The project's budget is a function of the project's tasks or activities, the duration of those tasks and activities, their sequence, and the resources required. In general, resources used on a project will have a cost, and the cost of using a particular task or activity must be included in the overall project budget.
Estimating the cost of a particular activity or task with an estimated duration involves five steps:
- Defining what resources will be needed to perform the work
- Determining the quantity of resources that are needed
- Defining the cost of using each resource
- Calculating the cost of the task or activity
Ensuring that the resources are levelled, that is, resources have not been over allocated.
For example, let's suppose that we have identified a particular task and estimated that it will take one day to complete and requires one project team member. Let's also assume, for simplicity, that no other resources are needed. This estimate may require that we define a cost for using this particular resource. For example, if our team member earns \$20 an hour, that sum is what our employee sees on his or her paycheck (before taxes and other deductions). The organization may provide other benefits and the total cost comes out to be \$25 an hour.
Cost of task = Estimated duration x True cost of the resource
= 8 hours x $25/hour = $200
We can even estimate the cost of a salaried employee by prorating his or her salary. This whole process can be simplified by using a project management software tool.
It is important to keep in mind that our example has only considered direct costs, or the cost of labour for using this resource directly. There are other costs like:
1. Indirect costs - These costs include such things as rent, utilities, insurance, and other administrative costs. For example, a consulting firm may charge a client $150 an hour per consultant. Included in that hourly fee would be the salary and benefits of the consultant and enough margin to help cover the administrative and operation costs needed to support the consulting office. **2. Sunk Costs**—Sunk costs are costs that have been incurred prior to the current project. For example, a previous attempt to build an application system may have ended in failure after three months and $250,000. This $250,000 would be considered a sunk cost, regardless of whether any work from the previous project is salvageable or of use to the current project.
3. Learning Curve— Often we have to "build one and throw it away" in order to understand a problem or use a new technology effectively. In addition, inexperienced people will make mistakes and new technology will usually require a steep learning curve in the beginning. As a result, time and effort can be wasted. This time to learn should be considered in either the project schedule or budget.
4. Reserves—Reserves provide a cushion when unexpected situations arise. Contingency reserves are based on risk and provide the project manager with a degree of flexibility. On the other hand, a project budget should have some management contingencies built in as well.
Once the resources have been assigned to the project, it is important that the project manager review the project plan to ensure that the resources are level. In other words, resources cannot be over allocated—i.e., a resource cannot be assigned to more than one task at the same time. Although the project manager may catch these mistakes early on, it is important that the level of resources be reviewed once the project schedule and resource assignments have been made. Not catching these mistakes early can have a demoralizing effect on the team and lead to unplanned (i.e., unbudgeted) costs. A project management tool such as Microsoft Project provides the means for identifying over allocated resources.