Project Management
Chapter 9. Budget and Procurement
,9.0 Learning Objectives and Overview
Learning Objectives
1. Define the project cost and explain its types.
2. Create a project cost plan to help guide the project team through the implementation
and closure phases of the project.
3. Define the budget estimation techniques.
4. Describe the process of documenting project procurement decisions, specifying the
approach, and identifying potential sellers. Define the resources that will be utilized in
a project, including the project team members
5. Practice the allocation of resources and calculation of their costs with Microsoft
Projec
Overview
While performing the planning of all the knowledge areas (e.g., scope, schedule, cost, quality,
stakeholders, risks), the project manager should be aware of the fact that all knowledge areas are
tightly linked to each other. That is, it is not possible to start with cost or quality first. The scope is the
starting point when project managers with the help of business analysts, subject matter experts, clients,
the project sponsor, and various stakeholders identify the project purpose, measurable objectives,
requirements, deliverables, and WBS activities. Whereas scope, time, and cost are the main constraints
of a project, all three are tightly linked to the resources, which are other constraints that include time
and cost as critical resources. After the scope (see Chapters 3 and 4) and schedule (see Chapter 7) are
delineated, the project manager can continue with the identification and allocation of resources based
on the scope (requirements and project activities) and the schedule (how project activities are
sequenced with duration for each of them). Allocation of resources provides the project manager to
determine the overall project budget most of which is spent on resources (Chapter 8).
Every project boils down to money. If we had a bigger budget, we could probably get more people to do
the project more quickly and deliver more. That’s why no project plan is complete until we come up
with a budget. But no matter whether the project is big or small, and no matter how many resources
and activities are in it, the process for figuring out the financial bottom line is always the same. This
chapter starts with defining the project cost and its types, then elaborates on the cost management
plan, continues with how to estimate costs and determine the budget, and ends with project
procurement management. We will expand Microsoft Project exercises in chapters 4 (scope), 7,
(schedule), and 8 (resources) by specifying the cost for all the activities and the overall project.
247
, Project Management
9.1 Project Costs
One of the criteria of project success is completing the project within budget. Developing and
controlling a project budget that will accomplish the project objectives is a critical project management
skill. Although stakeholders expect the project to be executed effectively and efficiently, pressures to
remain within budget vary based on the unique constraints and priorities of the project. On some
projects, the project completion date is the highest priority leading to a more flexible budget to
accommodate the inflexible deadline. Moreover, the project’s scope may have to be scaled back if it is
too ambitious to finish in time. On other projects, for example, ones with limited funding available,
remaining within budget is the highest priority. When this is the case, effective cost management is
imperative and trade-offs with scope, quality, and/or time may be required.
9.1.1 Boston’s Infamous Big Dig (Central Artery/Tunnel) Project
One of the notorious examples of project budget overrun is Boston’s Big Dig project although its
outcome had significant benefits to the Boston residents by lowering traffic jams and pollution. Central
Artery/Tunnel Project, the official name of the project, was the largest, most challenging highway
project in the history of the United States. This project’s objective was to reduce traffic and improve
mobility in one of America’s oldest, most congested major cities. Although the project had been planned
in the 1980s, it was completed in 2007. Its original completion was scheduled in the late 1990s, and its
original cost was estimated to be about 3 million dollars. However, including the interest to be paid, the
total cost was estimated to be 24 million dollars. As listed by Greiman and Warburton (2009), common
causes for cost escalation on the Big Dig included: the failure to include a cost for inflation in each
contract; delays in project completion; and the actual rate of inflation being greater than the planned
estimate. Other factors that impacted the Big Dig were financing shortfalls and interest rates, scope
changes, shortages of materials and labor, price increases, and market changes, weak project
managers, technical and design complexity, unexpected events and force majeure, and political and
legal risks.
The Big Dig project is considered a mega project, and unfortunately, many mega projects suffered a
substantial cost overrun as well as other problems regarding the scope, schedule, risks, and resources,
which in turn, led to the cost overruns. However, smaller projects, even our personal projects such as
moving to another house and going on a summer vacation, may experience problems with the cost.
When problems start in a project, the sponsor, clients, and other stakeholders first realize the
abnormality in the budget which is an explicit reflection of something going bad. The more money we
spend over the estimated budget, the more it hurts the stakeholders since the financial assets of a
project, organizations and individuals can be analogous to the blood of a living thing.
Some of the reasons why projects fail to keep themselves on track with regard to their budget can be
248
Chapter 9. Budget and Procurement
,9.0 Learning Objectives and Overview
Learning Objectives
1. Define the project cost and explain its types.
2. Create a project cost plan to help guide the project team through the implementation
and closure phases of the project.
3. Define the budget estimation techniques.
4. Describe the process of documenting project procurement decisions, specifying the
approach, and identifying potential sellers. Define the resources that will be utilized in
a project, including the project team members
5. Practice the allocation of resources and calculation of their costs with Microsoft
Projec
Overview
While performing the planning of all the knowledge areas (e.g., scope, schedule, cost, quality,
stakeholders, risks), the project manager should be aware of the fact that all knowledge areas are
tightly linked to each other. That is, it is not possible to start with cost or quality first. The scope is the
starting point when project managers with the help of business analysts, subject matter experts, clients,
the project sponsor, and various stakeholders identify the project purpose, measurable objectives,
requirements, deliverables, and WBS activities. Whereas scope, time, and cost are the main constraints
of a project, all three are tightly linked to the resources, which are other constraints that include time
and cost as critical resources. After the scope (see Chapters 3 and 4) and schedule (see Chapter 7) are
delineated, the project manager can continue with the identification and allocation of resources based
on the scope (requirements and project activities) and the schedule (how project activities are
sequenced with duration for each of them). Allocation of resources provides the project manager to
determine the overall project budget most of which is spent on resources (Chapter 8).
Every project boils down to money. If we had a bigger budget, we could probably get more people to do
the project more quickly and deliver more. That’s why no project plan is complete until we come up
with a budget. But no matter whether the project is big or small, and no matter how many resources
and activities are in it, the process for figuring out the financial bottom line is always the same. This
chapter starts with defining the project cost and its types, then elaborates on the cost management
plan, continues with how to estimate costs and determine the budget, and ends with project
procurement management. We will expand Microsoft Project exercises in chapters 4 (scope), 7,
(schedule), and 8 (resources) by specifying the cost for all the activities and the overall project.
247
, Project Management
9.1 Project Costs
One of the criteria of project success is completing the project within budget. Developing and
controlling a project budget that will accomplish the project objectives is a critical project management
skill. Although stakeholders expect the project to be executed effectively and efficiently, pressures to
remain within budget vary based on the unique constraints and priorities of the project. On some
projects, the project completion date is the highest priority leading to a more flexible budget to
accommodate the inflexible deadline. Moreover, the project’s scope may have to be scaled back if it is
too ambitious to finish in time. On other projects, for example, ones with limited funding available,
remaining within budget is the highest priority. When this is the case, effective cost management is
imperative and trade-offs with scope, quality, and/or time may be required.
9.1.1 Boston’s Infamous Big Dig (Central Artery/Tunnel) Project
One of the notorious examples of project budget overrun is Boston’s Big Dig project although its
outcome had significant benefits to the Boston residents by lowering traffic jams and pollution. Central
Artery/Tunnel Project, the official name of the project, was the largest, most challenging highway
project in the history of the United States. This project’s objective was to reduce traffic and improve
mobility in one of America’s oldest, most congested major cities. Although the project had been planned
in the 1980s, it was completed in 2007. Its original completion was scheduled in the late 1990s, and its
original cost was estimated to be about 3 million dollars. However, including the interest to be paid, the
total cost was estimated to be 24 million dollars. As listed by Greiman and Warburton (2009), common
causes for cost escalation on the Big Dig included: the failure to include a cost for inflation in each
contract; delays in project completion; and the actual rate of inflation being greater than the planned
estimate. Other factors that impacted the Big Dig were financing shortfalls and interest rates, scope
changes, shortages of materials and labor, price increases, and market changes, weak project
managers, technical and design complexity, unexpected events and force majeure, and political and
legal risks.
The Big Dig project is considered a mega project, and unfortunately, many mega projects suffered a
substantial cost overrun as well as other problems regarding the scope, schedule, risks, and resources,
which in turn, led to the cost overruns. However, smaller projects, even our personal projects such as
moving to another house and going on a summer vacation, may experience problems with the cost.
When problems start in a project, the sponsor, clients, and other stakeholders first realize the
abnormality in the budget which is an explicit reflection of something going bad. The more money we
spend over the estimated budget, the more it hurts the stakeholders since the financial assets of a
project, organizations and individuals can be analogous to the blood of a living thing.
Some of the reasons why projects fail to keep themselves on track with regard to their budget can be
248
