BBA 3626 Unit IV Research Paper
Columbia southern University
When it comes to budgeting projects, there are many important factors and steps that must be accounted for and taken in order to ensure accuracy and timeliness. Project cost can have a very large impact on whether or not a project is successful and should be very carefully considered within project planning. It is important to recognize and understand the various project cost terms as well as the various methods of estimating costs. Additionally, being familiar with the various issues that may arise within project cost estimating and how to deal with them can be essential to the success of any project. Finally, it is important to understand the terms and ideas associated with earned value management in order to successfully determine project progress and results.
Project Cost Terms
There are several terms associated with estimating the cost of a project beginning with fixed and variable costs. Fixed costs are those costs that will not change regardless of the size or amount of work to be completed. An example of this could be in the building of roads and the associated equipment. The cost of the machinery will remain the same no matter how much it is used. Variable costs include those that will fluctuate directly with volume of use, meaning, if a road were being built, the cost of the asphalt would vary directly with the length of the road. Fixed and variable costs are taken into account when determining how to perform certain activities and making choices within estimating costs. Some choices may reflect high fixed costs and low variable costs such as buying an expensive piece of machinery that can produce parts or pieces for a project. This has a higher fixed cost in order to produce lower variable costs in parts or pieces (Kloppenborg, 2015).
Another set of key terms is direct and indirect costs. Kloppenborg (2015) describes direct costs as those costs that occur directly as a result of the project itself and are typically classified as either direct labor or other direct costs. Direct costs include things such as laborers, materials, and travel, among various others. Indirect costs consist of the things that are required to keep an organization running but are not tied to a specific project. This includes things such as company infrastructure, various utilities, and insurance to name a few.
Following direct and indirect costs would be recurring and nonrecurring costs. “Recurring costs are those that repeat as the project work continues, such as the cost of writing code or laying bricks” (Kloppenborg, 2015, p. 248). Nonrecurring costs involve the events that happen only once during a project such as developing an initial design plan. Recurring costs are more likely to occur during execution while nonrecurring costs are more likely to happen during the planning phase of a project (Kloppenborg, 2015).
Regular costs are ones that are preferred over those costs that are expedited. Regular costs occur as a result of progress made during regular work hours and purchasing agreements. On the other hand, expedited costs are the costs that result when a project must be conducted at a quicker than normal pace, when overtime is warranted for workers, or as a result of expedited shipping charges from suppliers (Kloppenborg, 2015).
Other cost estimation terms that should be understood are internal and external costs, where external costs could be things such equipment, which can be purchased by the organization as a long term asset, or can be leased at a short term cost (Kloppenborg, 2015). Two final terms that are helpful to understand are estimate and reserve. Estimate is “a quantified assessment of the likely amount. It should always include an indication of accuracy” and reserve, which is “a provision in the project management plan to mitigate costs and/or schedule risk” (Kloppenborg, 2015, p. 249).
Methods of Estimating Costs
The are many methods that can be utilized in estimating project cost with variations within each of the methods. Three key methods that can be used in estimating project costs are analogous, parametric, and bottom-up. According to Kloppenborg (2015), Analogous estimating relies on historical data from previous projects as a means of estimating the duration or cost of a project. In comparison, parametric estimating is a technique which still relies on this same historical data, however, actual mathematics are involved and an algorithm is used to calculate cost and duration based on this historical data and other project parameters. Parametric estimating requires slightly more information than analogous estimating to complete a cost or duration estimate. Dysert (2008, p 03.1) breaks down parametric estimating as a “mathematical representation of cost relationships that provide a logical and predictable correlation between the physical or functional characteristics of a project and its resultant cost” and describes the method as an especially useful tool in preparing early conceptual estimates when there may be very little technical details available to provide a basis for supporting the use of more detailed estimating methods. Compared to analogous and parametric, bottom-up estimating is described as being the most detailed, takes the most time, and is perhaps the most accurate method of estimating. The bottom-up method estimates project cost or duration by amassing the estimates of the lower-level components of the work breakdown structure (WBS). In order for bottom-up estimating to be accurate, the WBS must be broken down to the most detailed level with very clear specifications. Each project is unique and various factors must be considered in choosing a method of estimating costs. Analogous requires the least amount of information and time in cost estimating while bottom-up requires the most in each respective category. However, with that said, bottom-up is also the most accurate method to estimating costs with analogous being the least accurate and parametric being in the middle for each category (Kloppenborg, 2015).
Issues in Estimating Project Costs
There is no perfect method or procedure to estimating the cost of a project and issues are inevitable and must be considered. Issues in project cost estimating that must be considered can include supporting detail, causes in variation, vendor costs, value engineering, activity based costing, life cycle costing, time value of money and international currency fluctuations. Causes of variation of project costs can be triggered by a number of different things, some are controllable and others are not. Projects that are more routine in nature and use proven technology and methods, there may be very few causes of variations and these variations can be more easily categorized. On the other hand, those projects that are less routine and use less proven methods, more uncertainty may exist within the cost of a project and the causes of variations may come from unknown or unforeseen sources. Many causes in variation are normal in nature and can be handled simply through improving work methods such as detecting and eliminating distractions. Causes in variations that are special in nature are handled more as risks and must be dealt with as such (Kloppenborg, 2015). Another key issue that must be considered when estimating project costs is value engineering. Manea (2017, p. 97) defines value engineering as “a process of systematic review that is applied to existing product designs in order to compare the function of the product required by a customer to meet their requirements at the lowest cost consistent with the specified performance and reliability needed.” Additionally, value engineering utilizes various analytical, creative, and evaluation methods to achieve these desired functions while maximizing value and maintaining or improving upon the required functions. Value engineering eliminates unnecessary life cycle costs while retaining the same safety, quality, and environmental requirements. Finally, value engineering presents opportunity for innovation, improves cost effectiveness and performance, and fosters partnering relationships between all parties involved (Lane, 2004).
Earned Value Management
The methodology of earned value management combines scope, schedule, and resource measurements in order to assess the performance and progress of a project. Currently known values include planned value, earned value, actual costs and budget at completion. Planned value is simply the budget assigned to scheduled work while earned value is a measure of the work performed shown in terms of the budget authorized for the work. Actual cost represents the amount spent on a task over a specific period of time. Budget at completion is an all-inclusive total of all budgets established for the work that is to be completed. Variances include schedule variance, the difference between earned value and planned value, and cost variance, which considers the deficit or surplus within a budget at a specific period of time. Indexes incorporate schedule performance index (SPI) and cost performance index (CPI). SPI is a measure of schedule efficiency expressed as the ratio: SPI = EV/ PV. CPI measures the cost efficiency of allocated resources expressed as: CPI = EV / AC. Estimates include estimate to complete (ETC) and estimate at completion (EAC). ETC is the expected remaining costs to finish all work within a project and EAC, which boils down to the expected total cost after completing all work associated with a project. Finally, the to-complete performance index, or TCPI, is a measure of the cost performance required to be achieved in order to finish any outstanding work to the remaining budget (Kloppenborg, 2015).
Budgeting for projects encompasses many important factors and considerations. Several methods exist for estimating costs including the analogous, parametric, and bottom-up methods, each of which requires it’s own set of inputs to ensure accuracy in estimating costs. Numerous issues such as those found in causes in variations and value engineering may arise within project cost estimating and it is important to understand how to deal with these issues. Finally, earned value management is an essential methodology and tool used in determining the performance and progression of a project and allows a projects team to fully understand the progress of their project in relation to cost and schedule and also allows for predictions to be made concerning the projects overall costs and schedule.
Dysert, L. R. (2008). An Introduction to Parametric Estimating. AACE International Transactions, 1–7. Retrieved from http://search.ebscohost.com.libraryresources.columbiasouthern.edu/login.aspx?direct=true&db=bsu&AN=33719989&site=eds-live&scope=site
Kloppenborg, T. J. (2015). Contemporary project management (3rd ed.). Stamford, CT: Cengage Learning.
Lane Davis, K. E. (2004). Finding Value in the Value Engineering Process. Cost Engineering, 46(12), 24–27. Retrieved from http://search.ebscohost.com.libraryresources.columbiasouthern.edu/login.aspx?direct=true&db=bsu&AN=15264525&site=eds-live&scope=site
MANEA, D. (2017). Value Analysis or Value Engineering – Establishing the Nomenclator and the Importance Level of the Functions. Review of General Management, 26(2), 97–104. Retrieved from http://search.ebscohost.com.libraryresources.columbiasouthern.edu/login.aspx?direct=true&db=bsu&AN=127653349&site=eds-live&scope=site