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Budget Planning and Procurement

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. Importance of budget planning.

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Budget Planning and Procurement

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  1. Budget Planning and Procurement

  2. 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

  3. 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

  4. 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

  5. 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

  6. Estimating Guidelines • Don’t gold-plate: estimate what you expect, and meet that estimate.

  7. 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 are 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

  8. Reporting Progress: Earned value management

  9. Project Cost Chart

  10. 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.

  11. Project Cost Chart (up to May)

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. ETC if past variances are not expected to continue: ETC = BAC – EV

  18. ETC if past variances are expected to continue at the same level ETC = (BAC – EV)/CPI

  19. Estimated Final Project Cost: EAC EAC = ETC + AC

  20. Budget Timeline • Contractual agreements often require partial payments • Prepare a schedule, based on contractual and other expenditure requirements

  21. 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

  22. Procurement Management • Make or buy analysis • Contract types • Fixed Price • Cost reimbursable • Time and materials • The Procurement Cycle

  23. 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/col11120/

  24. 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/col11120/

  25. 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/col11120/

  26. Fixed Price Contract types Figure 17.6.1.1 Table of Fixed Price Contracts and Characteristics Source: http://pm4id.org/9/5/

  27. Cost-Reimbursable Contract Types Figure 17.6.2.1 Table of Contract Types and Characteristics Source: http://pm4id.org/9/5/

  28. 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

  29. 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

  30. 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

  31. 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

  32. Questions?

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