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Cost Estimation Cost Budgetting Work Authorization
Cost Estimating The cost estimate is prepared as follows: The types of estimate required is determined from the RFP, RFQ or other requestor. The estimating method(s) appropriate to the type of estimate, the program phase and information available are selected. The estimating team is formed, briefed on the estimate requirements and statement of work. Estimates are prepared using a “Basis of Estimate” (BOE) Form, and collected by the “estimate manager” – usually the proposal manager before contract award, and project manager afterwards. Usually these estimates are expressed in a mixture of labour hours and dollars. The BOE forms are compiled, summarized, and submitted to the “Pricing” or “control accounting” function for the application of all additional Elements of Cost (EOC). If prepared for a proposal, “Profit” is applied to yield the proposal “priced estimate”. Otherwise, this forms the basis for the program budget.
Estimating Methods Similar approaches as used for schedule estimating Expert judgment Analogous Parametric Probabilistic Estimates include both internal estimates and quotes from suppliers and sub-contractor Take care to subject external estimates to the same level of scrutiny as internal
Kicking off the Estimate Team Preparing an estimate is “a project within a project”, with the following steps: The “estimate manager” – possibly marketing or business development for proposal, project manager after contract award – performs an initial review of the required RFP/SOW. Depending on the level of estimate required and complexity of work, manager pulls together “estimating” team of “experts” Team performs review and estimates on BOE sheets, often supplemented by completion of a SOW compliance matrix for their aspects
Typical Basis-of-Estimate (BOE) Format 674-2435 Specific reference to proposal, contract or purchase order number WBS reference: estimates are usually done at the lowest level of WBS definition available at the time of the estimate Occasionally, BOE’s may be done by functional group rather than WBS in order to provide clear accountability for the estimate, however, this is not preferred Estimator’s certification, and approval by related functional management Assures “ownership” of estimates by those who will need to support them Summary of the work being estimated, as well as applicable specifications Estimate methods used Estimates by task, activity or deliverable, broken out into impacted functions Allows for use in early resource planning Allows follow-up comparison to actuals to assess estimate accuracy Estimate assumptions May be derived from the SOW/RFP compliance matrix, but should be on the BOE in order to provide a “standalone” reference
Turning the Estimate into a Contract Price The estimates developed on the various Basis of Estimate forms are collected and added together – this gives the total labour, material and other costs exclusively associated with completing the project (ie. the “Direct Costs”) However, when deciding what price to charge the customer, these costs must be supplemented by the other “Elements of Cost” “Indirect Costs” – the “cost of doing business” Profit – the “charge” for the “added value” delivered
Material purchased to build program equipment and deliverables
Contract costs of sub-contracts performed for the program
Indirect: (applied by “Pricing” function)The “cost of doing business” for the business as a whole must be paid for by its “revenue generating” activities. This is done by calculating and applying “Overhead” rates to the Direct costs. Examples:
Total annual costs of secretarial, accounting, HS&E etc. staff divided by annual “direct” costs of all projects – rate applied against future project direct costs (eg. Add 50% to all direct labour hours)
Total material handling costs (labour, facilities, equipment) applied as an overhead to direct material costs
Profit: Not a cost, but an amount (usually %’ge) applied to final estimated cost total in order to ensure project “price” proposed to customer meets company financial goals
Typical Cost Estimating Procedure During the Concept Phases, the proposal manager and/or project manager may be asked to produce a ROM estimate: by senior management to support long term business planning, and/or the development of a “business case model” (Week 10) for determining whether the project is feasible at all, and its priority for investment relative to other projects; and/or by the client to support preliminary “Not to Exceed” funding proposals aimed at mutually developing requirements or performing early phase project work in advance of a full contract award. During the preliminary planning phase, the project manager prepares Budgetary estimates to support: customer proposals for project work; forecasting costs for annual enterprise business planning; obtaining high level budget allocations for project work During the planning phase, the team leads prepare Definitive estimates in order to support development of the project budget, and the initial authorization of work.
Typical Estimate Process (cont…) J5 Systems Integration Project Engineering J5 - Project Engineering 4. During project execution, the team leads revise the Definitive estimates as part of the periodic integrated schedule review and integrated change control processes, to support:
Detailed measurement of budgetary performance against the plan
revise budget allocation and work authorization