10 : Managing the Budget

1. 10 : Managing the Budget Estimating is like witchcraft: it involves foretelling situations about which little is known Brian Fine Riding the Project Life-cycle

2. Managing the Budget • levels of accuracy in project budgets • developing a budgetary system • using the PBS to control the budget • using the WBS to control the budget • budget overruns and escalating commitments Riding the Project Life-cycle

3. Levels of Accuracy in Project Budgets • the problem of uncertainty • the central estimate and distribution • the accuracy of data sets • sampling problems • site specificity • prices hide cost drivers • the pioneer process plant study • 44 projects Riding the Project Life-cycle

4. The Changing Accuracy of Estimates 30% scheme design 20% tender 10% final account central estimate 0% brief definition description completed building Riding the Project Life-cycle

5. Budget Estimating AccuracyThe Pioneer Process Plant Study Riding the Project Life-cycle

6. Developing a Budgetary System • the product breakdown structure • components • the work breakdown structure • tasks Riding the Project Life-cycle

7. The Product Breakdown Structure Riding the Project Life-cycle

8. The Work Breakdown Structure Riding the Project Life-cycle

9. Using the PBS to Control the Budget • the cost planning • benchmarking against similar projects • budget baseline establishment • the cost planning hierarchy Riding the Project Life-cycle

10. The Cost Planning Hierarchy cost/bed cost/seat cost/pupil unit rate cost/m2 gross area wall/floor ratio gross/net space ratio ratio analysis flooring/m2 roofing/m2 facade/m2 elemental cost 1000 m2 Penryhn slate bill of quantities Riding the Project Life-cycle

11. Value Engineering and Cost Management • target costing • the value engineering process • external audit by a third party • the VE workshop • the problem of estimating accuracy • the problem of incentives Riding the Project Life-cycle

12. Constructability • ensuring the design can be built • the constructability audit • incentive alignment and variantes • process capability • dimensional accuracy • skills and equipment • programme • quality management • the process capability trade-off Riding the Project Life-cycle

13. The Process Capability Trade-off cost of investment in improved process capability income from asset exploitation OR savings in costs of operation and maintenance return on investment in process capability project budget

14. Using the WBS to Control the Budget • tasks at the weekly level • the cost breakdown structure • labour • materials • plant • the organisational breakdown structure • assigning task execution to resource bases Riding the Project Life-cycle

15. Controlling the Budget • cost accounts • relate to OBS • the cost account plan • the performance measurement baseline Riding the Project Life-cycle

16. The Performance Measurement Baseline target price profit negotiated target cost agreed variations contingency performance measurement baseline cost accounts undistributed budget work packages planning packages time

17. Earned Value Analysis • relating budget to programme • earned value (EV) : invoicable work to date • actual cost: actual expenditure to date (AC) • budget variance (AV) = EV - AC • planned value : what ought to have been spent (PV or Project Performance Baseline) • programme variance (SV) = EV - PV • the cost performance index (CPI) • EV/AC • productivity • programme performance index • EV/PV Riding the Project Life-cycle

18. Earned Value Analysis time now, t PV 100 AC spend to date % complete AV SV progress to date EV 0 time

19. Budget Overruns and Escalating Commitments • why do budgets overrun? • poor estimating • regulatory constraints • the dynamic of escalation - why not cancel? • admission of failure • credible commitments • live in hope • provides for some income stream • project management tactics Riding the Project Life-cycle