Chapter 6 - The Project Price and Budget
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“The Ultimate Project Management Manual” Lesson 7 - Chapter 6 – The Project Price And Budget Openers This chapter has been greatly improved since the first edition, still the section on page 213, “Real World” Budgeting does tie things together and is a recommended starting point for context. It has been greatly clarified that this is both budgeting and pricing. We want all PM’s to be involved in pricing but there are many many instances where they are presented with a done deal to manage. In preparation please think about getting across the major message that is not well conveyed in the chapter. Review by another person is always necessary (pricing). Getting the right budget/price demands client knowledge, industry knowledge and experience. Always have your price or budget reviewed and seek the best experience you can bring to bear. What is the policy in your office in this regard? Chapter 6 of The Manual Page 195 – Why The Price (Or Fees)…………… – This is very important be careful not to get bogged down discussing this section too much. It is relevant but not the thrust of the chapter. It would be best handled by showing how these items go into our Fee/Payroll calculation and relating that to the NLM and GNLM as shown in Goldbase. State the most common fee bases in your office. Page 196 – Item 4. – This should be discussed throughout. How much and how to handle? Page 196 – Item 5. – You could really get bogged down here especially if you have altruists in the crowd who don’t get it. This isn’t the time and place to fix them. Page 197 – 3rd para – This is very common in several of our business lines. In these instances, if the effort expended creates a variance it is too late, you have spent your profit. Page 197 – Value Pricing…………… - An excellent section added in this edition. Explore whether there are clients/services in your mix that could be priced on value, i.e. usually on a lump sum for a specific result. Page 198 – Pricing Government Jobs – Make the point here that the overhead we’re allowed in virtually all DOT and other government pricing is just that, “allowed” not the actual cost. Our most recent FAR combined overhead was 149.65% (FY04) and the items in the list of Non-Allowable Overhead given on page 199 are usually 14-16% of direct labor. In FY04 it was only 11% of DJL. How much of profits are needed to cover these real costs? Page 200 – Upward……..Budgeting – This is the correct starting point for budgeting. Every aspiring PM should know how to do it and have done it more than once regardless of other methods employed. Following (or copying) the format of an example from another project is an excellent learning approach. Where in your office are there examples that folks can learn from? Do you have an example you can show? Send us a copy! Page 200 – Item 7 – Who has a client that will accept contingency as a line item? How do you deal with this? Page 201 – Worksheet – Not too bad. Have you got one in Excel? An example of a fairly sophisticated pricing matrix is provided as a separate attachment. Page 202 – Advantages – These are excellent and all correct. It would be worth a point by point reinforcement. Page 202 – Disadvantages – Can you say review? Experience? Pages 203-205 – Examples – These illustrate the disadvantages well. Can you repeat review? Experience? Page 205 – last para - This is where the PM really performs as the quarterback, a skill position! It is almost impossible to do this effectively unless you know the pricing/budgeting mechanism and facts cold!!! Page 206 – Downward Budgeting – Where do you get ideas about the value of the project or what the client is willing to pay? This is key market intelligence and it is amazing how often the client will tell you if you just ask! Discuss a few other ways to get this information (rules of thumb, similar project, % of capital cost, published budgets, etc.) Page 207 – 1st para, 2nd sentence – “….the dollars available for direct labor costs should dictate the scope….”!!!!! This also causes emphasis to be placed on defining what is NOT in the scope….!!!!! Communication is especially critical when sharing work with remote offices, other business lines, and subs if we are to stay in budget and maintain satisfied clients. Page 207 – 2nd para – This requires a fairly sophisticated and mature understanding !!!!!! These two paragraphs are at the heart of a huge problem in our industry, i.e. engineers and architects who can not resolve the disconnect between what the client “needs” (our perception) and what they are willing to pay for, early on in the relationship. What should the responsible professional do if this can’t be resolved? Page 207 – four bullets at end – Bull, bull and more bull! These are not reasons, they are excuses! Manage the work and avoid creating a variance. Page 209 – Unit Price Budgeting – All of these are used. What’s common in your practice? Usually retail rates like hours! These are most commonly used for small repetitive projects. Are they ever applicable for a large project? Page 209 – 2nd para, 3rd line – “commonly understood” – Understood by you and the client. Page 210 – last bullet – Is this so? Is it an issue? Page 210 – Staffing Level Budgeting – 1st para – “particularly well for small projects” – Pure BS! Page 211 – 1st para, “This budgeting…….” – Garbage! The only appropriate application of this type of budgeting is the obvious CI/CM and other instances where it is clearly understood that we’re supplying specific staff for a specific period. Page 211 – last para – Duhhh! How about “result in the need to request a scope/fee change?” Page 213-215 – “Real World” Budgeting – Spend some time here. This is really well expressed rationale. The impact of a review, check or second set of eyes should be obvious. Page 215 – Typical Costs…….. – Watch out you don’t get bogged down here again. Overhead discussions can go on forever. Have the information from your FY03 plan at hand and perhaps a chart of the overhead accounts for information Page 216 – last bullet at the top of the page – Discuss budgeting for QA/QC and how it is accomplished. Again, there are clients who want to see it and others that don’t. Is this an optional activity? Does it apply only to large projects? Does everyone know where the QA/QC Manual can be found (again!)? Page 216 – Methods Of Handling C&P – How do you view contingency? Do you always have some? Page 218 – 6 bullets – All are solid gold! Please say again experience, review, buy-in! Page 218 – Forecasting….. – We usually look at hours and manpower loading. How often is cash flow an issue with clients or with us? This is a good time, to remind everyone that the Effort expended prior to the first prebill run is cash spent by EK that has not yet been billed or collected. (Underscore the urgency of billing and collecting!) Page 221 – A graph of total fee expended on large projects is usually instructive. DO NOT FORGET ABOUT THE ESTIMATE TO COMPLETE. A periodic review of budget spent is a good time to make budget adjustments, review potential out of scope, and change orders. Sticking to the budget is a good way to keep the client relationship on the right track too. Finally, discuss who reviews/approves budgets in your office. Up to what limits? What are the most common problems you face with budget overruns? Why? Is the budget amount accepted and authorized by the client. Are your budgets (original and changes) in BST/Goldbase substantiated by proper client authorization or documented by approved “Working without Authorization (WWOA)”?