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Budgeting and Cost Estimation by myr60070

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									Budgeting and Cost
Estimation
 Budgets defined
 Two major approaches
 – Pros and Cons
 Behavioral issues
 Financial issues



                        1
Projects Make the Best of
Scarce Resources




                            2
Developing a Project
Budget
 Three major elements
 –   What ?
 –   How much ?
 –   When ?




                        3
NASA’s Pathfinder Rover:
Mars on a Shoestring




                           4
Why is budgeting for
Projects Tougher?
 Projects are unique
 Little history
 Projects can last for years




                               5
Potential Project Life
Cycles, Figures 7-1 and 7-
2




                             6
Two Major Approaches to
Budgeting
 Top-Down

 Bottom-Up

 Each has advantages . . . And
 disadvantages as well

                                 7
Top-Down Budgeting

 Based on judgment and history

 History includes actual costs

 Start at the top, and allocate down



                                       8
Pros and Cons of Top-
Down Budgeting
 Pros
 – Quick
 – Fairly Accurate

 Cons
 – Limited buy-in
 – Senior biased
 – Data misleading
                        9
Bottom-Up Budgeting

 Starts at the bottom

 Costs are aggregated

 Overhead added in



                        10
A Format for Gathering Data on
Project Resource Needs, Figure 7-
3




                                    11
Pros and Cons of Bottom-
Up Budgeting
 Pros
 – accurate in detail
 – Participative
 – Resolved Differences
 Cons
 – Overlooking errors
 – Time-consuming
 – Padded estimates
                           12
Behavioral Issues in
Budgeting
 Different perspectives,

 Bottom Line: Systems can be gamed

 So know what the games are . . .



                                     13
Financial Issues Worth
Considering: Inflation
 Inflation can distort estimates in different
 ways
 – Actual costs from the past will be less than
   comparables for today – the older the data, the
   greater the disparity
 – Long-duration projects can create special
   problems
      Six percent inflation doubles cost in just 12 years . . .
      . . . And 6% is low in much of the world


                                                                  14
Financial Issues Worth
Considering: Learning
Rate
 As output doubles, labor hours per
 unit decrease by a fixed percentage
 For example, the first unit of output
 takes 1,000 hours, and the learning
 rate is 80%
            Unit    Labor hours req’d
                      for that unit
             1            1000
             2            800
             4            640
                                         15
             8            512
Effects of Ignoring the
Learning Curve, Figure 7-
4




                            16
Reading: Three
Perceptions of Project
Cost




                         17
From: Three Perceptions
of Project Cost (Figure 2)




                             18
From: Three Perceptions
of Project Cost (Figure 3)




                             19
Cost is not a four letter
word!




                            20

								
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