Budget Planning and Procurement This work is licensed

Budget Planning and Procurement This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Budget and Procurement • • Importance Estimating costs to compare and select Methods of Estimating Managing the Budget • Budget timeline • Budget variances • Procurement • Make or buy • Types of contracts • Procurement cycle This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Importance of budget planning • Cost is one of the three project constraints • A budget is a plan or forecast • Cost management also includes tracking and managing variances from the planned expenditures • Detailed estimates are important This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Estimating costs to compare and select projects • Payback, rate of return or NPV (or combine them) • Need accurate numbers but must balance with the cost of getting more accurate estimates This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Estimating methods • Analogous estimate • Find a similar project or task and assume this one will be the same or similar • The more experience the estimator has, the better this works • Learn from each project • DPCI (Darnell-Preston Complexity Index) can help with benchmarking • Parametric estimate • Parameters such as number of square feet for a building; number of kitchens, bathrooms, etc. for a house. • Bottom-up estimating • Estimate each item or task and add them together • Generally more accurate but takes more effort to create This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Estimating Guidelines • Don’t gold-plate: estimate what you expect, and meet that estimate. This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Types of requirements • Cash flow • Make a plan of WHEN the outflows will occur, and ensure that the money is available on time • Contingency reserves • For unexpected expenses that arise during the project • There almost always some surprises, but can’t predict at the start what it will be • Project Manager does not allocate to the sub-projects but manages it centrally • Can be spent and still be within the original project budget • Management Reserves • For scope changes • Not likely to be spent; not part of project baseline This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Reporting Progress: Earned value management Budgeted Cost of work BCWS Scheduled Detailed estimates for each activity in the project Planned Value PV Total budgeted cost as of a certain date in the project Earned Value EV Budgeted cost of the completed work as of a certain date in the project Actual Cost AC Actual cost of the completed work as of a certain date in the project Budget at Completion BAC Total budgeted costs for the entire project This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Project Cost Chart $ 50 000 $ 45 000 $ 40 000 $ 35 000 $ 30 000 $ 25 000 $ 20 000 $ 15 000 $ 10 000 $ 5 000 $- February March April May June July Budget Baseline This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Budget Baseline and Project Cost Chart • The project budget is usually shown graphically, illustrating the cumulative planned spending. • Typical shape for the budget curve is s-shaped, with less spending at the beginning and end of the project. • Add the periodic expenditures on a regular basis to create the Project Cost Chart. This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Project Cost Chart (up to May) $ 50 000 $ 45 000 $ 40 000 $ 35 000 $ 30 000 $ 25 000 $ 20 000 $ 15 000 $ 10 000 $ 5 000 $- February March April Actual Expenditures This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). May June July Budget Baseline Project Management Chapter 12: Budget Planning and Procurement

Schedule Variance: SV • Difference between planned and actual progress SV=EV-PV • Positive value: project is ahead of schedule • Zero: project is on-time • Negative: project is behind schedule This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Cost Variance: CV • The difference between the earned value and the actual cost is the cost variance: CV=EV-AC • If positive, you are achieving more than you predicted for the money • If zero, you are right on the plan • If negative, you are achieving less than you predicted for the money This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Schedule Performance Index: SPI • Compares progress on the scope to spending: SPI = EV/PV • SPI less than one indicates the project is behind schedule • SPI of one is right on schedule • SPI greater than one the project is ahead of schedule This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Cost Performance Index: CPI • Compares the budget spent to date with progress to date: CPI=EV/AC • A value greater than one: under budget • Equal to one: on budget • Less than one: overspending the budget This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Estimated Cost to Complete the Project: ETC • Formula to use depends on what the PM expects with regard to future project costs and whether the original budget assumptions remain valid This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

ETC if past variances are not expected to continue: ETC = BAC – EV This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

ETC if past variances are expected to continue at the same level ETC = (BAC – EV)/CPI This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Estimated Final Project Cost: EAC = ETC + AC This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Budget Timeline • Contractual agreements often require partial payments • Prepare a schedule, based on contractual and other expenditure requirements This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Budget Management Summary • Cost estimations may be used to choose between options • Managing the budget includes • • Estimating costs and setting a budget Determining when the budgeted costs should occur Tracking expenditures Managing variances between the budget and the expenditures • Methods of Estimating • Analogous, Parametric, Bottom-up • Managing the Budget • Budget timeline • Budget variances This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Procurement Management • Make or buy analysis • Contract types • Fixed Price • Cost reimbursable • Time and materials • The Procurement Cycle This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Fixed Price Contract Figure 17. 6. 1: A fixed price contract the cost constant regardless of effort applied or delivery date. Illustration from Barron & Barron Project Management for Scientists and Engineers, http: //cnx. org/content/col 11120/ This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Cost Reimbursable Contract Figure 17. 6. 2: In a cost reimbursable or cost plus contract, the seller is guaranteed a fee. Illustration from Barron & Barron Project Management for Scientists and Engineers, http: //cnx. org/content/col 11120/ This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Time and Materials Figure 17. 6. 3: In a time and materials contract the cost (or revenue to the vendor) increases with increased effort. Illustration from Barron & Barron Project Management for Scientists and Engineers, http: //cnx. org/content/col 11120/ This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Fixed Price Contract types Figure 17. 6. 1. 1 Table of Fixed Price Contracts and Characteristics Source: http: //pm 4 id. org/9/5/ This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Cost-Reimbursable Contract Types Figure 17. 6. 2. 1 Table of Contract Types and Characteristics Source: http: //pm 4 id. org/9/5/ This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Procurement Cycle • Procurement Plan • Selecting the Contract Approach • • Skill level, uniqueness Type of relationship: supplier, vendor, partnership RFP, RFQ, personal contact How well known is the scope of the work? Risks—what are they? Who assumes them? How much float if any? How important to be sure of cost in advance? • Soliciting bids This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Procurement Cycle - continued • • Qualifying bidders Request for Quote (RFQ) Request for Proposal (RFP) Evaluating the bids • Usually a matrix approach • Cost is NOT the only consideration • • Awarding the contract Managing the contracts Logistics and expediting Change coordination This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Procurement Management Summary • Make or buy analysis • Contract types • Fixed Price • Cost reimbursable • Time and materials • The Procurement Cycle • • • Bidder qualification RFP or RFQ Analysis and selection Contract negotiation Contract administration Contract closure This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Chapter Summary • Cost management and Procurement are important activities for project managers • There are several methods for estimating the costs • Estimated costs may be used to choose between options • Project progress and budget management are closely related and can be managed with indices: BCWS, PV, SV, AC, CV, SPI, CPI, ETC, BAC and EAC • Contingency funds allow for the unexpected • Procurement management includes deciding about contracts and relationships with vendors, suppliers, partners • Reporting to the team and to management are important components in budget and procurement management This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement

Questions? This work is licensed under a Creative Commons Attribution 3. 0 Unported License (CC-BY). Project Management Chapter 12: Budget Planning and Procurement