3 pm3 c_2-%20estimating%20costs

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3 pm3 c_2-%20estimating%20costs

  1. 1. Cost Estimation<br />Cost Budgetting<br />Work Authorization<br />
  2. 2. Cost Estimating<br />The cost estimate is prepared as follows:<br />The types of estimate required is determined from the RFP, RFQ or other requestor.<br />The estimating method(s) appropriate to the type of estimate, the program phase and information available are selected.<br />The estimating team is formed, briefed on the estimate requirements and statement of work.<br />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.<br />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.<br />
  3. 3. Types of Cost Estimates<br />
  4. 4. Estimating Methods<br />Similar approaches as used for schedule estimating<br />Expert judgment <br />Analogous<br />Parametric<br />Probabilistic<br />Estimates include both internal estimates and quotes from suppliers and sub-contractor<br />Take care to subject external estimates to the same level of scrutiny as internal<br />
  5. 5. Kicking off the Estimate Team <br />Preparing an estimate is “a project within a project”, with the following steps:<br />The “estimate manager” – possibly marketing or business development for proposal, project manager after contract award – performs an initial review of the required RFP/SOW.<br />Depending on the level of estimate required and complexity of work, manager pulls together “estimating” team of “experts” <br />Team performs review and estimates on BOE sheets, often supplemented by completion of a SOW compliance matrix for their aspects <br />
  6. 6. Typical Basis-of-Estimate (BOE) Format<br />674-2435<br />Specific reference to proposal, contract or purchase order number<br />WBS reference: estimates are usually done at the lowest level of WBS definition available at the time of the estimate<br />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<br />Estimator’s certification, and approval by related functional management<br />Assures “ownership” of estimates by those who will need to support them<br />Summary of the work being estimated, as well as applicable specifications<br />Estimate methods used<br />Estimates by task, activity or deliverable, broken out into impacted functions<br />Allows for use in early resource planning<br />Allows follow-up comparison to actuals to assess estimate accuracy<br />Estimate assumptions<br />May be derived from the SOW/RFP compliance matrix, but should be on the BOE in order to provide a “standalone” reference<br />
  7. 7. Turning the Estimate into a Contract Price<br />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”)<br />However, when deciding what price to charge the customer, these costs must be supplemented by the other “Elements of Cost”<br />“Indirect Costs” – the “cost of doing business”<br />Profit – the “charge” for the “added value” delivered<br />
  8. 8. Elements of Cost<br /><ul><li>Direct: (estimated by team)These are usually directly accounted against the program. Examples:
  9. 9. Work conducted by dedicated program team
  10. 10. Material purchased to build program equipment and deliverables
  11. 11. Contract costs of sub-contracts performed for the program
  12. 12. 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:
  13. 13. 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)
  14. 14. Total material handling costs (labour, facilities, equipment) applied as an overhead to direct material costs
  15. 15. 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</li></li></ul><li>Typical Cost Estimating Procedure<br />During the Concept Phases, the proposal manager and/or project manager may be asked to produce a ROM estimate:<br />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 <br />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.<br />During the preliminary planning phase, the project manager prepares Budgetary estimates to support:<br />customer proposals for project work;<br />forecasting costs for annual enterprise business planning; <br />obtaining high level budget allocations for project work<br />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.<br />
  16. 16. Typical Estimate Process (cont…)<br />J5 Systems Integration<br />Project Engineering<br />J5 - Project Engineering<br />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:<br /><ul><li>Detailed measurement of budgetary performance against the plan
  17. 17. revise budget allocation and work authorization</li>

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