Tasks for the 7-8th seminar – Develop partial parts (2.6 – Project Costs) of your project according to the template of the seminar work This task is divided into two seminars, because creating a project budget requires quality preparation. ___________________________________________________________________________ 2.6. Project costs - overview of project costs (start-up costs, operation, reserves, changes and risks) 2.6.1. Project budget - suitable tabular form, e.g. according to individual stages of the project or according to direct / indirect costs, etc. 2.6.2. Tolerance budget (reserves) 2.6.3. Change budget (for possible changes during project management) 2.6.4. Risk budget ___________________________________________________________________________ Project budgeting overview 1. Cost planning and project budgeting Cost planning and project budgeting is part of the planning phase and builds on project scheduling and resource planning. The project budget consists of a cost side and a revenue side; it can be defined as the total amount of funds allocated to a project, usually divided into expenditure categories and phased over time. Part of budget planning is therefore cost planning as well as revenue planning (or other sources of cost coverage). For profitable projects, revenues exceed costs, for non-profit projects, both parties should be at least the same. The budget is a key part of the project plan, interested by all stakeholders - from project owners who are interested in what costs will be incurred and how much the project will earn, through team coordinators who want to know how much money they have available for their activities, to an individual employee for whom the amount of his salary is important in the budget. When compiling a budget, we can start with cost planning, so we compile a cost budget and then look for sources of coverage. Project costs As part of cost planning, we therefore appreciate the time spent on the project and the use of human, material or financial resources. The output of cost planning is the project cost budget. Costs can be broken down from different perspectives. To compile a budget plan, it is appropriate to first determine the direct costs (Direct Costs), which are directly related to the implementation of the project. Examples of direct costs are shown in tab. 1. Tab. 1: Direct costs Type of direct cost Example personnel costs for project staff · wages, public health insurance and social security contributions, pension contributions material costs · sand, cement, papers, toners purchase of services · rental of training facilities, translations and interpreting travel project staff · fares, meals, air tickets, accommodation acquisition, rental of tangible assets · computers, cars, cranes, furniture acquisition, rental of intangible assets · purchase of licenses, software, patents subcontracting costs · construction of a storage hall by a construction company Indirect Costs are those that cannot be clearly assigned to a specific project; these are the common costs of the whole organization. The organization's management determines how much of the organization's total indirect costs will be allocated to individual projects. Examples of indirect costs are shown in tab. 2. Tab 2: Indirect costs Type of indirect cost Example indirect personnel costs · part of the personnel costs of the organization's management operation of buildings · part of the cost of heating, energy consumption, cleaning, repairs of buildings used by the organization costs for the organization's support departments · part of the costs of marketing, accounting organization taxes and fees · part of the taxes and fees paid by the organization 2. Cost determination methods In practice, we may encounter many approaches and methods of cost valuation, from more or less "expert" estimates to complex mathematical procedures. The choice of method always depends on the type of project, its scope and degree of complexity. The main input for determining the costs of the project is a list of activities and an estimate of their duration, prepared during time planning. We know the total duration of the activity from the overview of activities, we must specify it in more detail when planning costs. E.g. we count 30 hours in the time planning for dredging the foundations for the house. When creating a budget, we must divide this time into individual components. We will have to estimate: • number of hours of excavator work, • number of hours of dredger's work, • mileage of the car transporting the soil, • number of working hours of a truck driver, • number of working hours of auxiliary workers. The quality of the cost estimate depends on both the quality of the time estimate and the quality of the unit cost estimate. We get the cost of dredging the foundations for the house by multiplying the number of hours the excavator works by the cost per hour of work. The cost per hour of excavator work may include a proportion of the rent or depreciation, part of the cost of repairs, fuel, etc. When determining the budget of project costs, we can use the processed cost calculations of the organization, which express the cost per unit of output (e.g. for an hour of excavator work, for an hour of teaching a lecturer). Analogous estimation When estimating costs, historical information of the organization is widely used, e.g. final budgets of previous projects that have implemented a similar type of costs, public or commercial databases on prices, e.g. publicly accessible databases of average wages of individual professions or price lists of construction works. When estimating the costs that will be realized by purchasing from an external entity (e.g. the services of a project auditor), it is appropriate to carry out a price survey when sending the cost budget by sending a preliminary request to three potential suppliers. This process (also called "top-down estimation") is based on information about past activities, considers the actual costs of previous projects and applies them to the current project. In doing so, it considers the scope and size of the current project and other variables. This approach is not very time consuming, but is less accurate. Expert estimates In projects, we often encounter expert estimates, where the project manager or team members use costs and knowledge of the issue to estimate costs. This option is most often used in cases where it is too time consuming or expensive to determine prices from verifiable sources. Parametric modeling Parametric modelling uses a mathematical model based on known parameters, which may vary depending on the type of work performed. The parameter can be, for example, the cost per cubic meter, the cost per hour of work of the excavator, etc. There are two types of parametric estimation: · Regression analysis. It represents a statistical approach to estimating future values, which is based on past values. · Learning curve. It is based on the simple assumption that, with repeated work, workers learn to work faster and with less error rate, thus reducing the cost of producing another unit. This estimate is parametric because it is based on repetitive activities carried out in the project over and over again. Unit costs decrease as the workforce experience increases, as it reduces the time required to complete the activity. Bottom-up estimation This process starts with zero total costs and adds the cost for each item in the hierarchical structure of work (WBS). The result is the sum of costs for the entire project. By calculating the cost of each individual WBS item (which we should have cost-calculated), we create a very accurate cost estimate. The bottom-up method is very time consuming, so it is also more expensive, but by using it we reduce the risk of incorrect estimation of costs. A side effect is also high-quality input information for deciding whether it is more advantageous for us to provide some outputs internally or externally. 3. Reserves (tolerances) It is necessary to reflect the risks of the project in the cost budget and create reserves in the project to cover increased or unexpected expenses. The amount of the reserve can be set as a percentage of the total expenditure of the project (usually units of percent) or reserves can be set only for some budget items. Typical examples may be provisions for: • exchange rate losses - for projects that use buying or selling in a foreign currency, it is necessary to consider a reserve that will cover the exchange rate change. • unexpected costs, e.g. during the reconstruction of older houses, it is only possible in the implementation phase to discover problems that will require additional staff, equipment, etc. • specified tolerances (range, range, scrap, longer implementation time = extra work, additional costs, etc.) 4. Change budget During project management, a number of changes arise, the project is alive and the longer the implementation time, the more changes come and needs to be addressed (change budget - these are funds for the Change Commission (according to Prince2), which approves the allocation of funds for the changes. the budget serves as a kind of "future" reserve. 5. Risk budget According to the established risk analysis, where the main threats and possible measures for the occurrence of the given threat are identified - they must be in this budget. There are also specific measures (their cost) in case of risk elimination when it occurs. In summary, this budget includes items for reducing the probability of the threat (e.g. vaccination in case of illness) and also items for eliminating the risk (the risk occurs, but we have insurance, co-payment, etc.). We use risk analysis (RIPRAN), where these data are presented. Examples of Project budget (Costs): Gratis IT Project Budget Table Example in PDF Format Example – Other Costs/Services in the budget planning5. Other costs, services85.1 Publications9 ...