3 pm3 c_3%20-%20the%20program%20budget

Cost Estimation
Cost Budgetting
Work Authorization

Cost Budgetting
The output of the budgeting process is an approved project budget that is allocated to different control accounts within a distributed budget
The total project budget is flowed down from the contract negotiation
Management and the PM divide up this budget to create a budget structure that defines the total funding available to be spent in the program as the distributed budget.
A control account structure is developed based on the work breakdown and organizational breakdown structures.
The distributed budget is “rationally” allocated to the control accounts.

The Budget
The budget is the amount of funding authorized to complete a “chunk” of the project scope
This “chunk” may be the entire project scope in the SOW and estimate, or a subset of this – for example:
customer funding may be negotiated in phases
A customer may solicit a proposal for both the R&D and production costs for an innovative, risky product, but only fund the R&D portion until it is evident it will work.
management may wish to control the funds “at risk” at any one time
For the same project, the customer may fund both phases, but management may only release the R&D portion in order to ensure that the product developed is profitable before authorizing production.
The budget is therefore related to the original estimates provided, but not necessarily the same, and usually less. Budget review is essential to:
Understand the scope approved
Highlight differences between funds authorized and funds estimated

Budget Sources and Structure
The Budget is provided by company management via the Sponsor team
It is authorized initially in the Project Charter, with changes introduced via the Integrated Change Control process (Changing the Plan)
The budget amount authorized is usually:
For customer funded activity, related to the amount agreed to within the proposal/contract negotiation, the Contract Price
For internally funded activity, an amount provided by management based on the original estimates provided and available company financing
In both cases, the total budget amount will be allocated for various purposes, among which is covering the costs of performing the project work
This allocation creates a number of budget “baselines” that comprise the budget “structure”

Typical Budget Structure
Fee
&
Profit
Authorized/
Non-priced Work(non-negotiated)
Management Reserve
Undistributed Budget
Control Accounts Planning WBS
Work Packages Planning Packages
Contract Price
Budget “Baselines” represent “yardsticks” by which the cost performance of different levels in the company can be measured
Different “layers” of management remove the pieces of the budget “pie” for which they are responsible, and measure lower layers based on what is left
Contract “Baselines”
Contract Budget
Base (CBB)
Negotiated
Contract Cost
Performance
Measurement
Baseline (PMB)
Distributed
Budget

Who’s budget? Who gets measured at what baseline?
Fee
&
Profit
Authorized/
Management Reserve
Contract Price
Business Management –
Corporate (“P&L”)
Contract “Baselines”
Contract Budget
Base (CBB)
“Resource” Management -
Sponsor (“Cost Centre”)
Negotiated
Contract Cost
Performance
Measurement
Baseline (PMB)
Project Management
Control Account
Management
Distributed
Budget

The “Corporate” budget
Fee
&
Profit
Authorized/
Management Reserve
The Contract Price is the anticipated total amount the seller will receive.
The total anticipated project cost or Contract Budget Base (CBB) is determined after negotiations by removing the profit.”
Occasionally, some details remain un-negotiated, but have some “provisional” funding allocated to allow the project to proceed.
Contract Price
Contract Budget
Base (CBB)
Once negotiated, this will be incorporated into the lower level budgets but, in the interim, the CBB will be reduced by this amount to give the funds that can be released to the team
This is the Negotiated Contract Cost, and what the “organization” calls “the budget
Negotiated
Contract Cost
Performance
Measurement
Baseline (PMB)
Distributed
Budget

The “Sponsor’s” budget
Fee
&
Profit
Authorized/
Management Reserve
Contract Price
The Sponsor team will consider the risks and assumptions highlighted within the Project Charter, and will retain a Management Reserve to allow for funding of unanticipated occurrences during the project (eg. Fires, economic issues, etc.)
Contract Budget
Base (CBB)
Negotiated
Contract Cost
Performance
Measurement
Baseline (PMB)
Distributed
Budget

The “Project Manager’s” Budget
Fee
&
Profit
Authorized/
Management Reserve
Contract Price
The remaining budget is under the PM’s control, and forms the project Performance Management Baseline (PMB)
The Project Manager will decide how much of the PMB to retain as Undistributed Budget to deal with short term issues and performance variation, and how much to distribute
Of the distributed amount, some will be distributed to the team to perform work against Work Packages, and some will be allocated to future work that is not yet authorized, but is kept in Planning Packages
Contract Budget
Base (CBB)
Negotiated
Contract Cost
Performance
Measurement
Baseline (PMB)
Distributed
Budget

Project Budget Reserves
Reserves are a means of mitigating program risks that will be discussed in Week 6
Undistributed budget is to mitigate “Known Unknowns”
Management Reserve is to mitigate “Unknown Unknowns”

The “Project Team’s” Budget
Fee
&
Profit
Authorized/
Management Reserve
Contract Price
Within the Distributed Budget, the Project Manager allocates budget:
to Control Accounts for the near term execution of Work Packages
Planning Packages for purposes of long term planning and resource forecasting
At the Control Accounts, control over the budget passes to the Control Account Managers (CAMs)
Contract Budget
Base (CBB)
Negotiated
Contract Cost
Performance
Measurement
Baseline (PMB)
Distributed
Budget

Work vs. Planning Packages
Control Account No. 1
Work Packages
Planning Package
Work Packages
Planning Package
Planning Package
Work Packages
Planning Package
Time Now
Time
6 Months

A Typical Budget Structure
Contract Price
Total Allocated
Fee
Budget (TAB)
TAB = CBB + OTB
Over Target Baseline
Contract Budget
(OTB) (if Applicable)
Base (CBB)
Negotiated
Authorized/
Contract Cost
Undefinitized Work
CBB = MR + PMB
Performance Measurement
Management
Baseline (PMB)
Reserve (MR)
PMB = UB + FCOM + DB
Undistributed
Distributed
Facility Cost of
Budget (UB)
Budget (DB)
Money (FCOM)
Control Account
Summary
Budgets
Control Accounts
Work Packages
Planning Packages
Measured
Level of Effort
Apportioned Effort
Effort (Discrete)
The program and senior management will establish a budget “flowdown” model that incorporates various “baselines” and “reserves” in order to:
Authorize what can be spent
Establish who controls budgets at each level
Set up a structure against which performance can be measure

“Rolling Wave” Definition
Near term/known events scheduled and resource loaded in detail to “activity” level
Longer term activities scheduled at increasingly reduced levels of detail
Depending on risk reduction philosophy, these may either have no budget/ resources allocated, or may be “lumped” as “Planning Packages”

3 pm3 c_3%20-%20the%20program%20budget

by harwoodr

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