The project budget – OPEN

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Topic 5.4: The project budget

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In the last Module, we discussed the principles of estimation as they apply to the business case.

As indicated at the time, all those methods can be applied with equal rigour to the project planning phase.

Now we have adopted the preferred alternative as our project, we need to sharpen our estimates from a plus-or-minus 20 per cent margin of error to get within 10 per cent of what our actual costs might be.

How do we do that?

The method we applied in the business case was what we call a top-down estimating technique.

In other words, we looked at the project as a whole, and asked how much would this output normally cost, and how long would it take to deliver, if (for example) we purchased it on the open market?

Bottom-up estimating, by contrast, takes that bottom line of the WBS – the tasks at their finest level of detail – and asks how much will each of these elements independently cost, and how long will they take to deliver?

Because we are estimating the discrete units of cost and time and adding them together (or ‘rolling them up’ as it is sometimes known), we can be confident that our total estimate of project cost and time will be much more precise.

In order to make accurate estimates for our project budget, we need to firstly ascertain what the resource requirements are for each task.

This process is properly know as requirements analysis, although that term can also be applied to the entire WBS / scope definition process (as we have done in this Unit).

In requirements analysis we ask, what do we need in the way of:

Equipment?

Materials?

Labour?

We can consult Google, expert stakeholders, or past project reports to get this data.

We can also apply analogous, parametric or other statistical techniques to fine-tune our estimates.

When analysing our labour requirements we also need to understand:

How much each unit of labour costs (for example, $50 per hour)

How many direct hours of labour are required (for example, 5 people x 2 hours each x $50 per hour = $500), and

How long it will take to complete the task (for example, 3 weeks)

Your project task may not be someone else's priority

Note the difference between labour cost and time to complete.

Just because it takes 10 hours of effort to deliver a task, doesn’t mean you will receive the output exactly 10 hours after work starts.

More often than not, our dependency on other activities (such as staff availability and delivery times) necessitate wait-time in our schedule.

Although the time to complete is not required for our project budget, it is a vital input into our project schedule, which we shall look at shortly.

The total (budgeted) cost of each task is therefore:

Equipment + Materials + Labour + Other Direct Costs

Contingency reserves (which we will introduce in the Unit on Risk) can then be appended to the budget for each task.

Indirect costs and management reserves (also discussed in that Unit) are applied to the overall project budget.

A simple project budget

Note, too, that equipment (or other resources) shared over multiple tasks are usually entered as indirect costs.