Project Budgeting and Resource Management

1. Project Budgeting and Resource Management Budget setting approaches Presenting the budget Project management Slack management Crashing Resource levelling Resource allocation

2. Introduction • Project Budget specifies the activities and their costs so as to achieve its objective and fulfill all requirements to complete the project. • Three tiers of budgets: • Long-range, organization-level • Midrange, functional unit • Operational, project based.

3. Top-down Budgeting Approach Long-range budget is developed by the top management, and then passed to the functional managers and project managers who will develop the functional and operational budgets. Top-down approach to budget preparation: StepOrganizational levelBudget prepared at each step • Top management Strategic budget based on organizational goals, constraints, and policies • Functional management Tactical budget for each functional unit • Project managers Detailed budgets for each project, including the cost of labour, material, subcontracting, overhead, etc.

4. Bottom-up budgeting • Project managers prepare his/her budget proposal that supports efficient and on-schedule project execution. • Functional managers prepare the budgets for their units, considering the resources required in each period of time. • To management streamlines and integrates the budgets from the low levels into a strategic long-range organizational budget. Bottom-up approach to budget preparation Step Organization level Budget prepared at each step 1 Top management Setting goals and selection of projects (a framework for budget) 2 Project management Detailed budget proposals for projects including costs of material, labor, subcontracting, etc. 3 Functional management Midrange budget for each functional unit 4 Top management Adjustments and approval of the aggregate long plan budget resulting from the process

5. Iterative budgeting • A combination of top-down and bottom-up budgeting

6. Presenting the budget • The budget generated is easier to understand and use if it is presented clearly and concisely. • The following recommendations can be adopted when preparing and presenting a project’s project • Incorporate a schedule showing the time that expenditure and revenues (if any) are expected to be realised. • Present the budget in quantitative, measurable units such as dollars or man-hours. • Define milestones in terms of achievements of goals and expenditures/revenues. • Use the budget as the baseline for progress monitoring & control. • The budget should translate short-term objectives into work orders, purchasing orders, etc. • Breakdown the budget to individual units responsible.

7. Budget Management • The budget of a project specifies the scheduled expenditures and scheduled revenue as a function of time. • Two approaches are used to manage the project to meet budget constraints: • Slack management -- An approach that utilizes the slacks of activities to meet the organizational budget requirements. • Crashing -- An approach that attempts to shorten an activity duration by adding more resource, so as to achieve a trade-off between cost and time.

8. Slack management • Development of the budget of a project includes the derivation of the scheduled expenditures and the scheduled revenue as a function of time, subject to the time constraint and the total investment limit. • The approach of slack management attempts to utilize the slacks of the activities to re-schedule the project, so that the time and monetary constraints are satisfied.

9. Slack management • The process of selecting activities to re-schedule the project will follow the following priority: • Non-critical activities that have free slack are the first candidates to be re-scheduled. • Non-critical activities that have total slack are the next candidates to be re-scheduled. • Finally, the critical activities are considered. • Overall, our goal is to make the whole project to meet the time constraint while the monetary limit is satisfied.

10. Slack management -Example Consider the example project, with the activities, durations and costs given below: Activity Duration (weeks) Cost ($1,000) A 5 1.5 B 3 3.0 C 8 3.3 D 7 4.2 E 7 5.7 F 4 6.1 G 5 7.2 Total = 31.0

11. Slack management We have found that (A,C,F,G) is the critical path, which has a length 22 weeks. The critical activities are A, C, F, and G, while activities B, E, and D have either free or total slack that can be used for budget planning.

12. Cash Flow • Let’s look at this project’s cash flow, assuming that, for budgeting purposes, the cost of each activity is evenly distributed throughout its duration. • In the next two tables, we look at the cash flow scenario for: • Early start schedule– Any activity will be started at its earliest start time. (Table 8-4) • Late start schedule– Any activity will be started at its latest start time. (Table 8-5)

15. Slack management • Figure 8.1 below depicts the cash flows for the early start and late start schedules. • Figure 8.2 below depicts their cumulative cash flows.

18. Slack management • From Figure 8-2 we can see that, if the total money allocated to the project is only $4,913 for weeks 1 through 6, then during this period only a late start schedule is feasible. • Also, if the total allocation to the project is increased to $10,398 for the first 6 weeks, then an early start schedule will become feasible. • Any allocation between $4,913 and $10,398 will force a delay of certain non-critical activities.

19. Slack management • The approach of slack management is to properly adjust the timing for non-critical activities so that the limit of total monetary allocation is satisfied, while the project is not delayed. • An early start schedule will result in relatively high expenditures in the project’s earlier stages, while a late start schedule will result in relatively high expenditures in the project’s later stages.

20. Risk vs. Capital Commitment Note that the choice between an early and a late start schedule affects the risk level associated with the project’s on-time completion. • Using a late start schedule means that all activities are started as late as possible without any slack to buffer against any uncertainty, increasing the probability of delays. • On the other hand, using an early start schedule requires an early commitment of money, which will mean additional cost if interest rate is taken into account.

21. Tradeoff Between Cost and Time • The approach of crashing is to reduce the duration of an activity by adding more resource, so as to achieve an optimal trade-off between cost and time. • Normally, for each activity, there is a time-cost curve, which represents the relationship between the time to complete the task and the associated cost.

22. Crashing

23. Crashing • The normal point gives the cost and the time involved when the task is performed in the normal way without extra resources such as overtime, special materials, or enhanced machine capacities to speed up the processing of the task. • The crash point gives the time and cost when the task is fully expedited; that is, no cost is spared to reduce its duration as much as possible.

24. Crashing • The time-cost curve may not be necessarily linear; it can take any form, even being a set of discrete points such as (L1, c1), (L2, c2), …, (Lm, cm). • Nevertheless, as an approximation, we sometimes assume that all intermediate time-cost trade-offs are possible and that they lie on the line segment between the normal point and the crash point (that is, the time-cost curve is approximated as a continuous linear function). • With such an approximation, we need only estimate the normal point and the crash point to build the time-cost curve.

25. The Crashing Process (1)Apply CPM to derive the normal schedule of the project, where each activity is performed at its lowest cost and at a normal duration. (2)Identify the critical path, and select the critical activity that is least expensive for crashing. If more than one critical path exist, then a least expensive activity on each path should be selected for crashing so that all the critical paths will be shortened. (3)Apply CPM again to derive the schedule of the project, where each activity is performed at the crashed cost and the crashed time as obtained in step 2 (if it has not been crashed, using its normal cost and time). (4)Repeat Steps 2 and 3, until no more crashing to reduce the current critical path(s) can be performed.

26. Crashing - Example

27. Crashing Results

28. Crashing • The crashing process can continue until a 14-week span is obtained. At this point, two critical paths emerge: A-C-F-G, and B-D-F-G. • The path B-D-F-G can be further shortened by crashing the activity B. But the path A-C-F-G can not be crashed any more. • Thus, the shortest possible duration of the whole project is 14 weeks.

29. Crashing – Cost vs. time tradeoff The crashing process has revealed a relationship between the cost and the schedule of the project, which allows us to prepare our budget by considering the possible trade-offs between cost and time.

30. Crashing - Example • Suppose that a fixed overhead of $500 per week is charged during the project’s duration. Further, assume that the project is due in 18 weeks and that a penalty of $1,000 per week is imposed starting from the 19th week. • The problem now is how to generate the best budget for the project so that the overall cost is minimal. • Table 8-8 below summarizes the cost-time function.

31. Crashing Example – Project costs 10,500 10,000

32. Crashing • From Table 8-8, we can see that the minimum cost occurs at the project length of 19 weeks. • That is, it is more economical to pay for a penalty of $1,000 and an overhead of $500 for a one-week delay than to pay $2,000 to crash the activity F to get an on-time schedule. • Based on this result (a 19-week schedule), we can generate the budget for the project (including the costs for all activities and the schedules to pay for these costs). • Figure 8-4 below graphically depicts the different cost components and the total cost as a function of its duration. Again, we can see that the 19-week schedule is the one with the lowest total cost.

33. Crashing

34. Resource Management • Resource leveling subject to project due date constraints • Resource allocation subject to resource availability constraints

35. Resource Management • Depletable resources -- Resources that are used up over time (e.g., a lump sum of money, raw materials, … etc.) • Renewable resources -- Resources that are available at the same level every time period (e.g., people, machines, … etc.) • Earlier, we mainly deal with budgeting and planning of depletable resources. Here we will consider the resource allocation problem with renewable resources. • Resource allocation for a project concerns with the trade-off between the cost of using resources, and the project schedule.

36. Example • Consider the example project as given in the Table below:

37. Renewable Resource Usage • Consider the “renewable” resource (labor) used to perform the activities of the project. Table 9-1 gives the resource requirements: 196

38. Tracking Resource Usage • Gantt Chart -- A graph that depicts the activities performed on the vertical axis and their corresponding durations on the horizontal axis (a technique developed by Henry L. Gantt). • The Gantt chart for the early start schedule of the example project is shown in Figure 9-2a. The corresponding resource requirements are given in Figure 9-2b.

39. Gantt Chart and Resource Profile- Early Start Schedule

40. Fluctuation in Resource Usage Level The early schedule requires a high level of resource at the early stages. The requirement during the first 3 weeks is 17/5=3.4 person-days per day. The highest resource requirement is 17 person days per week, while the lowest resource requirement is 3 person days per week. The fluctuation is 14 person-days.

41. Gantt Chart and Resource Profile- Late Start Schedule

42. Resource Usage Levels –Late Start Schedule The late schedule moves the high level of resource requirement from weeks 1 through 3 to weeks 3 through 5. The highest resource requirement is 12 person days per week, while the lowest resource requirement is 3 person days per week. The fluctuation is 9 person days.

43. Resource levelling • Resource levelling is defined as the re-allocation of total or free slack in activities so as to minimize the fluctuations in the resource requirement profile. • When the total resource requirement for the project is fixed, a minimum fluctuation tends to reduce the peak resource requirement, and thus leads to more balanced requirements over all periods. • For renewable resource, a balanced resource requirement is the desirable solution. • For labor, this means a fairer working load distribution; This also means a lower costs for hire, fire, and training. • For materials, this means less effort in material planning and control, and also lower cost in inventory.

44. General Resource Levelling Procedure • Calculate the average number of resource-days per period required by the project. (In the example, a total of 196 person-days are required. The average = 196/22 = 8.9, or about 9 person-days per week, since the project duration = 22 weeks). • With reference to the early start schedule and non-critical activities, gradually delay activities one at a time, starting with those activities that have the largest free slack. • Select the schedule that minimizes the resource fluctuation (which has daily resource requirements close to the calculated average).

45. Resource levelling - Example Apply the procedure of resource-levelling to the example project. Recall the results we have obtained by project scheduling (see the table below). We can see that activity E has the largest free slack (6 weeks).

46. Resource levelling - Example • The early start schedule is shown below. • The first step is to delay the start of E by 3 weeks until the end of activity B. This reduces the resource requirements from weeks 1 through 3 by 5 units. The resource profile is shown in the Table next.

47. Resource levelling - Example • The profile has a maximum of 13 person-days per week. Since the maximum occurs in weeks 4 and 5 and activity E can be delayed further, consider a schedule E starts after A is finished (after week 5). The resource requirement profile in this case is shown in the Table next.

48. Resource levelling - Example • Now the profile has a maximum of 12 person-days per week. The minimum is still 3, given a fluctuation of 12-3=9.

49. Resource levelling - Example • The next candidate for adjustment is activity B, with a free slack of 2 weeks. However, delaying B by 1 or 2 weeks will only increase the load in weeks 4 and 5, resulting in a net gain zero. • Therefore, we proceed to the last activity with a positive free slack - activity D, which is scheduled to start at week 5. Delaying D by 1 week results in the following resource requirement profile.

50. Resource levelling – ExampleMinimum Fluctuation Schedule • Now the corresponding schedule is shown in Figure 9-4. Note now the fluctuation of person-days is 12-5 = 7, which is smaller than other schedules including the early start and the late start schedules.