QUESTION 1Calculate the direct cost of labor for the project team using the following data. What are the costs for the individual project team members? What is the overall direct cost of labor?Your re

MBA 6961, Project Management 1 Cou rse Learning Outcomes for Unit IV Upon completion of this unit, students should be able to: 5. Analyze project costs as constrained by time, scope, and risk. 5.1 Differentiate between the various types of project costs. 5.2 Examine the methods and challenges to cost estimation. 6. Apply best practices of cost estimation related to project management. 6.1 Calculate the direct cost of labor for project team members. 6.2 Explain the importance of contingency funds for cost estimation. Reading Assignment Chapter 8: Cost Estimation and Budgeting, pp.256 –281 Unit Lesson Introduction In Unit III, we covered project selection methods, project scope management, and project portfolio management. These aspects of project management are important to all project stakeholders. Another critical aspect is the bottom line. Your stakeholders, particularly the project sponsor(s), will want to know the estimate d cost of the project. Cost estimation will provide an idea of how much a project will cost. Pinto (2016) noted that “ cost estimation processes create a reasonable budget baseline for the project and identify project resources (human and material) as well, creating a time -phased budget for their involvement in the project ” (p. 259). Two separate knowledge areas in estimating are 1) project cost management and 2) project time management (Project Management Institute [PMI], 2013). This unit will draw on these two areas for our discussion on project estimation. Cost Estimation Why cost estimation? The most obvious answer is that the project needs to establish a budget, set a price, and make a profit (in terms of tangible and/or intangible outcomes). In most projects, the project stakeholders need to know the costs involved in a project, including labor, materials, equipment, facilities, and other efforts such as subcontractors needed to execute the project. For most projects, the cost of personnel is the dominant cost. Project costs come in two forms: direct and indirect costs. Direct costs refer to the direct labor rate, total effort or labor hours, and the cost of materials. Indirect costs are more complex to calculate. Indirect costs refer to the intangible costs of projects and often go unnoticed. Indirect costs may include ma intenance, commission, employee benefits, and other similar costs. Still, each project is unique in terms of how a project manager (PM) defines direct and indirect costs. A project plan will often define some of these costs as both direct and indirect , dep ending on their use. For example, employee benefits associated with direct labor would be a direct cost, but employee benefits for indirect labor would be an indirect cost. The main types of costs involved in a project are as listed below: 1. fixed and variable costs —the latter being classified by activity level ; 2. recurring and non recurring costs, which are classified by repetition rate ; and 3. normal and expedited costs , which are classified by planned and unplanned expenses. UNIT IV STUDY GUIDE Cost Estimation MBA 6961, Project Management 2 UNIT x STUDY GUIDE Title Fixed and variable costs : According to Larson and Gray (2014) , fixed costs are the costs not affected by the level of activity in a project . Examples of fixed costs are insurance, taxation, and depreciation of assets. On the other hand, variable costs vary with the operation and level of activity throughout a project. Examples of var iable costs are energy consumption and labor. Recurring and nonrecurring costs: Recurring costs refer to costs that repeat as the company produces goods and services. A good example of recurring costs are variable costs because variable costs repeat based on the amount of labor or output in a project. Nonrecurring costs are not repetitive. Examples of nonrecurring costs would be the cost of an office building, which is considered a one -time cost. Normal and expedited costs: Pinto (2016) noted that normal costs refer to those costs incurred during normal project budget schedules. Examples are normal salaries to employees and overtime as calculated in the scheduled projected costs. In contrast, expedited costs relate to unplanned project costs associated wit h the project. Examples include the decision to crash the project to regain lost time, which will incur unplanned costs. Cost estimation is not an exact science as most projects experience change over their life cycle. Change may introduce other unforesee n variables that are complex to estimate. W hen a cost estimate is provided , it often is a general ballpark figure used to determine if the project has the resources it needs and if the capabilities are available. A ballpark figure is usually determined whe n limited information and resources exist. Cost estimation for unique projects is a very difficult endeavor because no previous metrics exist about outcomes , costs , and expense s. The estimate s for unique projects are often very detailed and definitive but only occur after determining all the scope and capabilities of the project. In industry, definitive estimate s are common. Another common type of tool used is the comparative estimate. The comparative estimate looks at his torical data to determine how much it previously cost to successfully complete a project of a similar nature. Of course, one must consider inflation, the increase in the cost of materials, and other such differences when estimating current costs based on p ast costs . When doing so, a manager can produce highly accurate estimates . These cost estimation tools and processes aid PMs during the cost estimation process, but there are some inherent challenges with these methods. Some of these problems include not having clear and succinct goals for the project, specification changes that can take place after the project begins, unexpected technical difficulties, and low initial estimations . Problems also include external factors including politics, economics, and g overnment regulations. Project Budgets Usually, the project budget is derived from the work breakdown structure (WBS). The project budget reflects all costs, including direct and indirect costs and other contingency planned costs incurred throughout the life cycle of the project. The general framework of a project’s budget consists of the following categories: 1. personnel costs (salaries , vacations, taxes, and insurance costs ); 2. travel and related expenses; 3. equipment and materials (incl uding cost of softwa re) ; 4. external services ( including subcontracting and consultan t expenses ); 5. other direct costs (bank fees , training , translation , and publishing costs ); and CORE CONCEPT S “The project budget is a plan that identifies the allocated resources, the project’s goals, and the schedule that allows an organization to achieve those goals” (Pinto, 2016, p. 275). MBA 6961, Project Management 3 UNIT x STUDY GUIDE Title 6. general costs ( rent, infrastructure, and communication costs ). Managers often detail these costs in the structure of the budget. As an example, infrastructure costs may contain expenses for electricity, heating, surveillance, and cleaning. The breakdown of some costs can be problematic because some resources are used simultaneously for more than one pro ject and/or activity, which is often the case with infrastructure costs. A manager should structure a budget according to the project’s activities and stages because this approach can decrease the probability of concealed direct and indirect costs. An act ivity - and state -centric budget will provide a better view of the distribution of resources over the project life cycle. This approach will also help in the planning of an optimal resource allocation strategy. Various types of budgets exist , which may include cash -flow budget, balance -sheet budget, capital - expenditures budget, sales or revenue budget, production budget, labor budget, space budget, and expense budget. For the sake of this discussion, we will focus on financial budgets, but we will al so show the interrelatedness of the various types of budgets. The composition of the budget must follow certain aspects to receive funding. To begin, a manager should prepare a realistic budget that contains only the specific costs for achieving the objec tives of the project. The project budget should follow sound financial principles in proportion to the project’s expected benefits; for example, the project return on investment (ROI) should only include a positive number. The rules of good practice advoca te adhering to hourly rates exactly the same for all employees with the same qualifications and tasks. Historically, organizations reserve budgeting for accountants and/or top management because of their experience in developing budgets with a high degree of accuracy. However, even with a high degree of accuracy, budgeting still encounters challenges. These problem arise not only because of stakeholders, but also because of an ongoing, limited amount of resources in an organization. Budget processes: Often, the budget development process follows the organization chart or a top -down approach. As Figure 1 below shows, budget development involves each level of the company in preparing and estimating the numbers for the budget in relation to the unit’s inv olvement. The budget is successively put together as it traverses through the organization until executives compile an overall budget plan to refine the budget directives as lower -level managers perform the calculations in alignment with the project’s obje ctives. CORE CONCEPT S “Cost estimation processes create a reasonable budget baseline for the project and identify project resources (human and material) as well, creating a time -phased budget for their involvement in the project” (Pinto, 2016, p. 259). MBA 6961, Project Management 4 UNIT x STUDY GUIDE Title Figure 1. Top -down budgeting approach Another budgeting method is the bottom -up approach. Lower -level employees drive this approach. As Figure 2 depicts, the bottom -up budgeting method is a participative approach in which top management initia tes the budget process by outlining general guidelines, but lower -level units drive and develop individual unit budgets. Top management then groups these unit budgets to form divisional budgets, gathering input as they traverse the organization upwards. Figure 2. Bottom -up budgeting approach Cost estimation and budgets are important parts of project management as they contribute to project monitoring and control. PMs use these tools to regulate and adapt project activities to meet project objectives.

On ce the project gets underway, cost estimation and budgets help to keep stakeholders up -to-date on the project’s performance and progress. References Larson, E. W., & Gray, C. F. (2014). Project management: The managerial process (6th ed.). New York, NY: McGraw - Hill Education. Pinto, J. K. (2016). Project management: Achieving competitive advantage (4th ed.). Boston, MA: Pearson . Project Management Institute . (2013). A guide to the project management body of knowledge (5th ed.). New town Square, PA : Author.