22 Budgeting and Cost Control Flashcards
What are the purposes of estimates?
- Enable budget setting and considerations of affordability
- Support judgements about value for money for the solution chosen
- Create a resource schedule which then in turn provides the cost view of the project
What three things should be considered when creating a budget?
- The different types of costs involved and when they will need to be paid so that they can be budgeted accordingly, i.e. funding drawdowns to cover payment milestones
- Information required from external sources, such as supplier costs, and how these align to the plan to enable budgeting
- The assumptions being made on the project and how they underpin the cost estimates so they can be understood, validated and budgeted for
What does the Cost Breakdown Structure (CBS) do?
Identifies all activity that has a cost associated with it, bot labour and non-labour in each work package.
How is the CBS developed?
Using the Work Breakdown Structure (WBS), each work package defined is used to look at the cost breakdown for delivery of each activity.
What can costs be attributed to?
People, equipment, materials, other resources required.
What does the CBS reflect?
The financial coding used in the project for recording and booking. It may be set at an organisational level as part of standard financial reporting procedures.
In a linear lifecycle, when will funding be released?
Funds will only be released at decision gates when the costs spent to date are understood and future forecasts have been approved.
In an iterative, when will funding be released?
The release of funding may be more frequent due to work being completed in short intervals.
Why is the cost planning exercise vital to the project lifecycle?
To manage cashflow and ensure the project manager knows when funding drawdowns are needed.
Name an example of a fixed cost.
A contract may set a monthly cost for resources provided by a particular supplier, irrespective of the actual resources used by the supplier over the month.
Name an example of a variable cost.
Paying for materials as and when they are needed or used. The monthly cost may well be different from month to month.
Name an example of costs recurring.
Software licenses and maintenance reoccur at set periods, happen periodically as an event happens and contribute multiple costs to the project at different times.
Name an example of non-recurring costs.
Equipment set up costs are a one-off cost to the project, happening once in a project lifecycle and contributing a single cost.
What is the difference between direct and indirect costs?
Direct costs are directly related to the outputs of the project, whereas indirect costs are associated with the costs of operating the outputs for the business as a whole.
Why is cost control necessary?
To identify variances to project budgets and cost forecasts to inform decision making.
Why do project managers use cost control techniques?
- To minimise costs where possible
- Identify areas of overspend
- Correct unacceptable levels of overspend
- Inform future projects by providing insight for lessons learnt
What does a forecast determine?
Project costs against scheduled activities.
What is Earned Value Management (EVM) good for?
It is ideal for identifying where a project is not progressing efficiently.
What does EVM do?
Reports on the project spend against the curve and the value of the work achieved. If the project is underspent or overspent against the planned spend line, knowing the value of work done at that point helps to refine budgets based on current project status.
What does monitoring enable?
Meaningful reports to be shared to improve performance and enable decision making. Monitoring takes the baseline that has been agreed and looks at how the project is performing against it.
What four things monitor progress against baselined budgets, timelines and success criteria?
- Decision gates
- Benefit reviews
- Stage reviews
- Audits
What can reporting include?
- Actual costs vs forecasted costs
- Actual spend vs forecasted spend against a set spend curve
- Actual spend vs actual work achieved looking at the efficiency of a spend (earned value analysis)
- Estimated project budget and the forecasted overrun based on planned completion dates
- Cashflow and drawdown requests
- Resource costs
- Change request costs
- Contingency drawdown requests
- Financial benefit realisation
What does reassigning resources consist of?
- Moving resources back into the business, back to the supplier or out of the organisation
- Ensuring the organisation is not charged for the resources that are no longer required
What does formally closing contracts include?
- Facilitating the closure of all contracts in the supply chain
- Making sure everything is done, and that everything that had been expected to be received has been
- Agreement of all final accounts
What is done in accounting and the management systems update?
- Close down the project on the accounting and management systems
- Remove delegated authorities and project cost codes
- No further money can be charged against the project
What is involved in the process of returning surplus funding?
Once all payments have been settled, any budget not spent returns to the business for use elsewhere.
