BEIRUT ARAB UNIVERSITY Faculty of Architectural Engineering

(PROJECT MANAGEMENT)

Subject: Budget as a design tool

ARCH635. Architectural Design & Decision Support Tool

ASSIGNMENT: NO. 3

Student Name : Khaled Hammoud

Student ID : 08000062

Fall 2014/2015 Presented To: Prof. Ahmed S. Attia

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1 TABLE OF CONTENTS

Abstract .................................................................................................................................................. 2

Keywords ............................................................................................................................................... 2

1

INTRODUCTION ................................................................................................................................ 3

1.1 Project Manager .......................................................................................................................3

1.2 Project MANAGEMENT: .........................................................................................................3

1.3 Cost ..................................................................................................................................................6

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Budget: ................................................................................................................................................... 7

2.1 The Concept of Budget ..........................................................................................................7

2.2 The Objectives of Budgets .......................................................................................................8

2.3 Budget as a Control Device .............................................................................................. 11

3

Project Management and the Comprehensive Project Budget........................................... 11

3.1 Project budgets ......................................................................................................................... 11

3.2 Building the Planned Project Budget......................................................................... 12

4

Conclusion ............................................................................................................................................. 14

5

References ............................................................................................................................................. 15

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ABSTRACT

This research aims to study the relevance of budget analysis in project management with

decision making in the design process.

This research will introduce the effect of budget on managerial level inside the organization.

The research will follow analytical methodology, comparative analytical methodology and

the inductive methodology.

KEYWORDS Project management, Budget, Cost, Management tools, Decision making.

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1. INTRODUCTION

1.1 PROJECT MANAGER

The project manager may build out the budget and resource plan without issue. Projects left

in the 'planning' state in Project Insight allow project managers to make as many changes as

necessary before launching the project. Therefore, early on in the project life cycle, planned

costs may be developed. These estimates can come from a variety of sources—such as prior

project experience, industry databases, vendor catalogs and the like.

A key role of the project manager in the design process is to analyze budget and control it,

taking into consideration that the budget associated with that task may change which can

carry along either a positive or a negative impact on the project design process making

budget as an element one of the significant effective tools in project decision making.

1.2 PROJECT MANAGEMENT:

The management of construction projects requires knowledge of modern management as well as an

understanding of the design and construction process. Construction projects have a specific set of

objectives and constraints such as a required time frame for completion. While the relevant

technology, institutional arrangements or processes will differ, the management of such projects has

much in common with the management of similar types of projects in other specialty or technology

domains such as aerospace, pharmaceutical and energy developments.

Generally, project management is distinguished from the general management of corporations by the

mission-oriented nature of a project. A project organization will generally be terminated when the

mission is accomplished. According to the Project Management Institute, the discipline of project

management can be defined as follows: [1]

Project management is the art of directing and coordinating human and material resources throughout

the life of a project by using modern management techniques to achieve predetermined objectives of

scope, cost, time, quality, and participation satisfaction.

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By contrast, the general management of business and industrial corporations assumes a broader

outlook with greater continuity of operations. Nevertheless, there are sufficient similarities as well as

differences between the two so that modern management techniques developed for general

management may be adapted for project management.

The basic ingredients for a project management framework [2] may be represented schematically in

Figure 2-1. A working knowledge of general management and familiarity with the special knowledge

domain related to the project are indispensable. Supporting disciplines such as computer science and

decision science may also play an important role. In fact, modern management practices and various

special knowledge domains have absorbed various techniques or tools which were once identified

only with the supporting disciplines. For example, computer-based information systems and decision

support systems are now common-place tools for general management. Similarly, many operations

research techniques such as linear programming and network analysis are now widely used in many

knowledge or application domains. Hence, the representation in Figure 2-1 reflects only the sources

from which the project management framework evolves.

Figure 2-1: Basic Ingredients in Project Management

Specifically, project management in construction encompasses a set of objectives which may be

accomplished by implementing a series of operations subject to resource constraints. There are

potential conflicts between the stated objectives with regard to scope, cost, time and quality, and the

constraints imposed on human material and financial resources. These conflicts should be resolved at

the onset of a project by making the necessary tradeoffs or creating new alternatives. Subsequently,

the functions of project management for construction generally include the following:

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1. Specification of project objectives and plans including delineation of scope,

budgeting, scheduling, setting performance requirements, and selecting project

participants.

2. Maximization of efficient resource utilization through procurement of labor, materials

and equipment according to the prescribed schedule and plan.

3. Implementation of various operations through proper coordination and control of

planning, design, estimating, contracting and construction in the entire process.

4. Development of effective communications and mechanisms for resolving conflicts

among the various participants.

The Project Management Institute focuses on nine distinct areas requiring project manager

knowledge and attention:

1. Project integration management to ensure that the various project elements are

effectively coordinated.

2. Project scope management to ensure that all the work required (and only the required

work) is included.

3. Project time management to provide an effective project schedule.

4. Project cost management to identify needed resources and maintain budget control.

5. Project quality management to ensure functional requirements are met.

6. Project human resource management to development and effectively employ project

personnel.

7. Project communications management to ensure effective internal and external

communications.

8. Project risk management to analyze and mitigate potential risks.

9. Project procurement management to obtain necessary resources from external sources.

These nine areas form the basis of the Project Management Institute's certification program

for project managers in any industry. [3]

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1.3 COST

Building cost depends on much more than mere construction cost; it includes related costs

such as design fees, interest and holding charges, legal costs, costs of repairs and

maintenance, and occupancy and operating costs.

Many studies in recent years (e.g. Peck, 1993) have pointed out that the initial cost of

construction represents only a small part of the cost of a building over its lifetime. The cost of

design is so small when considered against the life cycle cost of a building that it is almost

insignificant somewhere between 0.1 and 1%. It is in the early stages of the design and

documentation process that many of the most important decisions that determine the ultimate

value of the final product are made, yet clients regularly seek to cut comers during this period

of procurement. It is equally apparent that for many clients capital cost is the dominant factor,

particularly in areas, such as Australia, where commercial buildings are more often

constructed as marketable commodities rather than as facilities to be occupied by those who

initiate their construction.

Peck goes on to say that ' ... many client departments, developers and project managers

[make] a virtue out of achieving pre-stated costs and time deadlines without any

consideration of the total cost to the community that results from inadequate research, hasty

design development, ill considered technical evaluation and poor documentation.'

Cost management is usually associated with monitoring predicted costs during the design

process, followed by monitoring and reporting on expenditure during construction including

valuation of variations, extensions of time and so on. [6]

The project manager may build out the budget and resource plan without issue. Projects left

in the 'planning' state in Project Insight allow project managers to make as many changes as

necessary before launching the project. Therefore, early on in the project life cycle, planned

costs may be developed. These estimates can come from a variety of sources—such as prior

project experience, industry databases, vendor catalogs and the like.

A key role of the project manager in the planning process is to build consensus from the team

and sponsor on each of the WBS task elements, recognizing that as you elaborate on those

tasks, the budget associated with that task may change.

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2 BUDGET:

2.1 THE CONCEPT OF BUDGET

A budget is defined as s comprehensive and coordinated plan, expressed in financial terms,

for the operations and resources of an enterprise for a given future period. As such, the

concept of budget focuses on the following essential elements:

1. Comprehensive: A budget is comprehensive since it takes into consideration all of the

many aspects and activities of the enterprise.

2. Coordinated: A budget must consider and recognize the situation and problems of each

segment of the firm. The plans for the firm’s segments must be prepared jointly and in

harmony with each other and this be coordinated logically and practically.

3. Plan: A business budget involves two notions of planning. First, it expresses partly what

the firm’s management expects will happen, and the second, it reflects partly what

management intends to make happen. Good budgeting can not only suggest what will happen

but can also make things happen.

4. Financial terms: Business budgets are expressed in terms of the monetary unit (the United

States Dollars in USA ) which serves as the common denominator of business activities.

Although a basic development of a budget may include a variety of non-monetary quantities,

the final budget must reflect business plans in terms of money.

5. Operations: Budgets are intended to serve the operations of the various segments and

activities of the firm. In this sense, budgets reflect partly plans (in quantification) of revenues

and expenses for the future.

6. Resources: Budgets involve the planning of financial resources for the various types of

assets and other sources of capital to be invested in these assets.

7. Given future period: A budget must relate to a particular period of time.

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2.2 THE OBJECTIVES OF BUDGETS Budgets are intended to facilitate the managerial functions of planning and control as well as

the organizational pattern and other objectives as stated in the following:

1. To direct some of management’s attention from the present to the future planning,

2. Budgets affect the formulation of company’s strategies and policies, and assist to

implement them.

3. To force managers to analyze the companies’ activities critically and creatively.

4. To enable management to anticipate problems or opportunities in time to deal with them

effectively.

5. To reinforce the managers motivation to work to achieve the company’s goals and

objectives.

6. To give managers a continuing reminder of the actions they have decided on.

7. To provide a reference point for control reporting and evaluating performance.

8. Budgets authorize action..

9. Budgets promote communication and coordination of activities.[4]

A budget is a quantitative expression of a plan for a defined period of time. It may include

planned sales volumes and revenues, resource quantities, costs and expenses, assets,

liabilities and cash flows. It expresses strategic plans of business units, organizations,

activities or events in measurable terms. [5]

Budget helps to aid the planning of actual operations by forcing managers to consider how

the conditions might change and what steps should be taken now and by encouraging

managers to consider problems before they arise. It also helps co-ordinate the activities of the

organization by compelling managers to examine relationships between their own operation

and those of other departments. Other essentials of budget include:

To control resources

To communicate plans to various responsibility center managers.

To motivate managers to strive to achieve budget goals.

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To evaluate the performance of managers

To provide visibility into the company's performance

For accountability

In summary, the purpose of budgeting is tools:

1. Tools provide a forecast of revenues and expenditures, that is, construct a model of

how a business might perform financially if certain strategies, events and plans are

carried out.

2. Tools enable the actual financial operation of the business to be measured against the

forecast.

3. Lastly, tools establish the cost constraint for a project, program, or operation.

A budget is a fundamental tool for a project manager to predict with a reasonable accuracy

whether the project will result in a profit, a loss or will break-even. A budget can also be used

as a pricing tool.

There are two basic approaches or philosophies, when it comes to budgeting. One approach is telling

you on mathematical models, and the other on people.

The first school of thought believes that financial models, if properly constructed, can be used to

predict the future. The focus is on variables, inputs and outputs, drivers and the like. Investments of

time and money are devoted to perfecting these models, which are typically held in some type of

financial spreadsheet application.

The other school of thought holds that it’s not about models, it’s about people. No matter how

sophisticated models can get, the best information comes from the people in the business. The focus is

therefore in engaging the managers in the business more fully in the budget process, and building

accountability for the results. The companies that adhere to this approach have their managers develop

their own budgets. While many companies would say that they do both, in reality the investment of

time and money falls squarely in one approach or the other.

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1.1. Budget Types

Budget types ranges to involve all project phases:

Sales budget – an estimate of future sales, often broken down into both units and

currency. It is used to create company sales goals.

Production budget - an estimate of the number of units that must be manufactured to

meet the sales goals. The production budget also estimates the various costs involved

with manufacturing those units, including labor and material. Created by product oriented

companies.

Capital budget - used to determine whether an organization's long term investments

such as new machinery, replacement machinery, new plants, new products, and research

development projects are worth pursuing.

Cash flow/cash budget – a prediction of future cash receipts and expenditures for a

particular time period. It usually covers a period in the short term future. The cash flow

budget helps the business determine when income will be sufficient to cover expenses

and when the company will need to seek outside financing.

Marketing budget – an estimate of the funds needed for promotion, advertising, and

public relations in order to market the product or service.

Project budget – a prediction of the costs associated with a particular company

project. These costs include labour, materials, and other related expenses. The project

budget is often broken down into specific tasks, with task budgets assigned to each. A

cost estimate is used to establish a project budget.

Revenue budget – consists of revenue receipts of government and the expenditure

met from these revenues. Tax revenues are made up of taxes and other duties that the

government levies.

Expenditure budget – includes spending data items.

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2.3 BUDGET AS A CONTROL DEVICE

The profit budget is used for control by top management in two ways:

First, budget reports, comparing actual results with budget, together with analyses of

variances, an explanation of the causes of variances, an explanation of any corrective actions

being taken, and a current annual forecast are used to keep management informed on what is

happening in the divisions. It acts as an early warning so that management can take

appropriate action when necessary.

Second, the budget system is used to assist top management appraise the performance of the

individual manager.

3 PROJECT MANAGEMENT AND THE COMPREHENSIVE PROJECT BUDGET

3.1 PROJECT BUDGETS

Similar to resource plans, are a reflection of project work and the timing of that work. A

comprehensive budget provides management with an understanding of how funds will be

utilized and expended over time for projects or operations.

The S-Curve displayed below shows the estimated cumulative expenditures of the project

over time. In general, a project expends resources slowly, ramps up rather quickly as more

resources are utilized and then tapers off as the project comes to completion.

Most project expenditures follow this pattern, resulting in a graphical representation that

resembles an "S". Knowing the timing of expenditures on a project will assist management in

planning appropriately.

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FIGURE 1 S-CURVE

High-level estimates, provided by management in advance of a project's start, are not

budgets. In Project Insight, these high-level estimates are named 'target budgets.' A

comprehensive budget can only be developed as a result of the project schedule and resource

plan. Therefore, the better you identify all the work of the project within your schedule and

the types of resources necessary to complete the work effectively, the more accurate your

budget will be.

3.2 BUILDING THE PLANNED PROJECT BUDGET

The Work Breakdown Structure (WBS) is the basis for any budget. The WBS includes all the

work necessary to create the product of the project. The WBS is created through a

decomposition process resulting in deliverables defined at the lowest level of the WBS—

work package or what is called a 'task' in Project Insight.

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All of the efforts used in producing the deliverable of each task can be defined in terms of

cost. Labor, materials, facilities, services and overhead are examples of costs that may be

expended in producing the deliverable of the task.

The sum of all tasks within the WBS constitutes the total budget of the project. Project

Insight performs bottom-up budgeting, which means that the tasks roll up into summary task

totals, and the project total represents the sum of all tasks planned and actual costs.[6]

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4 CONCLUSION

In brief, budget analysis is one of the most important elements related to project management

utilities through providing a forecast of revenues and expenditures and construct a model of

how a project might perform financially if certain strategies, events and plans are carried out,

enable the actual financial operation of the business to be measured against the forecast and

establish the cost constraint for a project. Thus budget control can become a decision making

tool in design in the hands of the project manager when needed at any level of the progress of

work to avoid any crucial situations that intersect negatively with the result required.

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5 REFERENCES

1. Barrie, Donald S. and Boyd C. Paulson, Jr., Professional Construction Management,

McGraw-Hill Book Company, 2nd Ed., 1984.

2. Halpin, Daniel W. and Ronald W. Woodhead, Construction Management, John Wiley

and Sons, 1980.

3. Project Management for Construction by Chris Hendrickson

4. Budgeting and Decision-Making: The Concept and Objectives of Budgets

5. CIMA Official Terminology.

6. Metafuse, Inc. in conjunction with Core Performance Concepts, a PMI registered

education partner