EstablishIndirect BudgetsTheproject budgets should reflect the planned amounts allocated for indirect costs(e.g. Project Management).The overall value of establishing indirect budgetslies in the ability to manage cost elements that cannot be directly assigned toindividual cost products.
By comparing actual indirect costs to indirectbudgets, it can be determined whether the indirect costs are on track or ifrates will need to be adjusted.Because indirect costs can account for a majorportion of the cost of any project and as such, the budgetary control andmanagement of this category of cost cannot be overlooked or minimized. It isimportant to have an indirect budgeting and forecasting process, as well asidentifying an organization or role that is responsible for these budgets andprocesses.
2.4.4 Level of Effort Planning and ControlIdentify and control Level ofEffort activity by time phased budgets.
Only effort which is not measurable, orimpractical to measure, may be classified as Level of Effort.Meaningful product or management-orientedevents are critical for performance measurement.Objective measurement of Level ofEffort (LOE) activity is impractical and provides little visibility into actualperformance; therefore, its use should be minimized.Each task on the project needs tobe assessed to determine the best method to budget and measure its progresstoward completion. Level of Effort is defined as having no measurable output orproduct that can be discretely planned at the work package level. Level ofEffort should be limited to those activities that are unable to be measureddiscretely to avoid distorting project performance data. Level of Effort workpackages should be separately identified from Discrete Effort work packages andApportioned Effort work packages. Budgets for Level of Effort activity shouldhave a sound basis of estimate and be time phased to properly reflect when workwill be accomplished.
LOE budgets may be planned at either the Control Accountlevel or at the same level as Discrete or Apportioned work packages. 2.4.5 Cost Associated with MaterialThe earned material costs on a project are typically recorded on anas-applied basis, i.
e. at the point in time when the material is applied to thework in progress, but there may be exceptions. Earned Value for material willusually be credited no earlier than the point of receipt, in the same periodthat the work is completed and that the costs are applied.
In situations where Earned Value is credited, and correspondingActual Costs have not been recorded in the accounting system, the estimates forthe Actual Costs in management and Performance Measurement reports should beused, i.e. accruals. 2.4.6 ContingencyContingencyis the amount of total budget and time reserve designated for theaccomplishment of a specific task or set of tasks. Budget reserved forunplanned, but potentially required changes to scope, schedule, or cost.
Contingencymay only be used for known-unknownscope in the project. In other words, contingency is allowance forpotential known event, but the impact of the event itself is unknown. 2.4.7 Management ReserveManagementReserve is an amount of the Project Budget withheld for management controlpurposes, and is reserved for unforeseen work that is within the scope of theproject.
Management reserves are intended to address the ‘unknown-unknowns’within the project (unknown project events).Management Reserve is held forunexpected growth within the currently authorized work scope, rate changes,risk handling, and other program unknowns. Generally, Management Reserve isheld for current and future needs and is not used to offset accumulatedoverruns or underruns. Management Reserve may be held at the total projectlevel or distributed and controlled at lower management levels. In any case, anorganization should be able to account for all its used Management Reserve.
The budget being held inContingency may not be viewed by the Project as a source of funding for addedwork scope. Refer to the example of anIntegrated Work Breakdown Structure below. The figure specifically demonstrateshow Escalation, Contingencies, and P & G’s may be managed in an IWBS.