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Time and Cost Estimation
Dr. Lotfi Gaafar
Source: PMBOK Guide 2000
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Importance of Time and Cost Estimation
Estimates are needed to support good decisions.
Estimates are needed to schedule work.
Estimates are needed to determine how long the project
should take and its cost.
Estimates are needed to determine whether the project is
worth doing.
Estimates are needed to develop cash flow needs.
Estimates are needed to determine how well the project is
progressing.
Estimates are needed to develop time-phased budgets and
establish the project baseline
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Guidelines for Time and Cost Estimation
Have people familiar with the tasks make the estimate.
Use several people to make estimates.
Base estimates on normal conditions, efficient methods, and
a normal level of resources.
Use consistent time units in estimating task times.
Treat each task as independent, don’t aggregate.
Don’t make allowances for contingencies.
Account for risks separately.
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Types of Estimates
– Top-down (macro) estimates: analogy, group
consensus, or mathematical relationships
– Bottom-up (micro) estimates: estimates of
elements of the work breakdown structure
Condition Macro Estimates Micro Estimates
Strategic decision making X
Cost and time important X
High uncertainty X
Internal, small project X
Fixed-price contract X
Customer wants details X
Unstable scope X
A brief comparison
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Estimation Methods
Top-down (macro) estimates: analogy, group consensus,
or mathematical relationships
– Consensus methods
– Ratio methods
– Apportion method
– Function point methods for software and system projects
Bottom-up (micro) estimates: estimates of elements of
the work breakdown structure
– Template method
– Parametric Procedures Applied to Specific Tasks
– Detailed Estimates for the WBS Work Packages
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Types of Costs
Direct Costs
– Costs that are clearly chargeable to a specific work
package.
Labor, materials, equipment, and other
Direct (Project) Overhead Costs
– Costs incurred that are directly tied to an identifiable
project deliverable or work package.
Salary, rents, supplies, specialized machinery
General and Administrative Overhead Costs
– Organization costs indirectly linked to a specific
package that are apportioned to the project
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Refining Estimates
Reasons for Adjusting Estimates
– Interaction costs are hidden in estimates.
– Normal conditions do not apply.
– Things go wrong on projects.
– Changes in project scope and plans.
Adjusting Estimates
– Time and cost estimates of specific activities are
adjusted as the risks, resources, and situation
particulars become more clearly defined.
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Look at the history of similar projects to get a rough
estimate of costs. Make sure the scope and nature are
similar.
Determine the internal resources you have available to
use - people, equipment, etc., within your organization.
Determine the external resources - those not currently in
your organization - that you will need to get the job done.
Project Budget
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Activity Based Costing
Description:
– Quantitatively measures the cost and
performance of activities
– It is the quantitative aspect of the Activity based
costing that makes it a more efficient tool that
improves the quality of the final decision.
When to use it?
– Evaluate relative cost of various activities, and
potential effects of modifications
– Analyze alternative process flows with
comparative economic evaluation
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Benchmarking
Description:
– It is the continuous and systematic process of measuring
and assessing products, services, practices against
those of high performing organizations to improve
performance.
– Two types of benchmarking:
- Benchmarking prices
- Benchmarking processes
When to use it ?
– Benchmarking is used when a company is suffering
losses in a certain area and wants to improve its
performance to overcome these losses.
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Benchmarking
Procedure:
– Identify the work process or area to be improved
– Analyze the work process
– Measure your own performance
– Identify benchmarking partners
– Determine data collection method
– Collect data
– Determine performance gap
– Develop action plan
– Implement action plan
– Monitor results
– Recalibrate benchmarks (Repeat process)
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Target Costing
Description4
:
– Is the cost that can be incurred while still gaining
profit.
Target Cost = Estimated Selling Price (Target Price) – Desired Profit
When to use it1
?
– Dominantly with new products and services
– Improve existing products
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Target Costing
Example (The Montclair Paper Mill)5
Setting the target price: Per Ton
Competitor’s selling price to the merchant $1466
Less: freight paid by the mill (30)
Normal sales returns & allowances (60)
Montclair capital charge (120)
Ship to the DC (11)
DC operating cost (25)
DC capital charge (58)
Target Manufacturing Cost $1162
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Refining Estimates
Contingency Funds and Time Buffers
– Are created independently to offset uncertainty.
– Reduce the likelihood of cost and completion time
overruns for a project.
– Can be added to the overall project or to specific
activities or work packages.
– Can be determined from previous similar projects.
Changing Baseline Schedule and Budget
– Unforeseen events may dictate a reformulation of
the budget and schedule.
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* This Presentation is Based on information from PMBOK Guide 2000
Project Management
Cost Management*
Dr. Lotfi Gaafar
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Project Cost Management Processes
Resource planning: determining what
resources and quantities of them should be
used
Cost estimating: developing an estimate of
the costs and resources needed to complete
a project
Cost budgeting: allocating the overall cost
estimate to individual work items to establish
a baseline for measuring performance
Cost control: controlling changes to the
project budget
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Resource Planning
The nature of the project and the organization will
affect resource planning
Some questions to consider:
– How difficult will it be to do specific tasks on the project?
– Is there anything unique in this project’s scope
statement that will affect resources?
– What is the organization’s history in doing similar tasks?
– Does the organization have or can they acquire the
people, equipment, and materials that are capable and
available for performing the work?
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Cost Control
Project cost control includes
– monitoring cost performance
– ensuring that only appropriate project changes are
included in a revised cost baseline
– informing project stakeholders of authorized changes
to the project that will affect costs
Earned value management is an important tool
for cost control
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Using Software to Assist in Cost
Management
Spreadsheets are a common tool for
resource planning, cost estimating, cost
budgeting, and cost control
Many companies use more sophisticated and
centralized financial applications software for
cost information
Project management software has many cost-
related features
