## Budget

From the previously developed information, and some additional cost data, it is then possible to formulate a budget for the project. Such a project budget

TABLE 3.3 Task Responsibility Matrix (TRM)

Personnel (Staff) Categories

Training Specialist

ABC Senior Software Software Documentation

Engineer Engineer Specialist

Number Number Number Number Total:

of Person- of Person- of Person- of Person- Person-People Weeks People Weeks People Weeks People Weeks Weeks

is illustrated in Table 3.4, utilizing the same data from the task responsibility matrix in Table 3.3. Cost items may also be broken down by week, as illustrated in Table 3.5. This facilitates cost tracking, as discussed in the next chapter.

From Table 3.4, a project budget is prepared by first examining the direct labor costs. These costs are incurred as a result of project personnel working on the various tasks of the project. As shown in the figure, and using the person-week data provided in Table 3.3, we list the four categories of personnel together with their labor rates per week and the person-weeks that each has been assigned. This yields the direct labor cost by category. The summation of these costs (\$19,700) is the total direct labor cost for this project. This is augmented by adding the fringe benefits, in this case 30% of the direct labor costs. The resultant sum, shown as subtotal 1, is \$25,610. The next item of cost to consider is the overhead cost. This example shows the overhead rate to be 70%, or a total of \$17,927. Some companies embed fringe benefits into the overhead percentage and therefore there is no reason to consider fringe and overhead separately. In this model, they are constructed as separate rates.

Subtotal 2 shows the direct costs with fringe and overhead costs added, yielding an amount of \$43,537. At this point in the process, other direct costs (ODCs) are considered. These may be a variety of cost items, such as materials, consultants, subcontractors, and services provided from outside the company. In Table 3.4, two such costs are listed: the cost of purchasing soft-

 Direct Labor Rate/Week Person-Weeks Cost Senior software engineer \$1,000 10 \$10,000 Software engineer 700 10 7,000 Documentation specialist 500 3 1,500 Training specialist 600 2 1,200 25 \$19,700 Fringe benefits @ 30% \$ 5,910 Subtotal 1 \$25,610 Overhead @ 70% \$17,927 Subtotal 2 \$43,537 Other direct costs 1. Software \$ 8,000 2. Training materials 1,000 Subtotal 3 \$52,537 General & administrative @ 15% 7,881 Total cost \$60,418 Fee (profit) @ 10% 6,042 Cost and fee (Price) \$66,460

TABLE 3.5 Cost Budget by Week

Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8

Labor Category P-wk Cost P-wk Cost P-wk Cost P-wk Cost P-wk Cost P-wk Cost P-wk Cost P-wk Cost

TABLE 3.5 Cost Budget by Week

Labor Category P-wk Cost P-wk Cost P-wk Cost P-wk Cost P-wk Cost P-wk Cost P-wk Cost P-wk Cost

 Senior software eng'r 1 1,000 2 2,000 2 2,000 1 1,000 1 1,000 1 1,000 1 1,000 1 1,000 Software eng'r — — 2 1,400 2 1,400 1 700 2 1,400 1 700 1 700 1 700 Document specialist 1 500 1 500 1 500 — — Training specialist 1 600 1 600 1 1,000 4 3,400 4 3,400 2 1,700 4 2,900 3 2,200 4 2,800 3 2,300 Fringe @ 30% 300 1,020 1,020 510 870 660 840 690 Subtotal 1 1,300 4,420 4,420 2,210 3,770 2,860 3,640 2,990 Overhead @ 70% 910 3,094 3,094 1,547 2,639 2,002 2,548 2,093 Subtotal 2 2,210 7,514 7,514 3,757 6,409 4,862 6,188 5,083 ODCs: Software — — — — 8,000 — — — train, mat'Is — — — — 1,000 — — — Subtotal 3 2,210 7,514 7,514 3,757 15,409 4,862 6,188 5,083 G&A @ 15% 331 1,127 1,127 564 2,311 730 928 763 Total cost 2,541 8,641 8,641 4,321 17,720 5,592 7,116 5,846 Total cost \$60,418 Cumulative cost 2,541 11,182 19,823 24,144 41,864 47,456 54,572 60,418

ware, estimated at \$8,000, and the cost of training materials, shown as \$1,000. Adding these costs to subtotal 2 leads to subtotal 3, which is \$52,537.

Next, general and administrative (G&A) costs are added. These are represented as a percentage, in this case 15%, or a total of \$7,881. Summing this cost with subtotal 3 yields the total estimated project cost of \$60,418. This, of course, is a critical number. If all went according to plan, the overall project, for this example, would cost \$60,418. Finally, a fee is added, in this case 10%. This is the profit that the company wishes to make by engaging in this effort. Adding the fee to the cost results in the overall estimated price of \$66,460.

In order to calculate the bottom-line cost without ODCs, and do it quickly, we introduce the notion of a ''cost factor.'' This cost factor (CF) is a multiplier on the direct labor costs that results in the total project cost, without any ODCs. The cost factor is

where FR = fringe rate (expressed as a decimal) OH = overhead rate GA = general and administrative rate

Thus, in the example shown in Table 3.4, the cost factor is

CF = (1 + 0.3)(1 + 0.7)(1 + 0.15) = (1.3)(1.7)(1.15) = 2.54

This means that every dollar of cost at the direct labor line translates into \$2.54 in bottom-line cost, exclusive of ODCs.

In a similar vein, the ''price factor'' (PF) translates direct costs into bottomline prices and is

where PR is the profit (fee), expressed as a decimal. By using numbers from Table 3.4, the price factor is

Again, both the cost and price factor are rapid ways to estimate bottom-line costs and profits, but without other direct costs.

We note that some elements of cost are estimated by the Project Manager (more likely in concert with the Project Controller and the Chief Systems Engineer). These include the original person-week estimates, and the software and training materials costs (ODCs). All other costs are derivable from the fringe, overhead, and G&A costs. These three costs are characteristic of the corporate structure and generally are not under the control of the Project

Manager. In a similar vein, company management will likely select the fee (profit) that is to be bid, obtaining an input from the Project Manager.

The PM must control the project to the overall cost number and not the total bid price. The fee is not to be spent by the PM unless some agreement has been reached within the company's decision-making apparatus to do so for this project. There are even times when the PM is not aware of the fee (profit) that has been proposed.

The customer may also wish to see the estimated project costs broken down by time period (as in Table 3.5) or by project task. The task breakdown of cost would be derived from using the task person-week data shown in Table 3.3.

An inviolate notion in project as well as corporate management is that cost and price are not the same. If it turns out that the project is successful, then the enterprise would receive the bid price from the customer, which then would be booked as company sales or revenues. The difference between project revenue and project cost is, of course, the profit that is made by the project. If that number is positive and equal to or greater than the bid profit, then all is well. If it is negative, then the PM may be in some difficulty, with a lot of explaining to do.