Bhole_M7 - Project Management: A Managerial Approach...

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Project Management: A Managerial Approach Chapter 7 – Budgeting and Cost Estimation
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Overview Estimating Project Budgets Top-down Bottom-up Work Element Costing Budget Iteration Activity Budgets Continuous Budget Improvement
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Budgeting and Cost Estimation The budget serves as a standard for comparison It is a baseline from which to measure the difference between the actual and planned use of resources Budgeting procedures must associate resource use with the achievement of organizational goals or the planning/control process becomes useless The budget is simply the project plan in another form Chapter 7-1
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Estimating Project Budgets In order to develop a budget, we must: Forecast what resources the project will require Determine the required quantity of each Decide when they will be needed Understand how much they will cost - including the effects of potential price inflation There are two fundamentally different strategies for data gathering: Top-down Bottom-up Chapter 7-2
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Activity-Oriented Budgets
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Top-Down Budgeting This strategy is based on collecting the judgment and experiences of top and middle managers These cost estimates are then given to lower level managers, who are expected to continue the breakdown into budget estimates This process continues to the lowest level Aka: BBS – Budget Breakdown Structure Chapter 7-3
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Top-Down Budgeting Advantages: Aggregate budgets can often be developed quite accurately Budgets are stable as a percent of total allocation The statistical distribution is also stable, making for high predictability Small yet costly tasks do not need to be individually identified (???) The experience and judgment of the executive accounts for small but important tasks to be factored into the overall estimate Chapter 7-4
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Bottom-Up Budgeting In this method, elemental tasks, their schedules, and their individual budgets are constructed following the WBS or project action plan The people doing the work are consulted regarding times and budgets for the tasks to ensure the best level of accuracy Initially, estimates are made in terms of resources , such as labor hours and materials Bottom-up budgets should be and usually are, more accurate in the detailed tasks , but it is critical that all elements be included Chapter 7-5
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Bottom-Up Budgeting Advantages: Individuals closer to the work are apt to have a
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This note was uploaded on 01/18/2012 for the course IND/MECH mec 713 taught by Professor Bhole during the Fall '11 term at Ryerson.

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Bhole_M7 - Project Management: A Managerial Approach...

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