How budget and estimation cost of the project play a vital role in the project management system?

The two other major focal points of project management are cost estimation and budgeting. The project budget involves two steps, first step includes the project cost estimate is allocated to the various work packages in the project work break down structure.



Second, the budget for each work package so that it is possible to estimate how much budget should be allotted for that particular package. Cost estimates, work break down structure and project schedules are interrelated concepts. Once a base line schedule is prepared it is necessary to develop a base line budget. It is important to note that the cost of a work package cannot be estimated because it is too complex and it must be broken down so that appropriate estimate can be made.

The initial cost estimate can seal the project fate. If the project cost is over estimated, i.e. unrealistically high then the project may be lost. Accurate cost estimation is difficult task in project management, because it is done in the early planning stages. It is necessary to put practical constraints on project costs so that realistic budgets can be established. The following elements would typically constitute the ingredients of most cost estimates.

§ Resource required for the project.
§ Overheads in the technology.
§ Indirect overheads.
§ Profitability from the project.
§ Total expenses.

During the development of the project, cost related parameters should be monitored regularly. Comparison must be made among the parameters such as, amount spent on starting of the project with estimated cost etc. Allocating total project cost for various elements such as resources needed, consultants etc. Hence a Total budgeted cost (TBC) for each work packages are found out.

The total project costs are reviewed in relation to the work scope of the packages. The project cost usually determine when the proposal of the project are prepared, but detailed plans are not usually prepared at the time, when the budget for all the work packages are summed, they cannot exceed the total project cost. Once the TBC is established for each package, the second step in project budgeting process is to distribute each TBC over the duration or time spent on each work package, the cost is determined for each period, based on the activities that make up the work package.

Calculating budget cost for a specific time period is called Cumulative budget cost (CBC), it is the base line that will be used for analyzing the cost performance of the project. The CBC for the entire project provides a baseline against actual cost and work performance can be compared at any time during the project. The budget should tell how the money would be spent over the particular period. In preparing a budget for a project it is necessary to consider the administrative aspects of the project also.

1. Identification of investment opportunities.
2. Submission of proposal.
3. Decision-making.
4. Preparation of budget and appropriation.
5. Implementation.
6. Performance review.

Once the project starts it is necessary to keep track of the actual cost and the committed cost as they can be compared with the CBC. To keep track of he actual cost it is necessary to maintain an information system to collect data on a regular and timely basis. Such a type of system should include all the details of money spend over a period of time. Committed costs are also known as commitments or encumbered costs. Costs are committed when a resource needed for the project is ordered.

The committed cost must be considered as encumbered or set-aside since the money has to be paid in the future. Period by period basis actual cost for the project is called cumulative actual cost. Earned value for a project is determined by, the value of work actually performed, it is the key parameter in the project development, that must be determined throughout the project, and it involves collecting data on percent complete for each package. Once this percent complete data have been gathered, earned value can be calculated. Hence capital and budgeting and cast estimation play an important role for the success of the project.


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