Definition and Characteristics of Project

A Project is a temporary, unique and progressive attempt or endeavor made to produce some
kind of a tangible or intangible result (a unique product, service, benefit, competitive
advantage, etc.). It usually includes a series of interrelated tasks that are planned for
execution over a fixed period of time and within certain requirements and limitations such as
cost, quality, performance, others.

Projects differ from other types of work (e.g. process, task, procedure). Meanwhile, in the
broadest sense a project is defined as a specific, finite activity that produces an observable
and measurable result under certain preset requirements.

Projects differ from other types of work (e.g. process, task, procedure). Meanwhile, in the
broadest sense a project is defined as a specific, finite activity that produces an observable
and measurable result under certain preset requirements.

Characteristics of a Project

(a) Project has a owner, who, in the private sector, can be an individual or a company etc., in
the public sector, a government undertaking or a joint sector organization, representing a
partnership between public and private sector.

(b) Project has a set objective to achieve within a distinct time, cost and technical
performance.

(c) Project is planned, managed and controlled by an assigned team the project team planted
within the owner’s organization to achieve the objectives as per specifications.

(d) Project, in general, is an outcome in response to environments economies and

opportunities. As an example, we find that considering the changing pattern of modern living
the domestic appliances small e.g. grinders, mixers etc., and large, e.g. refrigerators, washing
machines etc. are on ever-increasing demand. This generates responses to avail opportunity to
produce such appliances.

(e) Project is an undertaking involving future activities for completion of the project within
estimates and involves complex budgeting procedure with a mission.

(f) Implementation of the project involves a co-ordination of works/supervisions by project

team/manager.

(g) Project involves activities to be carried out in future. As such, it has some inherent risk
and, in reality, the process of implementation may necessitate certain changes in the plan
subject to limitations and concurrence of the project owner.

(h) Project involves high-skilled forecasting with sound basis for such forecasting.
(i) Projects have a start and an end a characteristic of a life cycle. The organization of project
changes as it passes through this cycle the activities starting from—conception stage,
mounting up to the peak during implementation and, then, back to zero level on completion
and delivery of the project.

Types of Project

1. Construction Projects

The project produces an artifact. The value generated by the project is embedded in the
artifact. The artifacts may be a complex system with human and mechanical components.

Examples:

 Warship
 Jubilee line extension
 Millennium dome
 Customer call centre
 Method guidebook
 IT system

2. Research Projects

The project produces knowledge. The knowledge may be formally represented as models,
patterns or patents. Or the knowledge may be embedded in a working process or artifact.

Examples:

 Business modelling
 Developing a model of the UK economy
 Developing a new species of wheat
 Developing novel approaches to project management.
 Military intelligence/ codebreaking.
 The analysis, testing, QA or evaluation portions of a larger project.

3. Reengineering Projects

The project produces a desired change in some system or process.

Examples:

 Taking sterling into the Euro

 Renumbering the UK telephone system
 Implementing PRINCE project management practices into a large organization.
 Designing and installing an Intranet.

4. Procurement Projects
The project produces a business relationship contractually based with a selected supplier for a
defined product or service based on a fixed specification and/or a defined specification
process

Examples:

 Outsourcing a specific construction or research project

 Outsourcing a complete business function (such as IT).
 Imposing new rules and measures on a regulated industry.

5. Business Implementation Projects

The project produces an operationally effective process. The value generated by the project is
embedded in the process.

 Developing a new business process to repackage and exploit existing assets.

 Installing e-commerce

Some projects are difficult to classify under this scheme.

(i) National symbolic programmes

 Putting a man on the moon by the end of the decade

 Mitterand’s Grandes Projects
 New Labour

(ii) Large medical programmes

 Creating an artificial heart

 Mass inoculation programmes

(iii) Other hybrid or interdisciplinary projects

 Pilot projects
 Moving offices

Project Lifecycle, Phases

Project Lifecycle refers to the series of phases that a project goes through from its
initiation to its closure. It provides a framework for managing the progression of a
project, ensuring systematic and orderly achievement of objectives. The lifecycle
typically includes four main phases: Initiation, where the project is defined and its
feasibility is evaluated; Planning, involving detailed mapping of steps, resources,
timeframes, and budgets; Execution, where the plans are put into action and the project
deliverables are created; and Closure, marking the completion of the project, including
the handover of deliverables, release of project resources, and assessment of lessons
learned. Each phase has distinct objectives, tasks, and processes, guiding the project
team in achieving specific milestones and ultimately, the project goals. Managing these
phases effectively is crucial for the successful completion of a project, ensuring it meets
its scope, time, and cost constraints.

Phases of Project Lifecycle:

1. Initiation

This phase marks the beginning of the project. It involves identifying a need, problem, or
opportunity and evaluating the feasibility of addressing it through a project. Key activities
include defining the project at a high level, identifying key stakeholders, and securing initial
approval or funding. The main deliverable from this phase is usually a Project Charter, which
formally authorizes the existence of the project.

2. Planning

Planning is a critical phase where the project plan is developed in detail. This plan becomes
the roadmap for how the project will be executed, monitored, and controlled. Activities
include defining project objectives, developing a detailed work breakdown structure (WBS),
scheduling, budgeting, identifying resources, setting quality standards, and planning for risks.
Comprehensive planning sets the foundation for project success.

3. Execution
During the execution phase, the project plan is put into action. This phase focuses on
coordinating people and resources to carry out the project plan. Activities include executing
the tasks defined in the project plan, procuring resources, developing the team, and managing
stakeholder engagement. Execution is often the longest phase of the project lifecycle and
involves significant monitoring and controlling activities to stay on track.

4. Monitoring and Controlling

While this phase occurs concurrently with the Execution phase, it’s distinct in its focus.
Monitoring and controlling involve tracking the project’s progress and performance to ensure
it aligns with the project management plan. Key activities include quality control, tracking
and reporting project progress, managing changes through change control processes, and
ensuring project objectives are met. This phase is crucial for identifying and addressing issues
that may impact the project timeline, budget, or quality.

5. Closure

The closure phase marks the completion of the project. Activities in this phase include
finalizing all project activities, ensuring all contracted work is completed, obtaining
acceptance of the project deliverables from stakeholders, releasing project resources, and
formally closing the project. A key deliverable is the project closure report, which documents
project performance, lessons learned, and provides a record of variances between the planned
and actual project performance. Closure is an essential phase for wrapping up the project
systematically and learning from the project experience to improve future projects.

Concepts of Deliverables
The term deliverables is a project management term that’s traditionally used to describe the
quantifiable goods or services that must be provided upon the completion of a project.
Deliverables can be tangible or intangible in nature. For example, in a project focusing on
upgrading a firm’s technology, a deliverable may refer to the acquisition of a dozen new
computers.

On the other hand, for a software project, a deliverable might allude to the implementation of
a computer program aimed at improving a company’s accounts receivable computational
efficiency.

Deliverables:
In addition to computer equipment and software programs, a deliverable may refer to in-
person or online training programs, as well as design samples for products in the process of
being developed. In many cases, deliverables are accompanied by instruction manuals.

Documentation

Deliverables are usually contractually obligated requirements, detailed in agreements drawn

up between two related parties within a company, or between a client and an outside
consultant or developer. The documentation precisely articulates the description of a
deliverable, as well as the delivery timeline and payment terms.
Milestones

Many large projects include milestones, which are interim goals and targets that must be
achieved by stipulated points in time. A milestone may refer to a portion of the deliverable
due, or it may merely refer to a detailed progress report, describing the current status of a
project.

Film Deliverables

In film production, deliverables refer to the range of audio, visual, and paperwork files that
producers must furnish to distributors. Audio and visual materials generally include stereo
and Dolby 5.1 sound mixes, music and sound effects on separate files, as well as the full
movie in a specified format.

Paperwork deliverables include signed and executed licensing agreements for all music,
errors, and omissions reports, performance releases for all on-screen talent, a list of the credit
block that will appear in all artwork and advertising, as well as location, artwork, and logo
legal releases. Films deliverables also pertain to elements that are ancillary to the movies
themselves. These items include the trailer, TV spots, publicity stills photographed on set,
and other legal work.

 The word “deliverables” is a project management term describing the quantifiable

goods or services that must be provided upon the completion of a project.
 Deliverables can be tangible in nature, such as the acquisition of a dozen new
computers, or they can be intangible, like the implementation of a computer program
aimed at improving a company’s accounts receivable computational efficiency.
 A deliverable may refer to in-person or online training programs, as well as design
samples for products in the process of being developed.
 In many cases, deliverables are accompanied by instruction manuals.
 In film production, deliverables refer to the range of audio, visual, and paperwork
files that producers must furnish to distributors.

Project Planning: Scoping, Work Break down Structure (WBS)

Project Planning is a discipline for stating how to complete a project within a certain
timeframe, usually with defined stages, and with designated resources. One view of project
planning divides the activity into: Setting objectives Identifying deliverables Planning the
schedule Making supporting plans Project planning is part of project management,…

In "Management Notes"
Project Quality Management, Quality Concepts

Characteristics of Project Team

On this type of team, there is usually a strong trust bond, people work cooperatively together
to reach the common project goals, and often the project is even more successful than the
project manager and customer could have imagined.

These types of teams generally have some key characteristics in common that help make
them the effective, high-performing teams that they are.

Clearly defined goals

Clearly defined goals are essential so that everyone understands the purpose and vision of the
team. It’s surprising to learn sometimes how many people do not know the reason they are
doing the tasks that make up their jobs, much less what their team is doing. Everyone must be
pulling in the same direction and be aware of the end goals. Clear goals help team members
understand where the team is going. Clear goals help a team know when it has been
successful by defining exactly what the team is doing and what it wants to accomplish. This
makes it easier for members to work together – and more likely to be successful.

Clear goals create ownership. Team members are more likely to “own” goals and work
toward them if they have been involved in establishing them as a team. In addition,
ownership is longer lasting if members perceive that other team members support the same
efforts. Clear goals foster team unity, whereas unclear goals foster confusion – or sometimes
individualism. If team members don’t agree on the meaning of the team goals, they will work
alone to accomplish their individual interpretations of the goals. They may also protect their
own goals, even at the expense of the team.

Clearly defined roles

If the team’s roles are clearly defined, all team members know what their jobs are, but
defining roles goes beyond that. It means that we recognize individuals’ talent and tap into
the expertise of each member – both job-related and innate skills each person brings to the
team, such as organization, creative, or team-building skills. Clearly defined roles help team
members understand why they are on a team. When the members experience conflict, it may
be related to their roles. Team members often can manage this conflict by identifying,
clarifying, and agreeing on their individual responsibilities so that they all gain a clear
understanding of how they will accomplish the team’s goals. Once team members are
comfortable with their primary roles on the team, they can identify the roles they play during
team meetings. There are two kinds of roles that are essential in team meetings.

Open and clear communication

The importance of open and clear communication cannot be stressed enough. This is
probably the most important characteristic for high-performance teams. Many different
problems that arise on projects can often be can be traced back to poor communication or
lack of communication skills, such as listening well or providing constructive feedback.
Enough books have been written about communication to fill a library. And I’ve personally
written several articles on this subject alone for this site over the past few months.

Excellent communication is the key to keeping a team informed, focused, and moving
forward. Team members must feel free to express their thoughts and opinions at any time.
Yet, even as they are expressing themselves, they must make certain they are doing so in a
clear and concise manner. Unfortunately, most of us are not very good listeners. Most of us
could improve our communication if we just started to listen better—to listen with an open
mind, to hear the entire message before forming conclusions, and to work toward a mutual
understanding with the speaker.

Effective decision making

Decision making is effective when the team is aware of and uses many methods to arrive at
decisions. A consensus is often touted as the best way to make decisions—and it is an
excellent method and probably not used often enough. But the team should also use majority
rule, expert decision, authority rule with discussion, and other methods. The team members
should discuss the method they want to use and should use tools to assist them, such as force-
field analysis, pair-wise ranking matrices, or some of the multi-voting techniques.

Effective decision making is essential to a team’s progress; ideally, teams that are asked to
solve problems should also have the power and authority to implement solutions. They must
have a grasp of various decision-making methods, their advantages and disadvantages, and
when and how to use each. Teams that choose the right decision-making methods at the right
time will not only save time, but they will also most often make the best decisions. This
completes the four basic foundation characteristics: clear goals, defined roles, open and clear
communication, and effective decision making.

Balanced participation

If communication is the most important team characteristic, participation is the second most
important. Without participation, you don’t have a team; you have a group of bodies.
Balanced participation ensures that everyone on the team is fully involved. It does not mean
that if you have five people each is speaking 20 percent of the time. Talking is not necessarily
a measure of participation. We all know people who talk a lot and say nothing. It does mean
that each individual is contributing when it’s appropriate. The more a team involves all of its
members in its activities, the more likely that team is to experience a high level of
commitment and synergy.

Leader’s behavior

A leader’s behavior comes as much from attitude as from anything. Leaders who are effective
in obtaining participation see their roles as being a coach and mentor, not the expert in the
situation. Leaders will get more participation from team members if they can admit to
needing help, not power. Leaders should also specify the kind of participation they want right
from the start.

Participants’ expectations

Participants must volunteer information willingly rather than force someone to drag it out of
them. They should encourage others’ participation as well by asking a question of others,
especially those who have been quiet for a while.

Participants can assist the leader by suggesting techniques that encourage everyone to speak,
for example, a round robin. To conduct a round robin, someone directs all members to state
their opinions or ideas about the topic under discussion. Members go around the group, in
order, and one person at a time says what’s on his or her mind. During this time, no one else
in the group can disagree, ask questions, or discuss how the idea might work or not work, be
good or not good.

Only after everyone has had an opportunity to hear others and to be heard him- or herself, a
discussion occurs. This discussion may focus on pros and cons, on clarifying, on similarities
and differences, or on trying to reach consensus.

Valued diversity

Valued diversity is at the heart of building a team. Thus, the box is at the center of the model.
It means, put simply, that team members are valued for the unique contributions that they
bring to the team.

Diversity goes far beyond gender and race. It also includes how people think, what
experience they bring, and their styles. The diversity of thinking, ideas, methods, experiences,
and opinions helps to create a high-performing team.

Managed Conflict

Conflict is essential to a team’s creativity and productivity. Because most people dislike
conflict, they often assume that effective teams do not have it. In fact, both effective and
ineffective teams experience conflict. The difference is that effective teams manage it
constructively. In fact, effective teams see conflict as positive.
Managed conflict ensures that problems are not swept under the rug. It means that the team
has discussed members’ points of view about an issue and has come to see well-managed
conflict as a healthy way to bring out new ideas and to solve whatever seems to be
unsolvable. Here are some benefits of healthy conflict:

 Conflict forces a team to find productive ways to communicate differences, seek

common goals, and gain consensus;
 Conflict encourages a team to look at all points of view, then adopt the best ideas
from each;
 Conflict increases creativity by forcing the team to look beyond current assumptions
and parameters.

Positive team atmosphere

To be truly successful, a team must have a climate of trust and openness, that is, a positive
atmosphere. A positive atmosphere indicates that members of the team are committed and
involved. It means that people are comfortable enough with one another to be creative, take
risks, and make mistakes. It also means that you may hear plenty of laughter, and research
shows that people who are enjoying themselves are more productive than those who dislike
what they are doing.

Cooperative relationships

Directly related to having a positive atmosphere are cooperative relationships. Team

members know that they need one another’s skills, knowledge, and expertise to produce
something together that they could not do as well alone. There is a sense of belonging and a
willingness to make things work for the good of the whole team. The atmosphere is informal,
comfortable, and relaxed. Team members are allowed to be themselves. They are involved
and interested.

Cooperative relationships are the hallmark of top-performing teams. These top teams
demonstrate not only cooperative relationships between team members but also cooperative
working relationships elsewhere in the organization.

Participative Leadership

The participative leadership block is not at the top of the model because it is the most
important.

It is at the top because it is the only block that can be removed without disturbing the rest.

Participative leadership means that leaders share the responsibility and the glory, are
supportive and fair, create a climate of trust and openness, and are good coaches and teachers.

In general, it means that leaders are good role models and that the leadership shifts at various
times.
In the most productive teams, it is difficult to identify a leader during a casual observation.

In conclusion, a high-performing team can accomplish more together than all the individuals
can apart.

Characteristics of Project Leader

The terms project manager and project leader get used interchangeably all the time, and yet
there are a couple important differences that can be derived from the respective terms
themselves. Managers manage. Leaders lead. What this means in practice is that project
leaders are responsible for establishing direction, communicating their vision to management
and the workforce, and forging teams that are capable of delivering high-performance. In
contrast, project managers focus primarily on short-term goals and are responsible for solving
short-term problems.

The project manager implements the project and solves roadblocks as they emerge. Noting
that difference, it is easy to argue that project leaders have the most difficult job of all in
regard to the implementation of major change initiatives.

After all, project leaders liaise between management and the workforce, and are directly
responsible for ensuring the inspired execution of the agreed upon strategy. Here are the five
characteristics of highly effective project leaders.

1. They are strong communicators

Project leaders need to be particularly strong communicators as they must eventually provide
feedback to the management and facilitate the continual improvement efforts of the men and
women working under them.

2. They are trustworthy

Whether project leaders come from inside or outside the organization, they must have the
continued support and trust of the board of directors and management. Without this,
micromanagement and inefficiencies are bound to occur over the course of a major
transformation.

3. They understand people

While the project leader doesn’t necessarily need to be a “people person”, he or she does
need to have a strong sense of where the aptitudes and abilities of the team members lie.
Putting together a team twith complimentary strengths and weaknesses helps to ensure the
eventual success of the chosen project.

4. They can see the overall Performance

Being able to take the long-term view is a critical characteristic of project leadership and
project leaders need to be able to see the whole as it is in order to make connections that the
individual team members cannot see due to their limited scope in the overall project.
 5. They can see the all level of efforts

While taking the holistic view is critical for project leaders, they need to be able to
communicate on a detailed level about all aspects of the project to any level of seniority.
Possessing long-term vision will prove insufficient when it comes to managing people and
their individual roles within the larger project.

Project Costing: Fundamental Components of Project Cost

The project cost is a cost required to procure all the needed products, services and resources
to deliver the project successfully.

Example: In an example of a construction project, the cost estimation starts from land
acquisition cost, construction cost, materials cost, administration cost, labor cost and other
direct and indirect costs.

Cost management is concerned with the process of finding the right project and carrying out
the project the right way. It includes activities such as planning, estimating, budgeting,
financing, funding, managing, controlling, and benchmarking costs so that the project can be
completed within time and the approved budget and the project performance could be
improved in time.

Step 1: Resource planning

Resource planning is the process of ascertaining future resource requirements for an
organization or a scope of work. This involves the evaluation and planning of the use of the
physical, human, financial, and informational resources required to complete work activities
and their tasks. Most activities involve using people to perform work. Some activities involve
materials and consumables. Other tasks involve creating an asset using mainly information
inputs (e.g., engineering or software design). Usually, people use tools such as equipment to
help them. In some cases, automated tools may perform the work with little or no human
effort.

Resource planning begins in the scope and execution plan development process during which
the work breakdown structure, organizational breakdown structure (OBS), work packages,
and execution strategy are developed. The OBS establishes categories of labor resources or
responsibilities; this categorization facilitates resource planning because all resources are
someone’s responsibility as reflected in the OBS.

Resource estimating (usually a part of cost estimating) determines the activity’s resource
quantities needed (hours, tools, materials, etc.) while schedule planning and development
determines the work activities be performed. Resource planning then takes the estimated
resource quantities, evaluates resource availability and limitations considering project
circumstances, and then optimizes how the available resources (which are often limited) will
be used in the activities over time. The optimization is performed in an iterative manner using
the duration estimating and resource allocation steps of the schedule planning and
development process.

Step 2: Cost estimating

Cost estimating is the predictive process used to quantify, cost, and price the resources
required by the scope of an investment option, activity, or project. It involves the application
of techniques that convert quantified technical and programmatic information about an asset
or project into finance and resource information. The outputs of estimating are used primarily
as inputs for business planning, cost analysis, and decisions or for project cost and schedule
control processes.

The cost estimating process is generally applied during each phase of the asset or project life
cycle as the asset or project scope is defined, modified, and refined. As the level of scope
definition increases, the estimating methods used become more definitive and produce
estimates with increasingly narrow probabilistic cost distributions.

Cost estimating could be performed by dedicated software systems like Cleopatra Enterprise
cost estimating and project cost databases like CESK that are created and maintained to
support the various types of estimates that need to be prepared during the life cycle of the
asset or project.

Step 3: Cost budgeting

Budgeting is a sub-process within estimating used for allocating the estimated cost of
resources into cost accounts against which cost performance will be measured and assessed.
This forms the baseline for cost control. Cost accounts used from the chart of accounts must
also support the cost accounting process. Budgets are often time-phased in accordance with
the schedule or to address budget and cash flow constraints.

Step 4: Cost control

Cost control is concerned with measuring variances from the cost baseline and taking
effective corrective action to achieve minimum costs. Procedures are applied to monitor
expenditures and performance against the progress of a project. All changes to the cost
baseline need to be recorded and the expected final total costs are continuously forecasted.
When actual cost information becomes available an important part of cost control is to
explain what is causing the variance from the cost baseline. Based on this analysis corrective
action might be required to avoid cost overruns.

Below figure is a process map for project performance measurement. This process should be
run in a continuous improvement cycle until project completion:
The process for performance assessment starts with planning and having the right tools in
place. Dedicated cost control software tools can be valuable to define cost control procedures,
track and approve changes and apply analysis. Furthermore, reporting can be enhanced and
simplified which makes it easier to inform all stakeholders involved in the project.

Cleopatra Cost Control helps you achieve

 Project cost control and always tracing back cost components to its original budget.
 Scope change management. Estimate costs and add it to your project controls
document.
 Project completed? The feedback process will be in place. Send the actuals to your
cost models to increase their accuracy and quality for future estimating. Where most
tools are limited to either being cost estimating software or a cost control tool,
Cleopatra Enterprise is both.

Bonus Step: Benchmarking

As a bonus step, it is wise to add Benchmarking to the project cost management process.
Benchmarking helps close the loop between project A and project B. The knowledge from
project A (referring to the running and executed projects) are analyzed and the feedback is
reflected in project B (the next projects). That’s how an improvement cycle is created to
increase project performance. Benchmarking is widely used by technical industries to
improve the performance of the projects. Software systems such as Cleopatra project
benchmarking aid estimators and project controllers in answering the complex question: How
to use project big data to execute projects within time and budget?

The goal of project benchmarking is to store data from executed and running projects to
extract valuable project metrics and to benchmark current estimates. Performing statistical
analysis on historical data can result in valuable information on relationships between
variables, which can be used to set up a reliable cost knowledgebase or calibrate existing
ones.

It is important to note that project benchmarking does not only include the comparison
between projects, as it is also interesting to compare revisions within a project.

What you can achieve with Cleopatra Benchmarking

  Collect historical project data that can provide valuable analysis and project
comparison to make critical business decisions.
 Benchmark your estimates against your previous projects and improve your cost
estimate significantly.
 Extract metrics across projects to enhance future cost estimating accuracy.
 Develop meaningful and interactive reports.
 Export & Import data easily from Excel.

Types of Cost

1. Direct Cost

A direct cost is a price that can be directly tied to the production of specific goods or services.
A direct cost can be traced to the cost object, which can be a service, product, or department.
Direct and indirect costs are the two major types of expenses or costs that companies can
incur. Direct costs are often variable costs, meaning they fluctuate with production levels
such as inventory. However, some costs, such as indirect costs are more difficult to assign to
a specific product. Examples of indirect costs include depreciation and administrative
expenses.

Direct Costs Examples: Any cost that’s involved in producing a good, even if it’s only a
portion of the cost that’s allocated to the production facility, are included as direct costs.
Some examples of direct costs are listed below:

 Direct labor
 Direct materials
 Manufacturing supplies
 Wages for the production staff
 Fuel or power consumption

Because direct costs can be specifically traced to a product, direct costs do not need to be
allocated to a product, department, or other cost objects. Direct costs usually benefit only one
cost object. Items that are not direct costs are pooled and allocated based on cost drivers.

2. Indirect cost

Indirect Costs are costs that are not directly accountable to a cost object (such as a particular
project, facility, function or product). Indirect costs may be either fixed or variable. Indirect
costs include administration, personnel and security costs. These are those costs which are
not directly related to production. Some indirect costs may be overhead. But some overhead
costs can be directly attributed to a project and are direct costs.

There are two types of indirect costs. One are the fixed indirect costs which contains
activities or costs that are fixed for a particular project or company like transportation of
labor to the working site, building temporary roads, etc. The other are recurring indirect costs
which contains activities that repeat for a particular company like maintenance of records or
payment of salaries.
 3. Recurring Cost

A Recurring Cost is a regularly occurring cost or estimated cost which is documented with
one record—a Recurring Cost record—that describes the income or expense and its pattern
(how often it occurs, the rate at which it increases or decreases, the time period during which
the cost applies, and so forth). Recurring costs are stored in the Recurring Costs table

Recurring Costs provide a means of quickly modeling the major components of your
finances. You first establish a series of recurring costs to represent such items as tax
expenses, estimated maintenance costs, and monthly income from leases. Once you enter this
information, you can use these costs to generate Cost, Cash Flow, and Base Rent reports.

Recurring Cost Examples

Use recurring costs to:

 Record fixed expenses and income, or costs that change at a fixed rate – For costs that
are fairly static, enter one Recurring Cost record describing the cost, rather than create
individual Scheduled Cost records for each time you encounter this cost. For example,
enter one Recurring Cost record describing your monthly rent for a year rather than
enter 12 Scheduled Cost records for each rent bill. For costs that change at a fixed
rate, complete the Yearly Factor field of the Recurring Costs table.
 Record estimates of your expenses and income – Rather than enter the exact amount
of each monthly utility bill as a Scheduled Cost, enter a monthly estimate with a
Recurring Cost record by completing the Period field with “Month”, the Amount-
Expense with an estimate of the monthly bill, and the Start Date field. Since utilities
are ongoing costs do not complete the End Date field.
 Model seasonal costs – If you incur landscaping costs only between April and
September, create a Recurring Cost record for landscaping with a Seasonal Start Date
of April 01 and a Seasonal End Date of September 01 (the year value is ignored). The
system will only consider this recurring cost during the specified time frame.

4. Non- Recurring Cost

Unusual charge, expense, or loss that is unlikely to occur again in the normal course of a
business. Non recurring costs include write offs such as design, development, and investment
costs, and fire or theft losses, lawsuit payments, losses on sale of assets, and moving
expenses. Also called extraordinary cost.

5. Fixed Cost

A fixed cost is a cost that does not change with an increase or decrease in the amount of
goods or services produced or sold. Fixed costs are expenses that have to be paid by a
company, independent of any specific business activities. In general, companies can have two
types of costs, fixed costs or variable costs, which together result in their total costs.
Shutdown points tend to be applied to reduce fixed costs.

6. Variable Cost
A variable cost is a corporate expense that changes in proportion to production output.
Variable costs increase or decrease depending on a company’s production volume; they rise
as production increases and fall as production decreases. Examples of variable costs include
the costs of raw materials and packaging.

 A variable cost is a corporate expense that changes in proportion with production

output.
 Variable costs are dependent on production output.
 A variable cost can increase or decrease depending on several factors, as opposed to a
fixed cost which is one-time or constant.

The total expenses incurred by any business consist of fixed costs and variable costs. Fixed
costs are expenses that remain the same regardless of production output. Whether a firm
makes sales or not, it must pay its fixed costs, as these costs are independent of output.

Examples of fixed costs are rent, employee salaries, insurance, and office supplies. A
company must still pay its rent for the space it occupies to run its business operations
irrespective of the volume of product manufactured and sold. Although fixed costs can
change over a period of time, the change will not be related to production.

Variable costs, on the other hand, are dependent on production output. The variable cost of
production is a constant amount per unit produced. As the volume of production and output
increases, variable costs will also increase.

Conversely, when fewer products are produced, the variable costs associated with production
will consequently decrease. Examples of variable costs are sales commissions, direct labor
costs, cost of raw materials used in production, and utility costs. The total variable cost is
simply the quantity of output multiplied by the variable cost per unit of output.

There is also a category of costs that falls in between, known as semi-variable costs (also
known as semi-fixed costs or mixed costs). These are costs composed of a mixture of both
fixed and variable components. Costs are fixed for a set level of production or consumption
and become variable after this production level is exceeded. If no production occurs, a fixed
cost is often still incurred.

7. Normal Cost

Normal costing is cost allocation method that assigns costs to products based on the
materials, labor, and overhead used to produce them. In other words, it’s a way to find the
price of an item that is being produced using three different cost factors (which make up the
product cost).

The product costs that make up normal costing are actual materials, actual direct costs and
manufacturing overhead. The materials and direct costs are the true costs that are associated
with producing the item such as raw materials (the materials that make up the product) and
labor.

8. Expedite Cost
“Expedite Fees” are fees added to another fee, often a fee for service, to ensure that the
service provided will be expedited, meaning that it will be provided sooner than the same
service would be provided without such a fee.

Project Financing and Budgeting

Developing the project budget is a process for allocating administered and departmental
funds necessary to build a financial foundation for producing stated project deliverables.
When we talk about the project budget and financial resources we mean the solid
framework that helps project managers to deal with the “on budget” part of the project
implementation process. This framework involves cost planning and control.

For successful delivery of the project product, the project manager should effectively
estimate costs, track expenditure over time and adequately react to situations when the
financial resources are over-spent or under-spent, or there are opportunities for savings in the
project budget.

A Project Budget is the total amount of authorized financial resources allocated for the
particular purpose(s) of the sponsored project for a specific period of time. It is the primary
financial document that constitutes the necessary funds for implementing the project and
producing the deliverables. The project budget gives a detailed statement of all the direct and
overhead costs required to carry out the project goals and objectives.

A project budget template should be designed and managed under supervision and control of
the project manager. Also the customer and sponsor should be involved in allocating and
managing financial resources. Project budget management is a set of activities for estimating
the necessary amount of financial resources for the project, controlling project costs within
the approved budget and delivering the expected project goals.

Steps of the Budgeting Process

As an independent process, project budget management includes a series of steps to define

and produce a budget sheet. The key steps include:

 Development: estimating a necessary amount of financial resources and creating a

project budget sheet.
 Use: utilizing the authorized financial resources and executing the budget.
 Measurement: viewing cost performance and controlling the budget.
 Updating: viewing changes to the cost baseline and making updates to the project
budget sheet.

1: Budget Development

The first step of the project budget management process involves the project manager in
developing cost estimates and identifying the total amount of money resources necessary for
implementation of all the tasks and activities defined and stated in the WBS and the
Schedule.
Budget development should cover both capital and operating expenses to ensure successful
project completion. The project manager needs to define funding requirements and then send
a formal request to the sponsor who reviews the requirements and make a package decision
on providing the necessary money and financial resources. The sponsor can use the initiation
documents (like Feasibility Study, Business Case and Project Charter) to make that decision.

Such estimation methods as expert judgement, cost baseline measurement and cost
aggregation can be used for developing a project budget sheet. The project manager in
cooperation with the key stakeholders can use a combination of the methods to estimate a
necessary amount of financial resources and develop a project budget template.

2: Budget Use

The second step in project budget management is to allocate the identified financial resources
and start executing the budget. The project manager should control and keep track of the
budgeted resources in order to make sure that every scheduled task or activity is performed
with necessary funding and that there is no lack of money for the implementation of the entire
project.

The greatest way to track and control budget use is to develop an investment plan. This
formal document includes justifications and approvals for the acquisition of necessary
procurement items and services required in support of the project. An investment plan
describes the acquisition process with reference to the feasibility study (often in larger
projects a feasibility study template serves as a foundation for developing a project
investment plan).

The project manager needs to send an investment approval request form to the stakeholders
and wait for their approval/rejection. In case the plan is approved, the manager uses it to
control the budget execution. In case the document is rejected, the project manager should
receive stakeholder suggestions and make necessary amendments to the plan template. Then
the process may repeat until the plan is approved.

3: Budget Measurement

The third step in managing the project budget refers to taking actions necessary for providing
appropriate cost performance. The manager needs to use work performance data (like status
of the deliverables, cost-schedule estimates), the funding requirements request and the cost
performance baseline to check the budget appropriateness.

By conducting variance analysis, performance reviews and forecasting, the project manager
can compare the current cost performance against the planned amount of financed resources
stated in the project budget template. In case of any gaps or deviations it is necessary to make
formal change requests and modify the budget accordingly.

The project manager can develop corrective actions and send suggestions for approval to the
key stakeholders. The further budget control and measurement should be done with the
necessary evaluations and approvals.
4: Budget Updating

Once all the changes have been approved by the key stakeholders, the project manager can
proceed with updating the budget sheet and make changes to the existing breakdown
structure of financial resources. This will be the forth step of project budget management.

Cost estimates, resource activity estimates, the cost performance baseline and the cost
management plan should be updated in accordance with the approved changes.

Sources of Finance, Classification of Source of Finance

Finance refers to the management of money, including its creation, investment, and
allocation across various entities like individuals, businesses, and governments. It
encompasses activities such as borrowing, lending, saving, investing, and budgeting, aimed at
optimizing the use of financial resources. The field of finance is broadly divided into personal
finance, corporate finance, and public finance. Personal finance involves managing individual
or family financial activities, including savings, investments, and retirement planning.
Corporate finance focuses on funding sources, capital structuring, and investment decisions
within companies. Public finance deals with government revenues, expenditures, and
adjustments through policies to influence the economy. Understanding finance is crucial for
making informed decisions that ensure financial stability and growth across different scales
and sectors of the economy.

Sources of Finance:
Sources of finance refer to the different ways in which an individual, business, or
organization can obtain funding to start, run, or expand operations. These sources are broadly
classified into two categories: internal sources and external sources.

Internal Sources of Finance

 Retained Earnings:

Profits that are not distributed as dividends but are reinvested in the business.

 Personal Savings:

For sole proprietors or partners, using personal funds to finance the business.

 Asset Sale:

Selling off unused or underutilized assets to raise funds.

External Sources of Finance

External sources are further divided into debt financing and equity financing.

Debt Financing
  Bank Loans:

Borrowing a specific amount from a bank to be repaid with interest over a fixed period.

 Overdrafts:

An agreement with the bank allowing a business to withdraw more money than it has in its
account up to an agreed limit.

 Bonds:

Issuing debt securities to investors, who lend money to the entity in return for periodic
interest payments and the repayment of principal at maturity.

 Trade Credit:

Getting goods and services from suppliers on credit, payable at a later date.

 Leasing:

Paying for the use of equipment or premises over a period, instead of buying them outright.

Equity Financing

 Issuing Shares (Stocks):

Selling ownership stakes in the company to raise funds. This is more common in
corporations.

 Venture Capital:

Investment from firms or individuals in start-up or early-stage companies with high growth
potential in exchange for equity.

 Angel Investors:

Wealthy individuals who provide capital to startups for ownership equity or convertible debt.

 Crowdfunding:

Raising small amounts of money from a large number of people, typically via the Internet.

 Government Grants and Subsidies:

Funds provided by the government or public bodies to support businesses, often with specific
conditions or objectives.
Hybrid Instruments

Hybrid instruments combine elements of both debt and equity financing. Examples:

 Convertible Bonds:

Debt securities that can be converted into a predetermined number of the company’s shares.

 Preference Shares:

Shares that provide a fixed dividend before any dividends are paid to ordinary shareholders
and typically have no voting rights.

Choosing the Right Source of Finance

Choice among these various sources depends on several factors including the amount
required, the purpose of the funding, the cost of finance, the level of control or ownership the
owners wish to retain, and the financial condition and creditworthiness of the individual or
business. Each source has its advantages and disadvantages, and often a mix of sources is
used to meet the needs of the business while balancing risk and control.

Classification of Source of Finance:

Sources of finance available to businesses and organizations can be classified based on
various criteria, such as the period of financing, ownership and control, and source of
generation.

Based on the Period of Financing

 Short-term Finance:

Typically, this is for a period of less than one year. It is used to address immediate financial
needs or working capital requirements. Examples include trade credit, bank overdrafts, and
short-term loans.

 Medium-term Finance:

This type of finance is usually required for a period ranging from one to five years. It is often
used for purchasing equipment or funding expansion projects. Examples are medium-term
bank loans, leasing, and hire purchase.

 Long-term Finance:

Designed for a period exceeding five years, long-term finance is used for significant
investments like acquiring new buildings, long-term projects, or extensive expansion plans.
Sources include long-term loans, bonds, equity shares, and retained earnings.

Based on Ownership and Control

  Equity Finance:

Involves raising money by issuing shares of the company. Equity financing can dilute
ownership but doesn’t require repayment like loans. Shareholders may have some control
over the business depending on their shareholding.

 Debt Finance:

Refers to borrowing money that must be repaid over time with interest. Debt financing
includes loans, bonds, and debentures. It doesn’t dilute ownership, but companies are legally
obliged to repay the debt, affecting cash flow.

Based on Source of Generation

 Internal Sources:

These are funds generated within the business from operations or through internal
mechanisms like retained earnings or the sale of assets.

 External Sources:

Involve funds sourced from outside the business, including bank loans, public deposits,
venture capital, angel investors, government grants, and crowdfunding.

Additional Classifications

 Asset-Based Finance:

Loans or finance obtained by pledging assets. The finance amount is typically a percentage of
the asset’s value. Examples include factoring and invoice discounting.

 Hybrid Instruments:

These combine features of both debt and equity financing, offering flexibility in terms of
control, ownership, and financial obligations. Examples include convertible bonds and
preference shares.

Top Down Budgeting

Top-down budgeting is a crucial method of preparing a budget for an organization or a
company. Under this method, the senior management prepares a high-level budget on the
basis of the company’s objectives. The top management then allocates the amounts for the
individual departments, who use those numbers to prepare their own budget.

For the top-down budget, the top management uses past experiences and the current market
scenario, including margin pressure, competition, tax legislation, macroeconomic conditions
and more.
Also, the management uses past years budget and financial statements as a reference for
making an allocation to various departments. Additionally, senior management may also use
input from lower-level managers. For instance, if any department accounted for 20% of the
overall expenditure last year, then this year it would be allocated 20% of the funds. Any
adjustments to these numbers will be based on the input from the managers or the current
market scenario.

Process of TOP-DOWN BUDGETING

The top-level management will meet to decide on the targets for sales, expenses, and profits.
Next, the finance department will allocate these targets to other business departments. After
this, each department prepares its own budget.

Each department will then come up with a detailed budget, indicating how it will hit the
revenue target and at what cost. For instance, the number of products they will sell, how
much staff they will need, and more.

All such detailed budgets from the individual departments are then sent back to the finance
department. The finance department then approves them if they are in-line with the overall
objectives of the company. The finance department may also ask for some revisions if they
believe the department’s budget is deviating from the set goals.

After the finance department finalizes all the things, the budgets are put in the system. Going
forward, monthly reports are generated to compare the actual results from the planned ones.

Advantages

 Such type of budget focuses on the overall growth of the organization.

 It makes departments aware of what the top management expects from them.
 It is a quick way of preparing a budget and helps to overcome interdepartmental
issues.
 Saves time for lower management as well. Rather than preparing the budget from
scratch, each department gets a set goal. This saves both time and resources.
 Under top-down budgeting, management creates only one budget, rather than
allowing the department to create their own budget and combine them later. Hence, it
is a less tedious approach.

Disadvantages

 Since managers are not part of the budget-making process, they may not feel much
motivation to ensure their success.
 Since senior managers are not much aware of the day-to-day operations of the
departments, they may set unrealistic targets. This results in lower-level managers
finding it difficult to meet the set numbers.
 Such type of budgeting may often lead to over or under allocation of resources.

Bottom Up Budgeting
Bottom up budgeting is a type of budgeting that attempts to determine the underlying costs
for each individual department or segment of an organization and then total up each
department. This type of budgeting works in contrast to top down budgeting. Here are a few
things to consider about bottom up budgeting and how it works.

Start Small

This process starts out small by looking at the individual components and costs of projects. In
order to do this type of budgeting, you will need to start out by identifying all of the projects
that you plan on completing as a business. Once you identify the project, you need to figure
out what steps you will be taking to complete that project. At that point, you have to figure
out the costs for each step of the project and total them up.

Work Your Way up

After you have come up with a realistic cost estimate of each project, you need to total up all
the projects together. During this process, you need to work your way up from one level to
the next. For example, you may start out with a project budget for each week. Then total
although the to come up with a project budget for each month. You will then total the projects
for each month together to come up with an annual budget.

Manager Budgets

With this type of budgeting, you will also rely on managers to help out in the budgeting
process. You need each manager to come up with a realistic budget for all of the projects that
they will be taking on. You will then get the information from each manager and total it up in
order to come up with a budget for the company as a whole. When it comes to estimating the
number of man-hours that will be necessary to complete a particular project, a manager
should convert that figure to cash. This will ensure that there is enough money budgeted for
payroll as well.

Advantage of Bottom up Budgeting

One of the primary advantages of bottom-up budgeting is that it is traditionally very accurate.
As long as everyone takes care to look at every last detail of a project, it will generally come
out with an accurate estimate of costs. This type of budgeting also tends to improve the
morale of the employees because most of them will be involved with the budgeting process.
Every department will be expected to pitch in to come up with the new budget.

Disadvantage of Bottom up Budgeting

One of the disadvantages of this strategy is that it can sometimes lead to over budgeting.
Every department wants to make sure that they have enough money for the things that they
want to do over the course of the year. Because of this, some managers might add a little bit
of extra money into the budget so that it will be padded. If this happens often enough, it can
throw the whole budget off.

Introduction to Activity Based Costing

ABC costing focuses on identifying activities, or production processes, that are used to
process a job. These individual activities are grouped together with similar processes into a
cost pool that relates to single activity cost driver.

The cost pools are then analyzed and assigned a predetermined overhead rate that will
eventually be assigned to individual jobs and products.

As you can see, this is a multi-step process, but activity-based costing is a much more
accurate way of assigning indirect costs. It’s difficult to determine how much electricity or
heat one department or job uses over another without some type of methodical allocation
process.

Activity-based-costing-ABC-versus-traditional-cost-accounting-TCA-systems.png

Activity based costing has grown in importance in recent decades because:-

(1) Manufacturing overhead costs have increased significantly,

(2) The manufacturing overhead costs no longer correlate with the productive machine hours
or direct labor hours,

(3) The diversity of products and the diversity in customers’ demands have grown, and

(4) Some products are produced in large batches, while others are produced in small batches.

Let’s take a look at an example

Example

Activity based costing helps allocate overhead expenses to jobs and products based on the
amount of the activities required to produce the product instead of simply estimating how
much each job uses.

Properly assigning indirect costs is extremely important for management, especially in the
case of downsizing or outsourcing. Profitable departments can be assigned too much indirect
cost causing them to appear unprofitable on paper. Based an evaluation management can
choice to discontinue the operations and close a profitable branch because the costs were
properly distributed.

To compound the problems, once the profitable branch is closed the only remaining branches
are the unprofitable ones. By shutting down the only profitable department, the company may
not be able to cover its fixed costs.
The same scenario is true for outsourcing. Management may estimate outsourcing to be a
cheaper option because costs have not been allocated properly. In fact, outsourcing might
actually be more expensive.