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Determining Costs, Budgets, and Earned Value

  1. Estimate Activity Costs
    The estimated cost of an activity is based on an estimate of the types and quantities of resources required to perform the activity.

The estimated cost of an activity can include the following elements:

a) Labor costs

b) Material costs

c) Equipment costs

d) Facilities costs

e) Subcontractors and consultant costs

f) Travel costs

g) Reserve

  1. Determine Project Budget
    a) Determine total budgeted cost (TBC) (sum of the estimated costs of all the specific activities that make up that work package).

b) Develop a timed-phase budget (distribution by time period of the total budgeted cost for a work package or project over its expected time span based on when specific activities are scheduled to be performed.

  1. Aggregate Total Budget Cost
    a) Allocating total project costs for the various elements to the appropriate work packages will establish a total budgeted cost (TBC) for each work package.

b) There are two approaches to establishing the TBC for each work package: top-down and bottom-up.

c) Often, the sum of the initial estimated costs is greater than the amount of funds budgeted by the sponsor. Several iterations may need to be made to reduce the costs.

d) When the budgets for all the work packages are summed, they cannot exceed the total project budgeted cost.

  1. Develop Cumulative Budgeted Cost
    Once a total budgeted cost has been established for each work package, the second step in the project budgeting process is to distribute each TBC over the duration of its work package.

A cost is determined for each period, based on when the activities that make up the work package are scheduled to be performed to create the time-phased budget.

The cumulative budgeted cost (CBC) is the amount budgeted to accomplish the work scheduled to be performed up to that point in time.

The CBC for the entire project or each work package provides a baseline against which actual cost and work performance can be compared at any time during the project.

The cumulative budget is the standard against which actual cost is compared.

  1. Determine Actual Cost
    Once the project starts, it’s necessary to keep track of actual cost and committed cost so they can be compared to the CBC.

A. Actual Cost
To keep track of actual cost on a project, it’s necessary to set up a system to collect, on a regular and timely basis, data on funds actually expended.

Large projects will have charge codes for the work package numbers to determine how the actual costs compare to the planned costs.

B. Committed Costs
In many projects, large dollar amounts are expended for materials or services (subcontractors, consultants) that are used over a period of time longer than one cost reporting period.

These committed costs need to be treated in a special way so the system periodically assigns a portion of their total cost to actual cost.

Committed costs are also known as commitments or encumbered costs.

Costs are committed when an item is ordered, even though actual payment may take place at some later time.

C. Compare Actual Cost To Budgeted Cost
As data are collected on actual cost, including portions of any committed cost, they need to be totaled by work package so they can be compared to the cumulative budgeted cost.

Cumulative actual cost (CAC) should be calculated.

Figure 7.7 indicates that at the end of week 8, $68,000 has actually been expended on this project, although only $64,000 was budgeted as shown in Figure 7.5.

  1. Determine Value of Work Performed
    Consider a project for painting ten similar rooms over ten days (one room per day) for a total budgeted cost of $2,000. The budget is $200 per room.

At of the end of day 5, you determine that $1,000 has actually been spent, but what if only three rooms have been painted?

Earned value, the value of the work actually performed, is a key parameter that must be determined throughout the project.

The contractor might try to negotiate payment terms that require the customer to do one or more of the following:

· Provide a down payment at the start of the project.

· Make equal monthly payments based on the expected duration of the project.

· Provide frequent payments, such as weekly or monthly payments rather than quarterly payments.

Sample Solution

ader-member relations, if the group are familiar and trusting of the leader policy implementation becomes much simpler. Similarly to leadership, understanding and adapting to the situation is key to a leader being able to implement policies that ensure a group work as a team. Teamwork is a product of good leadership, and is again the responsibility of the leader to ensure the group are working successfully together. Highly functioning teams are essential within organisations to increase productivity and member satisfaction, by utilising the talents of all group members effectively within the constraints of the task, personal relationships and the group goals (Pettinger, 2007). Figure 2: Tuckman’s Model of Group Development (Agile Scrum Guide, 2019) Tuckman in his Model of Group Development provides easily identifiable stages that a groups performance can be measured against, making it useful for monitoring performance, Figure 2 shows Tuckman’s model. Ranking group performance against this scale can provide leaders with a clear understanding of how the group are functioning, allowing them to implement policies to change this if performance is unsatisfactory (Pettinger, 2007). Within organisations, the theory can be loosely applied to creating teams by grouping familiar individuals with the aim that they will reach the norming and performing stage of the model quicker. For short and simple tasks this is an extremely effective way of organising groups, due to the increased short term productivity. However there are significant issues with grouping individuals in this manner, particularly when tasks become more complex, and ultimately the model should mainly be used for monitoring the progress of groups (Pettinger, 2007). Figure 3: Belbin’s Team Roles (PrePearl Training Development, 2019) A more functional approach of grouping individuals is to utilise Belbin’s Team Theory (Belbin, 2017). Belbin identifies 9 key roles that must be fulfilled within a group to ensure success, the roles are summarised in Figure 3. The roles cover a wide spectrum of skills that need to be presen
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