Budgeting and Cost Control Flashcards
what 8 aspects are included in budgeting and cost control
- planning
- estimating
- budgeting
- evaluating
- monitoring
- forecasting
- reporting
- controlling processes
what three major components in that make up the project budget
- the base cost estimate
- contingency
- management reserve
what 5 types of costs are included in the base cost estimate
- resourcing – this includes staff costs, consultancy fees etc.
- accommodation and facilities
- consumables – e.g. power, stationery, IT supplies etc.
- expenses – travel and subsistence, communication
- capital items
what are the 4 main cost categories
- Direct costs - these are costs exclusive to the project and include the costs of resources directly involved in delivering and managing the work
- Indirect costs - these costs include the costs incurred by the project but which cannot be directly associated with a specific work element. These include overheads and other charges that may be shared across multiple activities
- Fixed costs - these are costs that remain the same regardless of how much output is achieved. Examples include facilities, the purchase of plant or machinery.
- Variable costs - these are costs that fluctuate depending on the amount of resource being used and include salaries, materials etc.
how is the work breakdown structure (WBS) used as a tool for effective cost control
it enables project costs to be controlled at appropriate levels, providing visibility and enhanced understanding.
Each work package in the WBS will have costs associated with labour, materials, expenses and possibly other cost categories
how is the cost breakdown structure (CBS) used as a tool for effective cost control
the CBS can be used to ensure that costs can be hierarchically attributed to a specific work package as well as being aggregated to align with the financial reporting systems of the host organisation.
This will provide increased visibility for the finance group in order to monitor costs and identify trends in expenditure.
what is the definition of the project contingency
contingency is the money set aside for responding to identified risks.
This part of the budget is set aside for responding to the risks after accounting for the cost of avoiding, transferring and reducing the threats or exploiting, enhancing or sharing the opportunities.
what is the definition of management reserve
a sum of money held as an overall contingency to cover the cost impact of some unexpected event.
These unexpected events include changes to the scope of work or unidentified risks.
The greater the uncertainty on the project, the greater the management reserve required. Innovative work will require a larger management reserve than routine work.
who generally controls the costs within a project
The project manager will generally have control over the base cost, while the sponsor retains control over the contingency and management reserve.
These may be held centrally as part of broader organisational funds.
what are the 4 main types of cost incurred on a project
- Committed Costs: This is money set aside for future provision of goods or services; that is, where a placement for an order for work to be done or materials required has been made, but the work is yet to be started or goods received. This money is often removed from the budget as the organisation has an obligation to pay these costs
- Accruals: Work that is partially or fully completed for which payment will be due; that is work that has been undertaken
- Actual Costs: money that has been paid out of the budget for services rendered or materials purchased
- Forecast Out-turn Cost: simply the total of committed costs, accruals and actual costs plus the estimate of the costs remaining in the work packages required to complete the project.
how is the variance of project expenditure dealt with
there should be agreed tolerances within which the project manager will operate.
Where the agreed tolerances is breached, the sponsor will need to become involved – this will form the basis of a project issue.
what are the ‘sunk costs ‘ of a project
Sunk costs are essentially the actual, committed and accrued costs that cannot be recovered, plus any costs incurred due to early termination of the project.
what are the 2 parts effective budgetary control
- Cost-accounting: Monitoring and control to compare actual costs with planned costs and the reasons for any variance
- Cost-management: Forecasting expected expenditure and taking appropriate corrective action to remain “on budget”. Regular reviews of progress against plan and forecast updates are essential if corrective action is to be taken on a timely basis.
what 7 items of information are required for effective cost management
- the budget (estimates), generally represented as an S-curve and used for comparing budgeted and actual costs against progress
- the details of committed costs including their expected timing
- the measurement of work accomplished
- cash-flow (details of expected expenditure and income over the life cycle of the project)
- forecast out-turn costs
- variance analysis
- cost reporting mechanisms may range from a simple spread-sheet to graphical reports that might be automatically generated by enterprise planning tools.
what are the 6 benefits of project budgeting and cost management include:
- Better visibility of project cash-flow
Understanding when payments are due to be made and assessing the available funding is essential in projects. Funding may be reliant on income generating activities. Effective cash-flow management is especially important for smaller contractors and also for larger organisations who may be engaged in major projects.
- Improved financial planning
Organisations need an accurate understanding of project costs if they are to make informed decisions regarding their financial commitments. This will have a large impact on the organisation’s borrowing and procurement commitments and may also be heavily influenced by its financial year planning.
- Understanding impact on profit and loss
Project cost commitments will have a major impact on the organisation’s ‘profit-and-loss’ statement. The cumulative cash-flow figures will be reflected in this statement and therefore an accurate depiction of accruals, commitments and forecasts are necessary.
- Establishing appropriate payment terms (customer-supplier)
It is in the project manager’s interest to try and ensure that customers pay as early as possible with the reverse being true when dealing with suppliers (whilst still maintaining an ethical procurement approach). Payment terms will have a major impact on cash-flow with negative cash-flow periods being of specific concern.
- Analysing the impact of budgetary change (or contract termination)
Early analysis of proposed changes that will have an impact on the project budget is important if costs are to be managed appropriately. Budgetary increases may render the project commercially unviable. The project manager must understand any contractual implications if agreements with suppliers and/or customers are to be prematurely terminated.
- Informed decision-making
The project management team are much better placed to make decisions concerning the project finances if they have accurate and timely data available to them. This may involve the approval of corrective action and may also help prevent further funds being expended on a project that is no longer able to satisfy its success criteria and/or deliver the expected benefits.
