Friday 7 May 2021

What is Project budget development


The budget of the project is being developed in stages.

An approximate estimate of costs in descending order. The purpose of the initial assessment is to determine whether the project should be carried out. Often you have to proceed from the amount that is allocated to the project. Therefore, only the main items of expenditure are assessed. In fact, annual and forward-looking plans contain approximate estimates of budgets, rather than accurate ones, as many would like.

Detailed budgeting. This is a cost calculation for all project works based on a complete structural scheme of work (see chapter 3).

Full and approved project budget. The budget of the project, which has been approved by the organization's management, has been developed in accordance with all expenditures.

Budget clarification during project development

The project is going through the following stages of development in the process of its implementation.

Stage Project Stage Budget Development Concept (Design) Approximate Evaluation of Works in Descending Order Develop Detailed Budget Development Full Approved Budget Start Budget Review after appointment of performers and provision of the necessary resources. If necessary, approve the revised budget. Execution Budget Adjustment in case of a change in the situation. If necessary, revise and approve the budget. Completion of Budget Adjustment in the event of a change in the situation. If necessary, revise and approve the budget.

An approximate estimate of the cost of the project is carried out at the design stage to determine the financial feasibility and feasibility of its implementation.

Detailed budget work is carried out at the development stage, when there will be a full list of works of the project. Before they begin, the management should receive approval and approval of the budget.

At the beginning of the project, when you decide with the executors and all the necessary resources and equipment, you should once again flip through the budget and, if necessary, make changes to it. Before proceeding to the implementation stage, approve the revised version of the budget.

As you work on a project, keep track of any changes to the situation and make adjustments to your budget if necessary.

Sometimes you may not participate in all stages of budget development. If you are hooked up to the project later, try to familiarize yourself with the original plan and resolve all the issues that will arise.

Estimating the cost of the project

Use a combination of two methods to make a detailed assessment of the cost of the project.

Bottom-up method. Evaluate the cost of each work of the structural work scheme and calculate these costs to determine the overall budget.

Top-down method. Analyze the cost of completing the main tasks of the project according to the structural scheme of the works to confirm their feasibility.

Here's how to evaluate the bottom-up method.

1. Work evaluate consistently.

2. Direct labor costs for each work are defined as the product of the number of hours worked by the hourly wage of the executor.

  • Direct labour costs are determined by:
  • Based on the individual bet of the performer.
  • Based on the average payment for this type of work.

For example, you need the services of a computer graphics specialist to organize a presentation. The head of the computer design department estimated the laboriousness of 100 hours. If the work is entrusted to your friend Harry, whose hour costs $30, the direct cost of this task will be $3,000. And if you do not know who will perform it, you should focus on the average rate of the graphic designer of your organization.

3. Identify the direct costs of materials, equipment, travel and subcontractor services for each work.

Identify the indirect costs associated with each work.

Typically, indirect costs are determined in proportion to planned direct costs. As a rule, accounting calculates the percentage of indirect costs.

  • Direct costs for the current year are determined.
  • Indirect costs for the current year are determined.
  • Indirect costs are divided into direct costs and multiplied by 100.

The more painstaking method of calculating indirect costs, described further in the "Two Ways to Determine Indirect Costs" insert, requires additional effort. However, your work will be rewarded with a more accurate assessment.

Suppose you are planning a project to develop a company's advertising prospectus based on such information.

Budget of the project to develop the company's advertising prospectus

Expenditure Category Expenses (dollars) Total (dollars) Direct labor costs: . . You: 200 hours x $30/hour. 6000 . Mary: 100 hours x $25/hour. 2500 . altogether. 8500 Indirect Costs (60%) . . . 5100 Other direct costs: . . .

You have to work 200 hours on the project and your employee Mary has 100.

  • Your bet is $30. mary's rate is 25 per hour.
  • You must purchase a paper for a printing device worth $1,000.
  • Your business trips to the suppliers will cost $300.
  • You have determined that the subcontractor will be paid $5,000 for the brochure.
  • The total indirect cost to your organization is 60%.
  • Two ways to determine indirect costs
  • Two methods are usually used to determine indirect costs.

Method 1. One factor is used for overheads and another for general and administrative costs.

Your organization's accounting determines the overhead ratio by calculating the ratio of all project overheads to all direct project costs.

Accounting determines the ratio of total and administrative costs by calculating the ratio of all general and administrative costs for projects to the sum of all direct labour costs, other direct costs, and project overheads.

You define overheads for a particular work as the product of the direct cost of the work to do the work at the overhead ratio.

You determine the general and administrative costs for a particular work by multiplying the amount of direct labor costs calculated and other direct costs of doing this work by the general and administrative cost ratio.

Method 2. One indirect cost factor is used for all overheads, as well as general and administrative costs.

Your organization's finance department determines the combined indirect cost ratio by calculating the ratio of all project overheads to all direct project labor costs.

You define the indirect costs for a particular work as a product of the direct cost of the work to do the work at the indirect cost factor.

Some organizations have developed a weighted labor ratio that combines hourly pay and related indirect costs. For example, if your bet is $30. per hour and the organization's indirect cost ratio is 0.5, your hour, taking into account the weight of labor, costs $45. (30 + (0,5x30) = 45).

The top-down cost method makes you think about the ratio of different aspects of the project. Suppose you plan to develop a new equipment or appliance. When the "top-down" method was counted, the total cost of the project was $100,000. With this distribution on tasks:

  • Design - $60,000;
  • Development - $15,000;
  • Tests - $5,000;

Production of the product - 20 thousand dollars.

However, experience with similar projects shows that the design phase typically spends 40% of your total budget, while you have 60% planned. Thus, the design costs correspond to the project costing $150,000, not $100,000.

Now you have two options. Either somehow reduce costs by developing an alternative strategy, or ask for another $50,000. In any case, it is necessary to make a strategically sound decision, not to manipulate the figures.

In the process of developing the budget of the project, you need to take into account all possible circumstances and unforeseen situations. In these cases, you should have an appropriate action plan.

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