Cost Budgeting

Cost budgeting is the process of allocating cost to the individual work items in the project. Project performance will be determined based on the budget allocated to the various parts of the project. The result of the cost budgeting process will be to produce the cost baseline of the project.

The cost baseline for the project is the expected actual cost of the project. The budget for a project should contain the estimated cost of doing all of the work that is planned to be done for the project to be completed. In addition, cost must be budgeted for work that will be done to avoid, transfer, and mitigate risks. Contingency must be budgeted for risks that are identified and may or may not come to pass. A reserve must be budgeted for risks that are not identified as well.

On most projects, the expected value for risks is budgeted. This is reasonable since it reflects the average risk exposure for the project. Using the worst case or the best case situation for the project would be overly pessimistic or optimistic and make the project overfunded or underfunded, neither of which is a good thing.

Table 3-1. Estimate of the cost of a printed circuit board.

Most

Expected

Standard

Item

Description

Optimistic

Pessimistic

Likely

Value

Deviation

SD Squared

1

100 ohm resistor

0.04

0.06

0.05

0.050

0.0033

0.00001111

2

200 ohm resistor

0.06

0.09

0.07

0.072

0.0050

0.00002500

3

10 ohm resistor

0.03

0.04

0.03

0.032

0.0017

0.00000278

4

10 mf capacitor

0.22

0.25

0.22

0.225

0.0050

0.00002500

5

20 mf capacitor

0.28

0.36

0.33

0.327

0.0133

0.00017778

6

5 mf capacitor

0.11

0.13

0.12

0.120

0.0033

0.00001111

7

Integrated circuit

1.66

1.88

1.79

1.783

0.0367

0.00134444

8

Wire

0.33

0.33

0.33

0.330

0.0000

0.00000000

9

Circuit board

1.7

2.05

1.98

1.945

0.0583

0.00340278

10

Connector

0.57

0.7

0.67

0.658

0.0217

0.00046944

Sum of Squares

0.00546944

Total Cost 5.542

Standard Deviation

0.07395569

Accounting for this money can be confusing and misleading. We do not want to give each of the people who are responsible for an activity the operating budget for the planned work plus the contingency budget for the work that may or may not have to be done. People being what they are, this money would all be spent to complete the activity whether or not the risk occurs.

One way to avoid this is to separate the contingency reserve and place it into a contingency activity with zero duration. When a problem occurs in an activity the money needed to correct the problem is taken from the associated contingency activity and placed into the operating budget for that activity.

There is a distinction between the contingency budget and the management reserve. The contingency budget is set up for the risks that can be identified but may or may not take place. The management reserve is money that is budgeted for the project for risks that are not even identified but where through experience or even intuitive insight we feel that the money will be needed. Contingency budgets should be approved by a manager one level higher than the normal approving manager or person doing the work. The money from the management reserve requires an approval by a person two levels higher.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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