Differentiate Between Cost Planning for Linear and Iterative Life Cycles

Question 1

What is Budgeting and Cost Control

Answer 1

• The estimation of costs, the setting of an agreed budget, and management of actual and forecast costs against that budget

Question 2

Cost Planning and Lifecycles

Answer 2

• Life-Cycle Cost Analysis (LCCA) is a method for assessing the total cost of facility ownership.
• It takes into account all costs of acquiring, owning and disposing of a building or building system
• More detail is typically necessary in the near term, whilst later phases of work can be maintained at a higher level of granularity
• Knowledge and lessons learnt over the course of the near term can affect our estimates for later elements of work
• We can see the cumulative effects of these costs over time in a costing profile in a linear lifecycle, as a linear lifecycle, scope and quality are fixed
• This coupled with the collaborative nature of the relationship between sponsor and project manager required in an iterative lifecycle could lead to a more frequent release of funding

Question 3

Project Budget

Answer 3

• A budget identifies the planned expenditure for a project and is used as a baseline against which the actual expenditure and predicted eventual cost of the work can be reported
• Once approval given, these refined estimates form the baseline cost
• By allocating costs the activities, a profile of expenditure is produced
• The three major components in that make up the project budget are:

1. The base cost estimate
2. Contingency
3. Management reserve

Question 4

Base Cost

Answer 4

• The base cost estimate comprises known costs associated with:

> 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

• There are different categories of cost:

o Fixed Costs do not vary with the volume of work undertaken e.g. purchase of plant and machinery

o Variable costs rise in direct proportion to the size or duration of the project e.g. labour, raw materials

o Direct Costs are those costs that can be directly attributed to the project e.g. all of the above

o Indirect Costs are part of the owning organisations’ overheads and are shared across projects/functions e.g. cost of buildings, management overheads

Question 5

Approvals

Answer 5

• The budget is allocated to Team Leaders and then to the project team as per the Work Breakdown Structure
• Budgets are controlled at Work Package level and rolled up for reporting purposes as per the Cost Breakdown Structure
• Deviations from the budget are managed with appropriate escalation levels

Question 6

Cash Flow

Answer 6

• Cash Flow concerns the flow of money in and out of the project to minimise the carrying cost of the financing for the project. For any project (or organisation) it is important to forecast and manage cash flow so as to ensure cash is available when needed
• Cost Accruals are for things that have been purchased but payment has not been made

Question 7

Time Phased Budget

Answer 7

• Once all our activities have been scheduled we can calculate our planned spend for each period and plot cumulative cost over time
• This gives us a budget baseline against which we can monitor progress
• It is the foundation of Earned Value Management

Question 8

Cost Management

Answer 8

• Cost management is the monitoring and control of costs against the budget
• It requires recording and monitoring of:

o Commitment: Orders placed and money taken from the budget to cover these orders

o Accrual: Work done for which payment is due but has not been made

o Actual expenditure: The money that has already been paid

o Forecast out-turn costs: The total of actual expenditure, accruals, commitments, and the estimate of the costs to complete the work to the end of the project

Question 9

Effective Cost Management

Answer 9

• Costs incurred should be directly attributable to a budget item
• Budget and costs are usually aligned by a cost breakdown structure (CBS)
• Budget is phased over time giving profile
• Profile used in financing and funding
• Allows a cash flow forecast to be developed
• Allows drawdown arrangements to be agreed with the organisation

Question 10

Monitoring and Control

Answer 10

• Performance is reviewed at regular intervals
• Reviews should assess cost performance in light of scope and schedule
• Trends can be identified by comparing actuals against budget
• Trends can be extended into forecasts
• Identifying trends and taking corrective action to minimise adverse variances is necessary for effective control
• The principal tool for monitoring and controlling cost is Earned Value Management
• Changes to the budget should only take place through formal change control

Question 11

Benefits of Budgeting and Cost Control

Answer 11

• Easier to gain approval and raising funding
• Increases the confidence of sponsor/ Project Board
• Early indications of potential cost over-spends allows early corrective action
• Allows effective management of contingency funds
• Increases the likelihood of achieving the return on investment ‘promised’ in the Business Case