Q. You also mentioned in the very last sentence of Module 7 Overview - "There won't be any of this section on your final." Did I miss something? IS there a final in this course? J
A. No, that's just my cute way of saying it's not too important.
Q. The thing that is most unclear to me is on page 337 where R&D project budgets are said to be stable over time when measured as a percentage of the total R&D budget. Is the author saying that as the total R&D budget vacillates, the R&D project budget will do so as well at a proportional rate? Increases in R&D project budgets would surely result in an increased total R&D budget, but I can't see the tie to percentages. Can you elaborate? And how does this apply to non-R&D projects?
A. Got me there. I've never done an R&D project. May be what's happening is that if the R&D department only has so much budget, that all it spends, so it is always within budget. It just adjusts the scope of work to fit the budget.
***Direct and indirect costs.
There are different schemes used for categorizing expenses. The names and what goes into each category are often dictated by contract terms or government regulations. If allowed to, companies will determine the best system for themselves. For large stand-alone projects, separate corporations are sometimes formed, and these will have their own system, one that is perceived best for that project. It's not uncommon for a company to have cost reimbursable jobs for several large owners or governments, each will require accounting for and charging expenses differently. Despite this, some concepts are plain and important:
Certain costs are directly attributable to the job (project). The salary of the worker on the job and the cost of materials delivered are examples of direct costs. Both of these have a cost code, the worker's timesheet, the material receipt form, and a check is written for a definite amount at a definite time. These are always direct costs.
There are certain charges that are also directly attributable to the job, but not paid out directly. For example, there is an allocation for the employer's contributions to the workers vacation time, sick pay, retirement fund. I call these "labor burden." There are also "statutory burdens" such as the employer's contribution to social security (FICA). These could be reduced to a cost per man-hour, and then counted as "direct costs" to the job. Alternatively, these could be summed for the entire company last year, then divided by all the company's direct costs, to get a percentage. This percentage is then applied to the direct labor. If this method is used, these burdens are often described as part of "indirect expenses."
Overhead items are costs that cannot be charged directly to the job. Examples are: the cost of the payroll department's clerical help, the company accountant. Overhead is sometimes "allocated" to the job, based on man-hours worked or square footage used. Other times it is held in a lump. Overhead is certainly an indirect cost, but most systems break it out as a seperate catagory, often called "G&A."
Your book mentions some items from cost estimating that are not "costs" at all, but estimates of technological and economic factors that may affect job costs. For example, an allowance for future pay raises will be a direct cost when the higher wages are paid out, but may be called "overhead" in the budgeting process.
The main point for the chapter is that all these are costs and need to be accounted for in the project budget.
Q. Given both the top down and bottom up budget processes, which methods are associated with the various organizational forms? Is one more suited than the other for given projects? It seems that in a matrix type project, a bottom-up approach would be appropriate however dangerous, given the potential for unconstrained 'padding' by functional departments. Yet a top-down process may pose difficult for a PM who is inexperienced in the finer details of the project.
A. In a strictly functional organization, the functional managers know a lot about their costs and the costs don't change much from year to year, so top-down is completely appropriate. In a pure project organization, the budget for each project must be estimated separately but an estimate is prepared. Often this is done before the PM is assigned to the project. The danger with a "weak matrix" organization is that the project budgeting will be overlooked based on the assumption that the costs will reside with the functional areas so not much budget or budgeting is needed for the project. A strong matrix is more like a pure project organization and cost are usually estimated in advance.
Q. The least clear thing was the section on making better estimates to determine bias; I don't understand the usefulness of trying to mathematically determine a person's bias in budget estimating.
A. Not much point in the types of projects I am familiar with.
Q. The muddiest part of the chapter was section 7.1 (An Iterative Budgeting Process) - I understood the general concept, but had a lot of difficulty understanding the detailed discussion of resource versus time requirements (ri and ti / d'i and t'I), to include the discussion related to Figure 7-1 and 7-2. I find it difficult to see myself using the graphs to make a budgeting decision.
A. The author is trying to use mathematics to reduce human nature to an equation. I should have skipped this section.
Q. how a project manager estimates a (realistic) budget when they have only a vague idea of what they are managing. I predict that Project 3 could help to partially answer this question. In any case, project managers (especially relatively inexperienced ones) do not usually manage projects that they have little understanding of -I understand that PM's are usually generalists, not experts-do they?
A. The older, wiser, and better paid a PM is, the less likely he is to know the technical details of what he is managing. Catch-22. But a team will do a budget, like any aspect of a large project, so the PM's skill comes with choosing the team. Now, having said that, PM's and other bosses often have a good "ball park" estimating ability, and often know what questions to ask. They should know their people, who estimates low, who estimates high.
Q. The last sentence on pg. 270 starts a quick dialogue of the budget vs. project life cycle. It states that a project with marginal returns at the end will probably have more budgetary constraints than a project with dynamic returns at the end. Is this true for all projects? I don't see how the construction of a bridge, development of a software package or creation of an advertising proposal can not have all the necessary funds devoted to it? As it's being explained, it seems you would have to leave the concrete out of the bridge or there would be no packaging for the software because of lack of funds because the life cycle is flat. Whether the end of the cycle is flat or not, the return is the same because the end product is the same.
A. I did not read it that way. By the "return" they mean the slope of the curve is flat, so a large change in the X (or independent variable, illustrated as time, but it could be any resource) results in a small change in Y (or dependent variable). This is characteristic of most projects. For example a construction project has a "punch list" phase that lasts long after the building is occupied. The other kind of project might have an absolute deadline and have accelerating costs towards the end. Designing a new assembly line that had to be operating by date certain. The late months have the actual equipment purchase, delivery, and the high costs of shutting down the existing production line.
Q. The most useful thing I learned from this module was learning curves. It seems like an obvious concept, but I've never really considered it as a factor in project budgeting before. Now that I know the learning rate formula, I hope I can use it in estimating costs for some of the tasks at my job. Of course, you said that it is a stretch to use the formula to estimate how long something should take, because you can't predict interruptions, workers' behavior, etc. So would you suggest shying away from actually using the learning rate formula???
A. Most project work is one-time and does not lend itself to learning curve analysis. However it is a very useful concept, especially if you are new at something and you want to compare you or your firm's production to a person or firm that has been in the business for a while. I am more familiar with it in construction claims, where a contractor is forced to lay off the crew, then starts up again later with another crew. Then learning curves are invoked to "prove" that the contractor would have been much more efficient had the original crew been left on the job.
Q. The "muddiest" item in this module was definitely project budgeting. The book shows Table 7-2 as an example, but I have absolutely no idea what this table is actually showing. More specifically, I assume the 1 through 8 across the top are months, but I don't know what the I and J columns are representing. In my experience, project budgets have been spreadsheets with tasks across the top and categories down the left hand side. Would this be a project budget? I feel that I might be missing something here??
A. The "i" and "j" are ancient scheduling talk for CPM's, I don't think Chapter 8 even uses them. "i" is the number of the start node and "j" the number of the finish node. By the time you read this, you will be an expert in nodes and such. The Table just illustrates how the budget is "spread" over the time.
Q. Once the author gets into the mathematical approach to budgeting, it gets very hard to follow and understand. A mathematical presentation is good, but several examples for follow on would be of immense help.
A. OK, I'll try to put some in for next year's class.