Project Budgeting and

Resource Management
Budget setting approaches
Presenting the budget
Project management
Slack management
Crashing
Resource levelling
Resource allocation

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Introduction
Project Budget specifies the activities
and their costs so as to achieve its
objective and fulfill all requirements
to complete the project.
Three tiers of budgets:
Long-range, organization-level
Midrange, functional unit
Operational, project based.
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Top-down Budgeting Approach

Long-range budget is developed by the top
management, and then passed to the
functional managers and project
managers who will develop the
functional and operational budgets.
Top-down approach to budget preparation:
Step Organizational level Budget prepared at each step
1
Top management
Strategic budget based on
organizational goals, constraints, and policies
2
Functional management
Tactical budget for each
functional unit
3
Project managers
Detailed budgets for each project,
including the cost of labour, material,
subcontracting, overhead, etc.

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Bottom-up budgeting
Project managers prepare his/her budget proposal that
supports efficient and on-schedule project execution.
Functional managers prepare the budgets for their units,
considering the resources required in each period of time.
To management streamlines and integrates the budgets
from the low levels into a strategic long-range organizational
budget.
Bottom-up approach to budget preparation
Step
Organization level
Budget prepared at each step
1 Top managementSetting goals and selection of projects (a
framework for budget)
2 Project management
Detailed budget proposals for projects
including costs of material, labor,
subcontracting, etc.
3 Functional management Midrange budget for each functional
unit
4 Top managementAdjustments and approval of the
aggregate long plan budget resulting
from the process

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Iterative budgeting
A combination of top-down and bottom-up
budgeting

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Presenting the budget

The budget generated is easier to understand and use
if it is presented clearly and concisely.
The following recommendations can be adopted when
preparing and presenting a projects project
Incorporate a schedule showing the time that
expenditure and revenues (if any) are expected to
be realised.
Present the budget in quantitative, measurable
units such as dollars or man-hours.
Define milestones in terms of achievements of
goals and expenditures/revenues.
Use the budget as the baseline for progress
monitoring & control.
The budget should translate short-term objectives
into work orders, purchasing orders, etc.
Breakdown the budget to individual units
responsible.

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Budget Management
The budget of a project specifies the
scheduled expenditures and scheduled
revenue as a function of time.
Two approaches are used to manage the
project to meet budget constraints:
Slack management -- An approach that utilizes
the slacks of activities to meet the
organizational budget requirements.
Crashing -- An approach that attempts to
shorten an activity duration by adding more
resource, so as to achieve a trade-off between
cost and time.

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Slack management
Development of the budget of a project
includes the derivation of the scheduled
expenditures and the scheduled
revenue as a function of time, subject
to the time constraint and the total
investment limit.
The approach of slack management
attempts to utilize the slacks of the
activities to re-schedule the project, so
that the time and monetary constraints
are satisfied.
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Slack management
The process of selecting activities to reschedule the project will follow the
following priority:
Non-critical activities that have free slack
are the first candidates to be re-scheduled.
Non-critical activities that have total slack
are the next candidates to be re-scheduled.
Finally, the critical activities are considered.

Overall, our goal is to make the whole

project to meet the time constraint while
the monetary limit is satisfied.
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Slack management -Example

Consider the example project, with the
activities, durations and costs given
below:
Activity Duration (weeks) Cost ($1,000)

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1.5

3.0

3.3

4.2

5.7

6.1

7.2
Total = 31.0

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Slack management
We have found that
(A,C,F,G) is the
critical path,
which has a length
22 weeks. The
critical activities
are A, C, F, and G,
while activities B,
E, and D have
either free or total
slack that can be
used for budget
planning.

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Cash Flow
Lets look at this projects cash flow,
assuming that, for budgeting purposes, the
cost of each activity is evenly distributed
throughout its duration.
In the next two tables, we look at the cash
flow scenario for:
Early start schedule Any activity will be
started at its earliest start time. (Table 8-4)
Late start schedule Any activity will be
started at its latest start time. (Table 8-5)

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Slack management
Figure 8.1 below depicts the
cash flows for the early start
and late start schedules.
Figure 8.2 below depicts their
cumulative cash flows.

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Slack management
From Figure 8-2 we can see that, if the
total money allocated to the project is
only $4,913 for weeks 1 through 6, then
during this period only a late start
schedule is feasible.
Also, if the total allocation to the project
is increased to $10,398 for the first 6
weeks, then an early start schedule will
become feasible.
Any allocation between $4,913 and
$10,398 will force a delay of certain
non-critical activities.

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Slack management
The approach of slack management is
to properly adjust the timing for noncritical activities so that the limit of
total monetary allocation is satisfied,
while the project is not delayed.
An early start schedule will result in
relatively high expenditures in the
projects earlier stages, while a late
start schedule will result in relatively
high expenditures in the projects
later stages.
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Risk vs. Capital Commitment

Note that the choice between an early and a
late start schedule affects the risk level
associated with the projects on-time
completion.
Using a late start schedule means that all
activities are started as late as possible
without any slack to buffer against any
uncertainty, increasing the probability of
delays.
On the other hand, using an early start
schedule requires an early commitment of
money, which will mean additional cost if
interest rate is taken into account.

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Tradeoff Between Cost and Time

The approach of crashing is to
reduce the duration of an activity
by adding more resource, so as to
achieve an optimal trade-off
between cost and time.
Normally, for each activity, there
is a time-cost curve, which
represents the relationship
between the time to complete the
task and the associated cost.
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Crashing

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Crashing
The normal point gives the cost and the
time involved when the task is performed
in the normal way without extra resources
such as overtime, special materials, or
enhanced machine capacities to speed up
the processing of the task.
The crash point gives the time and cost
when the task is fully expedited; that is,
no cost is spared to reduce its duration as
much as possible.

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Crashing
The time-cost curve may not be necessarily
linear; it can take any form, even being a set of
discrete points such as (L1, c1), (L2, c2), ,
(Lm, cm).
Nevertheless, as an approximation, we
sometimes assume that all intermediate timecost trade-offs are possible and that they lie on
the line segment between the normal point and
the crash point (that is, the time-cost curve is
approximated as a continuous linear function).
With such an approximation, we need only
estimate the normal point and the crash point
to build the time-cost curve.

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The Crashing Process

(1) Apply CPM to derive the normal schedule of the
project, where each activity is performed at its lowest
cost and at a normal duration.
(2) Identify the critical path, and select the critical
activity that is least expensive for crashing. If more
than one critical path exist, then a least expensive
activity on each path should be selected for crashing
so that all the critical paths will be shortened.
(3) Apply CPM again to derive the schedule of the
project, where each activity is performed at the
crashed cost and the crashed time as obtained in
step 2 (if it has not been crashed, using its normal
cost and time).
(4) Repeat Steps 2 and 3, until no more crashing to
reduce the current critical path(s) can be performed.

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Crashing - Example

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Crashing Results

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Crashing
The crashing process can continue

until a 14-week span is obtained. At

this point, two critical paths emerge:
A-C-F-G, and B-D-F-G.
The path B-D-F-G can be further
shortened by crashing the activity B.
But the path A-C-F-G can not be
crashed any more.
Thus, the shortest possible duration
of the whole project is 14 weeks.
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Crashing Cost vs. time tradeoff

The crashing process has

revealed a relationship
between the cost and the
schedule of the project, which
allows us to prepare our
budget by considering the
possible trade-offs between
cost and time.
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Crashing - Example
Suppose that a fixed overhead of $500 per
week is charged during the projects
duration. Further, assume that the project
is due in 18 weeks and that a penalty of
$1,000 per week is imposed starting from
the 19th week.
The problem now is how to generate the
best budget for the project so that the
overall cost is minimal.
Table 8-8 below summarizes the cost-time
function.

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Crashing Example Project costs

10,500
10,000

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Crashing
From Table 8-8, we can see that the minimum
cost occurs at the project length of 19 weeks.
That is, it is more economical to pay for a
penalty of $1,000 and an overhead of $500 for
a one-week delay than to pay $2,000 to crash
the activity F to get an on-time schedule.
Based on this result (a 19-week schedule), we
can generate the budget for the project
(including the costs for all activities and the
schedules to pay for these costs).
Figure 8-4 below graphically depicts the
different cost components and the total cost as
a function of its duration. Again, we can see
that the 19-week schedule is the one with the
lowest total cost.

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Crashing

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Resource Management

Resource leveling subject to

project due date constraints
Resource allocation subject to
resource availability constraints

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Resource Management
Depletable resources -- Resources that are
used up over time (e.g., a lump sum of
money, raw materials, etc.)
Renewable resources -- Resources that are
available at the same level every time
period (e.g., people, machines, etc.)
Earlier, we mainly deal with budgeting and
planning of depletable resources. Here we
will consider the resource allocation
problem with renewable resources.
Resource allocation for a project concerns
with the trade-off between the cost of using
resources, and the project schedule.
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Example
Consider the example project as given in
the Table below:

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Renewable Resource Usage

Consider the renewable resource (labor) used to
perform the activities of the project. Table 9-1 gives
the resource requirements:

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196

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Tracking Resource Usage

Gantt Chart -- A graph that depicts
the activities performed on the vertical
axis and their corresponding durations
on the horizontal axis (a technique
developed by Henry L. Gantt).
The Gantt chart for the early start
schedule of the example project is
shown in Figure 9-2a. The
corresponding resource requirements
are given in Figure 9-2b.
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Gantt Chart and Resource Profile

- Early Start Schedule

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Fluctuation in Resource Usage Level

The early schedule requires a high level
of resource at the early stages. The
requirement during the first 3 weeks
is 17/5=3.4 person-days per day. The
highest resource requirement is 17
person days per week, while the
lowest resource requirement is 3
person days per week. The
fluctuation is 14 person-days.
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Gantt Chart and Resource Profile

- Late Start Schedule

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Resource Usage Levels Late Start

Schedule
The late schedule moves the high
level of resource requirement from
weeks 1 through 3 to weeks 3
through 5. The highest resource
requirement is 12 person days per
week, while the lowest resource
requirement is 3 person days per
week. The fluctuation is 9 person
days.

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Resource levelling
Resource levelling is defined as the re-allocation of
total or free slack in activities so as to minimize the
fluctuations in the resource requirement profile.
When the total resource requirement for the project
is fixed, a minimum fluctuation tends to reduce the
peak resource requirement, and thus leads to more
balanced requirements over all periods.
For renewable resource, a balanced resource
requirement is the desirable solution.
For labor, this means a fairer working load distribution; This
also means a lower costs for hire, fire, and training.
For materials, this means less effort in material planning
and control, and also lower cost in inventory.

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General Resource Levelling

Procedure

Calculate the average number of resource-days

per period required by the project. (In the
example, a total of 196 person-days are
required. The average = 196/22 = 8.9, or about
9 person-days per week, since the project
duration = 22 weeks).
With reference to the early start schedule and
non-critical activities, gradually delay activities
one at a time, starting with those activities that
have the largest free slack.
Select the schedule that minimizes the resource
fluctuation (which has daily resource
requirements close to the calculated average).

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Resource levelling - Example

Apply the procedure of resource-levelling to the example
project. Recall the results we have obtained by project
scheduling (see the table below). We can see that
activity E has the largest free slack (6 weeks).

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Resource levelling - Example

The early start schedule is shown below.

The first step is to delay the start of E by 3

weeks until the end of activity B. This reduces
the resource requirements from weeks 1
through 3 by 5 units. The resource profile is
shown in the Table next.
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Resource levelling - Example

The profile has a maximum of 13 person-days

per week. Since the maximum occurs in weeks
4 and 5 and activity E can be delayed further,
consider a schedule E starts after A is finished
(after week 5). The resource requirement
profile in this case is shown in the Table next.

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Resource levelling - Example

Now the profile has a maximum of 12

person-days per week. The minimum is
still 3, given a fluctuation of 12-3=9.

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Resource levelling - Example

The next candidate for adjustment is activity B, with a free
slack of 2 weeks. However, delaying B by 1 or 2 weeks will
only increase the load in weeks 4 and 5, resulting in a net
gain zero.
Therefore, we proceed to the last activity with a positive
free slack - activity D, which is scheduled to start at week 5.
Delaying D by 1 week results in the following resource
requirement profile.

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Resource levelling Example

Minimum Fluctuation Schedule

Now the corresponding schedule is shown in

Figure 9-4. Note now the fluctuation of
person-days is 12-5 = 7, which is smaller
than other schedules including the early start
and the late start schedules.

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Resource leveling subject to project

due date constraints
Remarks

For small projects, the foregoing procedure

works well but still cannot guarantee to find the
optimal profile (solution).
To improve on the results, a similar procedure
can be activated by starting with the late start
schedule and checking the effect of moving
activities with slack back to the start of the
project.
To obtain better solutions, a number of
iterations (a loop of forward procedure and
backward procedure) may be used.

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12.2 Resource leveling subject to

project due date constraints

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Resource leve/ling vs. Resource

Limits
In some projects, it may be necessary to
keep the maximum resource consumption
below a certain ceiling (constraint) rather
than merely leveling the resources (goal).
If a feasible schedule cannot be found by
re-scheduling the non-critical activities,
one or more critical activities would have
to be re-scheduled to reduce the daily
resource consumption to within limits.

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Resource allocation subject to

resource availability constraints

Many projects are subject to resource availability

constraints.
For the example, if 17 or more person-days are
available every week, then an early start schedule
can be used to complete the project within 22 weeks.
If 12 person-days are available, then the project can
still be completed in 22 weeks (by a late start
schedule).
However, if the available person-days are 11 or less,
then the completion of the project may have to be
delayed.
How to minimize the project delay subject to the
resource availability constraints is the concern of
optimal resource allocation.

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Resource allocation subject to

resource availability constraints
To avoid a project delay in a low resource
availability, the following techniques may be
considered:
(1) Performing activities at a lower rate using available
resource levels.
Assume 11 person-days are available for A and B
per week, and the critical activity A requires 8
person-days while the non-critical activity B
requires normally 4 person-days. Let A use 8
person-days, and then only 3 person-days left for
B. Since B needs (3 weeks) x (4 person-days per
week) = 12 person-days in total, it may be possible
to schedule B to have (3 person-days a week) for 4
weeks, which also equals 12 person-days in total.

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Resource allocation subject to

resource availability constraints
(2) Activity splitting
It might be possible to split some activities into subactivities without altering the original precedence
relations. Then, complete some sub-activities first, and
delay other sub-activities to later times when sufficient
resource available.
(3) Modifying the network
Consider whether some precedence relations can be
modified, so that conflicts in using resources are resolved.
(4) Use of alternative resource
Consider subcontractors.
If the above techniques cannot solve the problem, then one or
more critical activities will have to be delayed, causing a delay
in the completion of the project.

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Resource allocation subject to

resource availability constraints
To illustrate, consider the example project under a
resource constraint of 11 person-days per week.
Because A requires 8 person days, activity B can
start only when A finishes. The precedence relations
force delays of D, as well as F and G. The new
solution is shown below.

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Resource allocation subject to

resource availability constraints
It is interesting to note that when the maximum available
resource reduces from 11 to 10 would not change the
solution above.
If the maximum available resource further reduces to 9,
the new solution is shown below (where C, D and E cannot
be concurrently performed since they require a total of 10
person-days).

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Resource Utilization
Resource utilization is defined as the
proportion of availability that a resource is
used.
For instance, in the example project, if 12 persondays are available each week and the total duration
of the project is 22 weeks, then a total of 12 x 22 =
254 person-days are available. But only 196 persondays are used for the project, thus the resource
utilization in this example is 196/254 = 0.74 = 74 %.
Resource leveling and resource allocation
techniques can be used to achieve a higher level of
resource utilization.

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Multiple Resources
The analysis of resource allocation
becomes much more complicated when
several types of resources are used, the
number of activities is large, and several
projects compete for the same
resources.
In real-life applications, the problem is
usually solved with heuristics, using
priority rules to make the allocations
among activities.
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Resource allocation heuristic

(1) First, a simple CPM analysis is used, assuming unlimited
resource availability.
(2) Then, a check is made to see if the schedule generated is
infeasible (the schedule is infeasible if its resource
requirement exceeds its availability at any point of time).
(3) Infeasibilities are addressed one at a time, starting with the
first activity in project network, and making a forward pass
toward the last.
(4) A priority measure is calculated for each activity
competing for the same resource. The activity with the lowest
priority is delayed until sufficient resources become available.
(5) The steps (3)-(4) above are repeated, until all infeasibilities
are resolved.

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Priority rules for resource

allocation
In the procedure above, a very
important operation is the use of
priority rules to determine the
activities that should be delayed.
How to design the priority rules
depend on the situations and the
experience and judgement of the
decision maker.

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Some common priority rules for

resource allocation
Activity with the smallest slack.
Activity with minimum late finish time (as determined
by CPM analysis).
gives high priority to activities that should start early in
the project.

Activity that requires the greatest number of resource

units.
gives the highest priority to the activity that requires the
maximum use of resource.

Activity that requires the smallest number of resource

units.
Shortest activities.
Longest activities.
Hybrid : weighted sum of other priorities.

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Summary
Project Management

Slack management
Crashing (Time vs. Cost tradeoff)
Resource levelling
Resource allocation

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