Chapter 10: Budget Planning

Chapter 10: Budget Planning

1. Budget Management

   • Importance budget planning
     • Cost is one of the three project constraints
     • A budget is a plan or forecast
     • Cost management also includes tracking and managing variances from the planned expenditures
   • Estimating costs to compare and select
   • Methods of estimating
   • Managing the budget
     • Budget timeline
     • Budget variances

2. Project Cost Management

   • The processes involved in planning, estimating, budgeting, and controlling costs so that the budget can be completed within the approved budget

3. Tools & techniques in estimating cost

   • Analogous estimate
   • Parametric estimate
   • Bottom-up estimating
   • Resource cost rates
   • Vendor bid analysis
   • Reserve analysis
   • Cost of quality

4. Cost Management

   • PV: Planned Value, estimated value of the planned work
   • EV: Earned Value, estimated value of work done
   • AC: Actual Cost, what you paid
   • BAC: Budget at Completion, the budget for the total job
   • EAC: Estimate at Completion, what is the total job expected to cost?
   • EAC: Estimate to Complete, forecasted costs to complete job
   • ETC: Estimate to Complete, forecasted costs to complete job
   • VAC: Variance at Completion, how much over/under budget do we expect to be?

5. Manage Cost:

   • Estimate Costs
   • Determine Budget
   • Control Costs

6. Managing the Budget

   • Cash flow
     • Contingency reserves
       • For unexpected expenses that arise during the project
       • There are almost always some surprises, but can’t predict at the start what it will be
       • Can be spent and still be within the original project budget
     • Management Reserves

7. Budget Baseline & Project Cost Chart

   • Project budget is usually shown graphically, illustrating the cumulative planned spending.
   • Typical shape for the budget curve is s-shaped, with less spending at the beginning and end of the project.
   • Add the periodic expenditures on a regular basis to create the Project Cost Chart.

8. Earned Value Formulas

   • EV-AC : Negative = Over budget & Positive = Under budget
   • EV-PV : Negative = Behind Schedule & Positive = Ahead of Schedule
   • EV/AC : How much are we getting for every dollar we spend?
   • EV/PV : Progress as % against plan
   • EAC-AC: How much more do we have to spend?

9. Earned Value guide

   • EV is always first
   • Variance = EV minus something
   • If the formula relates to cost use AC
   • If the formula relates to schedule use PV
   • Interpreting results: negative is bad and positive is good
   • Interpreting results: greater than one is good, less than one is bad

10. Cost Variance: CV

    • The difference between the earned value and the actual cost is the cost variance:
    • CV=EV-AC
      • If positive, you are achieving more than you predicted for the money
      • If zero, you are right on the plan
      • If negative, you are achieving less than you predicted for the money

11. Schedule Variance: SV

    • Difference between planned and actual progress
    • SV=EV-PV
      • Positive value: project is ahead of schedule
      • Zero: project is on-time
      • Negative: project is behind schedule

12. Cost Performance Index: CPI

    • Cost Performance Index: CPI
    • CPI=EV/AC
      • A value greater than one: under budget
      • Equal to one: on budget
      • Less than one: overspending the budget

13. Schedule Performance Index: SPI

    • Compares progress on the scope to spending
    • SPI = EV/PV
      • SPI less than one indicates the project is behind schedule
      • SPI of one is right on schedule
      • SPI greater than one the project is ahead of schedule