10 : Managing the Budget
Estimating is like witchcraft: it involves
foretelling situations about which little is
known
Brian Fine
© Graham M Winch
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Managing the Budget
•
•
•
•
•
levels of accuracy in project budgets
developing a budgetary system
using the PBS to control the budget
using the WBS to control the budget
budget overruns and escalating commitments
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Levels of Accuracy in Project Budgets
• the problem of uncertainty
– the central estimate and distribution
• the accuracy of data sets
– sampling problems
– site specificity
– prices hide cost drivers
• the pioneer process plant study
– 44 projects
© Graham M Winch
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The Changing Accuracy of Estimates
30%
scheme design
20%
tender
10%
central
estimate
brief
© Graham M Winch
definition
description
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final
account
0%
completed
building
Budget Estimating Accuracy
The Pioneer Process Plant Study
Project phase end
(see chapter 9 for phase
definitions)
Brief
Definition
Description
Trade package
Completion (by definition)
© Graham M Winch
Conventional
wisdom
accuracy level ±%
30
20
10
5
0
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on Estimated cost as a
proportion of actual cost for
44 projects %
62
78
83
93
100
5
Developing a Budgetary System
• the product breakdown structure
– components
• the work breakdown structure
– tasks
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The Product Breakdown Structure
universities
D721:2
core fabric
D721:G311:G251
facing bricks
G251:L321:1:2
copings
G251:L324:3
roofs
D721:2:G24
roof edges
G24:G34
rooflights
D721:G321:G24
roof coverings
G24:G312
guttering
G34:L731:4:2
skylights
G24:L414:5
downpipes
D721:G58:1:2
siphonic drains
G58:1:2:L731:4:7
roof membranes
G312:L524:2
roof cladding
G312:L522:1
thermal insulation
G312:L681:5:1
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The Work Breakdown Structure
universities
D721:2
roofs
D721:2:G24
brick/block walling
G24:2:JF1
profiled cladding
G24:2:JH3
brick/block walling
JF1:JF10
© Graham M Winch
waterprooring
G24:2:JJ4
metal cladding
JH3:JH31
single ply
JJ4:JJ41
sundry insulation
JH3:JP1:JP10
sundry insulation
JJ41:JP1:JP10
windows
G24:JL1
rooflights
JL1:Jl11
drainage
G24:JR1
rainwater goods
JR1:JR10
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scaffolding
G24:M31
facade scaffolding
M31:M312:3
sundry insulation
G24 : JP1
sundry insulation
JP1:JP10
supsended scaffold
M31:M312:6
8
Using the PBS to Control the Budget
• the cost planning
– benchmarking against similar projects
– budget baseline establishment
• the cost planning hierarchy
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The Cost Planning Hierarchy
cost/bed
cost/seat
cost/pupil
unit
rate
ratio
analysis
© Graham M Winch
cost/m2 gross area
wall/floor ratio
gross/net space ratio
elemental cost
flooring/m2
roofing/m2
facade/m2
bill of quantities
1000 m2
Penryhn
slate
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Value Engineering and Cost Management
• target costing
• the value engineering process
– external audit by a third party
– the VE workshop
• the problem of estimating accuracy
• the problem of incentives
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Constructability
• ensuring the design can be built
– the constructability audit
– incentive alignment and variantes
• process capability
–
–
–
–
dimensional accuracy
skills and equipment
programme
quality management
• the process capability trade-off
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The Process Capability Trade-off
cost of investment
in improved process
capability
income
from
asset
exploitation
OR
savings in
costs of
operation
and
maintenance
© Graham M Winch
return on
investment in
process capability
project budget
13
Using the WBS to Control the Budget
• tasks at the weekly level
• the cost breakdown structure
– labour
– materials
– plant
• the organisational breakdown structure
– assigning task execution to resource bases
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Controlling the Budget
• cost accounts
– relate to OBS
• the cost account plan
• the performance measurement baseline
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The Performance Measurement Baseline
target price
profit
negotiated
target cost
agreed
variations
contingency
performance
measurement baseline
cost accounts
work packages
© Graham M Winch
undistributed budget
planning packages
16
time
Earned Value Analysis
• relating budget to programme
• earned value (EV) : invoicable work to date
• actual cost: actual expenditure to date (AC)
– budget variance (AV) = EV - AC
• planned value : what ought to have been
spent (PV or Project Performance Baseline)
– programme variance (SV) = EV - PV
• the cost performance index (CPI)
– EV/AC
– productivity
• programme performance index
– EV/PV
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Earned Value Analysis
time
now, t
PV
100
AC
spend to
date
% complete
AV
SV
progress
to date
© Graham M Winch
0
EV
18
time
Budget Overruns and Escalating
Commitments
• why do budgets overrun?
– poor estimating
– regulatory constraints
• the dynamic of escalation - why not cancel?
–
–
–
–
admission of failure
credible commitments
live in hope
provides for some income stream
• project management tactics
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