PM FPX 5333 Assessment 1 Budget Analysis Report

PM FPX 5333 Assessment 1 Budget Analysis Report

Name

Capella university

PM-FPX5333 Project Budgeting, Procurement, and Quality

Prof. Name

Date

Introduction

This analysis begins by examining the project’s budget, particularly the cash flow management throughout the Nearlyfree project. Cash flow analysis is crucial for comprehending how payments are received, managed, and disbursed, as maintaining a steady cash flow each month is vital for the project’s sustainability. Essentially, evaluating cash flow is an assessment of a business’s financial health, which plays a pivotal role in transitioning from merely starting a business to effectively operating one (Tally, 2022).

At present, the Nearlyfree project is underway. While the project has initially adhered to its budget, it has reached the midpoint and is encountering challenges that raise concerns about its viability. Consequently, the project team has requested assistance with project management services. Following a comprehensive review, our focus was directed toward addressing the project’s needs and assessing its financial situation. This assessment allowed us to create a cost estimation report that could potentially realign the project. The analysis encompasses essential elements such as the Work Breakdown Structure (WBS), Total Cost of Ownership (TCO), and Return on Investment (ROI). Additionally, the report will employ cost estimation techniques based on the current financial circumstances and contingency plans to address potential project failures.

Current Financial State

The original budget for the Nearlyfree New Employee Orientation project was set at $25,000. However, an evaluation of the financial status indicates that the budget is likely to be exceeded. Initially, the baseline cost was $23,300, but the total project cost has surged to $30,380, resulting in a budget overrun of $8,080. These figures are particularly concerning, as the project is only halfway completed and has already exceeded its budget, necessitating urgent additional funding to meet the project timeline.

The project leadership relied on an analogous estimating approach, which has proven inadequate for the initial budget proposal. Analogous estimating is a rapid method that often lacks detailed information, leading to inaccuracies. A more effective technique moving forward would be the 3-point estimation method, which depends on the expertise of estimators to deliver a more precise estimate by considering both positive and negative factors. The 3-point estimating technique comprises three key points:

• Most Likely (M) or Best Guess (BG): This reflects the average effort required for a task, assuming it is repeated by a team member.
• Pessimistic (P) estimate: This signifies the amount of work necessary if negative factors arise.
• Optimistic (O) estimate: This represents the effort needed if positive risks materialize (Indeed, 2023).

Cost Estimate

Understanding the Work Breakdown Structure (WBS) is essential for evaluating project cost estimates and enhancing the team’s understanding of the costs associated with each task (Organ, 2023). The WBS organizes the project hierarchically, presenting a prioritized sequence of tasks.

To effectively develop the WBS, the following four steps should be taken (Organ, 2023):

1. Generate a list of high-level requirements or scope deliverables.
2. Categorize each high-level requirement based on major deliverables.
3. Break down these categories into measurable activities.
4. Assess the work packages for completeness.

According to Organ, utilizing the WBS for initial project estimation significantly boosts the likelihood of successful estimation, planning, and implementation. This methodology assists global project teams in mitigating risks and avoiding issues related to change control, scope creep, and project delays.

In the case of the Nearlyfree project, the WBS was constructed by following these outlined steps. However, the budgetary concerns indicate that the project scope was not adequately addressed, potentially rendering the deliverables unattainable.

Failure Points

A comprehensive report from Nearlyfree.com highlights two primary reasons for the project’s failure. Firstly, there exists a substantial disparity between the projected budget and the actual costs. Secondly, critical deliverables were omitted during the planning phase, leading to the project’s overall failure.

Delays have also played a detrimental role, consuming a significant portion of the budget. Proper scheduling and planning could have alleviated these delays, allowing for more efficient resource utilization. Funds that were allocated for delays could have been redirected to reinforce other aspects of the project.

Turnaround Recommendations

To redirect the project’s trajectory, we recommend implementing the following estimation techniques:

• Total Cost of Ownership (TCO): Evaluate the overall costs of the project, incorporating both direct and indirect expenses. A comprehensive understanding of all associated costs offers clearer insights into the project’s financial implications.
• Return on Investment (ROI): Assess potential returns and benefits derived from the project to determine if the anticipated gains warrant the associated costs.
• Contingency Reserves: Establish reserves to manage unforeseen risks and uncertainties, ensuring readiness for unexpected challenges without compromising project progress.
• 3-point Cost Estimation: Employ this technique to estimate project costs by evaluating optimistic, pessimistic, and most likely scenarios, thereby yielding a more accurate and realistic cost estimation.

By utilizing these techniques, we aim to revitalize the project and enhance its likelihood of success through a comprehensive understanding of costs, returns, and potential risks.

Total Cost of Ownership

Integrating the Total Cost of Ownership (TCO) into project considerations is vital for reversing the project’s trajectory. TCO aids investors in comparing a company with its competitors, facilitating informed investment decisions. It encompasses the asset purchase price alongside operational costs, providing a holistic view of the project’s long-term value (Twin, 2023).

When presenting a revised budget plan, incorporating the TCO is essential. This inclusion clarifies not only the initial system cost but also the direct expenses, such as software costs, installation, and employee training, offering a more comprehensive picture than a broad overall figure. With the projected TCO set at $27,133.33, it is critical to demonstrate how these funds will be allocated.

Return on Investment

Evaluating ROI is another strategy for project recovery. While TCO holds importance, ROI quantifies the benefits of a capital investment, reflecting the percentage of the total capital cost and predicting investment growth and returns over time (Fernando, 2023).

To calculate ROI, it is necessary to assess both outbound and inbound cash flows related to the investment. Accurate ROI calculations demand a thorough examination of every cost (Fernando, 2023). In this project, identifying long-term savings in labor or resources presents challenges. By subtracting the projected cost of $27,133.33 from the baseline cost of $30,380, the project savings amount to $3,246.67.

Contingency Reserves

Considering contingency reserves is another strategy for the project turnaround. Contingency reserves represent allocations within the schedule or cost baseline to accommodate known risks and implement response strategies (Harrin, 2022). Establishing a backup plan is essential for effectively managing uncertainties and risks within every project. Calculating contingency reserves involves utilizing the Expected Monetary Value (EMV) method, which multiplies potential loss by the probability of occurrence for both known and unknown risks. The total contingency is derived from aggregating multiple risks (Harrin, 2022).

Upon reviewing the budget, there exists a 90% probability that HR labor costs will exceed the budget, a 50% chance that project manager costs will surpass the allocated amount, and a 75% likelihood that training expenses will fall short. With an estimated contingency reserve of $5,000, the calculations are as follows:

• 90% of $2,777 equals $2,500
• 50% of $2,500 equals $1,250
• 75% of $3,750 equals $2,812.50

3-point Cost Estimation

The final method for revitalizing the project involves employing the 3-point estimation technique. This approach utilizes optimistic and pessimistic estimates to ascertain the ideal value for each task (Indeed, 2023). The estimation formula is (E = \frac{(a + m + b)}{3}), where (E) represents the estimated value, while (a), (m), and (b) denote the most likely, pessimistic, and optimistic values, respectively. This formula is recognized as the triangular distribution formula.

Upon reviewing the project documents, it becomes evident that several tasks exceeded the initial budget. The task with the largest overage was planning, which surpassed the baseline budget by $6,000. Additionally, labor costs for three team members also exceeded expectations. To address future underestimations, we will implement the 3-point cost estimation technique and allocate contingency reserves accordingly.

The new baseline budget, inclusive of the $5,000 contingency reserve, estimates the project cost at $32,133.33.

References

Fernando, J. (2023, May 24). Return on investment (ROI): How to calculate it and what it means. Investopedia. https://www.investopedia.com/terms/r/returnoninvestment.asp

Harrin, E. (2022, April 8). Project contingency: The ultimate guide. Rebel’s Guide to Project Management. https://rebelsguidetopm.com/project-contingency/

How does cash flow help in decision making?: Tally solutions. Tally. (2022, July 20). https://tallysolutions.com/accounting/how-does-cash-flow-help-in-decision-making/

Indeed Editorial Team. (2023, February 3). Three-point estimating: Definition, formula and example. Indeed. https://www.indeed.com/career-advice/career-development/three-point-estimating

PM FPX 5333 Assessment 1 Budget Analysis Report

Organ, C. (2023, March 23). Work breakdown structure (WBS) in project management. Forbes. https://www.forbes.com/advisor/business/what-is-work-breakdown-structure/

Twin, A. (2023, January 25). Total cost of ownership: How it’s calculated with example. Investopedia. https://www.investopedia.com/terms/t/total-cost-of