Development Cooperation Handbook/Designing and Executing Projects/Detailed Planning or design stage/How do you create budgets and track costs against them?

The cost tracking process How do you create budgets and track costs against them?

Budgets can be created and tracked from either of two directions, by using either a bottom-up (bottom-up estimating: An estimating method in which the base costs of individual work items or resources are calculated into task, resource, and project cost totals.) or a top-down (top-down estimating: An estimating method that uses the actual costs of a previous, similar project as the basis for estimating cost totals of a current project. This method is often used when there is limited information about the project.)estimating method. Microsoft Office Project supports both methods.

Creating a budget by using a bottom-up method
In a bottom-up approach, base rates or per-use costs for resources, and fixed costs or cost resources (cost resources: Resources that don't depend on the amount of work on a task or the duration of a task, such as airfare or lodging.) for individual tasks (task: An activity that has a beginning and an end. Project plans are made up of tasks.) are estimated. Microsoft Office Project calculates cost totals for resources, tasks, and the entire project. This method (also known as bottom-up estimating (bottom-up estimating: An estimating method in which the base costs of individual work items or resources are calculated into task, resource, and project cost totals.)) helps produce reliable and accurate results.When you create a bottom-up budget in Microsoft Office Project:

First, you enter pay rates, per-use costs, fixed costs, and cost resources. Next, you enter the estimated work or duration for each task. Finally, you assign resources to tasks. Note  Budget resources are more appropriate for use in top-down planning. They can be applied at the project level only by assigning a budget resource (budget resource: A budget resource captures the maximum capacity for a project to consume money, work, or material units for a project. Budgets can only be applied at the project level by assigning a budget resource to the project summary task.) to the project summary task (summary task: A task that is made up of subtasks and summarizes those subtasks. Use outlining to create summary tasks. Project automatically determines summary task information [such as duration and cost] by using information from the subtasks.).

Microsoft Office Project then calculates the total estimated costs of completing all tasks in the project. If this total is not in alignment with your budget, you must adjust pay rates, resource assignments, and so forth.

After you refine the estimated costs, you can save a baseline plan (baseline plan: The original project plans [up to 11 per project] used to track progress on a project. The baseline plan is a snapshot of your schedule at the time that you save the baseline and includes information about tasks, resources, and assignments.), thereby establishing a budget for the project.

With a budget in place, you can compare actual expenditures against the amounts that you planned to spend and then make any necessary adjustments to stay within the budget. In most instances, all that you have to do is enter actual cost amounts for each task. Microsoft Office Project calculates the task's cost based on the project's progress. You can also enter specific costs, if needed.

Note  You can view cost totals for tracking purposes in any of three ways: in the Project Information dialog box, in Project views (particularly the Task Usage and Resource Usage views), or in a report. Using Visual Reports, you can also export this cost information to other programs, such as Microsoft Office Excel 2007 and Microsoft Office Visio 2007.

Creating a budget by using a top-down method
In a top-down approach to budget estimating, overall resource, task, and project cost totals are estimated based on previous experience of similar projects. If you have a fixed maximum amount of money that you are able to spend on a project, a top-down budgeting method is preferable to a bottom-up method.

When you create a top-down budget for your project:

First, you create budget resources (budget resource: A budget resource captures the maximum capacity for a project to consume money, work, or material units for a project. Budgets can only be applied at the project level by assigning a budget resource to the project summary task.) that represent the overall budget for the project, including budget resources for costs, work, and materials. Second, you assign the budget resources to the project summary task. In this way, budgets are applied to the entire project. Third, you enter values for the budget resources. Fourth, you indicate which other resources in your project you want to track and measure against the overall budget resources. You do this by creating a custom field for all resources in your project and then categorizing each of the resources (including the budget resources) by specifying in the custom field a value that indicates which budget type the resource is being measured against. Finally, after you categorize all resources by budget type, you group the resources to view how they compare to the overall project budget.

What are rate-based costs, and how are they calculated?
Rate-based resource costs are costs of work resources (work resource: People and equipment resources that perform work to accomplish a task. Work resources consume time [hours or days] to accomplish tasks.), such as people or rental equipment, to which you assign standard and (if appropriate) overtime rates (overtime: The amount of work on an assignment that is scheduled beyond the regular working hours of an assigned resource and charged at the overtime rate. Overtime work indicates the amount of the assignment's work that is specified as overtime work.), usually assessed on an hourly basis. When you assign a resource to a task, Microsoft Office Project calculates the total resource cost by using the specified hourly resource rates and the time (or duration (duration: The total span of active working time that is required to complete a task. This is generally the amount of working time from the start to finish of a task, as defined by the project and resource calendar.)) that it takes to accomplish the task.

Note  By default, Microsoft Office Project uses standard resource rates to calculate costs for the entire amount of work used to complete a task. Microsoft Office Project does not automatically calculate additional hours as overtime work, unless you specifically assign the additional hours as overtime.

Because work always represents the total amount of work completed, the amount of overtime work is included in, not added to, the total amount of work. For example, if a person is scheduled to work 40 hours over four days, consisting of 8 hours of regular work and 2 hours of overtime work per day, you assign 10 hours of work per day, and then designate 2 hours of those 10 as overtime work. Microsoft Office Project calculates the cost of the hours specified as overtime work by using the specified overtime rate. The remaining hours are calculated at the standard rate.

Rate-based material costs are the costs of consumable material resources, such as building materials or supplies, to which you assign standard rates (but typically not rates calculated per hour). To assign costs for material resources, you set the rate per unit of material, such as a rate per yard or a rate per ton. When you assign a material resource to a task, Microsoft Office Project calculates material cost totals by multiplying the specified material resource rate by the number of material units used to complete the task.

Work resources sometimes have a cost rate table (cost rate table: A collection of information about a resource's rates, including the standard rate, overtime rate, any per-use cost, and the date when the pay rate takes effect. You can establish up to five different cost rate tables for each resource.) applied to them when costs are calculated. A cost rate table is a collection of rates and per-use costs for material and work resources. Microsoft Office Project provides five cost rate tables, named A through E (the names cannot be changed), so that if a resource charges separate rates for separate types of work, you can assign as many as five separate sets of rates to that resource. For example, if a carpenter charges a higher rate for finish work than for framing, you can apply one cost rate table to the finish work assignment and another to the framing assignment.

In each cost rate table, there are up to 25 rows that you can use to enter future rate changes (such as pay rate increases or material cost changes). For each rate change, you specify the date that the change takes effect. For example, if you know that a resource will receive a pay increase in six months, you can set Microsoft Office Project to automatically start using the new rate at that time.

Note  If you a re using Microsoft Office Project Professional 2003 and working with enterprise resources (enterprise resources: Resources that are part of an organization's entire list of resources. Enterprise resources can be shared across projects.), your organization may choose to place restrictions on rate tables. For example, your organization may designate rate table A for billing rates and rate table B for non billable rates. Contact your administrator (administrator: Sets up and manages user accounts, assigns permissions, and helps users with network or server access issues. This person can also manage and customize various elements in Project Professional and in Project Server.) for more information.

What are per-use costs, and how are they calculated?
Per-use costs are one-time fees for the use of a resource, such as equipment. Per-use costs never depend on the amount of work done. Instead, they are one-time costs that are incurred each time the resource is used. Although a per-use cost for a work resource depends on the number of assignment units (assignment units: The percentage of a work resource's time, or units, that the resource is assigned to a task.) used, a per-use cost for a material resource is applied only once. For example, if a brick layer has a per-use cost of $100 (rather than an hourly rate) and it takes three brick layers to complete a task, the cost is $300. But a per-use delivery cost of $100 for a material resource like cement is applied only once per delivery, whether 10 tons of cement are delivered or 100 tons.

Note  Per-use costs are set on the Costs tab of the Resource Information dialog box.

What are fixed costs, and how are they calculated?
Fixed costs are costs for a task that remain constant regardless of the task duration, the amount of work performed by the resource, and the number of assignment units.

''Note  A rate-based resource cost can increase when a task takes more time than projected, but a fixed cost does not. For example, if a carpenter is a rate-based resource (that is, if he or she is paid hourly) and is scheduled to complete a task in five days but actually takes seven days to complete it, the carpenter is paid more than was budgeted. If the carpenter is paid a fixed cost for the work, however, the cost remains the same, no matter how long the task takes to complete.''

You can assign fixed costs to a task to which rate-based resource costs are also assigned. For instance, if a rate-based resource that is assigned to a task also incurs travel costs, you can add the travel costs to the same task as a fixed amount. Fixed costs are included in the cost totals, both of project phases (on summary tasks (summary task: A task that is made up of subtasks and summarizes those subtasks. Use outlining to create summary tasks. Project automatically determines summary task information [such as duration and cost] by using information from the subtasks.)) and of the entire project.

Note  You set fixed costs in a task view (such as a Gantt Chart) by applying the appropriate Cost rate table, and then setting the cost amount in the Fixed Cost field.

What are cost resources, and how are they calculated?
Unlike fixed costs and per-use costs, cost resources (such as lodging or airfare) are created as a type of resource and then assigned to a task. Unlike work resources, cost resources cannot have a calendar applied to them; therefore, they do not affect the scheduling of the task. The amount of the cost resources doesn't depend on the amount of work done on a task.

Cost resources are used when you want to apply (to a single task) multiple separate miscellaneous costs that aren't changed by the amount of work performed on the task. For example, an executive working on a new project proposal might have three separate cost resources applied to him or her: one for airfare, one for food expenses, and one for hotel room expenses. In this way, several "fixed" costs can be applied to a single task. Unlike with work resources and material resources, cost rates cannot be applied to cost resources.

Note  Cost resources are created on the Resource Sheet. (On the General tab of the Resource Information dialog box, click Cost in the Type list.) After you create the cost resource, you can assign it to tasks as needed. After the cost resource is assigned to a task, you can set the amount of the cost by using the Task Information dialog box for that task, the Assignment Information dialog box for that task, or the Task Usage view that has the Cost table applied.

How can you regulate cash flow?
When assigning costs to tasks and resources, you can specify when the costs accrue (accrual method: Determines when the cost for a resource is incurred and when actual costs are charged to a project. You can incur costs at the start [Start] or finish [End] of a task or prorate them [Prorated] during the task.). If cash flow is a critical factor in your project, you may want to change how costs accrue for individual tasks, to ensure that they accrue only when you have sufficient funds available to pay for them.

Except for per-use costs, which always accrue at the start of a task, Microsoft Office Project prorates costs by default and calculates cost accrual based on the percentage of the task completed, distributing the accrual over the whole duration of the task. However, you can also have costs accrue either at the start of a task (if you have a lump-sum amount that is payable at the start), or at the end of the task (if you are holding payment until the work is finished).

''Note  The accrual method can be set in any of several ways, depending on the type of cost. For most types of resources (including work, material, and cost resources, and also per-use costs) you set the accrual method on the Cost tab of the Resource Information dialog box. For fixed costs, you set the accrual method by using the Fixed Cost Accrual field.''

To best track costs, you should first create a budget (budget: The estimated cost of a project that you establish in Project with your baseline plan.) by creating and entering cost values for budget resources (budget resource: A budget resource captures the maximum capacity for a project to consume money, work, or material units for a project. Budgets can only be applied at the project level by assigning a budget resource to the project summary task.) that are assigned to the project summary task (project summary task: A task that summarizes the duration, work, and costs of all tasks in a project. The project summary task appears at the top of the project, its ID number is 0, and it presents the project's timeline from start to finish.). You can then identify other resources and task costs that you want to track and measure against the budget resources. You can enter pay rates (pay rate: Resource cost per hour. Project includes two types of pay rates: standard rates and overtime rates.), per-use (per-use cost: A set fee for the use of a resource that can be in place of, or in addition to, a variable. For work resources, a per-use cost accrues each time that the resource is used. For material resources, a per-use cost is accrued only once.) and fixed (fixed cost: A set cost for a task that remains constant regardless of the task duration or the work performed by a resource.) costs for tasks (task: An activity that has a beginning and an end. Project plans are made up of tasks.), resources (resources: The people, equipment, and material that are used to complete tasks in a project.), and, if necessary, assignments (assignment: A specific resource that is assigned to a particular task.). Then, specify the estimated work (work: For tasks, the total labor required to complete a task. For assignments, the amount of work to which a resource is assigned. For resources, the total amount of work to which a resource is assigned for all tasks. Work is different from task duration.) or duration (duration: The total span of active working time that is required to complete a task. This is generally the amount of working time from the start to finish of a task, as defined by the project and resource calendar.) for tasks and assign resources to the tasks.

Only when all of these steps are complete can Project 2007 calculate the total estimated costs for the project. You might then want to refine your estimates. When you're done, you can categorize and group all resources to compare them to the budgeted costs. You can also set a baseline with the budgeted costs, and use it to compare with actual costs (actual cost: The cost that has actually been incurred to date for a task, resource, or assignment. For example, if the only resource assigned to a task gets paid $20 per hour and has worked for two hours, the actual cost to date for the task is $40.) as your project progresses.

After the project starts, you update task progress — the amount of work done on tasks or the percentage of the tasks that are complete. Project 2007 calculates costs for you based on task progress.

Note  You can also choose to turn off automatic calculation of costs and enter actual costs yourself, in addition to task progress.

By combining the actual costs of completed work with the estimated costs for remaining work (remaining work: The amount of work, in terms of a time unit such as hours or days, that is left to be completed on a task. This is calculated as follows: Remaining Work = Work - Actual Work.), Project 2007 calculates scheduled (scheduled or current cost: The latest cost of tasks, resources, assignments, and the entire project, which is displayed in the cost field as cost or total cost. It is kept up to date with cost adjustments that you make and with the project's progress.) (projected) costs. More importantly, it calculates the difference between the scheduled and baseline costs. This difference, or cost variance (CV: The difference between the budgeted cost of work performed [BCWP] on a task and the actual cost of work performed [ACWP]. If the CV is positive, the cost is currently under the budgeted amount; if the CV is negative, the task is currently over budget.), tells you whether your project is on budget.

You can do simple cost tracking by viewing the actual and scheduled (projected) costs for tasks, resources, assignments, and the project.

If you've created a budget through a baseline, you can do more extensive tracking by comparing the actual and scheduled costs against the baseline costs.

To determine whether you're on budget or not, you can view the cost variances between scheduled costs and baseline costs. For example, if a task is budgeted to cost $50, but the task is half-way done and already costs $35, the scheduled cost is $60 (the $35 actual costs to date, plus the $25 expected costs for the remaining work on the task). The cost variance is $10 ($60 of actual cost minus the $50 of budget cost).

By monitoring cost variances regularly, you can take steps to make sure that your project stays close to its budget.

Note  You can only view cost variances if you've entered initial costs and saved a baseline. For instance, if you didn't enter pay rates for a resource before you saved the baseline, you won't be able to view cost variances for that resource.

Tools:
The steps for creating a budget
 * Expense Claim Form
 * Per diem Claim Form



Template: Project Activities Costs

Template: Summative project budget

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