Because the costs are associated with activities and each activity has a start date and a duration, it is possible to calculate how much money needs to be spent by any particular date during the project. The money needed to pay for a project is usually transferred to the project account shortly before it is needed. These transfers must be timed so that the money is there to pay for each activity without causing a delay in the start of the activity. If the money is transferred too far in advance, the organization will lose the opportunity to use the money somewhere else, or they will have to pay unnecessary interest charges if the money is borrowed. A schedule of money transfers is created that should match the need to pay for the activities. The process of matching the schedule of transfers with the schedule of activity payments is called reconciliation. Refer to Figure 9.5 that shows the costs of ten major activities in a project. Funds are transferred into the project account four times. Notice that during most of the project, there were more funds available than were spent except at activity 6 when all the available funds were spent.
In the project budget profile shown in Figure 9.5, there is no margin for error if the total of the first six activities exceeds the amount of funding at that point in the project.
Contractual agreements with vendors often require partial payment of their costs during the project. Those contracts can be managed more conveniently if the unit of measure for partial completion is the same as that used for cost budgeting. For example, if a contractor is pouring concrete for a large project, their contract may call for partial payment after 25 percent of the total volume of concrete is poured as determined by cubic yards of concrete.
KEY TAKEAWAYS
- Analogous estimating scales an estimate from a similar project to match the current project. Parametric estimating multiplies a standard cost-per-unit value by the number of units in the project. Bids from contractors can be compared to estimate costs. Bottom-up estimating determines the cost of each detail and aggregates them to determine activity cost estimates.
- During the project selection and approval stage, rough estimates are used that are usually obtained using analogous and parametric methods. Vendor bid analysis and detailed bottom-up estimates are used in the initiation phase to estimate project costs.
- Detailed estimates are associated with activities and aggregated during the planning phase to create an activity-based budget. Funding transfers are arranged to reconcile money spent to money from funding sources in a timely manner.
EXERCISES
- An estimate that is obtained by scaling up an estimate from a similar project is a(n) estimate.
- An estimate that uses standard costs per unit such as price per square foot or price per cubic yard is a estimate.
- Matching the transfer of funds into the project account with the money spent is called .
Estimates
Consider a project in which you have been involved that used an estimating technique to provide numbers for the conceptual plan. Briefly describe the type of project and identify the estimating method used.
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