Master in science Integrated Construction Project Management, Universiti Teknologi Mara , UITM Shah Alam, Selangor, Malaysia

1. BUDGETING PROBLEM
• Identify current budgeting problem for a project or a company
• Identify effective solution for budgeting problem for a
company
HALIMAH BINTI SAIFURAHIM
NUR ISHAMI RAIHAN BINTI CHE MOHAMAD
THALHA SHAHID BIN HASHIM
MUHAMMAD RUZAINI BIN MOHD ANNUAR

2. (O’Brienet.al.,2006)
(Trauner,2009)
(Delpico,2013)
(Venkataraman,
2008)
(Edgerton,2008)
Hanes,C.(2015).
(Shah,2007)
K.HUMPHREYS,K.
(2005)
(Lepatner,2008)
Poskin,M.(2016,
June16)
(Calinet,al.,1995)
(Nikhil,2016)
(Stephen,2014)
(Kliment,2001)
(Greenhalgh,2011)
(Venkataraman,
2008)
UNREALISTIC
BUDGETING
  
ACTIVITY
STARTED OR
COMPLETED
OUT OF
SEQUENCE
     
ESCALATION OF
MATERIAL PRICE       
ACCELERATION
COST    

3. BUDGETING PROBLEM
UNREALISTIC BUDGET

4. Author /Year Output Finding
(Greenhalgh, 2011)
Poor estimating techniques and/or standards,
resulting in unrealistic budgets as the budget need
to be compliance with the assessment of the
design.
UNREALISTIC BUDGET +
Techniques in financial
allocation + do not compliance
with the activities
(Kliment, 2001) Unrealistic budget happen when there is lacking in
technique of detailing financial allocation
especially in design stage activities.
(Venkataraman,
2008)
Technique of top-down budgeting is truly useful
only when it is coupled with a top management
that is knowledgeable enough to make reasonable
cost estimates of the project at hand; if this is not
the case, the project is immediately saddled with
an unrealistic budget that cannot be achieved.
UNREALISTIC BUDGET

5. Relationship between definition of budget and the
problem of UNREALISTIC BUDGET during budgeting.
DURATION
FINANCIAL
ALLOCATION
ACTIVITIES
Especially during DESIGN STAGE
1. The end of schematic design
2. The end of design development
3. The midpoint of the
construction document phase
4. The end of the construction
document phase
(Kliment, 2001)
Do not compliance
with the activities
Techniques use in
financial allocation

6. Author /Year Output
(Kliment, 2001) During design, cost estimates should be more than one page
calculations based on past experience and square-foot cost data.
Most experienced teams try to quantify the building
components In increasing detail as the design progresses,
apply accurate unit prices to each component, and add in
appropriate contingencies for what is not yet
designed and the inevitable extras that occur in most
construction programs.
SOLUTION OF UNREALISTIC BUDGET.

7. BUDGETING PROBLEM
Activity Started or Completed
Out of Sequence

8. AUTHOR/YEAR OUTPUT FINDING
(Stephen, 2014) Out of sequence of work is often a project manager’s nightmare.
Engineers often take it upon themselves to decide that they really do
not need to wait for the scheduled predecessor. The result is not only
for progress reporting is fouled up and the schedule ceases to make
much senses.
ACTIVITY STARTED OR
COMPLETED OUT OF
SEQUENCE still proceed
even predecessor activity
not finish
(Nikhil, 2016) Out of sequence from a schedule perspective simply means that the
successor activity has reported progress even though the predecessor
activity was not complete
(Calin et. al., 1995) Out of sequence progress is the work started or completed for an
activity before it is logically scheduled to occur. When out of sequence
progress occurs, it may happen only to the start of that activity.
Succeeding activities of an out of sequence activity are not able to
start until all logical constraints are satisfied.
BUDGETING PROBLEM

9. Original
Schedule
Updated
Schedule
with
Retained
Logic
Updated
Schedule
with
Progress
Override
Mark et. al., (2017). How Retained Logic, Actual Dates, And Progress Override Deal With Out-Of-Sequence Progress, pg 1-4.
Retrieved March 25th Retrieved March 25th (2017)

10. BUDGETING SOLUTION
AUTHOR/YEAR OUTPUT
(Keane et. al.,
2015)
Solution to repairing an illogical sequence that result from
‘progress override’ to replace the logic which was over-ridden
with a more logical relationship, representing the true
dependence of two activities

11. BUDGETING PROBLEM
ESCALATION OF MATERIAL PRICE

12. Author /Year Output Finding
K.Humphreys,
K. (2005)
The same is true for materials. As the economy is booming, material costs
escalate more rapidly as the economy moves into a seller’s market.
Equally the return to tight competitive bidding conditions by material
suppliers brings about cost reductions in materials. If the market gets
tight enough, vendors bid either work or equipment at out-off pocket
costs with very little or no profit margin. Then the cycle starts all over
again.
Escalation Budget
on Materials Cost+
bidding process+
reducing the
materials cost +
forecasting failure
on material cost +
market price
Edgerton, W.
W. (2008).
Paying for such costs upfront in the bid price, many owner agencies
include contract provisions that unable to address the risk of escalating
costs, regardless of whether or not the contractor actually experiences
such costs that need to be modify especially on materials and labours
that miss highlight the materials cost in future.
Hanes, C.
(2015).
Like many contractors, suppliers and fabricators reduced their own
output capacity to cut costs in critical market situation. This, as a result of
demand exceeding supply, leads to inevitable price increases. It also
means that if the supplier fails or cannot meet requirements, the
contractor will have fewer choices for replacement, and may see
premium prices charged by any replacement supplier.
Escalation Budget on Materials Cost

13. Author /Year Output Finding
Stephen A.
Kliment.
(2001).
During a recession “negative escalation” can be experienced on
projects in many regions. Bid prices actually stabilize or go down
as contractors and labor just try to stay employed during sick
economy. It is not uncommon for costs to jump rapidly, to amounts
far greater than can be accounted for by normal increases in
labor and material costs, when a local construction market gets
busy.
Escalation Budget
on Materials Cost+
Bidding process+
reducing the
materials cost +
forecasting failure
on material cost +
unstable market
price
Shah, A.
(2007).
Depending on the forecaster’s ability to assign materials to relatively
homogeneous groups of goods, the availability of price indexes for the
different types of supplies, and the level of detail needed to make the
forecast realistic. The lack of disaggregated materials price indexes is
generally the primary obstacle and analysts make assumptions about
future increases in general price levels or simply use their judgment to
project these prices.
Poskin, M.
(2016, June 16)
There's many volatile and frequent fluctuations in specific areas, such Natural
resources, as cement for concrete, lumber, and copper also experience
fluctuations as well as iron ore and recycled steel in the domestic and world
markets. Material cost fluctuations can have a drastic impact on budget when
escalation is not factored.
Escalation Budget on Materials Cost

14. Relationship between definition of budget and the problem
of ESCALATION OF MATERIAL COST during budgeting.
DURATION
FINANCIAL
ALLOCATION
ACTIVITIES
Do not compliance
with the activities
Techniques use in
forecasting method
Escalation Budget on Materials Cost+
• Bidding process - reducing the materials cost
• forecasting failure on material cost
• unstable market price
The flow doesn’t flexibility
with market condition

15. LePatner, B. B. (May 2007). Broken Building, Busted Budgets. The University of Chicago Press, Ltd., London:
The University of Chicago.
EXAMPLES
Bidding -
Cuts the cost for winning the tender
Lump sum Contractor manager does not give the owner a fixed price.
Incomplete design, material cost fluctuations, a more protracted buyout process are some of the
resulting uncertainties that can come back to plague the owner in the form of change orders and delays.
Unstable materials market price –
A minor league baseball stadium in Little Rock was initially projected to cost $28 million, but by opening
day in April 2007, the stadium will have cost an additional $5.6 million due to increased construction
material costs and additional scope. Taxpayers helped finance the stadium’s original cost, but the
developers and fans will pay for the overruns in additional proceeds from tickets, parking, and
concessions.
Forecasting the cost -
The analyst make and inaccurate reference and data/lack of knowledge

16. CHARACTERISTIC OF GOOD BUDGET (PREVIOUS LESSON)
 RELIABLE FORECASTING – predict in advance
 CLEAR AND REALISTIC GOALS – realistic budget allocation
 FLEXIBILITY – toward unstable economy, project condition
 PROVIDE A FRAMEWORK FOR PERFORMANCE – budget is
under control/ setting a mitigation plan.

17. Managing the Cost Escalation Risk
• 1. Contract
While it is typical to include an escalation clause in subcontracts,
it is also worth asking if consideration should be made to
including concessions around escalation in the owner contract. Is
it possible to build in some contingency for exceptional
escalations, should they occur? Some builders do, and an “eyes
open” approach to escalation from all parties tends to make for a
more collaborative project environment. When all parties share
the risk, all parties have an incentive to mitigate and manage it
Hanes, C. (2015). Understanding and managing the escalation cost. XL Group Insurance.

18. Prequalification
Financial Prequalification is critical to insulating a contractor’s projects from
the impact of cost escalation on subcontractors. If subcontractors bear this risk
– and most do – financial analysis becomes an even more important
component of a contractor’s overall prequalification effort, allowing greater
assurance that they can absorb the cost of an anomaly in escalation on a given
project. Subcontractors’ financial ratios, especially days of cash, pipeline and
their WIP can speak volumes about their enterprise risk.
Bidding Behaviour
Instead of winning the tender, the bidder shall highlight in modifying the cost
especially on materials and labors. Escalation of materials price need to be
study precisely to avoid the future problem
Managing the Cost Escalation Risk
Hanes, C. (2015). Understanding and managing the escalation cost. XL Group Insurance.

19. BUDGETING PROBLEM
ACCELERATION COST

20. AUTHOR/YEAR/
BOOKS
OUTPUT FINDING
Ray R.
Venkataraman
and Jeffrey K.
Pinto(2008)Cost
and value
management in
project. Hoboken,
New Jersey:John
Wiley & Sons, Inc.
…project falls behind schedule, the project team has to make a decision regarding
accelerating project activities, which can have serious implications for the project
budget.
Number of factors can contribute to cost overruns, one of the main culprits is
project acceleration (p45)
Project acceleration….involves shortening activity duration times by adding
resources and incurring additional direct costs….have a direct and significant
impact on the project budget(p99)
accelerating
Wayne J
DelPico.(2013)
Project Control
Integrating Cost
and Schedule in
Construction.
Hoboken, New
Jersey:John Wiley
& Sons, Inc.
For a myriad of reasons, construction projects often do deviate from the initial
schedule and/or budget….
If the project experiences actual acceleration directed by the owner/client….. This
may increase the BAC (Budget At Completion) if there are costs associated with
actual acceleration (p119)
accelerating

21. AUTHOR/YEAR/
BOOKS
OUTPUT FINDING
Theodore Trauner,
(2009) Construction
delays: documenting
causes, winning claims,
and recovering costs.
San Diego, California:
Elsevier Inc.
Acceleration costs are often time-related issues associated with delay and
increased costs.
A common method to accelerate a project is through the addition of more
manpower…..including increasing the daily work hours, increasing the
number of workdays, adding additional shifts, increasing the number of
workers, or any combination of increased hours, days, shifts,
or workers (p214)
accelerating
James J. O’Brien and
Fredric L. Plotnick
(2006) CPM in
construction
management. United
States of America:The
McGraw-Hill
Companies, Inc.
the cost of the efforts of the parties to accelerate work and mitigate the
delays incurred by the project (p561)
accelerating

22. Budgeting Problem
Acceleration and increase in job scope will have impact on time, cost and activities:
Eg Elevated Double Track at Subang Skypark: a/ Increase in the number of Form Travellers from 4 to
7 sets for the balanced cantilever river crossings b/ new train station to be built
BUDGET
Time
related:
Extended
working hours
Cost related:
Increase
workers
Activity related:
Production of form
travellers

23. Budgeting Problem
• Budget will be affected when project acceleration take place
Project Acceleration
Contingency
fund
Management reserve
Total Project Budget
To overcome
To include in
Top management will allocate
sum of money for this purpose
BUT often when such funding is
required, the management will
keep silent about it.

24. Budgeting Problem
• Possible solutions to take into account of project acceleration, the
management will have to allocate in the budget:
i/ Contingency funds to deal with unplanned but predictable cost
increase eg possible increase in plant/machinery maintenance or rental
It is likely that the money will be spent and will form part of the total
project budget. If required, then the project will still be within budget.
ii/ Management reserves that will be use to deal with change in
project scope eg increase railway station floors from 2 to 3 storey
It is likely that money will not be spent but it can be included in the
total budget.
Source : Adrienna Watt (2012) BC Open Textbook project. British Columbia, Canada: BC Campus

25. References
Activity Started or Completed Out of Sequence
1. Stephen A. D, (2014). Managing Projects as Investments Earned Value to Business Value. New York. CRC Press Taylor and
Francis Group.
2. Nikhil G, (2016). A Forward Looking Approach to Project Management: Tools, Trends and the Impact of Disruptive
Technology. Mumbai. India. Springer Nature.
3. Calin et. al., (1995). Project Planning, Scheduling and Control in Construction: An encyclopedia of Terms and
Applications. New York. A Wiley-Interscience Publication
Unrealistic budget
1. Greenhalgh, B. (2011). Introduction to Building Procurement. USA and Canada: Spon Press 2 Park Square, Milton Park,
Abingdon, Oxon OX14 4RN.
2. Kliment, S. A. (2001). Building type basics for elementary and secondary schools. New York, Chichester, Weinheim,
Brisbane, Singapore, Toronto: JOHN WILEY & SONS, INC. .
3. Venkataraman, R. R. (2008). Cost And Value Management in Projects. . Hoboken, New Jersey: John Wiley & Sons, Inc.

26. Escalation Of Material Price
1. Edgerton, W. W. (2008). Recommended Contract Practices For Underground Construction. United States of America.:
Electronic edition published 2009.
2. Hanes, C. (2015). Understanding and managing the escalation cost. XL Group Insurance.
3. K.HUMPHREYS, K. (2005). Project and Cost Engineer's Handbook Fourth Edition. Granite Falls, North Carolina, U.S.A.:
Marcel Dekker.
4. LePatner, B. B. (May 2007). Broken Building, Busted Budgets. The University of Chicago Press, Ltd., London: The University
of Chicago.
5. Poskin, M. (2016, June 16). 2016 Cost Escalation Trends & Predictions. Cost Escalation Trends.
6. Shah, A. (2007). Local Budgeting - Introduction to the Public Sector Governance and Accountability Series . Washington,
DC: The International Bank for Reconstruction and Development / The World Bank.
7. Stephen A. Kliment. (2001). Building Type Basics For Elementary And Secondary Schools. Third Avenue, New York: John
Wiley & Sons, Inc.
ACCELERATION COST
1. Ray R. Venkataraman and Jeffrey K. Pinto(2008)Cost and value management in project. Hoboken, New Jersey:John Wiley
& Sons, Inc.
2. Wayne J DelPico.(2013) Project Control Integrating Cost and Schedule in Construction. Hoboken, New Jersey:John Wiley &
Sons, Inc.
3. Theodore Trauner, (2009) Construction delays: documenting causes, winning claims, and recovering costs. San Diego,
California: Elsevier Inc.
4. James J. O’Brien and Fredric L. Plotnick (2006) CPM in construction management. United States of America:The McGraw-
Hill Companies, Inc.
5. Adrienna Watt (2012) BC Open Textbook project. British Columbia, Canada: BC Campus