percentage or amount by
which actual costs exceed estimates.
 Profit margin: The ratio between revenues and profits.
 Profits : Revenues minus expenses.

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 Basic Principles of Cost Management

 Definitive estimate: A cost estimate that provides an

accurate estimate of project costs.
 Budgetary estimate: A cost estimate used to allocate
money into an organization’s budget.
 Rough order of magnitude (ROM) estimate: A cost
estimate prepared very early in the life of a project to
provide a rough idea of what a project will cost

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 Types of Estimates

 Rough Order of Magnitude Analysis:

 The first type of estimate is an order-of-magnitude
analysis, which is made without any detailed
engineering data.
 The order-of-magnitude analysis may have an
accuracy of ±35 percent within the scope of the
project.
 This type of estimate may use past experience (not
necessarily similar), scale factors, parametric
curves.

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 Types of Estimates
 Approximate Estimate:
 The approximate estimate (or top-down estimate),
which is also made without detailed engineering
data, and may be accurate to ±15 percent.
 This type of estimate is prorated from previous
projects that are similar in scope and capacity, and
may be titled as estimating by analogy, parametric
curves, rule of thumb, and indexed cost of similar
activities adjusted for capacity and technology.
 In such a case, the estimator may say that this
activity is 50 percent more difficult than a previous
(i.e., reference) activity and requires 50 percent more
time, man-hours, Rupees, materials, and so on.

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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 percent.

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 Types of Estimates

Type Estimating WBS General Time to

Method Relationship Accuracy

ROM Parametric Top down –25% to +75% Days

Budget Analogy Top down –10% to +25% weeks

(Approximate)

Definitive Engineering Bottom Up –5% to +10% months

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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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 Work Breakdown Structure Reporting Levels

 The Work Breakdown Structure is the framework

used to facilitate the requirement for integrating
these major components.
 The Work Breakdown Structure is further broken
down by Control Accounts, Work Packages, and
Planning Packages.

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 Control Accounts
 For the NUST House project, it was determined that
the performance measurements for the project will
be taken at Level 3 (see graphic below). The project
manager and the stakeholders must determine the
level at which the performance measurement will be
required.
NUST
Level 1 1

House Building
Level 2 Project
1.1 Control Account Level

Level 3 Concrete
1.1.1
Framing
1.1.2
Plumbing
1.1.3
Electrical
1.1.4
Interior
1.1.5
Roofing
1.1.6

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 Control Accounts
 A Control Account is an assigned WBS Level used to monitor
the cost and schedule performance of a significant element
of the work. Control Accounts are also referred to as Cost
Accounts. These terms are interchangeable, however, we
will use the term Control Accounts.

 A Control Account is a major management control point for:

• Cost Summarization
• Variance Analysis and Reporting
• Responsibility Assignment
• Scope Description
• Corrective Action Planning
 A Control Account Manager (CAM) is responsible for
executing the Statement of Work associated with their
assigned Control Account(s).
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 Work Packages/Planning Packages
 Now work packages and planning packages appear in the WBS as
shown in chart below. For the NUST House project, the Work
Packages and Planning Packages will be at Level 4 of the WBS. This is
the level at which detailed budgets will be developed and then
summarized at the Control Account level for reporting.

Level 1 NUST
1

Level 2
Patio House Building
Project
1.1 Control Account Level

Level 3 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
Level 4 1.1.1.1
1.1.2.1 1.1.3.1
1.1.4.1 1.1.5.1 1.1.6.1

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

Work Package / Planning Package Level 21

 Work Packages
 Work Packages (WP) contain a discrete segment of
work below the Control Account level that is defined
by
 a description or brief work statement
 starting and ending dates
 completion milestone
 work-in-process measure
 time-phased budget expressed in direct labor
(hours and/or Rupees), material, other direct costs
and subcontract dollars
 It is important that the duration of a Work Package be
a relatively short span of time (normally, but not
limited to, six months or less).

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 Planning Packages
 Planning Packages reflect a future segment of work within
a Control Account that is not yet broken down into
detailed work packages. A planning package has a firm
budget, estimated start and complete dates, and Statement
of Work.
 As work becomes more clearly defined, Planning Packages
are converted into Work Packages, with the following
constraints:
 All planning packages are converted into work
packages as requirements are defined
 Conversion of planning packages to work packages is
reviewed by the Project Manager & Sponsor
 Any conversion involving a change to the schedule or
budget of the control account must be accompanied by
approval from senior management 23
 Review
The budgeting process establishes a means for
documenting and tracking the cost goals for all
contractually authorized work.

The baseline is what cost and schedule performance

is measured against.

A Control Account is an assigned WBS Level used to

monitor the cost and schedule performance of a
significant element of the work.

Detail below the Control Account Level is contained

in Work Packages and Planning Packages.
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 Direct and Indirect Cost Accounting
Direct Costs: Costs applicable to, and identified
specifically with, the project contract Statement of
Work.
Examples of Direct Costs: Labor, Travel, Material,
Subcontractor Charges
Indirect Costs: Charges that cannot be consistently or
economically identified against a specific contract.
These are typically calculated by applying rates and
factors to the cost base.
Example of Indirect Costs: Fringe Benefits,
Overhead, Material Handling, General &
Administrative, Cost of Money.
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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
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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 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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