Principled negotiation is a negotiation that aims to achieve a win-win results. The conflicting stakeholders to a project are not enemies or competitors, but rather allies— members of an alliance with strong common interests. It is a requirement of all conflicting parties to seek solutions to the conflict that not only satisfy their own individual needs but also satisfy the needs of other parties to the conflict, as well as the needs of the parent organization. In the language of negotiation, this is called a “win-win” solution. Negotiating to a win-win solution is the key to conflict resolution. Principled negotiation is defined by four points. It separates the people from the problem. It focuses on interests, not positions. Before trying to reach agreement, the PM invents options for mutual gain. It also insists on using objective criteria. Rather than bargaining on positions, attention should be given to finding standards that can be used to determine the quality of a certain outcome.
Top-down budgeting is a method that begins with top managers’ estimates of the resources needed for a project. Its primary advantage is that the aggregate budget is typically quite accurate because no element has been left out. Individual elements, however, may be quite inaccurate. Another advantage is the budget is broken down into fine detail, starting from the most aggregated level following the WBS. Consequentially, small yet costly tasks need not be individually identified, nor need it be feared that some small but important aspect has been overlooked. The experience and judgement of the executive are presumed automatically to favor all such elements into the overall estimate. The method is also based on considerable past experience of the top-level management. As a result, junior managers feel forced to accept what they perceive to be insufficient allocations to achieve the objectives to which they must commit. Competition amongst junior managers is often quite intense. Therefore, an advantage is the junior managers are challenged to do the most with the least cost. Bottom-up budgeting is a method that begins with those who will be ding the tasks estimating the resources needed. The advantage is more accurate estimates. The most important tasks for top management to do in bottom-up budgeting is to include all the elements in the budgets with accuracy in the detailed tasks. Since the bottom-up budget has its unique managerial budget games, while it important for managers to be persuasive, but those who are consistently honest and have high credibility win more often. Also, top management must give junior managers valuable experience in budget preparation as well as the knowledge of the operations required to generate a budget because individuals closer to the work are bound to have a more accurate idea of resource requirements than their superiors. To ensure accuracy, the PM and functional managers may enter the discussion. The PM adds such indirect costs, possibly a project reserve for contingencies, and then a profit figure to arrive at the final project budget. Creating a reserve is important to be proactive, as subordinates have their hands in the budget, in terms of mitigating risks.
The uncertainty in labor cost estimating lies in the estimate of hours to be expended. Not including personal time ensures as underestimate. Further, direct costs for resources and machinery are charged directly to the project and are not usually subject to overhead charges. If a specific machine is needed by the project and is the property of a functional department, the project may pay for it by transferring funds from the project budget to the function department’s budget. The charge for such machines will be an operating cost, plus a depreciation charge based on either time or number of operating cycles. Use of general office equipment, for example, copy machines and drafting equipment, is often included in the general overhead charge. In addition to these charges, there is the General and Administrative charge. This is composed of the cost of senior management, the various staff functions, and any other expenses not included in overhead. Thus, a fully costed work element would include direct costs (labor, resources, and special machinery) plus overhead and G&A charges. It is advised the PM prepares two budgets: one with overheads and G&A charges and one without. The full cost budget is used by the accounting group to estimate the profit earned by the project. The budget that contains only direct costs gives the PM the information required to manage the project without being confounded with costs over which the PM has no control. With both budgets, the PM can correct cost overruns.