Budgets and Cost Control Flashcards
APM define budget as :
The estimation of costs, the setting of an agreed budget and managing of actual and forecast cost against the budget.
Cost planning is effectively about ?
Creating a justified and credible cost for the project and essentially a forecast of all the predicted costs of the project.
The there components of a budget ?
Base cost estimate , contingency and management reserve
Base cost estimate : This is the know cost of the project and will form the bulk of our budget as if we use to pay for such this as -
Human Resources
Accommodation
Consumables
Expenses
Capital items
It is what we believe we will need in order to implement our project management plan and execute all the project tasks, pay for all the resources and deliver output against the requirements
Contingency :
The contingency budget is a pot of money set aside and separate to the base cost edit image to pay for identified risks, or the ‘known unknowns’, effectively, it enables the project manager and their team to manage risk more effectively, as it provides them a sum of money that they can dip into to pay for any planned responses to risk .
Contingency: It does not typically require the project manger to ask for permission to use from the sponsor or steering group it is there to empower the project manager and allow them to make more?
effective decisions regarding risks without having to seek approval for additional funding to manage risk if they use the contingency budget
contingency - because we typically score risk and assign an owner based on this score we can also reflect this in our contingency using delegated authority this means ?
The project team won’t need to seek project manager approval to request access to funds to pay for risk responses , provided they remain within their delegated authority.
Management reserve: management reserve is money set aside for ‘unknowns unknowns’. Essentially…
we recognise that events may happen that couldn’t possibly have been predicted and having a funding pot of money set aside for just in case something happens will mean that we won’t need to draw money from other areas or ask for additional funding to deal with it.
Management reserve - it can be used to manage any sudden , unexpected changes in scope or direction, or any identified risk ghat have a very ?
Low likelihood of occurring but would have a manhole impact should them materialise.
Benefits of cost planning : Having a clear plan of what costs look like throughout a project will enable the project manager and their team to have more control over the project, since
the budget is one of key constraints that need to be managed
Benefits of cost planning - a well planned budget will provide a clear baseline for the project team to monitor progress against. If the tolerances are exceeded or even tending to be exceeded then the project manager and this team can ?
Take proactive action to intervene and keep the budget on track
Benefits of cost planning - A key document generated as part of scope is the Cost Breakdown Structure (CBS). If we have a defined and documented budget we can ?
Compare our actual cost against the estimated cost from the CBS, allowing us to assess our estimates and compile lessons learned for future decisions
Benefits of cost planning - A well defined budget can also help demonstrate the need for ?
Funding, helping to justify expenditure and can strengthen the business case .
Cost control terminology -
Committed - money that is
Legally agreed to be paid but has not yet been spent. Effectively we are contractually bound to pay someone,
So even if the project were to close early we will still need to pay
Cost terminology - Accrual
An accrued cost is money owed for work done but has not yet been invoiced. This means the money is spent , even it if remains in our account as we will need to pay for the work that has been done and are awaiting the invoice
Cost terminology -actual
Simply put money that has actually been spent. An invoice has been provided and we have paid the amount agreed in the invoice .
Cost terminology - estimate to complete -
We could call these planned cost in that they are predicted cost but as they are still a prediction then we could cancel them or alter them if needs be, since they are not committed contractually yet
Cost terminology - forecast
Our forecast cost will effectively be the sum of the all previous, we can use any future cost such as committed and estimate to complete to predict where things will be going and we can use actuals to monitor trends which can help to anticipate whether our planned cost need to be adjusted moving forward.
Planning the budget: fixed cost
A payment that remains static
Throughout a project regardless of usage.
Such as accommodation rental payments
Planning the budget: variable cost
Costs that will change depending on how much we use something
Planning the budget: direct cost
Cost that are directly attributable to the project. If the project wasn’t going ahead, then we would t need to spend this money
Planning the budget: indirect cost
There are cost that would need to be paid regardless of whether the project proceeds or not such as overhead cost
Planning the budget: labour cosr
Any cost associated with people such as salaries , expenses , accommodation etc
Planning the budget: non labour costs
Any cost associated with materials and deliverables such as tools a equipment, raw materials etc
Budgeting in a linear lifecycle - we will plan our budget based on any regular payments that we have agreed with contractors we will also need to consider ?
Payments that might be linked to the completion of Certain tasks or activities which could also tie into milestone payments ( payments at key points during the project)
Budgeting in a linear lifecycle: our expenditure from one month to the next might differ drastically because of this so we will use cumulative totals to help understand how much money we plan to spend overall at certain points throughout the project. We can then plot these cumulative Totals onto a graph to show the rate at which we plan to spend money throughout the project
Budgeting in an iterative lifecycle : since a iterative lifecycle is more dynamic and regulate changes to allow iterations it is likely that the funds are going to be released more regularly than in a linear approach , it is likely that budgets will be based on ?
The time boxes.
Because the project will effectively be controlled using these time-boxes , the planned budget will be based on how much money we plan to allocate to each time box based on its objectives
